March 10th 2019

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average declined 2.2 percent over the week to 25,450.24. The S&P 500 also recorded a weekly loss of 2.2 percent to finish at 2,743.07. The Nasdaq lost 2.4 percent for the week to end at 7,408.14. All three benchmarks posted their biggest weekly declines of the year. Most key S&P sectors ended in negative territory for the week, led by energy. Utilities were the only gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.1.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that – on a very short-time frame – the market looked quite vulnerable for a volatile consolidation period until mid-March. Although we had expected to see some form of consolidation, the impact on our short-term oriented indicators was surprisingly strong. To be more precise, the Modified MACD flashed a quite significant bearish crossover signal last week. This is telling us that the current price momentum of the market turned outright bearish last week. This can be also seen, if we focus on the Trend Trader Index as the S&P 500 closed 14 points below its bearish threshold. Nevertheless, both envelope lines of the Trend Trader Index are still rising, which indicates that the short-term uptrend of the market still remains intact from a structural point of view. This can be also seen, if we focus on our Advance-/Decline 20 Day Momentum Indicator, which has not turned bearish so far, although its gauge came down substantially last week. In general, it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate, when the market is entering a consolidation period or if the market is taking a breather. In such a situation, short- to mid-term market breadth will give us guidance if the current consolidation period will lead to a stronger pullback or if it will be just healthy in its nature.

Right now, short-term market breadth still looks somehow supportive although the impact of the recent consolidation period has definitely left its mark on our tape indicators. Both, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily, flashed a serious bearish crossover signal last week. This indicates that the underlying momentum and volume of advancing stocks on NYSE literally collapsed. This can be also seen if we focus on the percentage of stocks which are trading above their 20 day moving average, as its gauge was pushed far below its bullish threshold, signaling a broad based trend-break across the whole market. Even on a 50 days’ time perspective, we saw a stronger deterioration, although the gauge still remains bullish from a pure signal point of view. This picture is now also widely confirmed by the NYSE New HighsNew Lows Indicator, as we saw a stronger increase in the number of new lows (especially on Friday), whereas the number of new yearly highs did not show any signs of strength last week. As a result, the signal from the High-/Low-Index Daily continued to weaken although it has not turned bearish so far. So in the end, most of the selling pressure was coming from the broad market rather than from a few heavy weighted large-caps. Therefore, the underling short-term oriented tape condition of the market can be described as extremely weak/non-confirmative at the moment. As a result, the current consolidation period has now definitely a more corrective tilt. So even if we do not see further selling pressure immediately, with such weak readings all across the board, any upcoming rally attempt looks pretty capped as well. Therefore, the current risk-/reward ratio is deteriorating on a very fast pace at the moment.

From a pure contrarian point of view, the market is quite oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and, therefore, some bullish biased rally attempts cannot be ruled out at the moment. Apart from that fact, we can see that the gauge from the WSC Capitulation Index spiked significantly for the week and is, therefore, showing that the market has now entered a risk-off environment. This is another indication for our view that the current consolidation period could turn out to be the beginning of a stronger pullback into mid-March. This view is also confirmed from a pure cyclical point of view (Presidential Cycle) as the market often faces a stronger pullback (3-5 percent) until mid/end of March before further rallying can be expected. Another concerning fact is that the option market still remains quite complacent, although the market lost more than 2 percent of the week. This can be also seen if we focus on the AII Bulls & Bears survey, as the total amount of bulls still remains quite high at the moment. So all in all, the ingredients for further disappointments are definitely increasing on a very fast pace at the moment.

Mid-Term Technical Condition

However, on a mid-term time horizon, the recent move can be still classified as bullish biased consolidation period rather than the start of a stronger correction (losses below -10 percent). This is mainly due to the fact that the gauge from the Global Futures Trend Indexclosed in the middle part of its bullish consolidation area. Nevertheless, we should not forget that the gauge dropped by 14 percentage points during the last week. This is a quite strong move, if we consider the fact that the market only lost about 2 percent for the week. So if this trend continues it might be just a question of time until it drops below its bullish 60 percent threshold. If this is the case, the current consolidation has definitely the potential to trigger a stronger correction (in combination with weakening market breadth). However, right now this is not the case and, therefore, the overall tone still remains supportive. Consequently, the current short-term oriented deterioration looks also capped on the downside (at least for now). Another supportive fact is that the WSC Sector Momentum Indicator gained even more bullish ground last week, indicating that most sectors of the S&P 500 got back in a strong mid-term oriented uptrend (currently 38 percent). This can be also seen if we have a closer look at our Sector Heat Map, as it has been improving for weeks now. The momentum score of riskless money market decreased again (by 12.4 percentage points) last week and dropped to 14.6 percent! And currently, there is only one sector left (energy), which is trading below the one from riskless money market! Consequently, the current short-term oriented deterioration looks somehow capped on the downside.

Another main reason why we believe that the downside potential of the market remains quite capped (at least from the current point of view) is due to the fact that the current mid-term oriented up-trend of the market is still widely confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly gained more bullish ground last week, indicating that the overall tape momentum remains quite positive for the time being. Moreover, as long as mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading (far) above their bearish counterparts, it is a bit too early to get concerned about the current technical condition of the market. Another encouraging signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). If we focus on their recent development, we can see that both indicators were holding up quite well and even succeeded to remain bullish (100). This indicates that the total upside participation within the market still looks quite supportive, which is another indication that any upcoming short-term oriented pullback should not lead to a stronger correction (at least for now).

Long-Term Technical Condition

The long-term oriented trend of the market shows an intermingled picture. On the one side, our WSC Global Momentum Indicator slightly increased by 2 percentage points last week. This signals that 57 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are now trading above their long-term oriented trend and is in addition a quite supportive technical signal (as it shows that the current recovery is still global in scope). Our Global Futures Long Term Trend Index was also holding up quite well, whereas the WSC Global Relative Strength Index also shows that most markets have a higher relative strengthscore than U.S. Treasuries. But on the other side, we also saw quite bearish signs in our long-term market breadth indicators. The Modified McClellan Volume Oscillator Weekly narrowed its bullish gap and the percentage of stocks which are trading above their 200day moving average dropped to 34 percent. But the worst signal is coming from the High-/Low Index Weekly, as it flashed a bearish crossover signal last week. So all in all, this might be another indication that the recent rally is definitely running out of steam!

Model Portfolios

Last week, there have been no changes in the allocation advice of our model portfolios (WSC All Weather Model PortfolioWSC Inflation Proof Retirement PortfolioWSC Sector Rotation Strategy and the WSC Global Tactical ETF Portfolio).

Bottom Line

Despite the fact that the latest slow-down was in-line with our expectations, the deterioration within some of our tape indicators was quite surprisingly. Especially, the weaker readings within our short-term oriented tape indicators in combination with a weaker Global Futures Trend Index are indicating some form of a stronger exhaustion (although the market just lost about 2 percent last week). As a matter of fact, there is a quite high chance that the current consolidation period will transform into a more corrective set-up. Nevertheless, it is still a bit too early to pull the trigger as there are still some signals around that do not fit in the puzzle right now. In the current situation, the tilt towards corrective and supportive is quite narrow and that makes it quite tricky at the moment. If this situation continues, it could be also possible that the market is just slowly drifting lower as there is just too much breadth for a fast and stronger decline around and just too less for holding the market at those levels. And in the end, the S&P 500 could also trade 5 to 7 percent lower before anybody is realizing such a devaluation. Given the fact, that we are far ahead the curve at the moment, the best approach for our conservative members is to place a stop-loss limit around 2,731 (just in case things change quite fast within the next couple of days). This stop-loss should remain in place as long as we do not see any stronger improvements within our indictor framework. Aggressive traders should now switch into the bearish camp, as long as we see further deterioration within our short-term oriented indicator framework.

Stay tuned!!!