admin No Comments

March 27th 2022 |

Key Takeaways

  • No need to change our strategic bullish outlook for the S&P 500 from January 20th.
  • Quality of the current short-term oriented uptrend looks quite high.
  • Sentiment is giving no reason to worry right now.

Market Review |

U.S. stocks finished in positive territory with all three major averages notching second consecutive winning weeks. The Dow Jones Industrial Average posted a weekly increase of 0.3% to finish at 34,861.24. The S&P 500 gained 1.8% for the five days to 4,543.06. The Nasdaq rallied nearly 2% during the week to 14,169.30. Nearly all key S&P sectors ended in positive territory for the week, led by the energy sector. Health care was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded around 20.8.

Short-Term Technical Condition

In line with our recent call, the S&P 500 headed higher last week. More importantly, this move was confirmed by our entire short-term-oriented trend indicators since they continued to strengthen their bullish signals since last week. Currently, the S&P 500 is trading 143 points above the upper threshold of the Trend Trader Index. This is telling us that the purely price driven uptrend of the market remains intact as long as the S&P 500 does not drop below 4,298 (lower envelope line of the Trend Trader Index). Another positive trend signal is based on the fact that both envelope lines of the Trend Trader Index had bottomed-out during the week and started to increase again. The momentum of this robust up-trend remains also quite strong (since both trend lines of the Modified MACD literally rocketed last week, whereas the Advance-/Decline 20 Day Momentum Indicator got back into bullish territory on Tuesday). Consequently, the short-term-oriented trend (time-series-momentum) of the S&P 500 looks outright positive at the moment.

Currently, the quality of the this short-term-oriented uptrend looks quite high. As a result, the risk for a sudden trend reversal should remain low for the time being. The current up-trend of the S&P 500 is driven by a broad basis (20/50) and is well supported by volume (Upside-/Downside Volume Index Daily). Moreover, we can see that the momentum of advancing stocks (Modified McClellan Oscillator Daily) and advancing volume (Modified McClellan Volume Oscillator Daily) also remains quite positive at the moment. Another supportive fact is that we saw a steadily increasing number of stocks hitting a fresh new high (whereas the new lows have not shown any negative spikes so far). Thus, the High-/Low Index Daily almost flashed a bullish crossover signal last week. This is also telling us that the market internals are getting back on track. So all in all, given the quite broad-based upside participation, we expect further gains on the horizon.

Sentiment-wise further signs of normalization are visible since most of our option based indicators remain quite neutral at the moment (Daily Put-/Call Ratio All CBOE Options, WSC Put-/Volume Ratio, Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator). Moreover, we can see that there is still enough fire power on the sideline since the number of bears is still outpacing the number of bulls by a large extend (AII Bulls & Bears Survey). So if we see further gains ahead, these guys will start to get back into the market sooner or later. On the other hand, we can see that Smart Money continued to confirm the latest advance (Smart Money Flow Index), whereas the WSC Capitulation Index is still indicating a risk-on market environment.

Mid-Term Technical Condition

The mid-term-oriented up-trend of the S&P 500 also continued to show major signs of improvements last week. The Global Futures Trend Index succeeded to improve by 17 percentage points and is, therefore, showing a strong positive momentum. As long as this is the case, we can ignore the fact that its gauge has not managed to pass its important 60% threshold yet. Thus from a purely formal point of view, the current correction cycle is not fully over yet. However, as long as this indicator is showing strong positive momentum we keep ignoring this bearish signal for the time being. This view is also supported by the fact that the WSC Sector Momentum Indicator (which measures the purely mid-term oriented price trend of the underlying sectors of the S&P 500) also got back on track last week. These bullish facts are also illustrated in our Sector Heat Map as the momentum score of riskless money market dropped by 10 percentage points last week to end at 17.9%. In addition, only one sector (consumer discretionary) is now trading below the riskless money market.

Analyzing the mid-term-oriented upside participation also showed stronger signs of improvements compared to last week (albeit on quite low levels). First of all, our entire advance-decline indicators increased for the week (Advance-/Decline Volume Line, Advance-/Decline Line Daily and the Advance-/Decline Line Weekly). Hence, they have fully confirmed the latest advance of the S&P 500.  On the other hand, we can see that up-volume (Advance-/Decline Volume Line and the Upside-/Downside Volume Index Weekly) as well as the momentum of mid-term-oriented advancing issues (Modified McClellan Oscillator Weekly) still remain a bit weak-kneed at the moment (although they have shown some signs of recovery recently). This weak-kneed upside participation can also be observed if we focus on the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150). However, given the current short-term-oriented strength, we assume that these weak signals may get sorted out soon. So, even though we saw smaller improvements within our mid-term-oriented trend quality indicators, most of them can still be described as being supportive (on quite low levels) rather than being confirmative at the moment.

Long-Term Technical Condition

The long-term-oriented technical picture of the market slightly improved, but still remains quite week-kneed for the time being. 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 looks quite fragile at the moment. On the other hand, we can see that the latest advance continued to be quite global in scope since the gauge of the WSC Global Momentum Indicator increased to 42%. According to the WSC Global Relative Strength Index, all major asset classes (apart from U.S. Treasuries) continued to build up relative strength vs. riskless money market. Examining our long-term-oriented tape indicators reveals that all of them slightly increased last week (the High-/Low Index Weekly, SMA 200 and Modified McClellan Volume Oscillator Weekly).

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. Since the WSC Sector Momentum Indicator turned positive again, the WSC Sector Rotation Strategy is switching out of its bear market portfolio. Thus, the WSC Model Portfolio Composite is also changing most of its positions.

Bottom Line

The situation remains unchanged compared to last week. On a short-term time frame, the uptrend of the S&P 500 is definitely backed by a broad basis. Thus, the quality of the latest gains still look quite high. A fact which can also be observed if we focus on gauge of the Big Picture Indicator, which is now indicating a “Stabilization” market regime. As mentioned in the description of the Big Picture Indicator, in such a regime, it is quite difficult to differentiate if the recovery process is sustainable or just part of a stronger bear-market rally. Currently, it looks like the recovery has legs and as long as we see further strengthening in our short- to mid-term-oriented indicator framework, the situation should remain supportive. Thus, the risk for another correction leg should remain low. On the other hand side, the signals on a mid-term time perspective (WSC Mid-Term Composite) remain quite weak-kneed. Consequently, there is still also a chance that the current recovery will fade out again at some point in time if we do not see a stronger recovery there. Currently, this is pure speculation but we will monitor the development of our mid-term-oriented indicators closely within the next couple of days/weeks. However, given the latest development of our indicators, we stick to our strategic bullish outlook.

Stay tuned!