admin No Comments

May 23rd 2021

Market Review

U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average lost 0.5% over the week, to end at 34,207.84. The S&P 500 declined 0.4% from last week’s close to finish at 4,155.86. The Nasdaq closed at 13,470.99, ending the week 0.3% higher and breaking a four-week losing streak. Among the key S&P sectors, the health care sector was the best weekly performer, while energy dragged the most. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, ended at 20.2.

Short-Term Technical Condition

Even though the broad index finished in slightly negative territory for the week, the short-term oriented trend of the market remains neutral. The S&P 500 is still trading 11 points above the bearish threshold from the Trend Trader Index. Consequently, the purely short-term oriented price trend of the market remains supportive as long as the S&P 500 does not close below 4,144 (lower threshold from the Trend Trader Index). Also, from a structural point of view, the short-term oriented trend of the market has not turned bearish as both envelope lines of the Trend Trader Index have been trading sideways for the past days. This indicates that the latest weaknesses can still be described as a healthy breather rather than the beginning of a longer-lasting down-trend (at least from the current point of view). This can also be seen if we focus on our Advance-/Decline 20 Day Momentum Indicator as it is still trading in solid bullish territory. The only weaker signal is coming from the Modified MACD, indicating further volatile sessions ahead. So from a purely trend point of view the consolidation period is likely to continue for a while. Worth mentioning is the fact that the short-term oriented trend of the market is only giving a limited picture about the current condition of the market as it includes a lot of noise. Therefore, it is not unusual that some or even all of our short-term oriented trend indicators tend to deteriorate, when the price action of the momentum of the market is slowing down. In such a situation, short- to mid-term market breadth will help to evaluate if a bearish short-term oriented trend will lead to further stronger losses or if it was only caused by too much market noise. If short- to mid-term market breadth remains strong, the impact of a short-term oriented trend-break should be quite limited in price and time.

Although the readings from some of our short-term oriented market breadth indicators slightly weakened for the week, the quality of the current short-term oriented uptrend still looks quite supportive at the moment. This can be seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). The readings of both indicators remain supportive and have, additionally, not shown any signs of major weaknesses so far. This shows that the current price driven up-trend of the S&P 500 is still backed by a broader basis. On top of that, we can see that there are still enough stocks around which are hitting a fresh yearly high, whereas the number of stocks which were pushed to a new yearly low has not shown any negative spikes so far. As a result, the High-/Low Index Daily is far away from flashing a bearish crossover signal. Basically, the same is true if we focus on the Upside-/Downside Volume Index Daily. As long as more volume is flowing into advancing stocks than into the declining ones, the overall tone should remain supportive. The only negative signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily (since they have not shown any signs of bottoming out yet). This is telling us that the overall market breadth momentum still remains weak-kneed (although the overall level of our breadth indicators still remains strong). In conclusion, it can be said that the market internals still remain too robust to justify a stronger and sustainable trend-reversal at the moment. As a result, the current consolidation period can still be classified as healthy rather than being corrective in its nature.

On the contrarian side, we can see that the ongoing consolidation period still has its designated (positive) impact on market sentiment since the majority of our sentiment- and option based indicators (AII CBOE Put-/Call Ratio Indicator, AII Bulls/Bears Survey, WSC Dumb Money Indicator, AII CBOE Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator and the WSC Put-/Volume Ratio Oscillator) turned or remain bullish. On the other hand, we can see that the Smart Money Flow Index is narrowing its gap to the Dow Jones Industrial Average, whereas the WSC Capitulation Index is still indicating a risk-on market environment. So from a purely contrarian point of view it looks like that the recent consolidation period might be over soon. Thus, the chances for another rally attempt towards the latest high are definitely increasing on a fast pace.

Mid-Term Technical Condition

This view is also supported by a robust mid-term oriented technical condition of the market. The Global Futures Trend Index keeps trading in the middle of its bullish consolidation range, which is a quite healthy bullish signal. In the past, the market never faced a stronger correction with readings above 60%. On top of that we can see that our WSC Sector Momentum Indicator has not shown any signs of weaknesses so far, indicating that most sectors of the S&P 500 remain in a strong mid-term oriented uptrend for the time being. These bullish facts are also supported by the fact that the momentum score of riskless money market within our Sector Heat Map remains unchanged at 0%. In our view, this is another indication that the current consolidation period is still healthy in its nature. As a result, we believe that any upcoming short-term oriented weaknesses should be limited in price and time (and, therefore, it is still a way too early to bet on a stronger and sustainable trend-reversal).

This view is also confirmed by the fact that the current mid-term oriented uptrend is still well backed by an extremely broad basis. This is another indication, that it might be just a question of time until we see further gains ahead. To be more precise, while our Advance-/Decline Line Daily and Advance-/Decline Volume Line have not shown any signs of weaknesses yet, our Advance-/Decline Volume Line reached its highest level for years. As a result, it has formed a quite bullish divergence if we consider the fact that the S&P 500 declined for the week. Another outright bullish fact is that mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading above their bearish counterparts. As long as both indicators remain bullish in combination with readings above 60% within our Global Futures Trend Index, it is definitely too early to get concerned about a potential (stronger) pullback. Another encouraging signal is coming from the Modified McClellan Oscillator Weekly, which succeeded to improve last week and has, therefore, reached its highest level for months. This shows that the underlying momentum of advancing stocks on a mid-term time horizon continued to strengthen. On top of that we can see that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) is giving absolutely no reason to worry right now. With such solid bullish readings in mid-term market breadth, it is just a question of time until we see further strong rallying. As a result, it is a way too early to get concerned about the ongoing consolidation period.

Long-Term Technical Condition

The long-term uptrend of the market remains in force and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index keeps trading at the highest levels for years, indicating that the current bull-market of U.S. equities is still gaining momentum. We receive the same picture globally. Although the WSC Global Momentum Indicator decreased for the week, it shows that 81% 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. Thus, the current bull market remains global in scope. While our WSC Global Relative Strength Index shows a volatile week, the relative strength of all risky markets is still 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 and the High-/Low Index Weekly remained unchanged, while the Modified McClellan Volume Oscillator Weekly improved, giving absolutely no reason to worry right now.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Momentum Portfolio and the WSC Dynamic Variance Portfolio. Moreover, we are proud to announce that the WSC Inflation Proof Retirement Portfolio reached a new all-time high last week.

Bottom Line

Our outlook remains unchanged compared to last week. Even though we are still expecting to see further increased volatility ahead, there is no fundamental reason to change our strategic bullish outlook for the time being. If we consider the outright bullish tape structure of the market, the current consolidation period can still be described as quite healthy in its nature. In such a situation, any upcoming down-testing should be limited in price and time. Moreover, given the increasingly bullish signals on the contrarian side it could be possible to see another sustainable rally towards the latest high soon. A fact, which can also be seen if we focus on our Big Picture Indicator, which is still moving around within its bullish quadrant. As long as this is the case, we think it might be a way too early to throw in the towel.

Stay tuned!