August 11th 2019

Market Review

U.S. stocks had a wild week, with the major indexes recording their biggest one-day sell-off of the year on Monday. The indexes recovered some of those losses on Tuesday and finally finished the week with quite manageable declines. The Dow Jones Industrial Average dropped 0.8 percent over the week to 26,287.44. The S&P 500 booked a weekly loss of 0.5 percent to finish at 2,918.65. The Nasdaq shed 0.6 percent for the week to end at 7,959.14. Of the S&P sectors, utilities led advancers, while energy led decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 18.

Strategy Review

Despite the fact that the market was just trading a few percentages below its all-time high three weeks ago, we received a growing number of evidences that the market was highly at risk for a stronger pullback. Mainly, because our indicator framework showed us that the underlying tape structure was faltering on a very fast pace, although the broad market was still holding up quite well back then. As result, we advised our aggressive traders to remain short and our conservative members to place a stop-loss limit around 2,880 as it was just a question of time until sharp waterfall declines could be expected. The main reason why we did not issue a strategic sell signal immediately was due to the fact that there was still a small chance to see a longer lasting (bearish biased) consolidation period instead (which was not our preferred scenario). Anyhow, the stop-loss limit was triggered on Monday, whereas we saw further down-testing until Wednesday before stocks strongly rebounded at the end of the week. Consequently, the big question is if it is time for a bargain hunt or will the market face further declines?  Normally, a typical bottom tends to occur as a process rather than as a V-shaped recovery. If the market hits an important bottom, we usually see a strong counter trend rally, which normally lasts for a couple of trading sessions. After that, the market tends to show renewed weaknesses, which could then lead to a retest or even a break of its previous low. If this weakness comes along with more positive divergences within our market breadth indicators, we can be quite sure that the market hits rock bottom. We saw such a typical bottom building processes in August 2015, January 2016 or just in February 2018. Otherwise, further declines can be expected.

Short-Term Technical Condition

Not surprisingly, the short-term down-trend of the market remains well in force and has not shown any signs of stabilization so far. From a pure price point of view, we can see that the S&P 500 closed 33 points below the bearish threshold from the Trend Trader Index. Additionally, both envelope lines of the Trend Trader Index are dropping on a quite fast pace. This is telling us that within the past 20 days we saw lower highs and lower lows, which is another typical technical pattern for a strong short-term oriented down-trend. In this context, the S&P 500 is extremely far away from getting back into a short-term oriented price driven uptrend. The same is true if we focus on the Modified MACD, which remains in a bearish free fall and reached the lowest level for months and has, therefore, not shown any positive divergences so far. Another reason why we do not believe to see a V-shaped recovery is due to the fact that the Advance-/Decline 20 Day Momentum Indicator has not confirmed the latest recovery we saw. As this indicator tends to be a leading one, its non-confirmation is definitely a sign that we might see another wave of weaknesses ahead.

This picture is confirmed by our entire short-term oriented market breadth indicators. The short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued their bearish rides and plummeted once again to their lowest levels for months. This signals that the underlying momentum and volume of advancing stocks on NYSE literally collapsed. With such weak readings, it is quite unlikely that the recent V-shaped recovery will push the S&P 500 back to pre-correction levels. Basically the same is true if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50), as both indicators keep trading well below their bullish thresholds. Another interesting fact is that we did not see any signs of a stronger recovery within those indicators at the end of the week, although the S&P 500 managed to recover most of its losses. The only positive breadth signal, coming from the NYSE New HighsNew Lows Indicator, as we saw an outright strong reduction in new lows and even a stronger improvement in new highs during the week. Consequently, the High-/Low Index Daily managed even to flash a very small bullish crossover signal again at the end of the week. Given the quite bullish readings within both indicators, it could be possible that the previous intra-day low of the S&P 500 at 2,822 represents in important intermediate low. Therefore, it could be possible that this low will hold if we see another wave of weaknesses ahead.

From a pure contrarian point of view, the picture is getting increasingly bullish as most of our option based indicators flashed a buy signal last week (CBOE Put-/Call Ratio, All CBOE Put-/Call Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio). Above all, we can see that our reliable WSC Capitulation Index started to drop significantly, which is another indication that 2,822 represents an outright strong low. This view is also confirmed by the fact that the amount of bulls on Wall Street hit the lowest number in since January. This indicates a strong wash-out among market participants. And even from a cyclical point of view (Presidential Cycle), we often see a volatile bottom building process after the typical early August sell-off, which then often acts as basis for another rally-attempt into mid-September (before further troubles might be due).

Mid-Term Technical Condition

If we focus on the mid-term oriented trend condition of the market, we can see that the Global Futures Trend Index dropped slightly below its important 60 percent threshold. As a consequence, the gauge has definitely not confirmed the latest recovery from the S&P 500. As a matter of fact, it is highly likely to see at least another period of weaknesses (even a retest of the previous low), since the current correction cycle will be definitely not over as long as its gauge remains far below its outright bearish 60 percent threshold. Also from a pure price point of view, the mid-term oriented uptrend of the market deteriorated, as the WSC Sector Momentum Indicator slightly traded lower for the week. Nevertheless, its gauge was holding up surprisingly well, which might be another indication that 2,822 represents an outright important low. Moreover, it is telling us that most sectors within the S&P 500 are still outperforming riskless money market on a relative basis. Our Sector Heat Map reveals that although the momentum score of riskless money market increased to 12 percent (from 10 percent last week) there is still only sector (energy) that has a lower momentum score at the moment. Consequently, any upcoming weaknesses might not have the power to push the market significantly below its previous low (at least from a current point of view).

Examining mid-term oriented market breadth reveals a quite intermingled picture. On the first hand side – apart from the Advance-/Decline Volume Line Daily – our entire advance-/decline indicators (Advance-/Decline Line Daily and the Advance-/Decline Line Weekly) have formed a quite bullish divergence recently. Moreover, we can see that the Advance-/Decline Index Weekly and on the Upside-/Downside Volume Index Weekly were holding up quite well, as both gauges are far away of being bearish. This is a quite strong signal, as major corrections/bear markets always started with outright weak/bearish readings in both indicators. Given the fact that both indicators are still holding up quite well, we think the market still looks quite capped on the down-side (at least from the current point of view). On the other hand, we can also see that the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) keep trading at quite bearish levels, whereas the Modified McClellan Oscillator Weekly looks like that it will roll over into bearish territory soon. These facts are also telling us that the upside potential of the market looks quite capped on a mid-term time perspective as well. As a matter of fact, it looks like the latest pullback is just part of a larger top-building process into deeper Q3.

Long-Term Technical Condition

The long-term oriented up-trend of the market still remains intact. The gauge from the Global Futures Long Term Trend Index keeps trading in quite bullish territory (although it looks like it peaked out last week). Moreover, we can see that the relative strength of U.S. equities remains positive, although it dropped significantly for the week. The only negative signal is coming from the WSC Global Momentum Indicator, which shows that the majority of stocks (which are covered by our Global ETF Momentum Heat Map) dropped below their long-term oriented trend lines. This is a clear confirmation that the current global bull-market is slightly running out of steam. Basically, the same is true if we focus on long-term market breadth, as the Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average flashed a bearish signal, whereas the High-/Low Index Weekly still remains quite supportive for the time being.

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

Bottom Line

On a very short time frame, we received a lot of evidences that 2,822 represents an important intermediate low. Nonetheless, we should not forget that the readings from our entire short-term oriented indicators still remain outright bearish from a pure signal point of view. As a matter of fact, the recent price action can be still categorized as oversold bounce. Therefore, it is quite likely to see at least another period of weaknesses or another washout-day (even towards the latest correction low). In our preferred scenario, any upcoming pullback will be accompanied by an improving tape structure (WSC Short-Term Composite), which would then represent a good buying opportunity. Therefore, the most advisable approach for aggressive traders is to watch the tape quality quite closely within the next couple of days. We will either see an increasing short-term oriented tape structure (which would be the final confirmation that the market hit an important intermediate low) or the recent bounce was just a temporary recovery in an ongoing down-trend (not preferred scenario). Consequently, they should remain short as long as the WSC Short-Term Composite remains bearish, or has not formed any kind of bullish divergences. Conservative members should remain on the side-line as we would like to see at least a bullish signal within the WSC Short-Term Composite and a positive momentum within the WSC Mid-Term Composite first. This ensures that the overall risk-/reward ratio of such a bet remains attractive.

Stay tuned!