August 4th 2019

Market Review

U.S. stocks finished the week in negative territory with the main benchmarks posting the steepest weekly losses this year. The Dow Jones Industrial Average lost 2.6 percent over the week to 26,485.01. The S&P 500 recorded a weekly loss of 3.9 percent to finish at 2,932.05. The Nasdaq slumped 3.9 percent for the week to end at 8,004.07. The weekly declines for the S&P 500 and the Nasdaq were the largest 2019, while the Dow Jones Industrial Average had its second-worst week of the year. Nearly all key S&P sectors ended in negative territory for the week, led by energy. The utilities sector was the only gainer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped to 17.6.

Strategy Review

Over the past two weeks, we received a growing number of evidences that the latest rally was running out of fuel and, therefore, the risk of a limited pullback was increasing on a very fast pace. Nevertheless, we remained cautiously bullish from a pure strategic point of view, since the tape condition of the market was still a bit too strong to justify a stronger correction (below minus 10 percent) back then. Consequently, it was a bit too early to say if any upcoming limited pullback would be the beginning of a corrective top-building process into deeper summer or just a healthy technical process within an ongoing bull-market. As a consequence, we advised our members to take profits and to reduce risk/risky bets (e.g. short volatility trades) over the past two weeks. We even advised our aggressive traders to go short, if the S&P 500 dropped below the bearish threshold from the Trend Trader Index – a fact which happened on Wednesday. In the end, the S&P 500 tumbled 3.9 percent for the week. The big question right now is, if the latest pullback was just the beginning of a more significant correction or if it was just a healthy technical reaction from the market?

Short-Term Technical Condition

Obviously, the short-term oriented price trend of the market clearly turned bearish last week. This is due to the fact that the S&P 500closed 50 points below the bearish threshold from the Trend Trader Index. Consequently, the short-term oriented price trend of the market remains bearish as long as the S&P 500 does not close above 3,005 (upper threshold from the Trend Trader Index). Also from a pure structural point of view, the short-term oriented price trend of the market started to look quite bearish, as both envelope lines of the Trend Trader Index started to form a rounding top. The situation looks similar if we analyze the underlying momentum of this short-term oriented price trend. The Modified MACD flashed a very strong bearish crossover signal last week, indicating that further down-testing can be expected. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator as its gauge plunged significantly last week. As a consequence, it has clearly confirmed the sell-off from last week and has, additionally, formed a quite bearish divergence if we consider the current level from the S&P 500. As this indicator tends to be a leading one, further selling pressure can be expected. However, the short-term oriented trend of the market is only a limited picture about the current condition of the market. It is quite obvious, that our entire short-term oriented trend indicators tend to turn bearish after such a strong sell-off. Therefore, short- to mid-term market breadth will give us further guidance if such a sell-off will lead to further stronger losses or if was only caused by a handful of a few heavy weighted stocks in the index. So if short- to mid-term market breadth remains strong, the impact of a short-term oriented trend-break should be pretty limited.

Unfortunately, this is not the case right now as our entire short-term oriented market breadth indicators continued to deteriorate significantly last week. As a matter of fact, all of them have clearly confirmed the sell-off from last week. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are telling us that the underlying momentum and volume of advancing stocks on NYSE literally collapsed. A fact, which can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50) as both gauges tumbled into bearish territory last week. To be more precise, right now there are only 28/45 percent of all NYSE listed stocks which are trading above their 20/50 days moving average! The only somehow supportive short-term oriented tape signal is coming from the NYSE New HighsNew Lows Indicator. Although we saw a stronger increase in the number of new lows last week, the magnitude was surprisingly low. As a matter of fact, the High-/Low-Index Daily still remains bullish (although it showed a decreasing bullish gap last week). A possible explanation for that strong readings might be the fact that the market rallied already almost 17 percent this year and, therefore, there are hardly any stocks around which are trading below their yearly lows. So in the end, most of the selling pressure was coming from the broad market rather than from a few large-caps. Therefore, it is a way too early to bet on a sustainable bullish trend-reversal (at least on a short-term time perspective).

From a pure contrarian point of view, the market is slightly oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and, therefore, a corrective bounce cannot be ruled out at the moment. Another interesting fact is, that the recent sell-off has absolutely not caused any fear among market participants. This can be seen if we focus on the option market, as the put-/call ratio remains below 1, whereas the amount of bulls also increased compared to last week. On the other hand, we can see that the Smart Money Flow Index has clearly confirmed the latest sell-off, plus the WSC Capitulation Index is now definitely indicating a risk-off market environment. Consequently, it is highly likely to see some further selling pressure ahead. Another interesting fact is that the market has shown an incredible high correlation to the Presidential Cycle this year. If we have a closer look on that reliable cycle, we can see that the market often faces a limited pullback into early August. This is then followed by a corrective but stronger and corrective bounce, which is then the basis for another stronger rally into late September (which is often marks the final top in a pre-election year).

Mid-Term Technical Condition

If we focus on our mid-term oriented trend indicators, such a scenario looks quite likely. Mainly because the situation on a mid-term time horizon still looks quite stable at the moment – especially if we consider that the broad market had its worst week of the year. The gauge from our Global Futures Trend Index was holding up quite well and remains within its bullish consolidation range. Normally, as long as the gauge does not close below its 60 percent bullish threshold (in combination with weak mid-term oriented market breadth), the risks of a stronger correction is not given! Consequently, as long as we do not see a strong negative momentum within this gauge, the current pullback should turn out to be limited in price and time. Moreover, even from a pure price point of view, most underlying sectors within the S&P 500 remain in a mid-term oriented uptrend as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This can be also seen if we focus on our Sector Heat Map: First of all, the current momentum score of riskless money market has not changed compared to the previous week (and keeps trading at 10 percent). And secondly, the momentum score of all other sectors (except energy like in the previous week) keeps trading above the one from riskless money market.

Examining the mid-term market breadth, we can see a quite intermingled picture. First of all, the bullish gauge from our Modified McClellan Oscillator Weekly formed somehow a rounding top and, thus, narrowed its bullish gap. Secondly, also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped and even closed below the bullish threshold (100). This indicates that the underlying trend momentum of the market clearly turned bearish, plus most of all NYSE listed stocks are definitely not in an uptrend anymore. On the other hand, we can see that the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly still remain quite supportive (although not really confirmative at the moment). This would undermine our view (at least for the moment) that the recent sell-off was just the first phase of a longer-lasting top-building process into deeper September (similar like the Presidential Cycle).

Long-Term Technical Condition

The long-term oriented trend of the market remains positive. The WSC Global Momentum Indicator remains unchanged compared to the previous week and indicates that 60 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend lines. This is a clear confirmation that the current global bull-market is still in force (although we saw a stronger sell-off last week). Also our Global Futures Long Term Trend Index continued its bullish ride and also reached its highest level for months, signaling that the long-term oriented trend of U.S. equities remains intact. Another positive signal is coming from our WSC Global Relative Strength Index as the relative strength of nearly all risky markets improved. If we focus on our long-term market breadth indicators, we can see that the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly increased or have not shown any form of weakness, while the percentage of stocks which are trading above their 200 day moving average decreased last week.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Global Tactical ETF Portfolio. As the momentum score from utilities rose again above average and above the one from the S&P 500 (within our Sector Momentum Heat Map), we received a buy signal for that sector within the WSC Sector Rotation Strategy.

Bottom Line

Given the quite bearish readings within our short-term oriented indicator framework, we expect to see further selling pressure (towards 2,914/2,900 or even 2,885) ahead. However, given the still quite supportive readings on a mid-term time perspective, the downside potential of the market looks quite capped as well – at least from a current point of view. Therefore, it could be possible that the recent sell-off is just part of a larger top-building process which will finally unfold in late Q3/early Q4 (if mid-term oriented condition of the market remains supportive). On the other hand, if we see a further stronger deterioration within our short- to mid-term oriented indicator framework (especially within the Global Futures Trend Index), the recent sell-off will be just the start of a bigger correction (not preferred scenario right now). So all in all, we would advise our aggressive traders to monitor our indicator framework quite closely and to use close stops since the down-side potential looks quite capped – at least for now. Conservative investors should remain bullish, but we would advise them to place a stop-loss limit around 2,880 (closing basis), as things could change quite quickly during the week.

Stay tuned!