April 26th 2020

Market Review

U.S. stocks finished the week in negative territory with the main benchmarks posting their first weekly decline in three. The Dow Jones Industrial Average declined 1.9% over the week to 23,775.27. The S&P 500 recorded a weekly loss of 1.3% to finish at 2,836.74. The Nasdaq retreated 0.2% for the week to finish at 8,634.52. Most key S&P sectors ended in the red for the week, led by utilities. Energy and comm. services were the only gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 35.9.

Short-Term Technical Condition

Although the S&P 500 finished the week in negative territory, the short-term oriented uptrend of the market remains well in force. First of all, the Trend Trader Index is still signaling a quite bullish short-term oriented price trend as the S&P 500 closed 164 points above its bearish threshold on Friday. This is telling us that the pure price driven short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,672. Secondly, both envelope lines of this reliable indicator are increasing strongly, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be also considered as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy price-driven uptrend. Basically, the same is true if we analyze the underlying trend momentum of this short-term oriented price driven uptrend. There we can see that the Modified MACD has not shown any signs of weaknesses so far and has, therefore, not confirmed the latest weekly decline of the S&P 500. Consequently, this move can be classified as a breather rather than the start of a major trend-reversal. This view is also confirmed by the fact that the Advance-/Decline 20 Day Momentum Indicator, which showed some stronger signs of fatigue last week. As this indicator tends to be a leading one, we would not be surprised to see some kind of consolidation period ahead.

From a current point of view, any upcoming short-term oriented consolidation should turn out to be supportive in its nature as the as the current short-term oriented uptrend is still widely backed by a broad market. In other words, the chances for a sudden and stronger momentum crash remain quite limited as the current upside participation within the whole market still looks quite supportive at the moment. Especially the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are telling us that the momentum of advancing issues and advancing volume remains quite strong. As long as this is the case, the short-term oriented uptrend should not be at risk of fading out immediately. On the other hand side, some kind of short-term consolidation cannot be ruled out, since the bullish signal from the Upside-/Downside Volume Index Daily could be definitely a bit stronger in our point of view. Basically, the same is true if we focus on the NYSE New Highs/New Lows Indicator. There we can see that that there were hardly any stocks hitting a fresh yearly high or a fresh yearly low in the past week. As a consequence, the High-/Low-Index Daily is not able to turn bullish since further new highs are needed for such a signal. However, to justify further rallying we definitely need to see some improvements within these indicators soon, otherwise further sideways trading (consolidation) looks quite likely. Such a consolidation period remains quite healthy in its nature as long as our short-term oriented tape indicators remain bullish or continue to strengthen in that time period. Therefore, it was good to see that the percentage of stocks which are trading above their short-term oriented moving averages (20/50), showed some signs of stronger recovery at the end of the week. Anyhow, given the quite supportive tape condition at the moment, the chances for a sudden momentum-crash (correction) remain quite low currently. Nevertheless, we would also not be surprised if we see some form of (bullish biased) consolidation, before further strengths can be expected!

On the contrarian side, we can see that our entire option based indicators (Daily Put-/Call Ratio All CBOE Options Indicator, AII CBOE Put-/Call Ratio Oscillator and the Equity Options Put-/Call Ratio Oscillator) got back into neutral territory. In such a situation, volatility tends to slow down as market participants are not expecting major moves. A fact, which is illustrated by the CBOE Volatility Index, which dropped significantly (although the S&P 500 closed in negative territory for the week). This view is also confirmed by the WSC Capitulation Index, which is still indicating a risk-on market environment, plus the Smart Money Flow Index is still showing a hug bullish divergence to the Dow Jones Industrial Average. Although the amount of bears (AII Bulls & Bears survey) has dropped over the past few weeks, the fear of missing out (FOMO) still remains an important driver (as there are still enough bears around). The only negative signal is coming from a pure seasonal point of view. If we have a closer look at the Presidential Cycle, we can see that the next couple of months were historically seen, quite challenging ones. So from a pure contrarian point of view, we would not be surprised to see another strong but last rally attempt, pushing all bears back into the bullish camp again (together with some increased greed in our option based indicators) before stronger seasonal headwinds or even another correction might be due.

Mid-Term Technical Condition

This scenario would coincide with the fact that the bullish/supportive readings within our mid-term oriented indicators were developing moderately so far (although we saw a huge recovery rally). Hence, the overall technical environment of the market still looks quite vulnerable for major disappointments (once our short-term oriented indicators turn bearish again). The most concerning signal is coming from the Global Futures Trend Index as its gauge formed a rounding top last week. Although this decline was not significant, it prevented the gauge from passing the important 60 percent bullish threshold. As already mentioned a couple of times, as long as the gauge remains in the bearish consolidation area, the risk of another correction is still on the table – at least from a pure formal point of view. Therefore, it was good to see that the WSC Sector Momentum Indicator has shown some positive momentum recently, although it still remains quite bearish from a pure signal point of view. If this development continues, it might pass the bullish threshold soon. Also our Sector Heat Map showed some improvements. First of all, the momentum score of riskless money market dropped by more than 20 percentage points to 62%. In addition, the momentum scores of 4 sectors are now trading above the one from riskless money market. Nevertheless, still most sectors within the S&P 500 are underperforming the momentum score of riskless money market. In such a scenario, most sectors tend to perform negative on an absolute basis as they remain in a mid-term oriented down-trend. Consequently, it looks like the market will head into a make or break set-up in the next couple of weeks.

This view is also confirmed by mid-term market breadth. Our Modified McClellan Oscillator Weekly continued to decline, indicating an outright weak tape momentum at the moment. Another weak mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as their bearish signals strengthened last week. In the past, bearish readings within both indicators (together with a Global Futures Trend Index score below 60%) were mostly a reliable predictor for further major troubles down the road. In addition, our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily and the Advance-/Decline Line Weekly) did not show any serious bullish signs last week. The only bullish signal is coming from the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150), as both gauges slightly increased. So all in all, the mid-term oriented tape condition of the market is confirming our view that the market remains vulnerable.

Long-Term Technical Condition

The long-term oriented trend of the market has not shown any significant signs of recovery so far. The WSC Global Momentum Indicator has been trading for weeks at the lowest level possible (0%) and not shown any bullish moves. This signals that there are absolutely no local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) which are trading above their long-term oriented trend lines. Also our Global Futures Long Term Trend Index has been decreasing for weeks now, indicating that the long-term oriented trend of U.S. equities is quite damaged at the moment. And although our WSC Global Relative Strength Index slightly improved last week and it reveals that the relative strength of all risky markets is trading below the one from U.S. Treasuries (which is another indication that we are still quite early in the current up-cycle). Focusing on our long-term oriented tape indicators reveals that the Modified McClellan Volume Oscillator Weekly weakened while the High-/Low Index Weekly and the SMA 200 showed some bullish gains.

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

Last week, we received further evidences for our base case scenario where we most likely see at least another rally attempt before further major troubles might be due. To be more precise, the quality of the short-term oriented uptrend still looks quite supportive and, therefore, at least further bullish biased gains/consolidation or even another stronger rally attempt looks quite likely. If this move is not accompanied by stronger improvements within our mid-term oriented indicators (preferred scenario), we see another major pullback, once our short-term oriented indicator turn bearish again. Ideally, we see another strong rally (attempt), accompanied by an outright complacent crowd (further decreasing bears in combination with bearish readings in our option based indicators), before we see a stronger and sharp trend-reversal (which might mark the beginning of another major sell-off cycle). However, right now we are not there yet as our entire short-term oriented indicators still remain quite bullish. As a matter of fact, our strategic bullish view has not changed for now (although we have become a bit cautious recently). Consequently, we think that aggressive traders should stick in the bullish camp as there is still some attractive upside potential left, although it looks like the air is getting thinner. Anyhow, also conservative investors should remain invested since we think it is still a bit too early to pull the trigger yet (as there is still a small chance that we see further improvements on a mid-term time horizon). Nevertheless, we also think it would make sense to adjust the latest stop-loss limit to the lower threshold of the Trend Trader Index (intra-day), just in case we do not see another rally attempt (not preferred scenario).

Stay tuned!