August 22nd 2021
All three major U.S. averages finished a choppy week with losses. The Dow Jones Industrial Average dipped 1.1% last week to close at 35,120.08. The S&P 500 recorded a weekly loss of 0.6% to reach to reach 4,441.67. The Nasdaq was 0.7% lower for the week and finished at 14,714.66. Among the key S&P sectors, utilities were the best weekly performer, while energy dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 18.6.
Short-Term Technical Condition
From a purely price point of view, the short-term oriented uptrend of the market remains intact. This is mainly due to the fact that the S&P 500 managed to close above the lower envelope line of the Trend Trader Index on Friday. Given the fact that both envelope lines are still increasing, the purely price driven condition of the market still looks quite constructive. However, analyzing the underlying momentum of this price driven uptrend reveals a completely different picture. This is mainly due to the fact that the Modified MACD flashed a quite strong bearish crossover signal (as expected in our last technical market forecast), whereas the gauge of the Advance-/Decline 20 Day Momentum Indicator also plummeted back into bearish territory last week. This can definitely be interpreted as a short-term negative signal, since the risk of a short-term oriented trend reversal (momentum-crash) remains quite high. However, it is not unusual that some or even all of our short-term oriented trend indicators tend to deteriorate (or even turn bearish) when the market is entering a volatile consolidation period. Therefore, the main challenge is to differentiate between a healthy and a corrective short-term momentum crash. Normally, a trend reversal/consolidation period can be classified as healthy as long as our short- to mid-term oriented market breadth indicators remain supportive. In such a situation, a short-term oriented trend-break is just driven by a temporary weakness in heavy weighted stocks in the index or the result of profit taking (which is a quite typical phenomenon after a stronger rally). Both are not fundamental reasons to trigger a stronger and sustainable trend-reversal. In such a situation, weak or bearish signals in short-term oriented trend indicators can be ignored as they are just part of a healthy breather. The situation would be different, if a consolidation period is accompanied by an extremely weakening tape structure. Here, a potential trend-break is often just the harbinger of a more significant pullback since there is no safety net around to cushion such a move.
Given the fact that our entire short-term oriented market breadth indicators continued to deteriorate significantly last week, the market is getting increasingly vulnerable for a stronger pullback. Thus, we received further confirmation for our outright cautious strategic view. Currently, less than 40 percent of all U.S. listed stocks remain in a short-term oriented price driven uptrend (SMA 20 and SMA 50). Consequently, the risk that the S&P 500 faces a price driven trend-reversal remains high. More importantly, we can see that the broad market continued to weaken significantly. Thus, any upcoming trend-break could easily transform into a more severe pullback. If we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily we can see that the momentum of advancing stocks and advancing volume literally collapsed last week. Moreover, this move was accompanied by strong negative volume (Upside-/Downside Volume Index Daily). Another outright negative signal is coming from the NYSE New Highs/New Lows Indicator since the number of new lows outpaced the numbers of new highs. As a matter of fact, the High-/Low-Index Daily also flashed a bearish crossover signal last week. This is a quite serious signal if we consider the fact that the S&P 500 is just trading 1% below its all-time high. Consequently, the risk of stronger disappointments is increasing on a very fast pace since these signals are neglecting any healthy breather market scenario – at least from the current point of view.
On the contrarian side, we can see that the market is slightly oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and in combination with small bullish signals from the WSC Put-/Volume Ratio Oscillator, the Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator further large-cap overshooting cannot be ruled out. Apart from that fact, we can see that the WSC Capitulation Index continued to show further signs of strength, whereas its signal still remains supportive form a pure signal point of view. Unchanged compared to last week the market should approach rough waters within the next couple of weeks (Presidential Cycle). This is based on the fact that – historically – the market usually hits its high in a post-election year around mid-/late summer. Given the current tape structure, we would not be surprised to see increased selling-pressure sooner than later.
Mid-Term Technical Condition
Another reason why we remain alert is based on the fact that the mid-term oriented condition of the market also continued to weaken (significantly) last week. The most important signal is coming from the Global Futures Trend Index as its gauge plummeted to the lower part of its bullish consolidation area. Hence, the gauge has dropped to its lowest level for months and is, therefore, definitely not confirming the current levels of the S&P 500 anymore. More importantly, the indicator is now showing strong negative momentum and it is only trading 3 percentage points above its important 60% threshold. So, from a formal point of view, the market is getting increasingly vulnerable for stronger disappointments (once it passes this important threshold). Not surprisingly, from a purely price point of view, mid-term oriented uptrend of the market still remains intact (as we have not seen a stronger pullback so far). Consequently, the WSC Sector Momentum Indicator still keeps trading in solid bullish territory and has not shown any weaknesses recently. This indicates that most sectors within the S&P 500 are per definition still in a mid-term oriented up-trend. This can also be seen if we focus on our Sector Heat Map as the momentum score from riskless money market finished the week unchanged (0%) and below all other sectors.
Another major warning signal is coming from mid-term oriented market breadth since it also weakened considerably last week. Especially, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) flashed a bearish signal since they dropped to their lowest level for weeks. This is telling us that most NYSE listed stocks are per definition in a mid-term oriented down-trend at the moment (although the S&P 500 is trading near record highs). With such weak readings across the board the upside of the market looks increasingly capped. On top of that we can see that the Modified McClellan Oscillator Weekly strengthened its bearish signals as it widened its bearish gap. This shows that the mid-term oriented momentum of advancing issues on NYSE continued to gain bearish ground. Another outright concerning tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators strengthened their bearish signals indicating a weak demand all across the board. In the past, major pullbacks were always accompanied by bearish readings in both indicators together with a Global Futures Trend Index score below 60%. Thus, we remain alert at the moment. Also, our advance-/decline indicators (Advance-/Decline Line Weekly, Advance-/Decline Line Daily) weakened last week, the only exception is the Advance-/Decline Volume Line. However, given the outright weak or even bearish readings all across the board, the market looks outright vulnerable for negative driven news flow at the moment. Thus, there is absolutely no fundamental reason to change our cautious strategic view at the moment.
Long-Term Technical Condition
The long-term oriented uptrend of the market has also shown some signs of fatigue recently. This is mainly due to the fact that the WSC Global Momentum dropped 16 percentage points last week. It is now indicating that only 55% of 35 local equity markets all around the world (which are covered from our Global ETF Momentum Heat Map) are now still trading above their long-term oriented trendlines (in the previous week this gauge showed a reading of 71%). This indicates that the global bull market is definitely losing steam (which is another major red flag on the horizon). If we focus on the U.S. market we can see that the relative strength of all risky markets continued to weaken significantly versus U.S. Treasuries. This is another indication that the risk appetite among investors has started to decrease recently. Only the Global Futures Long Term Trend Index was holding up quite well. More importantly, we can also observe that long-term market breadth started to show some exhaustion, as the readings from our entire long-term oriented tape indicators weakened last week (High-/Low Index Weekly, SMA 200 and the Modified McClellan Volume Oscillator Weekly). This might be another piece of evidence that the market looks vulnerable on a short- to mid-term time horizon.
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.
If we consider the outright weak and/or bearish signals all across the board, there is absolutely no fundamental reason to change our strategic cautious view. We even received further confirmation that the market is getting increasingly vulnerable for a stronger pullback (since any short-term oriented trend-reversal has the potential to transform into an outright strong and sustainable down-trend at the moment). As a matter of fact, the risk-/reward ratio looks too low to justify any strategic long/risk position at the moment. However, in the past every stronger trend-reversal/correction started with an outright weak tape structure, but not every week tape structure lead to a correction. Consequently, there is still a small chance that the current narrow based rally starts to broaden out again sooner or later (definitely not our preferred scenario). In other words, even if we see a longer-lasting and volatile consolidation period instead of another strong down-leg/correction, we would sacrifice 2 to 4% upside potential until our indicator framework would flash an all clear signal again. Thus, our bearish view will remain unchanged as long as we do not see a significant recovery within our short- to mid-term oriented indicator framework. So, in the end, we think conservative members should stay on the sideline, whereas experienced short-term traders should focus on the short side if we a significant break in the Trend-Trader Index.