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May 15th 2022 |

Key Takeaways

  • The negative market regime still looks quite sustainable in its nature.
  • Fridays’ oversold bounce might continue into option expiration.
  • Stay in cash, as the risk-reward ratio is too low in the current market regime.

Market Review |

Despite the 2.4% bounce on Friday, major averages posted major losses for another week. The Dow Jones Industrial Average dropped 2.1% over the week to 32,196.66. The blue-chip average posted its first 7-week losing streak since 2001. The S&P 500 closed at 4,023.89 and posted a 2.4% weekly loss, marking its longest weekly losing streak since 2011. Moreover, with a decline of more than 20 percent from its peak, the broad index has officially entered a bear market. The Nasdaq plunged 2.8% this week to end at 11,805. Nearly all key S&P sectors were negative for the week, staples were the only gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 28.9.

Short-Term Technical Condition

Unchanged compared to last week, the short-term downtrend of the market remains well in force. The S&P 500 is still trading 123 points below the bearish threshold from the Trend Trader Index, plus both envelope lines are still decreasing on a fast pace. This shows that the market remains in an outright negative price trend at the moment. More importantly, the momentum of this negative short-term-oriented price trend remains strong (Modified MACD and the Advance-/Decline 20 Day Momentum Indicator). Thus, the latest bounce had literally no positive impact so far.

This view is also confirmed by the fact that the trend quality of this short-term-oriented downtrend has intensified. The momentum of declining stocks and declining volume continued to strengthen (Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily), whereas the volume of declining stocks continued to outpace the volume of advancing ones (Upside-/Downside Volume Index Daily). This broad-based down-side participation is also illustrated in our New Highs/New Lows indicator and the High-/Low Index Daily. To be more precise, the number of stocks dropping to a new yearly low spiked throughout the whole week, while there were hardly any stocks hitting a new yearly high. This broad based downside participation can also be seen if we focus on the percentage of stocks trading above their short-term-oriented moving averages (20/50). There, we can see that the majority of all U.S. listed stocks remains in a strong short-term-oriented downtrend at the moment. Thus, the latest gains can still be classified as an oversold bounce rather than the beginning of a sustainable recovery. Thus, it is still a way too early to bet on a major switch into a positive market regime – at least from the current point of view.

On the sentiment-side, we can see that the latest bounce had definitely relieved oversold conditions (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily). Moreover, we can see that most of our option based indicators (AII CBOE Put-/Call Ratio, AII CBOE Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio) have reached or kept trading in quite contrarian territory. This shows that there is a strong imbalance on the option market as the majority of market participants is betting on further declines. Given the fact that 90% of naked options tend to be an also-ran, it could be possible to see further bouncing into the option expiration date next Friday. 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.

Mid-Term Technical Condition

The mid-term-oriented trend of the S&P 500 also looks quite negative (since it has not shown any signs of stabilization yet). The gauge of the Global Futures Trend Index reached its lowest level for years, whereas the WSC Sector Momentum Indicator also continued to drop deeper into its bearish territory. As long as we do not see a stronger recovery here, the risk for (further) stronger waterfall declines remains outright high. Additionally, any upcoming gains should turn out to be corrective in their nature rather than the beginning of sustainable trend-reversal. A fact, which can also be observed if we focus on the Sector Heat Map. There we can see that the momentum score of risk-less money market jumped to 45%. This is definitely another major warning signal on the horizon, showing that the negative market regime will not be over soon.

This scenario is also driven by the fact that the mid-term-oriented trend quality remains quite strong. Our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to decline for the week. Also, the  percentage of stocks which are trading above their mid- (SMA 100/150) and long-term-oriented simple moving average (SMA 200) has not shown any major recovery so far. This is definitely confirming our view that the current negative market regime is quite strong in its nature. A fact, which can also be observed if we focus on mid-term-oriented declining issues (Advance-/Decline Index Weekly) and declining volume (Upside-/Downside Volume Index Weekly). As long as we do not see a stronger recovery here, in combination within with strong positive momentum in the Global Futures Trend Index or readings above 60%, any upcoming oversold gains should turn out to be limited in price and time.

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). Worth mentioning is the fact that the WSC Sector Rotation Strategy is strongly performing in line with its investment objectives.

Bottom Line

The outlook remains unchanged compared to last week. Although the chances for further bouncing into option expiration cannot be ruled out, there is absolutely no fundamental reason to change our cautious strategic view. The 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 market regime any time soon. As a matter of fact, the S&P 500 is still at risk for further stronger losses accompanied by high volatility. Consequently, the risk-/reward ratio of being invested still looks too low in that perspective.

Stay tuned!