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November 15th 2020

Market Review

U.S. stocks finished the week mostly with a strong performance, whereas one index even notched a record high this week. Closing at 29,479.81, the Dow Jones Industrial Average jumped 4.1% in five trading days for its second-straight positive week. The S&P 500 logged a 2.2% gain for the week to finish at a new record close of 3,585.15. While the Dow and S&P 500 recorded strong weekly gains, the Nasdaq Composite in contrast lost 0.6% during the week and finished at 11,829.29, notching its third weekly loss in four weeks. Still the Nasdaq is up 31.8% this year, while the Dow is up 3.3% and the S&P 500 11%. Nearly all key S&P sectors closed in positive territory, led by the energy sector. Technology was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 23.1.

Short-Term Technical Condition

During the whole week our entire short-term oriented trend indicators continued to strengthen. Thus, it is not a big surprise that the current short-term oriented uptrend of the market looks quite healthy for the time being. The S&P 500 is now trading nearly 169 points above the bearish threshold from the Trend Trader Index. This is telling us that the pure price driven short-term oriented up-trend of the market remains bullish biased as long as the S&P 500 does not drop below 3,416. Additionally, both envelope lines of this reliable price trend indicator continued to crawl higher, indicating that the resistance/support levels for the S&P 500 are still slightly increasing as well. This can be seen as quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy price-driven uptrend. Another confirmative signal is coming from the Modified MACD, which continued to widen its bullish gap. This shows that the underlying trend momentum (of this ongoing price trend) continued to strengthen as well and, therefore, an imminent trend-reversal looks quite unlikely from the current point of view. This view is also confirmed by the fact that the gauge of the Advance-/Decline 20 Day Momentum also managed to close higher for the week. Nevertheless, its gauge could be definitely a bit stronger if we consider the current levels of the S&P 500. Thus it could be possible that the pace of the ongoing uptrend is likely to slow down a bit. Nevertheless, right now this small bearish divergence can be definitely ignored at the moment.

The main rationale behind that fact is because the current short-term oriented uptrend is strongly backed by a broad basis (and, therefore, not only driven by a few heavy-weighted stocks in the index). Consequently, the current upside participation within the whole market looks quite confirmative for the time being. As a result, the chances for a sudden and stronger momentum-crash (trend-reversal) remain quite low for the time being. First of all we saw a solid number of stocks which hit a fresh yearly high (especially on Monday), whereas we hardly saw any stocks which were pushed to a new yearly low. Thus, the gauge of the High-/Low-Index Daily remains quite bullish (although it slightly decreased at the end of the week). This is signaling that the latest gains were definitely driven by a the whole market instead of being just the result of a large-cap driven rally. Another positive tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators showed a widening bullish gap last week. This is telling us that the momentum of advancing issues and advancing volume still has enough positive momentum to support the current uptrend. A fact which can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges jumped to the highest levels for weeks (which is a quite confirmative signal if we consider the current levels of the S&P 500). Another encouraging fact is that the short-term up-volume (Upside-/Downside Volume Index Daily) has not shown any signs of major weaknesses yet. So all in all, with such solid signals all across the board, it is highly unlikely that the current short-term oriented uptrend runs out of fuel soon – at least from the current point of view.

On the contrarian side we can see that a lot of bears had been forced to get back into the market, which partly explained the huge rally in risky assets last week. A fact, which we highlighted several times in our previous market comments. Not surprisingly – after the huge bear squeeze – the z-score of the AII Bulls & Bears Indicator turned quite bearish last week. Although this shows that a lot of good news might has already been priced in, most of our option based sentiment indicators (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) remain quite neutral for the time being. Consequently, the market is still far away from being complacent, which is a quite supportive sign if we consider the fact that the S&P 500 reached a new all-time high last week. Thus, there should be still some upside potential left (from a pure contrarian point of view). Even from a seasonal point of view (Presidential Cycle), the market tends to be quite bullish up until the end of the year. The only negative signal is still coming from the WSC Capitulation Index and the Smart Money Flow Index as both indicators have not shown any signs of bullish recovery so far. Given the still quite strong signals all across the board, we definitely keep ignoring these signals for now.

Mid-Term Technical Condition

This view is also supported by the fact that our entire mid-term-oriented indicators strengthened their bullish signals enormously last week. First, the gauge from the Global Futures Trend Index increased by more than 25 percentage points last week and jumped to 84%. Historically, such strong readings (in combination with bullish mid-term-oriented tape signals) never led to any stronger trend-reversal in the past. As a result, this can be interpreted as outright bullish technical signal for the time being and, therefore, further gains are highly likely. Secondly, the gauge from our WSC Sector Momentum Indicator is still trading in solid bullish territory, indicating that the mid-term oriented price trend of most sectors within the S&P 500 remains intact. These bullish facts are additionally supported by our Sector Heat Map as the momentum score of all sectors (except energy at 0% like in the previous week) remains above the one from riskless money market. Thus, we think it is a way too early to change our strategic bullish view.

Analyzing mid-term oriented market breadth indicators shows also 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 and even reached their highest levels for months. Hence, they are clearly confirming 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) increased during the week to their highest levels for months. This is an outright confirmative signal since it shows that the majority of U.S. listed stocks remains in a powerful mid-term oriented price driven uptrend. Consequently, the risk of a sudden trend-reversal should remain low. Another important signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as both indicators showed stronger signs of improvements and even managed to flash a small a small bullish crossover signal last week. These are extremely encouraging facts since bullish readings here are definitely necessary if the market wants to remain in a stable bull-market. Basically, the same is true if we focus on the Modified McClellan Oscillator Weekly which is about to flash a bullish crossover signal soon. So all in all, we saw an extremely strong recovery in mid-term oriented market breadth. As long this development continues, the current bull-market should not be at risk of fading out. Thus, it is definitely a bit too early to take the chips from the table.

Long-Term Technical Condition

Also the long-term oriented trend of the market showed strong 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 the highest level possible and indicates that currently 100% 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 and the Modified McClellan Volume Oscillator Weekly strongly improved, while the High-/Low Index Weekly remained nearly unchanged.

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 Industrials rose above average and above the one from the S&P 500, we received a buy signal for this ETF within our WSC Sector Rotation Strategy.

Bottom Line

With broadening strengths across the board, we received further confirmation that the current rally is not at risk of fading out soon. Thus, any upcoming breather should turn out to be limited in price and time. As a result, we stick to our strategic bullish outlook as we are expecting further gains into the years end. A fact which can also be observed if we focus on our Big Picture Indicator, which is still moving around within 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 renewed major trend reversal. For that reason, we would recommend that aggressive traders to stick in the bullish camp (as long as our short-term oriented indicators remain strong), whereas conservative members should also remain invested. Moreover, it makes sense to remove the stop-loss limit – at least for now.

Stay tuned!