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December 26th 2021 |

Market Review |

U.S. stocks closed out an extremely volatile week with gains. For the week, the Dow Jones Industrial Average rose 1.6% to end at 35,950.56. The S&P 500 gained 2.3% from last Friday’s close to end at a record of 4,725.79. The Nasdaq jumped 3.2% for the week to end at 15,653.37. Among the key S&P sectors, discretionary was the best weekly performer, while financials dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 18.0.

Short-Term Technical Condition

The short-term-oriented price trend of the market turned bullish last week. This is based on the fact that the S&P 500 closed 55 points above the upper envelope line of the Trend Trader Index. Thus, from a purely price point of view, the short-term uptrend of the market should remain intact as long as the S&P 500 does not drop below 4.603 (bearish threshold from the Trend Trader Index). Although this can be interpreted as first green shoots of recovery, the underlying momentum still looks quite weak-kneed at the moment. Despite the fact that the Modified MACD managed to flash a tiny bullish crossover on Friday, its signal is a way too weak-kneed to be taken too seriously at the moment. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator which also increased significantly on Friday but still remains quite bearish from a purely signal point of view. Despite the fact that the S&P 500 reached a new record high on Friday, it is just closing shy above levels we saw already in mid-November. Consequently, the underlying trend quality will give further guidance, if the latest break-out will have the potential to transform into a more sustainable set-up.

Although the S&P 500 reached a new all-time high last week, the underlying trend quality still shows an outright weak upside participation at the moment. This is telling us that the latest high was still mainly driven by short-covering and a few mega-techs rather than being the result of a broad-based demand. This can be observed if we focus on the NYSE New Highs/New Lows Daily as we have mainly seen a strong reduction in stocks hitting a new low rather than a strong spike in new highs. As a result, the High-/Low Index Daily just softened its bearish signal and is, therefore, far away from being confirmative at the moment. Moreover, the latest break-out was not confirmed by positive advancing volume since the Modified McClellan Volume Oscillator Daily has not managed to flash a bullish crossover signal so far. Basically, the same is true if we focus on the momentum of advancing stocks. Although the Modified McClellan Oscillator Daily managed to turn bullish, it signal is a way too weak-kneed to be taken too seriously at the moment. Basically, the same is true if we analyze the Upside-/Downside Volume Index Daily (as short-term up-volume should also be much stronger if we consider the current level of the S&P 500). Currently, the only real bullish signal is coming from the SMA 20, which jumped back into solid bullish territory. However, on the 50 day time frame (SMA 50), we can see that the majority of all U.S. listed stocks remains in a short-term-oriented downtrend at the moment. So all in all, the current short-term-oriented trend quality is still a way too low to be confirmative at the moment.

Analyzing market sentiment shows an increasingly neutral picture at the moment. The gauge of the AII CBOE Put-/Call Ratio dropped to average levels and, therefore, the z-score of this indicator remains within one standard deviation. Nevertheless, most of our option based oscillators remain supportive, although they have softened their bullish signals recently (Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator). Further support is coming from a seasonal point of view, as the market mostly faced stronger tailwinds in the last week of the year. Another short-term positive signal is coming from the WSC Capitulation Index which is now signaling a risk-on market environment for the time being. Thus, further support from a purely sentiment point of view looks quite likely – at least from a short-term time perspective.

Mid-Term Technical Condition

The situation looks quite different if we analyze the mid-term-oriented trend condition of the market. While the broad index hit a new record on Friday, our Global Futures Trend Index dropped on that day – finishing the week nearly unchanged. Closing around 38%, its gauge is not only trading far below the important 60% threshold, but also absolutely not confirming the current level of the S&P 500. Thus, as long as the gauge keeps trading below 60%, the risk of a stronger pullback remains outright high (of course only in combination with weak or bearish readings in mid-term-oriented market breadth). In addition, the upside potential of the broad market should be somehow also capped as long as the gauge does not show any signs of positive momentum (which is the case right now). Thus, we still remain cautious at the moment. However, from a purely price point of view, the mid-term-oriented uptrend of the market still remains intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far (although it also decreased on Friday). This indicates that most sectors within the S&P 500 are still in a mid-term-oriented uptrend (as we have not seen a stronger pullback so far). This can also be seen if we focus on our Sector Heat Map as the momentum score of all sectors keeps trading far above the one from riskless money market (currently at 0.0 percent).

More importantly, the mid-term oriented trend quality has not shown major signs of improvements so far. Thus, the risk of a stronger pullback remains high as the current upside participation still looks extremely weak-kneed at the moment. Despite the fact the percentage of stocks which are trading above their mid-term-oriented simple moving average (100/150) improved, they are far away from being bullish at the moment. This is telling us that most U.S. listed stocks remain in a mid-term-oriented price driven downtrend (although the S&P 500 reached a new record high last week). Moreover, the number of mid-term-oriented advancing stocks and advancing volume kept trading below their bearish counterparts since the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly have not succeeded to turn bullish yet. These are quite bearish signals, as in the past all corrections were accompanied by bearish or outright weak readings within both indicators (together with a Global Futures Trend Index score below 60%). In addition, the overall mid-term-oriented momentum of advancing stocks remains negative as the Modified McClellan Oscillator Weekly widened its bearish gap. The only positive signals are coming from our Advance-/Decline Line Daily and the Advance-/Decline Volume Line, while the Advance-/Decline Line Weekly finished the week unchanged. So, from a purely mid-term-oriented trend quality point of view, it still looks like that the current rally is mainly driven by a few heavy weighted stocks in the index. Therefore, the risk of a stronger trend-reversal still remains high.

Long-Term Technical Condition

Also, the long-term-oriented trend of the market continued to deteriorate last week. Once again, our Global Futures Long Term Trend Index declined and signals that of the recent bull market is losing steam. Another outright negative signal is coming from the WSC Global Momentum Indicator. There we can see that now only 23% of all local equity markets around the world keep trading above their long-term-oriented trend-lines. Thus, the global bull market continued to deteriorate all across the globe. According to the WSC Global Relative Strength Index, U.S. equities remain the strongest asset – at least so far. More importantly, the long-term-oriented trend quality also continued to deteriorate since the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly decreased, while the SMA 200 improved, but still has not succeeded to pass the bullish threshold.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Dynamic Variance Portfolio and the WSC Sector Rotation Strategy.

Bottom Line

Although further seasonal bouncing looks quite likely, there is still no fundamental reason to change our cautious strategic view. The current trend quality (upside participation) still looks too weak-kneed and, therefore, the risk for a stronger trend reversal remains high. Thus, the current risk-/reward ratio does not justify a strategic long position at the moment. This is based on the fact that we have not seen any signs of stabilization within our trend quality indicators yet. Therefore, stronger up-days are most likely just the result of short-covering (oversold bounces). Thus, the probability that such moves tend to be corrective in their nature remains quite high. A fact, which can also be seen if we focus on our Big Picture Indicator, which is still jumping around within its bearish consolidation quadrant. As long as this is the case, our strategic cautious outlook remains unchanged. In such a case, we rather scarify 2-3 percent upside potential to get an all-clear signal from our indicators again, rather than risking a stronger drawdown since capital appreciation remains the strongest driver of long-term success.

Stay tuned!