December 1st 2019

Market Review

U.S. stocks finished the holiday-shortened week in positive territory, with all three benchmarks reaching further minor all-time highs during the week. The Dow Jones Industrial Average added 0.6 percent for the week to end at 28,051.41. The S&P 500 advanced 1.0 percent from last Friday’s close to finish at 3,140.98. The Nasdaq climbed 1.7 percent over the week to 8,665.47. Most key S&P sectors ended in positive territory for the week. The energy sector was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.6.

Strategy Review

Since mid-November, we received a growing number of evidences that the market was in the middle of a corrective top-building process. To be more precise, our indicator framework showed that only due to the strong performance of a handful large- and mega-caps, the S&P 500 had reached a new all-time high, although the broad market was already faltering. We warned our members that such a situation was extremely dangerous since a trend-reversal within these few stocks could trigger a fast paced pullback as there was literally no safety net around which would be able to cushion such a move. In the past every correction started with a weak tape structure but not every weak tape structure lead to a correction. Consequently, we said that a trend-reversal in these large-cap stocks was needed to trigger such a domino effect. Otherwise, further top-building including some large-cap driven overshoots could be expected. Thus, we advised our members in our last week’s market forecast to place a wait for a short-term oriented trend-break (by placing a stop-loss limit), before taking any (short-) selling activities. Above all, we said that this stop-loss limit should remain in place until we see a stronger recovery within our indicator framework.
Obviously, no stop-loss limit was triggered last week but interestingly, we saw significant improvements within our indicator framework although the market just gained 1 percent for the week. Consequently, the big question is if the current correction cycle has already come to an end or is it just postponed to the next year? But let’s have a closer look at our technical market indicators first.

Short-Term Technical Condition

The short-term oriented uptrend of the market got back on track as the bullish readings from our entire short-term oriented trend-indicators strengthened last week. As per last week’s market forecast, the pure price driven uptrend of the market remains well in place since the S&P 500 is still trading 46 points above the bearish threshold from the Trend Trader Index. This is indicating that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 3,094. Additionally, both envelope lines of this reliable indicator have not shown any signs of weaknesses so far, which is also a quite constructive technical price driven trend signal. Another circumstance, neglecting the latest pullback scenario (for now) is the fact that the Modified MACD showed an increasing bullish gap again, plus the Advance-/Decline 20 Day Momentum Indicator strongly bounced back into bullish territory last week. So in the end, both indicators recovered significantly for the week and are, therefore, confirming the ongoing short-term oriented price trend of the market again.

We basically receive the same picture, if we focus on short-term market breadth. Especially, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) continued to grow further into bullish territory. This is telling us that the underlying trend-structure of the market is broadening again, which is a quite healthy tape signal. To be more precise, about 61/69 percent of all NYSE listed stocks are trading above their 20/50 day simple moving average. On top of that, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily gained further bullish ground and both indicators even managed to flash a small crossover signal. This indicates that the underlying breadth momentum of the market is slightly getting back on track. However, the most encouraging tape signal is coming from the NYSE New Highs/New Lows Daily Indicator as we saw some stronger spikes in the number of NYSE listed stocks hitting a new yearly high, in combination with one of the lowest readings of stocks which dropped to a new yearly low. As a consequence, the High-/Low-Index Daily strengthened its bullish signal significantly and has, therefore, successfully avoided a bearish crossover signal. So in the end, our entire short-term oriented tape indicators recovered significantly, indicating that the quite corrective short-term oriented condition of the market transformed back into a quite healthier market environment.

On the contrarian side, most of our option based indicators (Daily Put/Call Ratio All CBOE Options, AII CBOE Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator, WSC Put-/Volume Ratio and the WSC Put-/Volume Ratio Oscillator) continued to soften their quite bearish signals, where some of them even flashed a neutral signal again. This is quite interesting, given the fact that the market is trading near record highs. This increased fear can be also seen if we focus on the amount of bulls on Wall Street. There we can see that market sentiment turned quite neutral, as the amount of bulls/bears decreased/increased for the week. Consequently, the situation changed quite quickly here. On the other hand, we can also see that the WSC Capitulation Index (which is derived from the SMFI), is still trading in outright deep bullish territory.

Mid-Term Technical Condition

Another major reason, why the recent correction risk has diminished significantly is due to the fact that the gauge from the Global Futures Trend Index succeeded to recover last week and finally got back into the bullish consolidation area. As you probably know by now, as long as the gauge from this reliable indicator keeps trading above 60 percent (or shows stronger signs of positive momentum in combination with positive market breadth), the risk of a stronger correction is definitely off the table. Consequently, the market got back into a quite bullish set-up, which is quite astonishing if we consider the magnitude of the gains last week. Unchanged compared to last week, our WSC Sector Momentum Indicator is still trading at quite solid bullish levels, indicating that most sectors remain in a strong pure price driven mid-term oriented uptrend. This can be also seen if we focus on our Sector Heat Map as the momentum score of all sectors (except energy) remains above the one from riskless money market (currently at 10 percent).

If we focus on mid-term oriented market breadth, we basically get the same set-up as we have on a short-term time frame. First of all, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) increased, indicating the current upside participation within the whole market is getting quite broad-based again. Moreover, the Modified McClellan Oscillator Weekly also strengthened last week and even (slightly) increased its bullish gap, telling us that the underlying breadth momentum of the broad market is re-gaining strength. Another encouraging fact is that our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have not shown any signs of negative divergences recently, which is another confirmative sign for now. However, the most important signal is coming from the Advance-/Decline Index Weekly and from the Upside-/Downside Volume Index Weekly as both indicators regained some strengths on weak bullish levels. This is another indication, that the broad market is gaining momentum at the moment.

Long-Term Technical Condition

The long-term oriented trend of the market remains nearly unchanged compared to the previous weeks. Although the WSC Global Momentum Indicator slightly decreased last week, it indicates that 68 percent 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. Also our Global Futures Long Term Trend Index started to bottom out and signals that the long-term oriented trend of U.S. equities is re-gaining momentum. This can be also seen if we focus on the WSC Global Relative Strength Index, which shows that U.S. equities have the highest cross-sectional momentum score at the moment. On top of that, we can see that our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly, SMA 200) also improved compared to the previous week.

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. Moreover, we are proud to announce that the WSC All Weather Portfolio reached a new all-time high last week.

Bottom Line

Given the quite strong improvements all across the board, it looks like that the large-cap driven uptrend transformed back into a more broad-based rally. Hence, the risk of a stronger correction has clearly diminished and, therefore, we upgrade our strategic view from cautious to bullish again. For that reason, we would advise our aggressive traders to increase their risk budget again, whereas conservative members should remove their stop-loss limit as the current risk-/reward ratio looks attractive again (at least for the time being). The main reason, why we mention ‘at least for the time being’ here is based on the fact that there are still some divergences around. As a matter of fact, it could be possible to see a renewed deterioration soon, but for now the Big Picture Indicator is improving. Stay tuned!