May 31st 2020

Market Review

U.S. stocks were on track for solid weekly gains. The Dow Jones Industrial Average jumped 3.8% from the prior Friday’s close to end at 25,383.11. The S&P 500 advanced 3.0% for the week to close at 3,044.31. Nasdaq was looking at a 1.8% weekly gain and finished at 9,489.87. For the month, the Dow is on track for a 4.2% gain, the S&P 500 is set for a 4.5% climb while the Nasdaq is looking at a 6.7% advance in May. All S&P sectors ended higher, led by financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 27.5.

Short-Term Technical Condition

In line with our expectations, the market managed to break above the upper range of its nearly unbreakable trading range last week, where it got stuck for almost six weeks. Consequently, it is not a big surprise at all that the short-term oriented uptrend of the market remains well intact as the readings from our entire short-term oriented trend-indicators continued to strengthen last week. The S&P 500 is now trading 149 points above the bearish threshold from the Trend Trader Index. This shows that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,895. Additionally, both envelope lines of this reliable indicator are still steadily increasing, indicating that the resistance/support levels for the S&P 500 are increasing as well. This is a quite supportive signal as higher highs and higher lows are a typical pattern for a healthy uptrend. Another important fact is that the underlying momentum of this short-term oriented price driven trend still looks quite strong as the Modified MACD widened its bullish gap last week. The only weaker signal is coming from the Advance-/Decline 20 Day Momentum Indicator. Although its gauge showed a small bullish move on Friday, it decreased for the week and, hence, did not confirm the latest high of the S&P 500. Thus, it could be possible that the pace of the current rally might slow down a bit within the next couple of trading sessions.

Nevertheless, this small bearish trend divergence can be ignored since our entire short-term oriented market breadth (aka tape indicators) have clearly confirmed the recent breakout of the S&P 500. As a result, the risk of a fast-changing trend reversal is extremely low for the time being. Especially, the percentages of stocks which are trading above their short-term oriented moving averages (20/50) are telling us that the current short-term oriented uptrend is backed by an extremely broad basis. The SMA 50 has even reached its highest level for years, indicating a healthy sector rotation (since not only tech-heavy mega-caps are pushing the prices higher). Another strong bullish signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators also showed a widening bullish gap. This indicates that the current short-term oriented uptrend is widely supported by a positive momentum of advancing stocks and advancing volume. Another supportive fact is that the number of all NYSE-listed stocks which reached a new yearly was much higher than the ones dropping to a new yearly low. Therefore, the High-/Low Index Daily slightly strengthened its bullish signal for the week (although its overall level could be higher if we consider the current levels of the S&P 500). Anyhow, with such solid signals across the board, it is highly unlikely that the recent rally will run out of fuel soon. Hence, it is too early to bet on a major trend-reversal for the moment.

The only major red flags are coming from the contrarian side. There we can see that most of our option-based indicators have turned bearish or have even strengthened their bearish signals recently (WSC Put-/Volume Ratio, Equity Options Put-/Call Ratio Oscillator, All CBOE Put-/Call Ratio Oscillator). This indicates a lot of speculation/greed within the market. If this trend continues, we would be surprised if the market is trading much higher in mid-June, when the option expiring date is due. Coincidentally, this is also the timeframe when the market should face stronger head winds from a cyclical point of view (Decennial Cycle). On the other hand, we can see that a lot of market participants remain quite pessimistic as the number of bears on Wall Street remains extremely high. As a matter of fact, there is still a lot of dry powder on the sideline which could drive prices higher. As long as this number decreases, the “buy the dip” mentality will remain in force. If we put all these signals together, the most likely outcome would be further gains but with increased volatility/nasty down-days. This would dampen short-term speculation and lead to the cause that the market would be able to continue to climb the wall of worry (at least from a pure contrarian point of view).

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, we get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market showed solid improvements last week and is, therefore, giving no reason to worry right now. This is mainly because our reliable Global Futures Trend Index jumped to the upper range of the bullish consolidation area and is now trading far above the critical 60% threshold. These facts are telling us that the mid-term oriented up-trend of the market remains well in force. With such solid readings (and in combination with supportive market breadth), any upcoming weaknesses should turn out to be limited in price and time. Therefore, it is a way too early to change our strategic bullish base case scenario. Additionally, we can see that the WSC Sector Momentum Indicator also strengthened last week and is trading at quite bullish levels, signaling that most sectors of the S&P 500 got back or remain in a mid-term-oriented price driven uptrend. Looking at our Sector Heat Map also shows further improvement since the momentum score of riskless money market dropped to the lowest levels for weeks.

More importantly, the current mid-term oriented up-trend of the market is strongly confirmed by mid-term-oriented market breadth. The percentage of stocks which are trading above their mid-term oriented moving averages (100/150) continued to increase during the week, indicating the current upside participation within the whole market is quite broad-based (although both indicators still remain bearish from a pure signal point of view). Additionally, the Modified McClellan Oscillator Weekly showed solid signs of improvements as it nearly flashed a bullish crossover signal last week. This indicates that the underlying breadth momentum of the broad market is getting back on track. Probably, the most important mid-term-oriented signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as both indicators strengthened their bullish signal significantly last week. This shows that the current mid-term-oriented uptrend is still strongly supported by mid-term oriented advancing volume and advancing issues on NYSE. This can be also observed if we examine our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line Weekly) as all of them increased last week or were holding up quite well. All in all, the technical condition of the ongoing uptrend still looks extremely healthy and, therefore, it is a way too early to change our strategic bullish outlook.

Long-Term Technical Condition

The long-term oriented trend of the market shows again the same picture as in the previous weeks. Our Global Futures Long Term Trend Index, which has been decreasing for weeks, continued its bearish ride. This is indicating that the long-term oriented trend of U.S. equities remains bearish for the time being. A small positive sign, in contrast, is coming from our WSC Global Momentum Indicator. After weeks of trading at the absolute bottom (0%), its gauge succeeded to increase to 12%. This indicates that 12% of all local equity markets around the world – which are covered by our Global ETF Momentum Heat Map – managed to get back above their long-term oriented trend lines. If we focus on the WSC Global Relative Strength Index, we can see that the momentum of most risky markets is slightly regaining strength (although U.S. Treasuries remain the strongest market). If we examine our long-term oriented tape indicators (Modified McClellan Volume Oscillator Weekly, the SMA 200 and the High-/Low Index Weekly), we can see that all of them slightly improved.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. The allocation of the WSC Sector Rotation Strategy remains unchanged.

Bottom Line

Even though it could be possible to see some nasty sentiment driven washout days, there is no fundamental reason to change our strategic bullish outlook for now. The market is following our forecasted path so far and given the outright bullish tape structure, we think that any upcoming weaknesses should turn out to be limited in price and time. A fact, which can be also seen if we focus on our Big Picture Indicator, which managed to get back into its bullish quadrant a couple of days ago. As long as this is the case, it is a way too early to take the chips from the table. Hence, aggressive short-term traders should focus on buying the dips, whereas conservative investors should remain invested. Moreover, with such bullish readings across the board, we think our suggested stop-loss limit from our previous market comment is not necessary anymore.

Stay tuned!