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May 22nd 2022  |

Key Takeaways

  • The negative market regime still looks quite sustainable in its nature.
  • On a very short-time frame, the chances for a stronger oversold bounce are increasing.
  • Stay in cash, as the risk-reward ratio is too low in the current market regime

Market Review |

In line with the our latest Market Regime Outlook, U.S. stocks experienced a roller-coaster week that left the major averages significantly lower for the week. The Dow Jones Industrial Average plummeted 2.9% for the week to finish at 31,261.90. The blue-chip index booked its first eight-week losing streak since 1923. The S&P 500 lost 3.0% in five trading days to end at 3,901.36. The Nasdaq finished at 11,354.62 and plunged 3.8% this week. Both averages posted seven-week losing streaks. Most key S&P sectors ended in negative territory for the week, led by staples. The energy sector led gainers. The CBOE Volatility Index (VIX) – seen by many investors as the best “fear gauge” on Wall Street – traded near 29.4.

Short-Term Technical Condition

Not surprisingly, the short-term-oriented downtrend of the market remains well in force. After closing 133 points below the bearish threshold of the Trend Trader Index on Friday, the S&P 500 is currently far away from getting back into a short-term-oriented uptrend. In addition, both envelope lines of the Trend Trader Index are still drifting lower on a fast pace (which is another typical pattern of a strong negative price trend at the moment). This view is widely confirmed by the fact that the momentum of this negative price trend remains well in place (Modified MACD and Advance-/Decline 20 Day Momentum Indicator).

More importantly, the trend quality of this short-term-oriented downtrend still looks too high to trigger a positively biased market regime (Big Picture Indicator) at the moment. The volume in declining stocks is still outpacing the volume in advancing ones (Upside-/Downside Volume Index Daily), whereas more than 74 percent of all U.S. listed stocks remain in a short-term-oriented downtrend at the moment (SMA 20/50). Although the momentum of declining stocks (Modified McClellan Oscillator Daily) and declining volume (Modified McClellan Volume Oscillator Daily) on NYSE has softened a bit recently, it remains quite strong in its nature. The same if true if focus on the number of stocks hitting a fresh yearly high or low (NYSE New HighsNew Lows Indicator). There, we can see that the number of new lows have not fully confirmed the latest low of the S&P 500, but they still have reached again quite negative readings. Consequently, the High-/Low-Index Daily softened its negative signal but is still far away from flashing a positive crossover signal at the moment. As mentioned above – with such a strong downside participation all across the board –  it might be a way too early to bet on a sustainable shift into a positive biased market regime at the moment.

On the sentiment-side, we can see that our entire option based indicators turned bullish or even strengthened their bullish signal recently (AII CBOE Put-/Call Ratio, AII CBOE Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio). Additionally, we can see that market sentiment in total (AII Bulls & Bears survey) remains quite pessimistic. Thus, the chances for a stronger and even longer-lasting oversold bounce remain high. On the other hand, we can see that Smart Money confirmed the sell-off from last week, whereas the WSC Capitulation Index is still indicating a risk-off market environment for the time being. Thus, we think any upcoming gains would turn out to be corrective in their nature.

Mid-Term Technical Condition

Unchanged compared to last week, the mid-term-oriented trend of the S&P 500 still looks outright negative at the moment (Global Futures Trend Index and the WSC Sector Momentum Indicator). As long as we do not see any positive momentum in the gauge of the Global Futures Trend Index it is a way too early to bet on a sustainable trend reversal. Moreover, we can see that the spread between the momentum score of the S&P 500 and the one of riskless money market within our Sector Heat Map continued to widen. To be more precise, the momentum score of riskless money market rocketed another 12 percentage points (!) last week to end at 57%. All these facts indicate that the current correction cycle is far from being over and, therefore, the S&P 500 remains at risk for further waterfall declines.

This picture is also confirmed by the fact that the mid-term-oriented downside participation still remains broad-based in its nature. On Friday, more than 80 percent of all U.S. listed stocks closed below their mid- to long-term oriented trendlines (SMA 100/150 and SMA 200). Additionally, we can see that our  entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have not shown any major signs of positive divergences yet. Especially, mid-term-oriented declining issues (Advance-/Decline Index Weekly) and mid-term-oriented declining volume (Upside-/Downside Volume Index Weekly) looks too pronounced to consider a major regime shift at the moment.

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

Our outlook remains unchanged compared to last week. Although the chances for a stronger and even longer-lasting oversold bounce remain intact, there is absolutely no fundamental reason to change our cautious strategic view. The current downtrend of the S&P 500 is still well backed by a broad basis and, thus, it is quite unlikely that the gauge of the Big Picture Indicator will jump back into a positive (biased) market regime any time soon. As a matter of fact, the risk-/reward ratio of a strategic investment still looks too low in that perspective.

Stay tuned!