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August 18th 2019

Market Review

U.S. stocks ended a wild week with losses. For the week the Dow Jones Industrial Average dropped 1.5 percent to 25,886.01. The S&P 500 lost 1.0 percent over the week to end at 2,888.68. The Nasdaq declined 0.8 percent from the week ago close to finish at 7,895.99. All three benchmarks posted their third straight weekly losses. Most key S&P sectors ended in negative territory for the week, led by energy. Utilities and consumer staples were the only gainers. The Chicago Board Options Exchange Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 18.5.

Strategy Review

In our last week’s comment, we highlighted the fact that we believed that the market would follow a typical correction pattern (sell-off -> bounce > retest -> bottom or further declines). As a consequence, we expected to see another significant washout day/sell-off towards the latest correction low at 2,822 (whereas we strongly believed that the market would not break below that important threshold). Therefore, we advised our members to stay at the sideline or to remain short. Moreover, we mentioned that it was extremely important to monitor such a retest quite carefully as it would give us further guidance where the market would head to. In other words, if such a down-leg/retest was accompanied with quite strong positive divergences in market breadth (shrinking downside volume/declining issues, decreasing new lows, increased tape momentum and fewer stocks below their moving averages …) in combination with supportive signals within our contrarian indicators, we would have the final confirmation for an ultimate bottom. Otherwise further renewed waterfall declines could be expected as the process would start all over again. In fact, the S&P 500 tumbled 3.2 percent until Thursday and after hitting 2.825, it rebounded into the week’s end. Consequently, the big question is if this retest was accompanied with positive divergences or if this rebound was nothing more than an oversold bounce?

Short-Term Technical Condition

After the strong sell off, the short-term oriented down-trend of the market remains well in force and gained even more bearish ground last week! From a pure price point of view, we can see that the S&P 500 closed 30 points below the bearish threshold from the Trend Trader Index. In addition both envelope lines of this reliable indicator are still drifting lower, indicating an outright bearish trend-structure at the moment. The same is true if we focus on the Modified MACD, as its gauge gained even more negative momentum last week and has not shown any signs of positive divergences so far. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator remains well below its bullish threshold, although it was holding up quite well on Thursday and even showed some stronger bullish moves on Friday. This indicates some form of a positive divergence, although this signal is still a way too weak to be taken too seriously at the moment. However, in such a situation short-term market breadth is key area of focus as it will tell us if we have seen the worst already or if further selling pressure can be expected.

If we focus on our short-term oriented tape indicators, we can see that some of them have already started to show some kind of bullish divergences, although they are quite small at the moment. First of all, we saw a strong reduction in the number of stocks hitting a new low on Friday, whereas the number of new yearly highs still remains quite supportive. This can be seen as a first positive sign for a stronger trend-reversal. Consequently, the bearish signal from the High-/Low Index Daily looks quite weak-kneed and could, therefore, easily flash a bullish crossover signal if we see a stronger up-day ahead. Despite the fact that the percentage of stocks which are trading above their short-term oriented moving averages (20/50) remain quite bearish, we can see that on a 20 day’s time frame, the gauge is trading at significant higher levels compared to the latest low we saw 3 weeks ago. The picture looks quite different if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators dropped further into bearish territory and, therefore, did not confirm the bounce on Friday. This indicates major signs of exhaustion for the underlying momentum and volume of advancing stocks on NYSE. So all in all, we have seen some typical ingredients for an important low, but we should not forget that they still remain a bit week-kneed in their nature.

The situation on the contrarian side is also increasingly supportive at the moment as we received further evidences that 2,822 represents an outright important low. First of all, the CBOE Volatility Index (VIX) traded at significantly lower levels on Thursday, indicating that a lot of negative expectations are already priced in. This is a typical signal that we have seen the worst already, at least in a short-term time perspective. If we focus on our option based indicators (Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio and the z-score from the CBOE Put-/Call Ratio Daily) as well as on market sentiment, we can see that they are getting increasingly bullish. Moreover, we can see that the big guys have started to increase exposure, as our reliable Smart Money Flow Index did not confirm the latest low from the Dow Jones Industrial Average, whereas our WSC Capitulation Index did also not confirm the latest retest of the previous low. Even from a pure seasonal point of view (Presidential Cycle), we can see that the market often hits an important intermediate low at the end of August, which just acts as basis for another strong but corrective counter-trend rally into September. So from a pure contrarian point of view, it looks like that we have seen the worst already.

Mid-Term Technical Condition

If we analyze the mid-term oriented trend of the market, we can see that it continued to weaken last week. The gauge from our Global Futures Trend Index plummeted to the middle part of the bearish consolidation area (45 percent). As already mentioned a couple of times, from a pure formal point of view, the market remains in a correction mode as long as its gauge keeps trading below that important threshold. Nevertheless, it was also good to see that its gauge showed some kind of positive momentum on Friday, which might be another indication that a stronger trend reversal might be due soon. This could also explain the fact that the WSC Sector Momentum Indicator still remains quite bullish, although it dropped slightly for the week. This indicates that the mid-term oriented uptrend of the market remains intact – at least from a pure price point of view. In more detail, it is telling us that most sectors within the S&P 500 are still outperforming riskless money market on a relative basis. This can also be observed if we focus on our Sector Heat Map as the momentum score of all sectors (except energy) keeps trading above the one from riskless money market. Nevertheless, we can see that the momentum score of riskless money market increased significantly in the last weeks (currently at 21 percent), which is a quite negative signal at the moment.

On the other hand, we can see that the mid-term oriented market breadth condition still looks quite constructive, although the recent slow-down has definitely left its mark on some of our tape indicators. This becomes quite obvious since the Modified McClellan Oscillator Weekly nearly flashed a bearish cross-over signal. Also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) are still trading in deep bearish territory. This indicates that the underlying trend momentum of the market still looks quite damaged at the moment. On the other hand, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume were still holding up quite well and are still trading well above their bearish counterparts (mid-term oriented advancing issues). Basically, the same set up is true if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as they all have not shown any significant bearish moves recently (and just traded more or less sideways). So all in all, the current technical condition of the market looks quite weak but still somehow too supportive to justify the start of another significant correction or even the start of new bear-market at the moment. Nevertheless, as conditions could change quickly, we will monitor the developments of them quite closely within the next couple of weeks.

Long-Term Technical Condition

The long-term oriented trend of the market shows a quite intermingled picture. After forming a rounding top, the Global Futures Long Term Trend Index finally started to decrease (although it still remains quite bullish from a pure signal point of view). The gauge from the WSC Global Momentum Indicator dropped into bearish territory. This is telling us that the majority of stocks (which are covered by our Global ETF Momentum Heat Map) dropped below their long-term oriented trend lines and that the current global bull-market is slightly running out of steam. In addition, the relative strength of all risky markets dropped significantly and keeps trading far below the one from U.S. Treasuries. This is a confirmation that global equity markets are still at risk for disappointments.  On top of that, we can see that this negative long-term trend is widely confirmed by long-term market breadth. As per last week’s report, the Modified McClellan Volume Oscillator Weekly flashed a bearish crossover signal while the percentage of stocks which are trading above their long-term simple moving averages (200) gained more bearish ground. Only the High-/Low Index Weekly is still trading at quite supportive levels.

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 Global Tactical ETF Portfolio. Moreover, we are proud to announce that the WSC All Weather Model Portfolio reached a new all-time high last week.

Bottom Line

Despite the fact that we saw some typical patterns for a major bottom last week, we think it is still a bit too early for conservative investors to get back into the market. This is mainly due to the fact that the bullish divergences/signals are still a bit weak-kneed at the moment. Consequently, the opportunity costs for conservative members of not being invested still remain extremely low for the time being. So even if the market hit a final low last week, we would like to see at least some further improvements/bullish signals within our indicator framework (WSC Short-Term Composite and WSC Mid-Term Composite), before we would advise our conservative members to get fully back into the market again. This ensures that the overall risk-/reward ratio of such a bet remains attractive. As things could change quite quickly in such a market environment, we would strongly advise them to monitor both indicators quite closely within the next couple of days. Aggressive traders should close their profitable short positions and should just re-open them again if the S&P 500 breaks below 2,800. Moreover, they should focus on the long-side again if the WSC Short-Term Composite starts showing stronger signs of positive momentum (in combination with an increasingly bullish short-term oriented tape structure). The main idea behind that call is that if we see a break below 2,800 the bottom building scenario is definitely off the table and we will see further selling pressure ahead. On the other hand, if the market hit an important low last week (preferred scenario), it could be possible that the market will jump a couple of percent within a few days.

Stay tuned!