August 16th 2020

Market Review

In line with our recent call, U.S. averages finished another week in positive territory (despite Friday’s muted trading action). The Dow Jones Industrial Average recorded an 1.8% weekly gain to end at 27,931.02. The S&P 500 booked a weekly climb of 0.6%, closing at 3,372.85. The Nasdaq climbed less than 0.1% since last Friday’s close and finished at 11,019.3. Among the key S&P sectors, the industrials sector was the best weekly performer, while utilities dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended at 22.05.

Short-Term Technical Condition

The market remained in a bull-mode last week. Consequently, it is not a big surprise that the short-term oriented uptrend of the market remains well in force for the time being. To be more precise, the S&P 500 is now trading nearly 100 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 intact as long as the S&P 500 does not drop below 3,274. Furthermore, we can see that both envelope lines of this reliable indicator continued to push higher, indicating that the resistance/support levels for the S&P 500 are still increasing. This can be still seen as an outright constructive technical signal as higher highs and higher lows are a typical pattern for a healthy price-driven uptrend. If we focus on the underlying trend momentum (of this ongoing price trend), we can see that it remains positive as the Modified MACD has not shown a bearish crossover signal so far. Thus, it has clearly confirmed the latest gains of the S&P 500. The only weaker signal is coming from the Advance-/Decline 20 Day Momentum Indicator. Although its gauge remains bullish, it lost some momentum last week and, hence, did not fully confirm the weekly performance of the S&P 500. As this indicator tends to be a leading one, we would not be surprised if the pace is likely to slow down a bit.

The main reason, why this small bearish divergence can be ignored for the moment is because the current short-term oriented uptrend is still backed by the broad market. Consequently, the current upside participation within the whole market still looks quite confirmative for the time being. As a result, the chances for a sudden and stronger momentum-crash (trend-reversal) remains quite limited. During the week we saw a solid number of stocks which hit a fresh yearly high, 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 telling us that the latest gains were not only caused by a few mega-caps, as the demand was quite broad-based last week. Another positive tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both showed a widening bullish gap last week. This tells 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 Upside-/Downside Volume Index Daily as it has not flashed a bearish crossover signal so far. The only weaker signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Even though both indicators finished the week nearly unchanged, their overall signal strength could be a bit stronger if we consider the current levels of the S&P 500. However, if we consider the still quite confirmative tape condition, this minor bearish divergence can be ignored – at least for now.

On the contrarian side, we still received a lot of contradicting signals last week. Probably, the most concerning signal is still coming from the option market as most of our relevant indicators (All CBOE Put-/Call Ratio Daily, WSC Put-/Volume Ratio and the All CBOE Call-/Put Ratio Oscillator) are showing an extreme level of complacent in this area. A fact which is also confirmed by the WSC Dumb Money Indicator. As already mentioned last week, such extreme signals are often a vanguard of sentiment driven washout-days or even limited but stronger pullbacks to deaden short-term optimism. Consequently, the risk of such an event is increasing on a very fast pace. On the other hand, we see that there are still enough bears around to push prices higher. Moreover, we can see that the WSC Capitulation Index is still indicating a risk-on market environment. Consequently, there is a tug-of-war between these two forces and that might explain why we have not seen a sentiment driven washout-event so far. Moreover, given the quite supportive short-term oriented tape structure we do not believe that such an event would have enough power to trigger a sustainable trend-reversal from the current point of view.

Mid-Term Technical Condition

This view is also supported by the fact that our entire mid-term-oriented indicators are giving no reason to worry right now, as all of them remain quite bullish or even strengthened their bullish signals last week. First, the gauge from the Global Futures Trend Index even increased last week to 94% and is, hence, trading in outright bullish territory. Historically, such strong readings (in combination with bullish mid-term-oriented tape signals) never led to any stronger correction/trend-reversal in the past. As a result, this can be interpreted as outright bullish technical signal for the time being. Secondly, the gauge from our WSC Sector Momentum Indicator was also holding up quite well recently, indicating that most sectors of the S&P 500 remain in a mid-term-oriented price driven uptrend. 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 (which dropped to 5.2%). Thus, we think it is a way too early to change our strategic bullish view.

This strategic bullish view is also driven by the fact that the current mid-term-oriented uptrend is also confirmed by mid-term-oriented market breadth. Our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily and the Advance-/Decline Line Weekly) increased in the last couple of trading session or even reached a record level (Advance-/Decline Line Weekly). This is another piece of evidence that we might see new all-time highs soon. A fact, which is also confirmed by the positive development of the Modified McClellan Oscillator Weekly, whereas the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) remained unchanged (SMA 100) or even slightly strengthened their bullish signals (SMA 150) last week. The only weaker signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as both indicators declined for the week, but still managed to stay in the bullish camp from a pure signal point of view. All in all, the current upside participation within the market still looks quite broad based and, therefore, there we strongly believe that there is still some upside potential left for the time being.

Long-Term Technical Condition

The long-term oriented trend of the market showed also stronger signs of improvements last week. The WSC Global Momentum Indicator increased by another 3 percentage points and signals that now 65% 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 rally remains quite globally in scope. Moreover, this is another indication for our base case scenario that the current rally will push the market towards multiple highs in the next couple of weeks. Furthermore, our WSC Global Relative Strength Index shows increased risk-appetite among investors. Another strong signal is coming from our WSC Long Term Trend Index, which reached the highest level for weeks. Examining our long-term market breadth indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and SMA 200) also reveals that all of them continued to strengthen last week.

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.

Bottom Line

With quite confirmative signals across the board, we strongly believe that the current rally is not at risk of fading out soon. Thus, any upcoming (sentiment driven) breather should turn out to be limited in price and time. In addition, there is still enough dry power left to push prices higher since the number of bears on Wall Street remains high. As a result, we stick to our strategic bullish outlook, where we are expecting to see several new all-time highs soon. 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 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!