September 9th 2018
U.S. stocks finished the holiday-shortened week with losses. The Dow Jones Industrial Average lost 0.2 percent over the week to 25,916.54. The blue-chip index snapped a three-week winning streak. S&P 500 declined 1.0 percent for the week to finish at 2,871.68. The Nasdaq slumped 2.7 percent for the week to end at 7,902.54. The technology-laden index posted its fourth straight loss — its first since April — and is worst start to September since 2008. Among the key S&P sectors, utilities and consumer staples were the best weekly performer, while materials and technology dragged. The CBOE Volatility Index, or VIX, a measure of investor uncertainty, jumped to 14.88.
Short-Term Technical Condition
In last week’s comment we highlighted the fact that we would not be surprised to see some weak/choppy markets until 21th of September (option expiration date). Moreover, we mentioned that – from a pure seasonal point (Presidential Cycle) of view – it was not unusual to see some increased volatility in the last month of the 3rd quarter. In fact, the S&P 500 posted its first negative week in five. However, from a pure price point of view, the short-term oriented trend still remains constructive, as the S&P 500 closed between the two envelope lines of the Trend Trader Index. Moreover, we can see that both envelope lines are still drifting higher, indicating that we saw higher highs and higher lows within the past 20 days. Furthermore, the Advance-/Decline 20 Day Momentum Indicator managed to close above its bearish threshold, although it had dropped significantly for the week. This is telling us that the underlying short-term oriented trend of the market still remains bullish biased, although it deteriorated significantly last week. Therefore, it was not a big surprise at all that the Modified MACD flashed a small bearish crossover signal last week. However, after a stronger rally, it is not unusual that the short-term oriented trend is losing some steam. To evaluate if such a slow-down will turn out to be healthy or more corrective in it nature, short- to mid-term market breadth are a key area of focus.
Unfortunately, short-term oriented market breadth had to take a hard hit during the last couple of trading sessions as most of our tape indicators weakened significantly or even turned bearish. Especially the number of stocks hitting a fresh yearly new low spiked at the end of the week to the highest level since early August. This indicates that the latest decline was not only driven by a handful of heavy weighted stocks in the S&P 500. On the other hand side, we can also see that the number of new highs was holding up quite well. This shows an increased dispersion within the market, which often occurs if the market is entering a consolidation period. Nevertheless, the spike in new lows was big enough to trigger a small bearish crossover signal within the High-/Low-Index Daily, indicating a weakening tape structure. Another threatening tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily, as both indicators also flashed a strong bearish crossover signal last week. This is telling us that the underlying tape momentum of the market has clearly turned negative. This can be also observed if we have a closer look at the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Both gauges decreased for the week and passed the bearish threshold (50) or dropped into deep bearish territory (20). As a matter of fact, it is quite likely to see further choppy/weak markets into next week.
On the contrarian side, we can see that the latest decline has started to have its designated impact on short-term sentiment. This is mainly due to the fact that the z-score from the Daily Put/Call Ratio All CBOE Options Indicator turned quite neutral again. Another supportive contrarian signal is the fact that the WSC Capitulation Index is still indicating a risk-on market environment on a very short-time frame. Moreover, we can see that the market is quite oversold at the moment and, therefore, a smaller bounce cannot be ruled out at the moment. On a mid- to long-term time horizon, we received another red flag (beside the quite bearish readings from the Smart Money Flow Index) as the market triggered three Hindenburg Omen last week. This is a quite rare bearish technical signal and when it occurs, the market should be at risk for a stronger pullback within the next 30 days. According to our research, since 1996, the market faced a stronger loss exceeding the 5 percent range within the following 30 days in less than 25 percent of all cases. In all these cases, the mid-term tape structure of the market was extremely damaged as well (which is not the case right now). In other words, the Hindenburg Omen is just a single number that shows that the tape structure of the market is lagging behind right now. Nevertheless, we will keep a close eye on the development of our indicator framework (especially on a mid-term time horizon) in the next couple of weeks.
Mid-Term Technical Condition
If we focus on the mid-term oriented technical condition of the market, we basically get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market has slightly lost some stream recently. This is mainly due to the fact that the Global Futures Trend Index dropped to 65 percent last week. This is telling us that the overall mid-term oriented trend condition of the market still remains supportive but not really confirmative at the moment. As a matter of fact, it is a bit too early to take the chips from the table. However, we would get quite cautious if the gauge from the Global Futures Trend Index drops below 60 percent (in combination with weakening market breadth). Because in such a weak tape environment, the market is extremely vulnerable for a stronger correction (as in the past all corrections started like this way). However, from a pure price point of view, the mid-term oriented uptrend of the market remains quite powerful as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far and keeps trading at the highest level for months. This indicates that most sectors within the S&P 500 are per definition still in a mid-term oriented up-trend. These bullish facts are also supported by our Sector Heat Map. The momentum score of all sectors keeps trading above the one from riskless money market (currently at 0.0 percent).
The good news is that mid-term market breadth is still quite bullish at the moment, as it has only shown some small signs of exhaustion recently. Especially, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) were holding up quite well as they closed far above their 50 percent threshold. Basically, the same set up is true if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line). Only the Modified McClellan Oscillator Weekly narrowed its (small) bullish gap, indicating some form of a mid-term slow down. However, the most important mid-term tape signal is coming from the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly. Both indicators still remain on solid bullish levels from a pure signal point of view and, therefore, we think the market is not at risk for a stronger correction (above 10 percent) right now. Nevertheless, we will monitor their development quite closely within the next couple of weeks.
Long-Term Technical Condition
The long-term oriented uptrend of the market shows – once again – exactly the same picture as in the previous week. The WSC Global Momentum Indicator has been trading for 6 weeks at the same level, indicating that just 22 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are still trading above their long-term oriented trend lines. As already pointed out several times, this is a clear signal that the current global bull-market is quite fragile at the moment. On the other hand side, our Global Futures Long Term Trend Index has been increasing for 7 weeks, signaling that the long-term oriented trend of U.S. equities is regaining momentum. Our WSC Global Relative Strength Index shows that the relative strength of all risky markets increased last week, but all markets (except one) are trading below the one from U.S. Treasuries. This is a sign for a slow growth period. Looking at our long-term oriented tape indicators, the High-/Low Index Weekly was holding up quite well last week while the Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average weakened last week.
If we have a closer look at our Model Portfolios, we can see that there have been no changes in the allocation advice from the WSC Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Global Tactical ETF Model. Moreover, we are proud to announce that our WSC Sector Rotation Strategy reached a new all-time high last week.
Despite the fact that the latest September slow-down was in-line with our expectations, the deterioration within some of our tape indicators was quite surprising. Especially, the weaker readings within our short-term oriented tape indicators in combination with a weaker Global Futures Trend Index are indicating some form of a stronger exhaustion (although the market just trades a few percentage below its all-time high). As a matter of fact, there is a small chance that the current rally will transform back into a more corrective set-up. Nevertheless, it is still a bit too early to pull the trigger as there are still some signals around that do not fit in the puzzle right now. In the current situation, the tilt towards corrective and supportive started to get quite narrow and that makes it quite tricky at the moment. If this situation continues, it could be also possible that the market is just slowly drifting lower during September as there is just too much breadth for a fast and stronger decline around and just too less for holding the market at those levels. And in the end, the S&P 500 could also trade 5 to 9 percent lower before anybody is realizing such a devaluation. So all in all, we remain cautiously bullish – at least for now but we also think it is time to place a stop loss limit around 2,790 (just in case things change quite fast within the next couple of days). This stop-loss should remain in place as long as we do not see any improvements within our indictor framework.