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March 12th 2017

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average declined 0.5 percent over the week to 20,902.98, snapping a streak of four straight weekly gains. The S&P 500 dropped 0.4 percent to finish at 2,372.60. The Nasdaq slipped 0.2 percent for the week to end at 5,861.73. Both indexes snapped a run of six weeks of consecutive gains. Among the key S&P sectors, technology was the best performer on the week and energy the greatest decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.7.

Strategy Review

It has now been just over a year since we saw the last correction succeeding minus 10 percent. Back then our members had successfully sidestepped that carnage before we advised them to raise exposure quite quickly afterwards. Despite the fact that the overall market environment was slightly different (as the market was still in major bounce mode from the cyclical bear market in 2015), we can see almost the same developments within our indicator today. This is mainly due to the fact that we saw a fast (just within a couple of days) and stronger deteriorating all across the board, although the market is just trading shy below its all-time high. As a consequence, most of them are forming a huge bearish divergence and additionally mid-term market breadth is also showing major signs of exhaustion. This is a quite toxic situation as the market tends to be outright vulnerable right now. Therefore, it could be possible that the market is running into a major top right now and hence we remain outright cautious at the moment! But let’s have a closer look at our indicator framework.

Short-Term Technical Condition

Despite the fact that the S&P 500 closed 20 points above the bearish threshold from the Trend Trader Index, the short-term trend structure of the market started to deteriorate significantly last week. Furthermore, we can see that the underlying trend-momentum is outright weak at the moment. This is mainly due to the fact that the Modified MACD flashed a clear bearish crossover signal last week, indicating some form of short-term exhaustion. This is also a sign that stronger sustainable gains are quite unlikely in such a scenario. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. The gauge from this reliable indicator dropped significantly into bearish territory, indicating that the pace is likely to slow down within the next couple of sessions. In general, it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate, when the price action of the market is slowing down (after a stronger rally). In such a situation, short- to mid-term market breadth will give guidance if any upcoming short-term bullish trend break will lead to stronger losses or if renewed strengths can be expected. Normally, a slow-down or a consolidation period is considered to be healthy one as long as short-term to mid-term market breadth does not completely turn bearish, indicating that the market internals remain pretty healthy.

Unfortunately, short-term market breadth does not look rosy at all, and therefore, we would not be surprised to see further declines ahead. Especially, the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily have completely wiped out their positive divergence as their bearish signals strengthened significantly last week. This indicates that the overall tape momentum turned pretty bearish, plus the overall market internals still look pretty damaged right now. This becomes pretty obvious if analyze the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50) as both gauges dropped into bearish territory. This can be also seen if focus on the NYSE New HighsNew Lows Indicator as the total amount of stocks hitting a fresh 52 weeks high remains outright low, whereas the amount of stocks hitting a fresh 52 weeks low has started to show some persistence strength. Consequently, the High-/Low-Index Daily turned bearish last week. So in the end, there was absolutely no recovery within the short-term oriented tape structure visible, As a consequence, the current technical condition of the market looks pretty damaged at the moment.

On the contrarian side, there are hardly any new signals around. The market is quite oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and therefore, the price action might slow down on a very short-time frame. The Smart Money Flow Index still looks quite confirmative, whereas the WSC Capitulation Index is still indicating a risk-on market environment. Nevertheless, we saw a stronger surge within that gauge recently. Unchanged compared to last week, market sentiment measured by Market Vane is indicating extreme complacent which is another red flag on the horizon.

Mid-Term Technical Condition

Another reason why we believe that the market is at risk for a stronger pullback is clearly the fact that the mid-term oriented condition of the market also deteriorated significantly last week. This is mainly because the gauge from the Global Futures Trend Index dropped 25 percentage points for the week and has therefore, closed at 62 percent! This is slightly (2 percentage points) above the threshold of the bearish consolidation area. If this trend continues it is just a question of time until we see a drop of this indicator below 60 percent. If this is the case, the risk of a fast paced correction is extremely high (of course only in combination with weak or bearish readings in mid-term oriented market breadth). Right now we are not completely there yet but nevertheless, it is definitely time to get a cautious stance as the gauge could easily drop quite quickly below that important threshold. Not surprisingly, from a pure price point of view, the mid-term oriented uptrend of the market still remains intact as the WSC Sector Momentum Indicator keeps trading at very bullish levels so far. This indicates that most sectors within the S&P 500 are still in a mid-term oriented up-trend. This can be also seen if we focus on our Sector Heat Map as the momentum score from the S&P 500 kept trading far above the one from riskless money market.

Another reason why we believe that the market is at risk (to form an important top) is due to the fact that nearly all of our mid-term oriented tape indicators also deteriorated significantly last week. Especially, our Modified McClellan Oscillator Weekly looks like it is about to roll over into bearish territory soon, whereas the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) came down substantially last week. Consequently, if this development continues with that speed we saw last week, it might be just a question of time until we see further bearish readings here. The same is true if we have a look at the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly. Despite the fact that both indicators still remain supportive from a pure signal point of view, their bullish gauge dropped again for the week. In the past, bearish readings within those indicators (in combination with a bearish Global Futures Trend Index) mostly led to a stronger correction. Consequently, we remain pretty cautious at the moment.

Long-Term Technical Condition

On a very long-time frame, the technical picture of the market remains pretty bullish at the moment and therefore, we do not think that a stronger correction should lead to a new bear market at the moment. This is mainly due to the fact that the WSC Global Momentum indicates that 72 percent of 35 local equity markets all around the world (which are covered from our Global ETF Momentum Heat Map) are still in a long-term oriented up-trend at the moment. Moreover, it was good to see that the readings from the Global Futures Long Term Trend Index also showed some signs of improvements last week. This can be also monitored if we focus on the Global Relative Strength Index, as the relative strength of most risky markets keeps trading far above the one from U.S. Treasuries. Moreover, this long-term oriented uptrend of the market is still widely confirmed by long-term market breadth. This is due to the fact that the readings from our entire long-term oriented tape indicators remain bullish (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average). Nevertheless, we can also see some exhaustion in their readings which might be another piece of evidence that the market looks vulnerable at the moment.

Model Portfolios

If we have a closer look at our Model Portfolios, we can see that there have been no changes in the allocation advice from the WSC Global Tactical ETF Portfolio, the WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. As the momentum score of materials dropped below average and below the one from the S&P 500 within our Sector Heat Map, we received a sell signal for that sector within our WSC Sector Rotation Strategy.

Bottom Line

Although the market only trades a few percentages below its all-time high, we remain outright cautious at the moment! This is due to the fact that the technical condition of the market looks extremely damaged at the moment. With such weak readings all across the board the market is outright vulnerable and therefore, the risk of a stronger correction remains outright high.  Nevertheless, we would like to see some stronger negative price action below 2,335 first, before we advise our members to take any actions (This is due to the fact that the Global Futures Trend Index is still somehow supportive and therefore, another – not sustainable – large-cap driven rally attempt cannot be ruled out at the moment).  As a matter of fact, we would advise our conservative members to place a stop-loss limit at 2,335. This stop loss limit should be in place until our mid-term indicator framework turns positive again! Aggressive traders should go short, if the S&P 500 drops below 2,335 and should increase their exposure if we see further down testing below 2,316/2,300.

Stay tuned!