September 1st 2019

Market Review

U.S. stocks posted solid gains for the week. The Dow Jones Industrial Average added 3.0 percent over the week to end at 26,403.28. The S&P 500 recorded a weekly 2.8 percent gain to close at 2,926.46. The Nasdaq advanced 2.7 percent from last Friday’s close to finish at 7,962.88. Still, the major indexes posted their worst monthly performance since May. The Dow fell 1.7 percent in August while the S&P 500 lost 1.8 percent and the Nasdaq pulled back 2.6 percent. All key S&P sectors ended in positive territory for the week, led by the industrials sector. The CBOE Volatility Index (VIX), widely considered to be the best fear gauge on Wall Street, traded near 19.

Strategy Review

Despite the fact that the market was just trading a few percentages below its all-time high in early August, 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. We warned our members that such a situation was extremely dangerous as just a trend-reversal within these few stocks could trigger a fast paced pullback since there was literally no safety net around which would be able to cushion such a move (as the broad market was already in a weak technical condition). Consequently, we expected that any upcoming short-term oriented trend reversal would trigger a stronger pullback. As result, we advised our conservative (aggressive) members to switch into cash (go short) as the opportunity cost (risk-/reward ratio) of not being invested (being long) was extremely low. In fact, shortly afterwards the S&P 500 tumbled towards 2,822 which was then followed by a period of increased volatility. More importantly, after that sell-off our indicator framework showed that 2,822 represented an outright strong bottom, which we expected to be retested again. In fact, after a stronger oversold bounce, the S&P 500 tumbled again towards 2,825 and after another short-lived relief rally it sold-off again towards 2,834. In both cases, our indicator framework was showing us that we might have seen the worst already (as 2,822 represented an outright strong bottom). Moreover, we said that it might be time to get back into the market again if our indicator framework would continue to improve. After the market managed to close in positive territory for the week, the big question is if it is time for a bargain hunt or if last week’s recovery will turn out to be a huge bull-trap?

Short-Term Technical Condition

From a pure price point of view, the short-term oriented trend of the market turned bullish, as the S&P 500 managed to close 55 points above the bearish envelope line from the Trend Trader Index. As a matter of fact, the latest recovery can be classified as a new short-term oriented up-trend rather than just a short lived bounce (as long as the S&P 500 does not drop below 2,871). Nevertheless, we can also see that both envelope lines of the Trend Trader Index are still decreasing and, therefore, the current short-term oriented price-driven up-trend still looks quite fragile in its nature. Apart from that fact, we can observe further positive developments within our remaining short-term oriented trend indicators. The gauge from the Advance-/Decline 20 Day Momentum Indicator jumped back into bullish territory on Thursday and has, therefore, clearly confirmed the latest recovery from the S&P 500. Another quite encouraging signal is coming from the Modified MACD which also succeeded to flash a small bullish crossover signal on Thursday. Consequently, any upcoming weakness would most likely just produce a bullish divergence in its readings (as extremely heavy losses would be necessary to bring this short-term oriented gauge back to its former low)! So from a pure price point of view, this fact is telling us that it should not take too long until the market will get back into a risk-on mode again. However, even though the latest trend strengthening can be seen as a green flag on the horizon, it should be always counterchecked with our breadth indicators (to make sure it is broad-based and, therefore, sustainable in its nature).

If we focus on our short-term oriented tape indicators, we can see that all of them continued to improve during the whole previous week or even flashed a bullish signal. Consequently, we can be quite sure that we have seen the worst already. First of all, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to strengthen significantly and, therefore, both indicators flashed a bullish crossover signal last week. This is indicating that the underlying momentum of advancing stocks and advancing volume is getting back on track on a very fast pace. This is a quite constructive tape signal, as it indicates that the latest recovery is definitely driven by a border basis and not only from a few heavy weighted stocks in the S&P 500. This can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both indicators still remain bearish from a pure signal point of view, they continuously improved over the past week. This is a quite constructive signal, as it indicates that the broad market is getting back into a short-term oriented uptrend. Nevertheless, we should not forget that their overall scores are still a bit weak-kneed at the moment, which might be an indication for a short-lived consolidation period. However, given the fact that we saw quite stable readings in the number of stocks which are hitting a fresh yearly high (especially at the end of the week), together with low readings in the number of stocks which were pushed to a new yearly low, we think the current short-term oriented recovery is not at risk of fading out at the moment. This can be also observed if we focus on the High-/Low Index Daily, which also managed to flash a small bullish crossover signal last week.

The situation on the contrarian side remains almost unchanged compared to the previous week as the fear among Wall Street remains persistent. The amount of bulls has not really recovered since it hit a low three weeks ago. Moreover, most gauges of our option based indicators remain within bullish territory (Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio and the z-score from the CBOE Put-/Call Ratio Daily), plus from a seasonal point of view (Presidential Cycle) the market should also face some seasonal tailwinds up until mid-September. The only negative signal is coming from the WSC Capitulation Index, which is still indicating a risk-off market environment. However, given the fact that the latest recovery is still fragile (only from a pure price point of view), this is not a big surprise at all.

Mid-Term Technical Condition

Analyzing the mid-term oriented technical condition of the market reveals almost the same picture as on a short-term time perspective, as it also continued to strengthen last week. Especially, the gauge from our reliable Global Futures Trend Index jumped above its 60 percent bullish threshold, indicating that the risk of another correction is outright low at the moment. Another positive signal is the fact that is gauge reached the highest level, since we had seen the volatile bottom building process after the initial sell-off in early August.  This is another fact that it might be a good time to get back into the market again. Basically, the same is true if we analyze the pure price driven mid-term oriented trend of the market as our WSC Sector Momentum Indicator keeps trading in quite bullish territory. The only negative signal is coming from our Sector Heat Map as the momentum score of riskless money market remains elevated. As already mentioned above, given the fact that the latest recovery is still a bit fragile (from a pure price point of view), this is not a big surprise at all.

If we analyze our mid-term oriented market breadth indicators, they show some encouraging signs of recovery at the moment (although most of them still remain a bit weak-kneed at the moment). First of all, both bullish gauges from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly increased for the week. Another positive signal is coming from our entire advance-decline indicators (Advance-/Decline Line Daily and the Advance-/Decline Line Weekly) as both of them have started to form a quite bullish divergence recently. Only the Advance-/Decline Volume Line could be a bit stronger. More importantly, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) slightly increased for the week – although they still have not gotten back into bullish territory yet. But still this is a quite supportive signal, as it indicates that the latest bounce was supported by a broader basis. And finally, also our Modified McClellan Oscillator Weekly showed a decreasing bearish gap, although the indicator still remains quite bearish at the moment. So all in all, the mid-term oriented tape condition of the market remains supportive. As a result, we think the risk of a stronger immediate correction towards the latest low has reduced significantly. Consequently, we do not believe that any upcoming weaknesses will have the power to push the S&P 500 below its former low at 2,822 (at least for the next couple of weeks).

Long-Term Technical Condition

The long-term oriented trend of the market also recovered last week. The Global Futures Long Term Trend Index still remains quite bullish, whereas our two other trend indicators recovered from low bearish levels (WSC Global Momentum Indicator and the WSC Relative Strength Indicator). This is telling us that the latest recovery had a global impact, which underlies our view that we might have seen the worst already. Moreover, long-term oriented market breadth showed also some signs of recovery as the bullish gauges from the Modified McClellan Volume Oscillator Weekly stabilized last week. Moreover, the percentage of stocks which are trading above their 200 day simple moving average increased significantly, whereas the High-/Low Index Weekly remains quite supportive for the time being.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio, the WSC Dynamic Variance Portfolio and the WSC Inflation Proof Retirement Portfolio, whereas the allocation from the WSC Sector Rotation Strategy remains unchanged. Moreover, we are proud to announce that the WSC All Weather Portfolio reached another all-time high last week.

Bottom Line

On a short-term time perspective, the technical condition of the market got definitely back into a bull-mode. Consequently, we strongly believe that we have seen the worst already (at least for now). The main reason, why we mention “at least for now” is due to the fact that the latest correction cycle has definitely left its mark on our mid- to long-term oriented indicators (although they also showed some stronger improvements last week). So if the upcoming rally will not be able to bring our mid- to long-term oriented tape/trend indicators back to confirmative levels, the latest correction will turn out to be just the beginning of a longer-lasting top-building process (rather than being a healthy behavior during a bull-market). Normally, a typical top building process starts with a sharp correction (like the recent one) which is then followed by a low quality/large cap rally which often pushes the market towards or slightly above its old bull-market high. As such a large-cap driven rally can never be sustainable in the long-run, the result is another but stronger correction which always pushes the market to a new low. On the other hand, if we see that the market internals are gearing up, the market will definitely continue to rally since the latest correction was just a healthy process within an ongoing bull market. Therefore, the next couple of weeks will give us further guidance where the market is heading.

Anyhow, with quite brightening readings within our short- to mid-term oriented framework (WSC Short-Term Composite and the WSC Mid-Term Composite), we think it is time to get back into the market as we think that we have seen the worst already. Therefore, the risk-/reward ratio is extremely attractive at the moment to play a stronger recovery towards or above the latest bull-market high. As a matter of fact, we would advise our conservative members to get back into the market again (by buying into weaknesses rather than chasing the market too aggressively on the upside). This is mainly due to the fact that the positive environment should remain in place within the next couple of weeks. Aggressive traders should also focus on long-side again.

Stay tuned!