November 8th 2020

Market Review

U.S. stocks strongly rebounded for the week with the major averages notching their best weekly performance since April. The Dow Jones Industrial Average gained 6.9% week to date to close at 28,323.40. The S&P 500 finished at 3,509.44 and rocketed 7.3% this week, posting its biggest election week gain since 1932. The Nasdaq jumped 9% for the week and finished at 11,895.23. All key S&P sectors succeeded to close in positive territory for the week, led by the technology sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 24.9.

Strategy Review

In our last weeks’ comment the main topic was to answer the question if the sell-off back then was the beginning of a stronger correction or if it was just an exaggerated version of a sentiment driven wash-out event (which would then be of course the basis for further growth). Given the fact that we saw several typical signs for a stabilization/bottom at hand, we argued that it was still a bit too early to throw in the towel as the sell-off could be still categorized as an extreme washout-event back then. Nevertheless, we also said that these signals looked a bit weak-kneed as well. Hence, there was still a small chance left that this recent sentiment driven washout sell off would transform into a more corrective environment. In such a binary situation, the development of our short-term oriented indicator framework remained key area of focus. Given the fact that these signals could change quite quickly during the week, we recommended to place a stop-loss limit at 3,190, since a drop towards these levels would have definitely caused stronger deteriorations within our indicator framework. However, during the whole week we saw improving readings all across the board, whereas no stop-loss limit was triggered so far.

Short-Term Technical Condition

Not surprisingly, the market was able to get back into a short-term oriented uptrend as most of our relevant indicators turned bullish last week. From a pure price point of view, this short-term uptrend should remain intact as long as the S&P 500 closes above 3,402 (which is the lower envelope line of the Trend Trader Index). Furthermore, we can see that both envelope lines of this reliable indicator have also started to bottom out as well. This is another encouraging positive trend-signal as it shows that the underlying trend structure of the market is also slightly turning bullish again. As a matter of fact, the recent recovery can be now almost classified as a new uptrend rather than being just an oversold bounce. This view is confirmed by the fact that the Modified MACD also flashed a bullish crossover signal last week and has, therefore, confirmed the latest gains from the S&P 500. Only the Advance-/Decline 20 Day Momentum Indicator has shown some small signs of non-confirmation recently as its gauge did not fully confirm the rally from last week. As the latter indicator tends to be a leading one, it could be possible to see some kind of slow-down/breather next week.

However, this is not a big deal-breaker at the moment as we also saw stronger signs of recovery within our short-term oriented market breadth indicators last week. The most encouraging tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both of them flashed a bullish crossover signal last week. This indicates that the latest rally was supported by strongly surging advancing issues and advancing volume on NYSE. A fact, which can be also observed if we focus on the Upside-/Downside Volume Index Daily. Consequently, the latest recovery was driven by the whole market and not only by a few heavy weighted stocks in the index (which is a quite healthy tape signal for the time being). A fact which can also be seen if we examine the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both indicators weakened a bit on Friday, they managed to jump back into bullish territory last week, showing that the majority of U.S. listed stocks got back into a short-term oriented uptrend again. Probably the most important bullish signal was coming from the NYSE New Highs minus New Lows Indicator, as we saw a strong increase in hew highs without any stronger spikes in new lows. As long as this is the case, the overall market environment should remain supportive. Consequently, it was not a big surprise at all that the High-/Low-Index Daily succeeded to flash a bullish crossover signal last week and has, therefore, clearly confirmed the latest gains of the S&P 500. All in all, the positive time-series momentum of the S&P 500 was strongly backed by a broad basis. Therefore, the recent recovery can be definitely classified as a new uptrend rather than being just an oversold bounce. Nevertheless, we should not forget that most of our short-term oriented tape indicators could be a bit stronger from an absolute level and, therefore, we would not be surprised if the pace is likely to slow down a bit in the next couple of trading sessions.

On the contrarian side, we can see that the market is quite overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and, therefore, a short-lived breather cannot be ruled out at the moment. Apart from that fact, most of our option based indicators remain mostly neutral to supportive (Daily Put-/Call Ratio All CBOE Options Indicator, WSC Put-/Volume Ratio, WSC Dumb Money Indicator, Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator) indicating that there is still enough room left for the market to climb the wall of worry. Moreover, we can see that the amount of bulls also increased during the week, but has not reached extreme levels yet. This is probably the strongest driver for returns as more and more bears are switching the sides. The result are often strong melt-ups (like the one we saw last week), when these guys are getting back into the market. Another positive ingredient is coming from a pure seasonal point of view (Presidential Cycle) as the market often faces further tailwinds up until early December. But on the other hand side we can see that the WSC Capitulation Index is still indicating a risk-off market environment, whereas the Smart Money Flow Index is still showing stronger troubles ahead on a mid-term time perspective. Although this is a red-flag on the horizon, we keep ignoring these signals for now as long as our remaining indicators stay constructive.

Mid-Term Technical Condition

The mid-term oriented condition of the market still looks a bit weak-kneed at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index is still trading below its important 60% threshold. As already mentioned a couple of times, from a pure formal point of view, this indicates that the recent correction cycle is definitely not over yet. Consequently, the overall recovery looks a bit fragile form a pure mid-term oriented view. On the other hand side, we can see that the gauge of the Global Futures Trend started to bottom out and does additionally show strong positive momentum. As long as this is the case, the underlying tone should remain positive. Additionally, we can see that most sectors within the S&P 500 remain in a strong uptrend as the gauge of the WSC Sector Momentum Indicator keeps trading at solid levels and even slightly improved for the week. Consequently, the underlying price trend of the S&P 500 looks quite solid right now. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all sectors (except energy) remains above the one from riskless money market (which dropped around 2 percentage points).

Analyzing mid-term oriented market breadth shows mostly a quite supportive picture. This is based on the fact that our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line Weekly) increased for the week or were at least holding up quite well and have, therefore, confirmed the latest gains of the S&P 500. Also the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) are showing that the majority of U.S. listed stocks remains in a mid-term oriented price driven uptrend. On the other hand, we can see that the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly have not improved at all. Basically, the same is true if we focus on the Modified McClellan Oscillator Weekly. Right now this is not an imminent show-stopper but if we do not see a stronger recovery here, the risk of a longer-lasting and broad-based trading range remains high.

Long-Term Technical Condition

Therefore, it was good to see that the long-term oriented trend of the market also showed signs of improvements last week. Our Global Futures Long Term Trend Index continued its bullish ride, indicating that the long-term oriented trend of U.S. equities remains intact. In addition, our WSC Global Momentum jumped to its highest level for months and indicates that currently 94% 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. Consequently, the recent rally was definitely global in scope (which is another bullish ingredient for now). Moreover, also our WSC Global Relative Strength Index increased compared to the previous week and reveals that the relative strength of all risky markets is trading far above the one from U.S. Treasuries. If we examine our long-term oriented tape indicators, we can see that the SMA 200 improved, while the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly remained nearly unchanged.

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

On a short-term time frame, the current uptrend is definitely backed by a broad basis. As a result, the overall tone should remain quite bullish, even though the market appears ready for a short-lived breather and/or profit taking activities. The only major deal-breaker at the moment is based on the fact that the readings on a mid-term time perspective still remain a bit weak-kneed. Consequently, there is still a very small chance left that the recent bull-run will be faded again if we do not see further strengthening in our (short-term oriented) indicator framework (not preferred scenario). Hence, we would definitely turn cautious if we see more new lows than new highs or even a strong spike in new lows, plus a strong deteriorating gauge of the Global Futures Trend Index. As this is not the case right now (plus there should be still enough purchasing power left), we think it is definitely too early to get concerned about these facts. Thus, we upgrade our view from cautiously bullish to bullish again. For that reason, we would recommend that aggressive traders should focus on the long side again, whereas conservative members should also remain invested (although it makes sense to keep their stop-loss limit in place – just in case things change quite quickly during the week).

Stay tuned!