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August 9th 2020

Market Review

After a short consolidation period at the beginning of the week, all three U.S. major indexes continued to push significantly higher for the week. The Dow Jones Industrial Average added 3.8% in five trading days to close at 27,433.48. The S&P 500 jumped 2.5% for the week, to finish at 3,351.28. The Nasdaq also rallied 2.5% to end at 11,010.98. All key S&P sectors ended in positive territory, led by industrials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 22.2.

Short-Term Technical Condition

In line with our recent outlook, the short-term oriented uptrend of the market remains well in force. Currently, the S&P 500 is trading 120 points (!) above the bearish threshold from the Trend Trader Index. This shows that the short-term oriented (price driven) up-trend of the market remains intact as long as the S&P 500 does not drop below 3,231. Furthermore, we can observe both envelope lines of this reliable indicator still drifting higher on a fast pace, showing that the resistance/support levels for the S&P 500 are increasing as well. This is an outright constructive technical signal since higher highs and higher lows are a typical pattern for a healthy price-driven uptrend. If the analyze the underlying momentum of this price driven uptrend, we can observe that the Modified MACD also strengthened last week and has, therefore, clearly confirmed the latest rally of the S&P 500. The same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator as its gauge jumped to the highest level for weeks. These are quite confirmative signals as they clearly show that the current positive time-series momentum of the S&P 500 remains outright strong for the time being.

To avoid typical and painful momentum crashes, it is essential to analyze if the prevailing trend of the market is driven by a broad basis or only by a few heavy weighted stocks in the index. If the first one holds, the probability that the prevailing trend continues is extremely high, since it is based on a broad demand and vice versa. Currently, the underlying trend participation of the ongoing uptrend improved and looks, therefore, extremely healthy. This becomes obvious since our entire short-term oriented market breadth indicators strengthened their bullish signals last week. First, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) jumped back into deep bullish territory. This is a strong indication that the prevailing (positive) time-series momentum of the S&P 500 is outright strong since 76/69 percent of all Russell 3000 stocks are currently trading in a short-term oriented uptrend. On top of that, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not shown any signs of weaknesses since both indicators slightly widened their bullish gaps last week. This is telling us that the prevailing uptrend is still supported by a healthy number of advancing issues and advancing volume. This can be also seen if we focus on the Upside-/Downside Volume Index Daily, as the amount of up-volume also traded at quite confirmative levels last week. Additionally, we saw solid readings in the total number of all NYSE-listed stocks which reached a yearly new high, whereas we saw hardly any stocks hitting a fresh yearly low. Thus, the bullish gauge of the High-/Low-Index Daily also strengthened (and keeps, therefore, trading at quite confirmative levels). All in all, we can see that the prevailing short-term oriented uptrend of the S&P 500 is currently backed by an outright broad basis. Consequently, we strongly believe that the risk of a fast and sustainable trend-reversal should remain quite low for the time being. As a result, we think that the current rally will still have enough power to push the S&P 500 towards new record highs soon.

Unchanged compared to last week, the only super red flags are still coming from the contrarian side. There we can see that most of our option based indictors (All CBOE Put-/Call Ratio Daily, WSC Put-/Volume Ratio and the All CBOE Call-/Put Ratio Oscillator) are telling us that the market is extremely complacent at the moment. A fact which is also confirmed by the WSC Dumb Money Indicator. As already mentioned last week, such extreme signals are often accompanied by increased volatility/or nasty pullbacks to dampen short-term optimism. Consequently, we would not be surprised to see some rocky sessions/washout-days ahead. On the other hand, we can still see that the number of bears on Wall Street remains outright high, indicating that there is still enough dry powder around to drive prices higher on a mid-term time perspective. Above all, we saw that the gauge of the WSC Capitulation Index continued to drop deeply into bullish territory, whereas the Smart Money Flow Index was also confirming the latest gains of the Dow Jones Industrial Average. In the end, the overall set-up remains confirmative but given the increased greed within the option market we would not be surprised if the current rally will be accompanied by some nasty washout (reversal) days.

Mid-Term Technical Condition

Unchanged compared to last week, the mid-term-oriented technical condition of the market still reveals a quite robust picture. The Global Futures Trend Index keeps trading above its outright bullish 90% threshold, indicating that any upcoming short-term oriented weaknesses should be limited in price and time (of course only together with strong readings in mid-term market breadth). Consequently, we would not take any sentiment driven short-term oriented pullback too seriously as long as this indicator has a positive momentum and/or keeps trading far above its 60% bullish threshold. Another outright bullish signal is coming from the WSC Sector Momentum Indicator since it also closed in solid bullish territory last week. This shows that most sectors of the S&P 500 remain in a mid-term-oriented up-trend. This view is also supported by the fact that the momentum score of riskless money market (from our Sector Heat Map) continued to drop for the week (to 10%). As a matter of fact, we strongly believe that it is a way too early to change our strategic bullish outlook any time soon.

Another reason for our bullish base case scenario is the fact that our entire mid-term-oriented tape indicators continued to improve significantly last week. Therefore, the current mid-term oriented positive time-series momentum of the market is well supported by the broad market. Especially, the Modified McClellan Oscillator Weekly strengthened significantly, indicating that the overall tape momentum is outright positive for the time being. And all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) increased for the week. The Advance-/Decline Line Daily and the Advance-/Decline Line Weekly even reached a record level. Therefore, these indicators are clearly confirming our new highs scenario for the S&P 500. Another encouraging signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both indicators strengthened last week and the SMA 150 finally succeeded to get back into the bullish territory. Thus, the increase of both gauges indicates that the total upside participation within the market looks very broad based, which is another indication that it might be a bit too early to take the chips from the table. However, the most important mid-term-oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both indicators have not shown any weakness so far. Normally, as long as mid-term oriented advancing issues and mid-term oriented up-volume are trading well above their bearish counterparts, any upcoming short-term oriented weaknesses should be limited in price and time. Consequently, we strongly believe to see further gains into deeper summer.

Long-Term Technical Condition

Basically, the long-term oriented picture of the market also continued to improve last week. Our Global Futures Long Term Trend Index strengthened significantly, showing that the long-term oriented trend of U.S. equities is still gaining momentum. In addition, our WSC Global Momentum Indicator jumped to the highest level for weeks, signaling that currently 61% 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. Another positive signal is coming from our WSC Global Relative Strength Index as it increased once again compared to the previous week. Finally, also our entire long-term oriented tape indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly, SMA 200) improved considerably last week.

Model Portfolios

If we have a closer look at our Model Portfolios, we can see that there were no changes in the allocation advice from the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. As the underlying momentum score of Health Care dropped below average and below the one from the S&P 500, we received a sell signals for that ETFs within our WSC Sector Rotation Strategy. Moreover, we are proud to announce that the WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio reached a new all-time high last week.

Bottom Line

Basically, our outlook remains almost unchanged compared to last week. Given the increased greed within the option market, nasty sentiment-driven washout-days/pullback cannot be ruled until the option expiration date is due (at 21st of August). Nevertheless, we strongly believe that any upcoming weaknesses should be limited in price and time since the current up-trend is backed by a broad basis in every important timeframe. Thus, every (stronger) pullback will just act as basis for further rallying. This “buy the dip mentality” is also supported by the fact that there are still enough bears around to push prices higher on a mid-term time perspective. As a matter of fact, our strategic bullish outlook remains unchanged compared to last week as the underlying tone remains outright positive. A fact that can also be observed if we focus on our Big Picture Indicator which is still moving around its bullish quadrant. As long as this is the case, and as long as we do not see any negative spikes in new lows, in combination with a strong weakening Global Futures Trend Index it is a way too early to bet on a major trend reversal. Therefore, we believe that conservative investors should remain invested, whereas aggressive traders should continue to buy the dips (instead of chasing the market too aggressively on the upside).

Stay tuned!