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March 13th 2022 |

Key Takeaways

  • No fundamental reason to change our cautious strategic outlook from January 16th
  • Sentiment hits extreme negative levels, thus, the risk for oversold bounces are accumulating
  • Stay on the sideline since the current risk-/reward ratio looks too low to justify any kind of bargain hunt at the moment
  • New high in our WSC Inflation Proof Retirement Portfolio

Market Review |

U.S. stocks finished another week in negative territory. The Dow Jones Industrial Average declined 2.0% during the week to end at 32,944.19. The blue-chip index posted its fifth consecutive weekly decline. The S&P 500 Index dropped 2.9% from the prior Friday’s close to finish at 4,204.31. The Nasdaq tumbled 3.5% during the week to 12,843.81. The S&P 500 and Nasdaq booked their third straight week of losses, their longest slide since December 2018. Nearly all key S&P sectors finished lower, led by staples. The energy sector was the only gainer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 30.8.

Short-Term Technical Condition

According to our short-term-oriented trend indicators, the bearish status of the market remains well in force and even gained more negative ground last week. If we focus on the Trend Trader Index, we can see that the purely price driven down-trend of the market remains in place as the S&P 500 closed 84 points below its bearish threshold. In addition, both envelope lines of this reliable indicator are declining on a very fast pace, which is another indication for a well-established bearish short-term-oriented price driven trend. Another concerning fact is that the Modified MACD dropped to its lowest levels since March 2020. This is telling us that the underlying trend momentum gained even further negative ground last week. On top of that, we can also see that the gauge of the Advance-/Decline 20 Day Momentum Indicator continued to drop further into deep bearish territory. As a matter of fact, our entire short-term-oriented trend indicators have confirmed the new low of the S&P 500. Thus, it is highly likely to see further pain down the road.

This view is confirmed by the fact that the that quality of this short-term-oriented down-trend remains extremely high. In other words, the current negative trend of the S&P 500 is still driven by the broad market and not only be a few heavy weighted stocks in the index. Thus, the chances for a sustainable trend reversal remain extremely low. The current down-trend is still confirmed by a strong negative momentum of declining volume (Modified McClellan Volume Oscillator Daily) and declining issues (Modified McClellan Oscillator Daily). This can also be observed if we focus on the NYSE New HighsNew Lows Indicator. During the whole week we saw a solid number of NYSE-listed stocks which dropped to a new yearly low, in combination with quite depressed numbers of stocks which reached a new yearly high! As a matter of fact, the High-/Low-Index Daily widened its bearish gap. This is another major red flag on the horizon, as it is telling us that the market internals have not shown any signs of recovery yet. This can also be observed if we analyze the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both indicators have absolutely not shown any positive movements so far. This signals that the current down-trend of the S&P 500 is still driven the majority of all U.S. listed stocks, whereas the volume of declining stocks is still outpacing the volume of advancing ones (Upside-/Downside Volume Index Daily). Thus, the current down-trend still looks to strong in its nature to bet on a major trend-reversal at the moment.

Sentiment-wise we can see that the latest low in the S&P 500 caused some fear among market participations. The put-/call ratio spiked above 1 on Thursday (Daily Put-/Call Ratio All CBOE Options), whereas the number of bears in the AAII survey remains high. Moreover, we can see that the Smart Money Flow Index has still been holding up quite well recently (and, therefore, the WSC Capitulation Index is signaling a risk-on market environment). Although such a spread between dumb- and smart money can be interpreted as a quite positive signal, the overall level of fear still remains too low in our point of view. The z-score of the Daily Put-/Call Ratio All CBOE Options has not reached outright contrarian levels so far, whereas the number of bulls was even increasing in the AAII survey recently. Thus, we think there is still enough downside potential left before we see the ultimate capitulation (which then often marks the end of a correction cycle).

Mid-Term Technical Condition

Another major reason for that view is the fact that the mid-term-oriented condition of the market also continued to deteriorate last week. First of all, the gauge from the Global Futures Trend Index keeps trading at the lower end of the bearish consolidation area (31%) (and, therefore far below the very important 60 percent threshold). As long as the gauge of this reliable indicator keeps trading below this important threshold (in combination with strong mid-term-oriented trend-quality scores), any upcoming gains should be limited in price and time. Another negative mid-term-oriented trend signal is based on the fact that the WSC Sector Momentum Indicator has finally dropped into the bearish area and, hence, reached its lowest level since May 2020. This is the confirmation that now the majority of sectors within the S&P 500 is underperforming riskless money market on a relative basis. This fact is also illustrated in our Sector Heat Map as the momentum score of riskless money market jumped 10 percentage points (!) last week to end at 33.7%. In addition, 4 sectors are now trading below the riskless money market sector. Hence, the mid-term technical condition of the market remains quite fragile.

Examining the quality of this mid-term-oriented down-trend still reveals a strong bearish picture. First of all, the Modified McClellan Oscillator Weekly once again widened its bearish gap and dropped again to its lowest level for years. This indicates an outright weak tape momentum at the moment. In such a situation, we would be extremely surprised to see stronger (sustainable) gains ahead. Second, the percentage of stocks which are trading above their mid-term-oriented simple moving average (100/150) has also not shown any signs of improvement so far. In addition, both gauges are still trading in deep bearish territories. Further warning signals are coming from the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly. Both indicators widened their bearish gaps significantly. The same applies to our Advance-/Decline Indicators. All of them declined (Advance-/Decline Line Weekly and Advance-/Decline Line Daily) and especially the Advance-/Decline Volume Line plummeted to the lowest level for months. These facts undermine our view that, from a purely mid-term-oriented tape perspective, there is no fundamental reason for us to change our cautious view.

Long-Term Technical Condition

The long-term-oriented technical picture of the market continued to deteriorate. Unchanged compared to the previous weeks, the Global Futures Long Term Trend Index continued its decrease (although it has not turned bearish yet). This is indicating that the long-term-oriented up-trend of U.S. equities is running out of steam. A fact, which also holds globally. The WSC Global Momentum Indicator signals that now only 19% of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are still trading above their 200 day moving average. This is a quite serious signal, as it shows that the recent correction cycle is quite global in scope. According to the WSC Global Relative Strength Index, all major asset classes (apart from commodities) are underperforming riskless money market. This is another indication that the chances for a fast-paced V-shaped recovery remain quite low. Examining our long-term oriented tape indicators reveals that all of them weakened last week (the High-/Low Index Weekly, SMA 200 and Modified McClellan Volume Oscillator Weekly).

Model Portfolios

Last week, there were no changes in the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. Since the WSC Sector Momentum Indicator turned negative, the WSC Sector Rotation Strategy is switching in its bear market portfolio. Moreover, we are proud to announce that our WSC Inflation Proof Retirement Portfolio reached a new all-time high last week.

Bottom Line

Our outlook remains unchanged compared to last week. Given the quite weak-kneed readings all across the board, there is no fundamental reason to change our cautious outlook yet. On a very short-time frame oversold bounces are possible. However, given the quite weak-kneed readings all across the board, any upcoming gains can be still classified as corrective rather than the beginning of a new and sustainable uptrend. This view remains unchanged, as long as we do not see a stronger recovery in our indicator framework. A fact, which can also be observed within our Big Picture Indicator (as its gauge kept jumping around within its bearish consolidation quadrant last week). That being said, we think conservative members should stay on the sideline since the current risk-/reward ratio looks too low to justify any kind of strategical bargain hunt at the moment.

Stay tuned!