March 7th 2021
Last week, all three major U.S. averages finished a quite volatile week mostly with decent gains. The Dow Jones Industrial Average gained 1.8% during the week to close at 31,496.30. The S&P 500 recorded a weekly gain of 0.8% to close at 3,841.94. The Nasdaq was 2.1% lower for the week and finished at 12,920.15, but Friday’s strong rebound with 1.5% put the heavy-tech index back above water for the year to date, if barely. Most key S&P sectors ended in positive territory for the week, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 24.7.
Short-Term Technical Condition
Despite the fact that the S&P 500 managed to close almost 0.8% higher for the week, the short-term oriented trend of the market continued to gain more bearish ground last week. From a pure price point of view, the short-term oriented trend of the market still remains bearish since the S&P 500 has not managed to close above the lower envelope line of the Trend Trader Index so far. In addition, both envelope lines of the Trend Trader Index started to form a small rounding top last week. As a result, it looks like that the recent consolidation period is definitely getting a more bearish biased tilt. A fact, which can be also seen if we focus on the Modified MACD, which showed an increasing bearish gap last week. This is telling us that the underlying momentum of this price driven down-trend has not shown any signs of stabilization/bullish divergence so far. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator. Despite the fact that this indicator still remains bullish from a pure signal point of view, we can also see that it did not confirm the latest gains on Friday. Given the fact that this indicator is a leading one, in combination with quite weak short-term oriented trend signals further down-testing can be expected – at least on a very short-term time frame. Although this looks quite grim in the first place, the main challenge is to identify if such moves are just part of a healthy breather or more significant and sustainable in their nature. To answer that question, short- to mid-term market breadth will tell us if the negative price action is caused by a few heavy weighted stocks (e.g. Apple, Facebook, Alphabet, Tesla) in the index, or if it is a result of a weak demand all across the board. If the second one holds, a bearish (biased) short-term oriented trend could easily transform into a more significant pullback/correction, since there is no safety net around to cushion such a move.
Although the market managed to pull out a gain for the week, our entire short-term oriented market breadth indicators continued to worsen last week. Thus, it looks like that the market is getting increasingly vulnerable for further disappointments. More specifically, the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) decreased significantly in the last week. The gauge from the 20 SMA even dropped to the bearish territory during the week and the 50 SMA is about to do so soon. Especially, the magnitude of the weekly decline for both indicators turned out to be quite strong if we consider that the fact that the S&P 500 is still trading slightly below its all-time high. As result, the recent short-term oriented trend break is getting increasingly backed by a broad basis. Additionally, the short-term oriented momentum of this broad based down-trend also continued to weaken significantly since the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed an increasing bearish gap last week. With such weak readings, it is quite unlikely that the market will get back on track soon. A fact, which is also confirmed by the Upside-/Downside Volume Index Daily. Although this indicator remains bullish from a pure signal point of view, the amount of up-volume is too low to trigger a sustainable V-shaped recovery at the moment. Another weak but still bullish signal is coming from the NYSE New Highs/New Lows Indicator. There we can see that the number of stocks hitting a new yearly new high are still trading at quite robust levels, but the number of new lows have also started to increase recently. As long as new lows are not outpacing new highs, the underlying tone should remain somehow constructive. Nevertheless, the number of new lows is quite high if we consider the fact that the S&P 500 is just trading 3% below its all-time high. As a matter of fact, the bearish gauge of High-/Low-Index Daily has started to show some momentum recently. Therefore, the current tilt between supportive or corrective consolidation looks quite narrow at the moment.
On the contrarian side, the recent volatility caused a lot of fear among market participants. To be more precise, the z-score of the AII CBOE Put-/Call Ratio finally managed to turn neutral again, indicating increased hedging activities. A fact, which can be also observed if we focus on the WSC Dumb Money Indicator, the Equity Options Call-/Put Ratio Oscillator and the WSC Put-/Volume Ratio Oscillator. On the other hand, we can see that the WSC Capitulation Index is still indicating a risk-on market environment since Smart Money has not completely thrown in the towel yet. So despite the fact that the short-term oriented tape condition of the market looks outright weak, another stronger rally attempt towards the latest high or at least further volatile trading days can be expected until we see further selling pressure ahead. A fact, which is also supported by the Decennial Cycle. This would also coincide with the fact that the market triggered a Hindenburg Omen last week, indicating that the market should face an increased pullback risk within the next 30 days.
Mid-Term Technical Condition
This might also explain the fact that the mid-term oriented up-trend remains intact so far, although it has started to weaken recently. In other words, although the Global Futures Trend Index is still trading in the middle part of its bullish consolidation area, it dropped 12 percentage points last week. This is a quite strong move, if we consider the fact that the market gained about 0.8% for the week. So, if this trend continues it might be just a question of time until it drops below its bullish 60% threshold. If this is the case, the current consolidation has definitely the potential to trigger a stronger correction (of course only in combination with weakening market breadth). Consequently, we remain alert as such a move below 60% could happen within days (if we consider the speed of the recent deterioration). As a result, the current consolidation period has definitely the to transform into a more corrective set-up. A fact which can be also observed if we focus on our Sector Momentum Heat Map. Despite the fact that the mid-term oriented price trend of the S&P 500 remains intact (WSC Sector Momentum Indicator), the momentum score of riskless money market within our Sector Momentum Heat Map rose by than 13 percentage points to 15% last week. This is another indication that the current consolidation period might not be over soon.
If we focus on mid-term market breadth, we can see that the up-trend participation within the market still looks quite supportive (although we have also seen signs of stronger deterioration recently). This becomes quite obvious if we focus on the Modified McClellan Oscillator Weekly, which started to form a quite strong rounding top (indicating that the underlying mid-term oriented tape momentum is fading away). Basically, the same is true if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Despite the fact that both indicators remain bullish from a pure signal point of view, they continued to deteriorate last week. A fact, which can be also observed if we focus on the Advance-/Decline Index Weekly. On the other hand side, we can see that the bullish gauge of the Upside-/Downside Volume Index Weekly even managed to gain some positive moment (which is a quite healthy trend signal at the moment). However, the most encouraging signals are coming from our advance-decline indicators. While the Advance-/Decline Line Daily and the Advance-/Decline Line Weekly have not shown any weaknesses so far, the Advance-/Decline Volume Line rocketed to record levels. So from a pure mid-term breadth point of view, the downside potential of the market still looks quite capped at the moment.
Long-Term Technical Condition
The long-term technical condition of the market still shows quite a robust picture. The gauge from the WSC Global Momentum Indicator jumped back to 100%, indicating that all local equity markets around the world remain in a long-term oriented uptrend. Also, the Global Futures Long Term Trend Index keeps trading at the highest levels for months and has not shown any weaknesses so far. This might be another indication that any upcoming pullback will just be a normal event in an ongoing bull-market. In addition, the relative strengths of all risky markets are still outperforming treasuries, which is another supportive long-term oriented signal. If we examine our long-term oriented tape indicators, we can see that all of them (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and SMA 200) are giving no reason to worry right now.
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. Since the momentum score of Consumer Discretionary dropped below average and below the one of the S&P 500 we received a sell signal for that sector within our WSC Sector Rotation Strategy.
Despite the fact that the S&P 500 is just trading shy below its all-time high, the technical picture of the market continued to deteriorate last week. As a result, the current consolidation is getting increasingly bearish biased in its nature. Especially, the bearish readings within our short-oriented tape indicators in combination with a weakening mid-term oriented trend-structure is telling us that there is a good chance that the market is about to enter a bearish-biased top building process soon. In the best case, we see another non-sustainable rally attempt towards the latest high (in combination with further weakening or non-confirmative signals on a short- to mid-term time perspective) to complete a text-book like top-building process. Currently, we are not completely there yet since there are still some signals which do not fit into the puzzle right now. This can be also seen if we focus on our Big Picture Indicator, which is still indicating a bullish biased consolidation period. Thus, there is still a chance that the current fragile market environment will transform back into a healthier set-up (albeit not our preferred scenario). However, in the end we think it is definitely time to get a more cautious view as things could change quite quicky during the week. As a result, we think it is time for conservative members to take profits on strong days and to place a stop-loss limit at 3.720 (intraday). This stop-loss should remain in place as long as we do not see any improvements within our indictor framework. Aggressive traders should focus on the short-side again, although they should only be in the market if they are experienced to trade fast intra-day trend-reversals.