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January 16th 2022 |

Market Review |

U.S. stocks wrapped a volatile week that left the major averages mostly unchanged for the week. The Dow Jones Industrial Average lost 0.9% for the week to close at 35,911.81. The S&P 500 eked out a small weekly loss of 0.3% and finished at 4,662.85. The Nasdaq declined 0.3% over the week to end at 14,893.75. Most key S&P sectors closed lower for the week, dragged by the real estate sector. Energy was the best weekly performer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 19.2.

Short-Term Technical Condition

According to the Trend Trader Index, the short-term-oriented price trend of the S&P 500 turned slightly bearish at the end of the week (after being more or less neutral on Tuesday and Wednesday). Moreover, we can see that the underlying momentum continued to deteriorate since the Modified MACD also increased its bearish gap (meaning that the short-term moving average dropped faster than its longer-term-oriented average). On the other hand, we still can observe some positive signals, indicating that the short-term-oriented price uptrend of the market has not completely broken yet. First of all, both envelope lines of the Trend Trader Index are still (slightly) increasing and have not formed a bearish rounding top so far. This indicates that within the past 20 days we still saw higher highs and higher lows (albeit on an intraday basis). Second, our Advance-/Decline 20 Day Momentum Indicator rose to quite bullish levels (although it slightly decreased on Friday). Hence, this indicator shows once again a quite bullish divergence to the S&P 500. As a result, the recent trend-break can be categorized as non-sustainable so far (at least from a purely price point of view). As pointed out in our previous market timing forecast, it is not unusual that some or even all of our short-term-oriented trend indicators tend to deteriorate (or even turn bearish) during a volatile consolidation period. The main challenge in such a market environment is to differentiate between a supportive and a corrective consolidation process. In such a situation, short- to mid-term trend quality (also known as market breadth) will give us further guidance if a negative short-term-oriented trend can be ignored or if it has the potential to transform into a more significant pullback.

Unfortunately, our short-term-oriented trend quality indicators reflect the same intermingled picture as in the previous week. Consequently, the tilt between supportive and corrective consolidation process remains quite narrow for the time being. The percentage of stocks which are trading above their short-term-oriented moving averages (20/50) slightly decreased for the week. This shows that the purely short-term-oriented price driven downtrend of the market slightly strengthened for the week (albeit the bearish signal is still a bit too weak-kneed to be taken too seriously at the moment). The same applies to the High-/Low Index Daily. While the indicator succeeded to flash a bullish crossover signal in the middle of the week, it turned slightly bearish again on Friday. The main reason behind that fact was that the number of stocks hitting a fresh yearly low overtook the ones hitting a new yearly high on Friday. Although this can be interpreted as quite negative signal, the spread between new highs and new lows is still a way too narrow to throw in the towel immediately. Another positive signal is coming from the spike in NYSE Volume, which often marks a short-term-oriented trend-reversal. Further positive signals are coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators succeeded to strengthened their bullish readings for the week, whereas the latter one even succeeded to reach its highest level for week. This is telling us that the momentum of advancing stocks and advancing volume on NYSE still remains quite robust or even improved for the week. A fact, which can also be observed if we focus on the Upside-/Downside Volume Index Daily. All in all, the current trend quality reflects the same setting as in the previous week: it still looks supportive somehow, but the bullish impulses are also missing as well. As a result, further volatile sideways trading looks quite likely – at least from the current point of view.

Unchanged compared to last week, market sentiment is also showing no clear direction at the moment. The spread between bulls and bears in the AII Bulls & Bears survey remains neutral, which also applies for most of our option based indicators (z-score AII CBOE Put-/Call Ratio, Equity Options Call-/Put Ratio Oscillator, AII CBOE Call-/Put Ratio Oscillator and the WSC Put-/Volume Ratio). Thus, there is no clear driver for stronger moves in both direction visible. A fact, which is now also confirmed by the WSC Capitulation Index, as its gauge is neither showing a risk-on nor a risk-off market environment for the time being. The only interesting signal was the spike of the AII CBOE Put-/Call Ratio above 1 at the end of the week. On a very short-term time perspective such stronger spikes are definitely bullish (as they indicate increased fear/heading activities among market participants). As already mentioned last week, all these neutral signals strongly coincide with the fact that the Presidential Cycle as well as the Decennial Cycle are showing a quite volatile but bullish biased development in the first quarter of the year. If we consider the quite weak but somehow still supportive readings around, such a scenario looks quite likely – at least from a current point of view.

Mid-Term Technical Condition

Examining the mid-term-oriented technical condition of the market also reveals nearly the same setting as in the previous week (although some signals slightly weakened). The most serious signal is coming from our Global Futures Trend Index, which dropped slightly below its important 60% threshold again. As the readers of our weekly Market Timing Forecast know, as long as the gauge of this indicator keeps trading below this threshold, the risk of a stronger pullback remains high (of course only in combination with weak or bearish readings in mid-term-oriented market breadth). In addition, the upside potential of the broad market should be somehow also capped as long as the gauge does not show any signs of positive momentum (which is the case right now). Thus, we still remain cautious, and it will be crucial to monitor the development of this indicator within the next couple of sessions. However, from a purely price point of view, the mid-term-oriented uptrend of the market still remains intact as the WSC Sector Momentum Indicator keeps trading at solid bullish levels and has not shown any signs of weaknesses so far (although it also slightly decreased on Friday). This indicates that most sectors within the S&P 500 are still in a mid-term-oriented uptrend (as we have not seen a stronger pullback so far). This can also be seen if we focus on our Sector Heat Map as the momentum score of all sectors keeps trading far above the one from riskless money market (currently at 0.0 percent).

Also, the mid-term-oriented trend quality has not changed substantially compared to the setting we saw in the previous week. Once again, our advance-decline indicators succeeded to increase (Advance-/Decline Volume Line) or were holding up quite well at least (Advance-/Decline Line Daily, Advance-/Decline Line Weekly). Consequently, all gauges are showing a positive divergence to the S&P 500. This reveals that the broad market was holding up quite well and, hence, a lot of selling pressure was rather caused by some heavy weighted stocks in the index. The percentage of stocks which are trading above their mid-term-oriented simple moving average (100/150) finished the week unchanged. This indicates that the underlying trend momentum of the market remains neutral. Also, mid-term-oriented up-volume finished the week flat, while mid-term-oriented advancing issues showed some small weaknesses at the end of the week. And although our Modified McClellan Oscillator Weekly continued its decline, it at least succeeded to narrow its bearish gap. So, all in all, the signals of our mid-term-oriented trend quality indicators have not shown any significant bearish moves recently (and just traded more or less sideways). Hence, tilt between supportive and corrective also looks quite narrow on that time frame too. Thus, as conditions could change quickly, we will monitor the developments of them quite closely within the next couple of weeks.

Long-Term Technical Condition

The long-term-oriented trend of the market showed some signs of improvements last week. The WSC Global Momentum Indicator succeeded to improve by 3 percentage points and signals that 42% of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend-lines. Our Global Futures Long Term Trend Index keeps trading at solid bullish levels, indicating that the long-term trend for U.S. equities remains intact. Still, it has not succeeded yet to stop its bearish journey, which has been lasting for months. But the most important signal of our long term section is coming from our WSC Global Relative Strength Index. Analyzing this indicator reveals that the relative strength of risky markets improved substantially last week. This shows that the risk-appetite among investors is increasing. The long-term trend quality shows the same picture as in the previous week. While the High-/Low Index Weekly and the SMA 200 were holding up quite well and finished the week flat, the Modified McClellan Volume Oscillator Weekly succeeded to narrow its bearish gap.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. As the momentum score of consumer staples and financials rose above average and above the momentum score of the S&P 500, we received a buy signal for these ETFs within the WSC Sector Rotation Strategy. Thus, the WSC Model Portfolio Composite is also adding these ETFs at expense of the existing holdings of the WSC Sector Rotation Strategy. Moreover, we are proud to announce that the WSC Inflation Proof Retirement Portfolio and the WSC Sector Rotation Strategy reached a new all-time high last week.

Bottom Line

The situation remains unchanged compared to last week. Thus, we are still expecting to see further volatile sideways trading (consolidation) ahead. Although the trend- and the trend quality are a bit too supportive to throw in the towel immediately, the situation could change literally within days. Thus, we still remain cautiously bullish, since it is too late to buy (add exposure) and too early to sell. A fact, which can also be observed by the gauge of the Big Picture Indicator, which keeps jumping around between bearish biased consolidation and recovery market regime. In other words, the tilt between corrective and supportive consolidation remains quite narrow. According to the Presidential Cycle, it is quite common to see such a longer-lasting consolidation in the first quarter of the year. Nevertheless, given the fact that the situation could escalate within days, it would also make sense for conservative investors place a stop-loss limit (closing price) at 4,531 (just in case things change quite fairly during the week). This stop-loss should remain in place as long as we do not see any improvements within our indictor framework. Aggressive traders should stay out or at least should reduce leverage since it is hard to trade a non-trading market.

Stay tuned!