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September 19th 2021

Market Review

U.S. stocks ended the week with losses. The Dow Jones Industrial Average dropped 0.1% from the week-ago close to 34,584.88. The blue-chip index booked its third straight week of declines and has not had a 3-week losing streak since September 2020. The S&P 500 recorded a 0.6% loss over the week and finished at 4,432.99, its second straight week of losses. The Nasdaq Composite booked a weekly fall of 0.5% to end at 15,043.97. Most key S&P sectors ended in negative territory for the week, led by the materials sectors. Discretionary and energy were the only gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, increased to 20.8.

Short-Term Technical Condition

Unchanged compared to last week, the short-term oriented trend of the S&P 500 remains negative. This is based on the fact, that the S&P 500 dropped deeper below the bearish threshold of the Trend Trader Index on Friday (43 points). In addition, both envelope lines of the Trend Trader Index started to form a rounding top. As a result, we received more confirmation that the current market environment is definitely getting a more bearish biased tilt. A fact, which can also be seen if we focus on the Modified MACD, which showed an increasing bearish gap last week and dropped to the lowest level for months. This is telling us that the underlying momentum of this price driven down-trend has not shown any signs of stabilization/bullish divergence so far. The case is slightly different if we focus on the Advance-/Decline 20 Day Momentum Indicator. This indicator got back into the bullish area on Friday and, hence, showed a bullish divergence to the S&P 500. As pointed out in our last week’s Market Timing Forecast, in times of increased volatility, it is not unusual that short-term oriented trend indicators show fast changing signals. In such a situation, short- to mid-term market breadth will give us further guidance if the recent weakness has the potential to transform into a more significant pullback again or if it was just the realization of increased volatility.

Most of our short-term oriented tape indicators did not show any stronger signs of improvements last week. Thus, it looks like that the market is getting increasingly vulnerable for further disappointments. More specifically, the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) has not succeeded to get back into bullish territory and even decreased last week. This shows a deterioration within the broad market, since most stocks are now per definition already in a short-term oriented price driven down-trend. This can be seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators continued their bearish rides last week. Especially the latter one widened its bearish gap significantly. Another negative signal is coming from the Upside-/Downside Volume Index Daily, showing that the selling pressure was not only focused on a few heavy weighted stocks in the index. On the other hand, we can see that most of the selling pressure was mainly driven by profit taking so far (which can be interpreted as still a quite positive signal). This becomes obvious if we focus on the NYSE New Highs/New Lows Indicator, since the number of new yearly highs (77) is still higher than the ones dropping to a new yearly low (30). As long as we do not see a strong negative spike in new lows (outpacing new highs), the market internals still remain somehow supportive. Consequently, the High-/Low-Index Daily remains positive, albeit it weakened significantly. In the end, the short-term oriented market internals got definitely a more bearish tilt, although a strong spike in new lows is still missing to complete that picture.

On the contrarian side, most of our option- and sentiment-based indicators (AII CBOE Put-/Call Ratio, AII Bulls/Bears Survey, WSC Dumb Money Indicator, AII CBOE Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator and the AII Bulls & Bears Survey) remain more or less neutral. An exception to this is the WSC Put-/Volume Ratio Oscillator which shows that the momentum of puts being bought reached outright low levels (indicating a certain degree of complacent among market participants). This is a quite interesting fact, if we consider the outright weak tape structure of the market. From a purely technical point of view, this complacent is another typical ingredient within a corrective top-building process. On the other hand, we can see that the WSC Capitulation Index is still showing a risk-off market environment. A fact, which is also confirmed by the bearish divergence between the Smart Money Flow Index and the Dow Jones Industrial Average. Another strong warning signal is coming from a seasonal point of view, since the Decennial- and the Presidential Cycle are indicating a quite challenging time period up until the end of the year.

Mid-Term Technical Condition

From a purely signal point of view, the mid-term oriented uptrend remains intact. This is mainly because the Global Futures Trend Index closed in the middle part of its bullish consolidation area (although it’s gauge decreased for the week). Thus, there is still a chance that the corrective set-up on a short-term time perspective transforms back into a more healthier market environment. This is because as long as the gauge from this indicator remains above its 60% threshold, any short-term oriented weaknesses tend to be limited in price and time (of course, only in combination with confirmative market breadth readings). Hence, it will be crucial to monitor the gauge of this indicator closely within the next couple of days (as it will give us further guidance if the recent short-term weaknesses will be just the starting point for further declines or just a temporary weakness). Not surprisingly – from a purely price point of view – the mid-term oriented uptrend of the S&P 500 remains intact. This is based on the fact that the  WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This can also be observed if we examine our Sector Heat Map, as the momentum score of all sectors remains above the one from riskless money market (currently at 0%).

Unfortunately, the current mid-term oriented uptrend of the market is not confirmed by mid-term oriented market breadth (since the current upside participation looks quite weak at the moment).  The Modified McClellan Oscillator Weekly continued its bearish journey and dropped to the lowest level for months. This signals that the mid-term oriented tape momentum of the market remains outright negative. Another concerning fact is that mid-term oriented advancing issues as well as mid-term oriented up-volume are trading well below their bearish counterparts. In the past, we never saw a stronger and sustainable rally with bearish readings in both of those indicators. Basically, the same is true if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both gauges have not shown any positive moves yet and, therefore, they remain in bearish territory. In addition, we can see that our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have not shown any signs of bullish divergences yet and especially the latter one plummeted to the lowest level for months.

Long-Term Technical Condition

The long-term oriented technical picture of the market slightly weakened. Our Global Futures Long Term Trend Index decreased for another week, indicating that the bull-market of U.S. equities continued to weaken. Basically, we receive the same picture globally. Our WSC Global Momentum Indicator continued its bearish ride (as it dropped 3 percentage points for the week), but still shows that 55% of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend lines. Thus, the current bull market remains intact, although it has also started to lose some grip recently. A fact, which can also be observed in our WSC Global Relative Strength Index (since all risky markets continued to lose momentum vs. riskless money market). In addition, more and more markets are dropping below U.S. Treasuries. If we examine our long-term oriented tape indicators, we can see that all of them declined (SMA 200, Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly).

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Rotation Strategy and the WSC Dynamic Variance Portfolio.

Bottom Line

The situation remains more or less unchanged compared to the previous week. Given the weak readings all across the board (especially on a short-term time perspective), the recent set-up has still a quite corrective tilt up – at least on a short-term time perspective. On a mid-term time perspective, the situation could be described as somehow supportive and, therefore, the current set-up has still the potential to transform back into a healthier market environment again. For such a case, we definitely need to see stronger improvements within our short-term oriented indicators (which is not the case right now if we consider the developments of our indicators). Another concern are definitely the upcoming seasonal headwinds. If we put all these facts into context and if we see further deterioration (especially within the Global Futures Trend Index), the situation could easily escalate within a few trading days. A fact, which can also be observed within our Big Picture Indicator. Currently, this reliable indicator is still jumping around in its bullish quadrants. Nevertheless, its distance to its bearish consolidation quadrant is also quite close at the moment. Consequently, the situation remains tense. In the end, we recommend our conservative members to keep their stop loss-limit at 4,365 (intraday) and to monitor the developments of our indicator framework closely.

Stay tuned!