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April 10th 2022 |

Key Takeaways

  • The S&P 500 is getting increasingly vulnerable for stronger disappointments
  • Time to place a stop-loss at 4,450 since the up-trend quality deteriorated significantly
  • New all-time high in our WSC Sector Rotation Strategy

Market Review |

Markets were in consolidation mode last week. The Dow Jones Industrial Average dipped 0.3% week-to-date to close at 34,721.12. The S&P 500 booked a weekly loss of 1.3% to finish at 4,488.28. The Nasdaq inched down about 3.9% on the week and ended at 13,711.00. Despite the week’s small losses, the three major averages are within striking distance of their record highs. Of the S&P sectors, health care led advancers, while the technology sector dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 21.2.

Short-Term Technical Condition

From a purely price point of view, the short-term-oriented trend turned neutral on Friday as the S&P 500 closed within both envelope lines of the Trend Trader Index on that day. On the other hand, we can see that both envelope lines of the Trend Trader Index are still increasing strongly (as we have seen higher highs and higher lows on a 20 days rolling basis). Thus, the recent neutral signal should not be taken too seriously in that context. The situation looks different if we analyze the underlying momentum of this short-term-oriented price trend. Although the underlying momentum remains positive, it has started to show some stronger signs of fatigue recently. This can be seen if we focus on the Modified MACD and the Advance-/Decline 20 Day Momentum Indicator. Both indicators weakened last week, although they still remain bullish from a purely signal point of view. So, from that perspective, further consolidation into deeper April looks quite likely. More importantly, the underlying trend-quality will help us to answer the question if such a slow-down is just part of a healthy breather or potentially the beginning of a more significant trend-reversal.

If we have a closer look at our trend-quality indicators, we can see that all of them deteriorated significantly last week. Thus, it looks like that the market may get increasingly vulnerable for further disappointments and that the latest consolidation is about to get a bearish tilt. Firstly, the percentage of stocks which are trading above their short-term-oriented simple moving averages (20/50) dropped into quite bearish territory last week. In other words, the majority of all U.S. listed stocks are trading already in a short-term-oriented price driven down-trend at the moment. Additionally, the momentum of this broad based down-trend also strengthened last week (Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily). Another negative signal is coming from the Upside-/Downside Volume Index Daily, showing that the selling pressure was not only caused by few heavy weighted stocks in the index. The same applies to the High-/Low Index Daily, which also flashed a bearish crossover signal again. 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. Although this can be interpreted as a quite negative signal, the spread between new highs and new lows is still a way too narrow to throw in the towel immediately. As a matter of fact, we are getting increasingly cautious at the moment.

According to our option based indicators (WSC Put-/Volume Ratio, Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator), market sentiment can be described as quite neutral for the time being. On the other hand, we can see that the Smart Money Flow Index was not confirming the latest weaknesses of the Dow Jones Industrial Average, whereas the WSC Capitulation Index is still indicating a risk-on market environment. These are definitely quite supporting facts, for the time being. From a purely seasonal point of view, it could be possible to see another rally attempt before the market should face stronger headwinds up until July (Presidential Cycle).

Mid-Term Technical Condition

Another reason why we get a bit more cautious is based on the fact that the mid-term-oriented trend condition of the market also showed stronger signs of fatigue last week. This is because the gauge from the Global Futures Trend Index dropped by a few percentage points last week (and is, therefore, now showing a negative momentum!). Moreover, we should not forget that its gauge is still trading in the bearish consolidation area. Thus, this negative momentum could be interpreted as another major warning signal at the moment. Moreover, we can see that the price driven mid-term-oriented uptrend also slowed down a bit since the WSC Sector Momentum Indicator finished the week flat (albeit, in bullish territory). This can also be seen if we examine our Sector Heat Map, as the majority of sectors within the S&P 500 has still a higher momentum score than riskless money market. Nevertheless, we can also see that the score of the riskless money market also increased to 19.8% last week. Thus, the clouds on the horizon are definitely gathering at the moment.

Analyzing the quality of the mid-term-oriented trend also shows a deteriorating picture. Most of our advance-decline indicators confirmed the latest weaknesses or even dropped lower (Advance-/Decline Line Daily, Advance-/Decline Line Weekly, Advance-/Decline Volume Line). Moreover, we can see that the broad market strengthened its mid-term-oriented down-trend as the percentage of stocks which are trading above their mid-term-oriented simple moving averages (100/150) dropped for the week. Moreover, we can see that the momentum of advancing issues remains negative (Modified McClellan Oscillator Weekly) and, therefore, it is not a big surprise that the absolute numbers of mid-term-oriented declining issues picked up again (Advance-/Decline Index Weekly) momentum. Only, mid-term-oriented up-volume remains supportive, showing that there is still flowing more volume in advancing stocks than in declining ones (at least for now).

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. Since the momentum score of financials dropped below average and below the one of the S&P 500 within our Sector Heat Map, we received a sell signal for that ETF in our WSC Sector Rotation Strategy. Moreover, we are proud to announce a new all-time high in our WSC Sector Rotation Strategy.

Bottom Line

Although we expected to see some kind of sentiment driven consolidation, the recent deterioration within our short-term-oriented indicator framework turned out to be surprisingly strong. Especially, if we consider the fact that the market only lost 1.3% for the week. As a result, the risk-/reward ratio started to deteriorate again (at least on a short-term time perspective). That does not necessarily mean that we see increased further pressure immediately, but on the other hand – with such weak readings all across the board – the upside potential of the market also looks quite capped. At least on a short-term time perspective. Currently, it is still a bit too early to say if the recent short-term weaknesses will have the potential to trigger a stronger pullback (since most of our short-term oriented signals still remain supportive/bullish from a purely signal point of view). A fact which can be also observed if we focus on our Big Picture Indicator, which is currently showing a positive (bullish) environment for risky assets. Hence, it is a bit too early to throw in the towel immediately – at least for now. Nevertheless, we think it is a good time to place a stop-loss limit at 4,450 (closing price)  just in case things change quite quickly during the week.

Stay tuned!