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February 13th 2022  |

Key Takeaways

  • The trend remains bearish and there is no fundamental reason to change our cautious outlook
  • Further selling pressure towards or even below the previous low at 4,326 looks quite likely
  • Stay on the sideline since the current risk-/reward ratio looks too low to justify any kind of bargain hunt at the moment

Market Review |

U.S. stocks finished the week with losses. The Dow Jones Industrial Average lost 1.0% over the week to 34,738.06. The S&P 500 suffered a weekly loss of 1.8% to close at 4,418.64. The Nasdaq dropped 2.2% for the week to end at 13,791.15. Among the key S&P sectors, energy was the best weekly performer, while the technology sector dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 27.4.

Strategy Review

In our last week’s market comment, we said that the bounce would turn out to be corrective in its nature since we had not seen any typical patterns of a sustainable bottom yet. Moreover, we said that a typical sell-off cycle tended to be quite volatile, as the way down was always accompanied by stronger but corrective counter-trend rallies (bull-traps). Thus, there was no fundamental reason to change our cautious outlook. In fact, after the S&P 500 had continued to bounce towards 4,590 until Wednesday it lost more than 170 points in two trading days. More importantly, the market has been following a typical textbook-like sell-off pattern so far. To be more precise, after a stronger down-leg, we usually see a strong counter trend rally, which normally lasts about 5 to 10 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 or re-test comes along with quite positive divergences within our indicator framework (less new lows, a lower CBOE Volatility Index and further positive divergences) we can be quite sure that the market hits rock bottom. Otherwise, the subsequent bounce will most likely be corrective in its nature. Currently, it looks like the market has just entered step 3 of that process on Thursday. Thus, the quality of the down-leg will give us further guidance.

Short-Term Technical Condition

Not surprisingly, the short-term trend turned clearly bearish since the S&P 500 closed below the bearish threshold from the Trend Trader Index (18 points). Consequently, the short-term-oriented price trend of the market remains negative as long as the S&P 500 does not manage to close above 4,532 (upper threshold of the Trend Trader Index). Furthermore, both envelope lines of this reliable indicator are still decreasing on a fast pace. This is another typical technical pattern for a strong short-term-oriented down-trend. These bearish price trend signal is also confirmed by the fact that the Advance-/Decline 20 Day Momentum Indicator dropped to one of its lowest levels for more than one year. Given the fact that this trend indicator is a leading one, further down-testing can be expected. The only small positive trend signal is coming from the Modified MACD since it is still bullish from a purely signal point of view. However, this bullish signal is a bit too weak-kneed to take it too seriously at the moment. So all in all, the short-term-oriented trend of the market got again a bearish biased tilt last week. As you probably know by now, short-term-oriented trend indicators are quite reactive. Therefore, it is quite common that they turn negative after strong wash-out days. To identify if this trend will continue or if it was just a flash in the pan, the underlying quality of this trend (aka market breadth) will give further guidance.

The quality of the current down-trend looks quite high at the moment. Thus, further selling pressure towards the latest low looks quite possible. Especially, the NYSE New HighsNew Lows Indicator shows that the number of stocks hitting a fresh yearly low outpaced the new highs significantly during the whole week. Consequently, the High-/Low-Index Daily widened its bearish gap significantly. As long as we do not see a recovery here, it is too early to bet on a sustainable trend reversal. More importantly, it also tells us that the latest decline was driven by the whole market and was not only caused by a few heavy weighted stocks within the S&P 500. This can also be seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both indicators are telling us that the majority of all U.S. listed stocks remains in a strong short-term-oriented down-trend at the moment. Additionally, this strong price driven down-trend is also confirmed by strong volume since the Upside-/Downside Volume Index Daily also turned bearish last week. Therefore, it is not a big surprise that the momentum of declining volume strengthened (Modified McClellan Volume Oscillator Daily) last week, whereas the momentum of advancing issues clearly turned negative (Modified McClellan Oscillator Daily). All in all, the quality of the current short-term-oriented down-trend still looks too high to bet on sustainable trend-reversal at the moment. In other words: in such an environment stronger up-days are normally just oversold bounces rather than the beginning of a new recovery rally.

The bounce which lasted until Thursday continued to have its designated impact on market sentiment. First of all, the number of bears in the AII Bulls & Bears survey dropped, whereas the option market shows a muted level of fear (especially compared to the initial down-leg in late January). To be more precise, although we saw a spike in the put-/call ratio on Friday, the z-score of the AII CBOE Put-/Call Ratio has not reached extreme levels so far. Moreover, we can see that most of our option based oscillators remain more or less neutral (AII CBOE Call-/Put Ratio Oscillator and the Equity Options Call-/Put Ratio Oscillator) or have turned bearish recently (WSC Put-/Volume Ratio Oscillator). Thus, the market now looks better positioned for further selling pressure. The only positive signal is coming from the WSC Capitulation Index, which is still showing a risk-on market environment on a very short-time frame.

Mid-Term Technical Condition

The mid-term-oriented condition of the market shows the same setting as in the previous week. The Global Futures Trend Index keeps trading at low levels (29%), indicating that the risk for further strong waterfall-declines (like the one on Friday) remain outright high. Thus, as long as we do not see levels above 60% or at least some stronger signs of momentum in that indicator, it is definitely a bit too early go on a buying spree. Even if we do not see stronger selling pressure immediately, the upside potential of the broad market should be also quite capped with such weak readings. Moreover, we can see that the purely price driven mid-term oriented uptrend of the S&P 500 also continued to weaken. This is based on the fact that the WSC Sector Momentum Indicator lost further bullish ground last week. This can also be seen if we examine our Sector Heat Map, as the momentum score of riskless money market increased to 12% last week. This is another indication, that the current correction cycle is far away from being over at the moment.

If we examine the quality of the mid-term-oriented downtrend, we receive the same message. Especially, our Modified McClellan Oscillator Weekly widened its bearish gap last week and has, therefore, clearly confirmed the sell-off on Friday. Also, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) show that the price trend structure of the broad market still looks extremely damaged at the moment. A fact which is also confirmed by our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as most of them remain outright weak or even dropped to a new low last week. Probably, the most concerning signals are still coming from our Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as both indicators are still far away from flashing a bullish crossover signal. Thus, the chances for a fast V-shaped recovery remain extremely low – at least for the time being.

Long-Term Technical Condition

Also, the long-term-oriented trend of the market looks quite damaged. Once again, our Global Futures Long Term Trend Index continued to decline, showing that of the current bull market in the US is losing steam. A fact, which also holds globally since only 23% of all local equity markets around the word are still trading above their long-term-oriented trend-lines (WSC Global Momentum Indicator). If we focus on the WSC Global Relative Strength Index we can see that all risky markets (apart from commodities) are underperforming money market. These negative trend signals are confirmed by the fact that the trend quality on a long-term-oriented time horizon also continued to weaken last week (High-/Low Index Weekly and Modified McClellan Volume Oscillator Weekly and the SMA 200).

Model Portfolios

Last week, there were no changes within the our model portfolios (WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Dynamic Variance Portfolio and the WSC Sector Rotation Strategy). Moreover, we are proud to announce that our WSC Inflation Proof Retirement Portfolio reached a new all-time high last week.

Bottom Line

Given the bearish readings all across the board, there is no fundamental reason to change our cautious outlook for the time being. In our opinion, the market has just entered the next step of a typical sell-off cycle. Thus, further selling pressure towards or even below the previous low at 4,326 looks quite likely. Even if we do not see stronger declines immediately – with such weak readings all across the board – the upside potential of the market should remain capped. A fact, which can also be observed within our Big Picture Indicator (which is still indicating a bearish consolidation market regime). Thus, conservative members should stay on the sideline since the current risk-/reward ratio looks too low to justify any kind of bargain hunt at the moment.

Stay tuned!