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April 17th 2022 |

Key Takeaways

  • The S&P 500 is getting increasingly vulnerable for stronger disappointments
  • Time to place a stop-loss at 4,450 since the up-trend quality deteriorated significantly

Market Review |

U.S. stocks finished the holiday-shortened week with losses. The Dow Jones Industrial Average lost 0.8% over the week to 34,451.23. S&P 500 declined 2.1% for the week to finish at 4,392.59. The Nasdaq slumped 2.6% for the week to end at 13,351.08. Among the key S&P sectors, energy and materials were the best weekly performer, while technology dragged the most. The CBOE Volatility Index, or VIX, a measure of investor uncertainty, traded near 22.7.

Short-Term Technical Condition

The short-term-oriented trend of the market turned clearly bearish last week. This is based on the fact that the S&P 500 closed 79 points below the bearish threshold of the Trend Trader Index. Although both envelope lines of the Trend Trader Index are still increasing, we can see that the momentum of this short-term-oriented down-trend has also started to strengthened (Modified MACD and the Advance-/Decline 20 Day Momentum Indicator). Thus – from a purely price point of view – the recent weakness has definitely the potential to trigger further losses instead of being just a healthy breather.

This view is also confirmed by a high trend-quality (meaning that the latest weakness was definitely backed by a broad basis, instead of being just the result of a few heavy weighted stocks in the index). Thus, it can be described as more sustainable in its nature. The momentum of declining issues and declining volume started to accelerate (Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily), whereas the number of stocks hitting a fresh yearly low was twice as high (278 on Friday) as the number of stocks which were pushed to a new yearly high (only 142 on Friday). As a result, the High-/Low-Index Daily widened its bearish gap last week. Short-term up-volume has not shown any signs of strength so far, whereas the market triggered another Hindenburg Omen last week. This is another piece of evidence that the broad market is faltering on a fast pace. A fact, which can also be seen if we focus on the percentage of stocks which are trading above their short-term-oriented moving averages (20/50). So all in all, the current short-term-oriented down-trend is currently driven by the whole market and, therefore, the potential for further stronger losses remains outright high.

Apart from the historical high numbers of bears in the AII Bulls & Bears survey, market sentiment can be still described as mostly neutral at the moment (WSC Put-/Volume Ratio, Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator). A small bullish tilt is coming from the Smart Money Flow Index, which was not confirming the latest weaknesses of the Dow Jones Industrial Average. A fact, which can also be observed if we focus on the WSC Capitulation Index, which is still indicating a risk-on market environment for the time being. So all in all, the situation looks quite mixed/neutral at the moment.

Mid-Term Technical Condition

Another concerning fact is that the mid-term-oriented trend also continued to weaken significantly last week. The gauge from the Global Futures Trend Index dropped again several percentage points for the week and closed at 36%. This is already in the middle of the bearish consolidation area and far below the very important threshold of 60%. In such a case, the risk for stronger waterfall declines remains outright high (underlying our cautious strategic view). So, even if we see some form of bounce ahead, a sustainable recovery is only possible if this indictor is getting back on track. On the other hand side, we can see that the mid-term-oriented price-driven uptrend has not been broken yet since the WSC Sector Momentum Indicator was holding up quite well. This is based on the fact that the majority of sectors within the S&P 500 has still a higher momentum score than riskless money market. But as already pointed out in our previous Market Forecast, we can also see that the score of the riskless money market increased (to 21.9%). Thus, the clouds on the horizon are definitely gathering at the moment.

The mid-term-oriented down-side participation has also continued to strengthen (and is, therefore, not confirming the bullish readings of the WSC Sector Momentum Indicator anymore). The majority of all Russell 3000 stocks is currently in a mid-term-oriented price driven down-trend (stocks trading above their mid-term-oriented simple moving average (100/150)), whereas the momentum of mid-term-oriented declining issues remains strong (Modified McClellan Oscillator Weekly). Another concerning fact are the bearish signals from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60%) have been in most cases the vanguard of a stronger correction. Only our advance-/decline indicators (Advance-/Decline Line Weekly, Advance-/Decline Line Daily and the Advance-/Decline Volume Line) finished the week nearly unchanged. Hence, the bearish mid-term-oriented trend quality is outright high, leaving enough room for further negative surprises. Even if we do not see stronger selling pressure immediately, with such weak readings across the board the upside potential of the S&P 500 should also remain extremely capped.

Model Portfolios

Last week, there were no changes within our ETF Model Portfolios (WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, WSC Sector Rotation Strategy).

Bottom Line

Currently, there is absolutely no fundamental reason to change our cautious strategic view. After the S&P 500 closed below our suggested stop-loss limit at 4,450 at the beginning of the week, the negative trend continued to intensify as expected. So even if we do not see stronger selling pressure immediately – with such weak readings all across the board – the upside potential looks also extremely capped at the moment. Consequently, the risk-/reward ratio of being invested looks outright low at the moment. A fact, which can also be seen if we focus on our Big Picture Indicator, which moved into its bearish consolidation quadrant on Friday.

Stay tuned!