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January 9th 2022  |

Market Review |

U.S. stocks finished the week with losses. The Dow Jones Industrial Average lost 0.3% over the week to 36,231.66. The S&P 500 booked a weekly loss of 1.8% to close at 4,677.03. The Nasdaq dropped 4.5% for the week to end at 14,935.90. Among the key S&P sectors, energy was the best weekly performer, while the real estate sector dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 18.8.

Short-Term Technical Condition

On Friday the S&P 500 closed shy below the bearish threshold from the Trend Trader Index. As a result, the purely short-term-oriented price trend (time-series momentum) of the S&P 500 turned slightly negative. Additionally, we can see that the underlying momentum of this price driven trend also started to weaken and finally turned negative on Friday, since the Modified MACD flashed a bearish crossover signal. Nevertheless, the short-term-oriented price up-trend of the market has not completely broken yet, since both envelope lines of the Trend Trader Index are still increasing and have not formed a bearish rounding top so far. Also, the Advance-/Decline 20 Day Momentum Indicator is still trading in the bullish area and even succeeded to increase on Friday, hence, showing a bullish divergence to the S&P 500. As a result, the recent trend-break can be categorized as non-sustainable so far (at least from a purely price point of view). In times of increased volatility, it is not unusual that our short-term-oriented trend indicators give contradicting signals. In such a situation, short- to mid-term market breadth (known as the trend quality) will give us further guidance if the recent weakness has the potential to transform into a more significant pullback or if it was just the realization of increased volatility.

Our short-term-oriented trend quality indicators show an intermingled picture. Hence, the market internals are telling us that the current trend upside participation within the market remains supportive, albeit not overwhelmingly bullish at moment. In other words, given the fact that the market finished the week in negative territory, the development within their readings could have definitely been worse. This becomes obvious if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators strengthened their bullish readings for the week and especially the latter even succeeded to reach its highest level for weeks. This indicates that the underlying momentum of advancing stocks and advancing volume remains quite supportive for the time being. Moreover, it tells us that the recent weakness was mainly driven by the latest tech-rout rather than by the broad market. This can also be seen if we focus on the percentage of stocks which are trading above their short-term-oriented moving averages (20/50). While the first one (SMA 20) had to take a harder hit, the latter one (SMA 50) only dropped by a few percentage points. Another neutral sign is coming from the NYSE New HighsNew Lows Indicator, as the numbers of new yearly lows was nearly equal to the new yearly highs. And in addition, we have not seen any further negative spikes in the stocks hitting a new yearly low. Still the High-/Low Index Daily flashed tiny bearish crossover signal. In the end, the underlying trend quality still looks quite supportive and, therefore, it might be a bit too early to get concerned about the latest declines. On the other hand, we can also not ignore the fact that the bullish impulses are also missing as well. Thus, we would not be surprised to see some form of volatile but bullish biased consolidation ahead – at least from the current point of view.

Currently, market sentiment is also showing no clear tilt at the moment. A fact, which can also be observed if we focus on the AII Bulls & Bears survey (since the number of bulls almost equals the number of bears). Moreover, it was interesting to see that the AII CBOE Put-/Call Ratio spiked towards 1 at the end of the week. On a very short-term time perspective such stronger spikes are definitely bullish (as they indicate increased fear/heading activities among market participants). However, on a more longer-term time perspective, most of our  readings on the option market can be still described as quite neutral (z-score AII CBOE Put-/Call Ratio, Equity Options Call-/Put Ratio Oscillator, AII CBOE Call-/Put Ratio Oscillator and the WSC Put-/Volume Ratio). Thus, there is no clear driver for stronger moves in both direction visible. The only real positive signal is coming from the WSC Capitulation Index which is still indicating a risk-on market environment for risky assets. Thus, the downside potential still looks quite capped at the moment. These signals strongly coincide with the fact that the Presidential Cycle as well as the Decennial Cycle are showing a quite volatile but bullish biased development in the first quarter of the year. If we consider the quite weak but somehow still supportive readings of our short-term-oriented indicators, in combination with stronger mid-term-oriented readings, such a scenario looks quite likely.

Mid-Term Technical Condition

Another reason, why it is still too early to get concerned about the latest volatility is based on the fact that the mid-term-oriented up-trend of the market remains robust. Although the Global Futures Trend Index slightly decreased at the end of the week, it managed to pass its important 60% threshold. As long as the gauge of this indicator remains above these 60%, the risk of a stronger pullback or a longer-lasting decline should be quite limited. Thus, it will be crucial to monitor the development of this indicator within the next couple of weeks. Anyhow, currently most sectors within the S&P 500 still remain in a strong mid-term-oriented price driven uptrend as the WSC Sector Momentum Indicator is still trading at quite encouraging bullish levels and even succeeded to increase for the week. As a matter of fact, the underlying price trend of the S&P 500 looks quite solid at the moment. This can also be observed if we examine our Sector Heat Map, as the momentum score of all sectors remains above the one from the riskless money market (currently at 0%).

Another main fact why we believe that it is still a way too early to panic right now is due to the fact that the mid-term-oriented trend quality also looks too supportive at the moment to justify a stronger pullback. The most important signals are coming from our entire advance-decline indicators. While the Advance-/Decline Line Daily finished the week nearly unchanged, the Advance-/Decline Line Weekly slightly improved in that time period and the Advance-/Decline Volume Line rocketed to its highest level for weeks. Thus, all gauges are showing a positive divergence to the S&P 500. This means in more detail that the broad market was holding up quite well and, consequently, a lot of selling pressure was caused by heavy weighted stocks in the index. The percentage of stocks which are trading above their mid-term-oriented moving averages (100/150), the Modified McClellan Oscillator Weekly, the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly finished the week unchanged, indicating that the trend quality has not worsened. Hence, the internal mid-term-oriented demand for stocks still looks quite healthy.

Long-Term Technical Condition

The long-term-oriented trend of the market shows again nearly the same picture as in the previous weeks. The WSC Global Momentum finished the week nearly unchanged and signals that 39% of all local equity markets around the world (which are covered by the WSC Global ETF Momentum Heat Map) remain in a long-term-oriented uptrend. The Global Futures Long Term Trend Index continued its bearish ride (which has been lasting for months), but still keeps trading at solid bullish levels. This is telling us that the long-term trend for U.S. equities remains intact but continued to weaken. Examining our WSC Global Relative Strength Index reveals an intermingled picture. Some markets declined, while some improved. But U.S. equities still remain the most attractive market in relative terms. Analyzing long-term market breadth also shows the same intermingled picture as in the previous week. While the High-/Low Index Weekly and the SMA 200 were holding up quite well and finished the week unchanged, the Modified McClellan Volume Oscillator Weekly succeeded to bottom out.

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. As the momentum score of materials rose above average and above the momentum score of the S&P 500, we received a buy signal for that ETF within the WSC Sector Rotation Strategy. Thus, the WSC Model Portfolio Composite is also adding that ETF in expense of the existing holdings of the WSC Sector Rotation Strategy. Moreover, we are proud to announce that the WSC Inflation Proof Retirement Portfolio reached a new all-time high last week.

Bottom Line

Our outlook remains unchanged compared to last week. Even though we are still expecting to see increased volatility ahead, there is no major reason to change our strategic bullish outlook for the time being. Currently, the upside participation within major indexes still looks too supportive to get concerned about the latest price action we saw. A fact that can be also observed if we focus on our Big Picture Indicator, which is still indicating a supportive (bullish biased) market regime. As long as this is the case, and as long as we do not see any negative spikes in new lows, in combination with a strong weakening Global Futures Trend Index, the increased volatility should remain bullish biased in its nature. A view, which is also supported from a seasonal point of view (Presidential Cycle and Decennial Cycle). Hence, we think it makes sense to remain invested, although aggressive traders should reduce leverage in such a volatile market environment.

Stay tuned!