March 3rd 2018
U.S. stocks finished the week with losses. The Dow Jones Industrial Average dropped 3.1 percent over the week to 24,538.06. The S&P 500 recorded a weekly loss of 2.0 percent to finish at 2,691.25. The Nasdaq shed 1.1 percent for the week to end at 7,257.87. All key S&P sectors finished in the red for the week, dragged by materials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 19.6.
Short-Term Technical Condition
Right in line with our recent call, U.S. stocks recorded sharp losses for the week. The sell-off began on Thursday and continued on Friday as bears took the S&P 500 down to 2,648 (just 2 points below our projected price target), before it strongly bounced back into Friday’s closing bell. Not surprisingly, the short-term oriented technical condition of the market deteriorated compared to last week. Apart from the fact that the S&P 500 managed to close within the neutral territory of the Trend Trader Index, the remaining short-term oriented trend signal remains quite bearish. To be more precise, the Modified MACD flashed a small bearish crossover signal, whereas the gauge from the Advance-/Decline 20 Day Momentum Indicator kept trading well below its bullish threshold last week. This indicates that the underlying short-term oriented price momentum of the market has clearly a bearish tilt at the moment. Nevertheless, if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator, we can see that its gauge looks like as it has hit rock bottom recently. Consequently, it has formed a huge bullish divergence as it did not confirm the sell-off from last week. This indicator often begins to turn before prices do, thereby making it a leading indicator. Even though this fact can be seen as a green flag on the horizon, it should be counterchecked with our breadth indicators.
If we analyze our short-term oriented breadth indicators, we get nearly the same picture. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed major signs of exhaustion. Both indicators also flashed a bearish crossover signal. These facts indicate that the underlying momentum and volume of advancing stocks on NYSE are very weak at the moment. This picture is also confirmed by the NYSE New Highs – New Lows Indicator, as we have seen an increase in the number of new lows, whereas the number of new yearly highs remains outright depressed! Consequently, the High-/Low-Index Daily flashed a small bearish crossover signal. As a matter of fact, it was also not a big surprise that the percentage of stocks which are trading above their short-term oriented moving averages (20/50) also dropped deeper into bearish territory. To be more precise, right now there are only 33/37 percent of all NYSE listed stocks trading above their 20/50 days moving average. These facts are telling us that the latest decline was definitely driven by the whole market and was not only caused by a few heavy weighted stocks within the S&P 500. So despite the fact that our entire short-term oriented tape indicators remain quite bearish from a pure signal point of view, we can also identify some bullish divergences in the readings from the High-/Low-Index Daily, the Modified McClellan Oscillator Daily and the Upside-/Downside Volume Index Daily. To be more precise, their bearish signals could be much worse if we compare the current levels from the S&P 500 with similar levels in mid-February. In our opinion, this is another indication that latest correction low at 2,532 represents an outright strong intermediate bottom (at least for now).
On the contrarian side, we can see that the fear among investors remains persistent. This is due to the fact that the readings from our option based contrarian indicators grew even more into bullish territory last week (Global Futures Put-/Volume Ratio, Equity Options Call-/Put Ratio Oscillator Weekly and the All CBOE Options Call-/Put Ratio Oscillator Weekly). As approximately 90 percent of all uncovered options are an also-ran, we would be surprised if the market traded higher until March 16th, when the option expiring date is due. This time perspective would be in-line with our cyclical roadmap, where we expect to see a stronger but corrective bounce into March. Another encouraging fact is that the gauge from the WSC Capitulation Index dropped by half of its rise, indicating that we might have seen the worst already (at least on an intermediate basis).
Mid-Term Technical Condition
On a mid-term time horizon, the technical condition of the market remains quite unchanged compared to last week. This means in more detail that it still looks very vulnerable currently. Mainly, since the gauge from the Global Futures Trend Index is still trading slightly below its 60 percent bullish threshold! As always stated in our market comment – from a formal point of view – the current correction cycle will be not be over as long as its gauge keeps trading below that important threshold! Therefore, it was good to see that its gauge has shown again some positive momentum recently! Nevertheless, as long as the gauge remains within its bearish biased consolidation brackets, the risk of stronger pullbacks remains quite high. In contrast and also like in the previous weeks, the mid-term oriented price trend of the market remains positive. Mainly, because our WSC Sector Momentum Indicator is trading at quite solid levels and has not shown any signs of weakness so far. This indicates that most sectors within the S&P 500 are still outperforming riskless money market on a relative basis. A fact which is also supported by our Sector Heat Map as the momentum score of all sectors (except utilities like in the previous weeks and now also consumer staples) keeps trading above the one from riskless money market (currently at 20.2 percent).
If we focus on our mid-term oriented tape indicators, we can see that their readings remain quite intermingled at the moment. The overall tape momentum of the market remains quite weak as the Modified McClellan Oscillator Weekly showed a widening bearish gap last week, whereas Advance-/Decline Index Weekly slightly strengthened its bearish signal. This can be also observed if we focus on the percentage of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150). Both indicators decreased for the week and are, therefore, trading slightly below their bullish threshold. Nevertheless, their readings remain somehow supportive if we consider the fact that the S&P 500 dropped 2 percent last week. Another encouraging fact is that the Upside-/Downside Volume Index Weekly remains quite bullish, although mid-term oriented up-volume deteriorated slightly last week. In our opinion, this is another piece of evidence that it might be still a bit too early to bet on a major financial melt-down. On the other hand, the current mid-term oriented tape structure is also telling us that the upside potential of the market remains quite capped. Also a piece of evidence for our cyclical roadmap which suggests that the latest bounce is just part of a complex multi-week top building process which will finally unfold in early Q2 2018.
Long-Term Technical Condition
The long-term uptrend of the market remains intact, and therefore, our long-term bullish outlook has not been changed so far. Our WSC Global Momentum keeps trading at solid levels and indicates that 82 percent of all local equity markets around the world remain within a long-term oriented uptrend. Our Global Futures Long Term Trend Index is also trading at solid levels. This positive momentum can also be observed by looking at the Global Relative Strength Index. The relative strength of all risky markets keeps trading far above the one from U.S. Treasuries. But we can also observe some exhaustion in long-term market breadth, as the readings from our entire long-term oriented tape indicators (High-/Low Index Weekly, the Modified McClellan Volume Oscillator Weekly, percentage of stocks which are trading above their 200 day moving average) weakened last week.
If we have a closer look at our Model Portfolios (WSC Inflation Proof Retirement Portfolio, the Global Tactical ETF Portfolio, the WSC Sector Rotation Strategy and the WSC All Weather Portfolio) we can see that there were no changes in the allocation last week.
Given the fact that most of our short- to mid-term oriented indicators remain weak but somehow supportive, we received further confirmation for our cyclical roadmap (Presidential Cycle). In other words, we think that the latest correction low at 2,532 just acts as basis for a quite volatile but corrective bounce into mid-March. After that, we often see another significant correction leg, which is then followed by another rally into April before a cyclical bear market could hit the market in early summer. Right now, our indicator framework is still supporting this scenario, as the mid-term oriented condition of the market is too supportive to justify another significant down-leg towards/below 2,532, but too weak to trigger a sustainable rally towards new highs. Consequently, a volatile but bullish biased move into mid-March looks quite likely. From a trading perspective, a break above 2,698 would give way towards 2,754 whereas a break of that level would give way to 2,780. Although we even received further confirmation for our view that the current move is just part of a complex top-building process, conservative investors should remain invested. This is mainly due to the fact that we think that the latest rebound is an attractive bet as it could push the S&P 500 towards 2,850/2,870 into March, before further major troubles might be due.