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February 7th 2021

Market Review

U.S. stocks ended the week with solid gains pushing the main indices to new record highs. The Dow Jones Industrial Average added 3.9% percent over the week to end at 31,148.24. The S&P 500 jumped 4.7% in that time period to close at a record high of 3,886.83. The Nasdaq rocketed 6% from last Friday’s close to finish at a record high of 13,856.30. All key S&P sectors finished positive for the week, led by the energy sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 20.9.

Strategy Review

In our last weeks’ comment we tried to answer the question if the sell-off two weeks ago was just an exaggerated version of a sentiment driven wash-out event (which would then set the basis for further growth) or the beginning of a longer-lasting corrective top-building process into deeper Q1. Especially, the incredible speed of the deterioration within our indicators looked quite worrisome back then, although most of our indicators remained bullish from a pure signal point of view. Although these bullish signals were neglecting an immediate correction scenario in the first place, we argued that if the deterioration within our indicators would continue with such a speed, the situation could easily escalate literally within days. Thus, we recommended our conservative members to take profits and/or to place a stop loss limit at 3,650, just in case the situation would worsen significantly during the week. Moreover, we said that this stop-loss limit should remain in place until our indicator framework would turn positive again. Therefore, the big question now is, if we have seen the worst already or if the recent recovery rally was just part of a typical top-building process?

Worth mentioning is the fact that a typical top building process starts with a sharp pullback (5-7%), which is then followed by a low quality/large cap rally which often pushes the market towards or slightly above its old bull-market high. Since such a low quality rally is not sustainable in its nature, the result is often another but stronger down-leg which pushes the market below its previous low (which is then of course, just the beginning of a longer-lasting down-trend). On the other hand, if the initial pullback is quite shallow in its nature and if the market internals are getting back on track in the following recovery rally, the whole event can be categorized as healthy process within an ongoing bull market. Given the fact that the recent sell-off turned out to be quite shallow in its nature, no stop-loss limit was triggered last week. Thus, the next step is to evaluate the quality of the recent recovery.

Short-Term Technical Condition

After the strong recovery, the short-term oriented price driven trend of the market clearly turned bullish again since the S&P 500 closed nearly 100 points above the bearish threshold from the Trend Trader Index. Additionally, we can see that both envelope lines have not been affected by the increased volatility so far, which is another positive price driven trend signal at the moment. More importantly, the underlying momentum of this short-term oriented price trend also turned slightly positive, since the Modified MACD managed to flash a small bullish crossover signal last week. Although this looks quite bullish from a pure signal point of view, the crossover signal is still extremely weak-kneed at the moment. As a matter of fact, it has not fully confirmed the latest recovery of the S&P 500. Basically, the same is true if we focus on our Advance-/Decline 20 Day Momentum Indicator. Despite the fact that the gauge of this reliable indicator strengthened for the week, it is far away from confirming the latest record high of the S&P 500. Given the fact that this indicator is a leading one, it could be possible to see some form of consolidation head. If we consider the fact that the recent recovery rally might be just part of a typical top building process, these two non-confirmative signals can be definitely interpreted as short-term warning signals (at least from a pure trend point of view).

However, the situation looks completely differently, if we analyze short-term market breadth. There we can see that the upside participation within the recent rally was extremely broad-based since our entire short-term oriented tape indicators improved significantly last week. As a result, the chances that any upcoming consolidation will trigger a stronger and sustainable trend-reversal should remain quite low for the time being. To be more precise, during the whole week we saw a steady increase in the number of stocks which hit a fresh yearly high, whereas on Friday the number reached quite confirmative levels again (286). Additionally, there were hardly any stocks which dropped to a new yearly low (2), which was another piece of evidence that the latest recovery was quite healthy in its nature. Therefore, the gauge of the High-/Low-Index Daily finally succeeded to widen its bullish gap again. This is telling us that the latest gains were not caused by a few mega caps but they were a result from a strong demand all across the board. A fact which can be also seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both of them improved last week and even managed to flash a bullish crossover signal. This shows us that the momentum of the market internals (advancing issues and advancing volume) are gearing up again since they are outpacing their bearish counterparts. A fact that can be also observed if we focus on the Upside-/Downside Volume Index Daily which widened its gap significantly. Another very strong signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges jumped back into solid bullish territory fully confirming the current levels of the S&P 500. With such strong signals all across the board, it is highly unlikely that the latest recovery will turn out to be corrective in its nature.

On the contrarian side, we receive a quite patchy picture at the moment. On a very short-term time frame, the market is quite oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily). Therefore, it is likely that the pace will slow down a bit in the next couple of trading sessions. Above all, we can see that there is still a lot of speculation (AII CBOE Put-/Call Ratio, WSC Put-/Volume Ratio, the WSC Put-/Volume Ratio Oscillator, WSC Dumb Money Indicator and the WSC Timing Indicator) and, therefore, the risk for further painful washout-days remains persistent. Another negative signal is coming from the Smart Money Flow Index, which did not confirm the latest rally. Given the fact that Hedge Funds have been terrible squeezed recently, this signal might be a bit flawed at the moment. On the other hand, we can see that the WSC Capitulation Index is about to form a major inflection point, indicating that we have seen the worst already. Another mid-term positive signal is coming from the AII Bulls & Bears survey, as the number of bulls have dropped significantly recently. Thus, there is still enough fire power left to push prices higher on a mid-term time perspective. From a seasonal point of view, it looks like the market is following the Decennial Cycle rather than the Presidential Cycle, which is another positive input factor at the moment.

Mid-Term Technical Condition

Unchanged compared to last week, the mid-term oriented trend condition of the market still remains quite robust at the moment. This becomes obvious if we focus on the gauge from the Global Futures Trend Index, which is trading at the top end of its outright bullish area (95%) and has, therefore, fully confirmed the latest rally of the S&P 500. Worth mentioning is also the fact that its gauge has been trading at this top level for the past 8 weeks. As mentioned last week, as long as this gauge remains above 90 percent or does not show extreme negative momentum, the risk for a sudden correction should remain extremely limited. Basically, the same is true if we focus on the WSC Sector Momentum Indicator, which kept trading at outright bullish levels (but also not showing any reaction to the jump of the broad index). This implies that the majority of sectors in the S&P 500 remains in a mid-term oriented price driven up-trend. These bullish facts are also supported by our Sector Heat Map as the momentum score from riskless money market remains at 0% and, hence, keeps trading well below all relevant key sectors. In our view, this is another indication that the positive mid-term oriented time-series momentum of market remains well intact. Thus, the top-building scenario is definitely off the table at the moment.

This view is also confirmed by quite robust readings in mid-term oriented market breadth. All our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) rocketed for the week and have reached their highest readings for months. Therefore, they have fully confirmed the latest record of the S&P 500! Consequently, the recent high was definitely driven by a broad basis, which is an absolutely healthy tape signal. A fact, which can be also observed if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). There we can see that the total upside participation within the latest rally was outright strong. Also the Modified McClellan Oscillator Weekly gained more bullish ground last week, indicating that the overall tape momentum remains positive for the time being. The only small weak signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both indicators slightly lost some ground on high bullish levels. So, all in all, our mid-term oriented tape indicators are telling us that any upcoming short-term oriented weaknesses should not lead to a stronger pullback at the moment!

Long-Term Technical Condition

Once again, the long-term oriented trend of the market remains nearly unchanged compared to the previous weeks. The WSC Global Momentum Indicator keeps trading at its highest level possible, showing that 100% of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend-lines. As pointed out several times, this is a quite supportive technical signal, as it shows that the current bull market remains quite globally in scope. Another encouraging signal is coming from our Global Futures Long Term Trend Index which is trading at the highest levels for years (although it slightly decreased in the past weeks). This indicates that the S&P 500 remains in a strong technical bull market for the time being. Furthermore, our WSC Global Relative Strength Index shows increased risk-appetite among investors. Also, our long-term market breadth indicators improved significantly last week (Modified McClellan Volume Oscillator Weekly, SMA 200) or remained stable at least (High-/Low Index Weekly).

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. Moreover, we are proud to announce that the WSC Model Portfolio Composite, WSC Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio reached a new high during the previous week.

Bottom Line

The recent recovery rally was backed by a quite broad basis. As a result, the recent recovery can be definitely categorized as healthy in its nature, which is of course neglecting any kind of corrective top-building scenario. In other words, the overall tone should remain quite bullish and, therefore, any upcoming breather should be limited in price and time. A fact, which can be also observed if we focus on our Big Picture Indicator, as its gauge jumped back into its outright bullish quadrant already on Wednesday. Consequently, we would recommend our conservative members to remove their stop-loss limit (and increase their exposure on weak-trading days for those who took profit). Aggressive traders should remain in the bullish cap as long as our short-term oriented indicator framework remains constructive.

Stay tuned!