October 27th 2019

Market Review

U.S. stocks finished the week with solid gains. The S&P 500 rose 1.3 percent to 3,022.55, just closing 3 points below its latest closing high in July. The Dow Jones Industrial Average ended the week with a gain of 0.8 percent, at 26,958.06. The Nasdaq advanced 1.8 percent from last Friday’s close to finish at 8,243.12. Most key S&P sectors ended in positive territory for the week, led by the energy sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed at 12.65.

Short-Term Technical Condition

In line with our latest call, the market continued to push higher last week. Consequently, it is not a big surprise that the short-term oriented uptrend of the market remains well in force at the moment. To be more precise, the S&P 500 is now trading 70 points above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,952. Furthermore, we can see that both envelope lines of this reliable indicator continued to bottom-out, indicating that the resistance/support levels for the S&P 500 are increasing again. This can be 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 price trend momentum, we can see that the bullish status from the Modified MACD also strengthened during the last week and has, therefore, clearly confirmed the latest rally from the S&P 500. On top of that we can see that the Advance-/Decline 20 Day Momentum Indicator has not shown any signs of non-confirmation yet, which is another outright bullish short-term oriented signal. So all in all, the current time-series momentum of the S&P 500 looks outright bullish at the moment, indicating further gains ahead.

More importantly, the current short-term oriented uptrend is strongly backed by the broad market since the underlying tape condition of the market improved significantly last week. Consequently, the current upside participation within the whole market looks quite healthy at the moment and, therefore, the chances for a stronger momentum-crash remains quite limited at the moment. Especially, the strong increase in the number of stocks which were hitting a fresh yearly high grew towards quite confirmative levels, whereas we hardly saw any stocks which were pushed to a new yearly low.  As a consequence, the bullish gauge of the High-/Low-Index Daily continued to widen its bullish gap, indicating that the latest gains were not caused by a few mega caps but they were a result from a strong demand all across the board. Another interesting fact is that the number of new yearly highs is definitely higher than in mid-September. Thus, the risk of a sudden momentum reversal/crash is outright low at the moment. 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 yet and even continued their bullish ride last week. This shows us that the current short-term oriented uptrend is widely confirmed by positive momentum in advancing issues and advancing volume. This strong up-volume can be also seen if we focus on the Upside-/Downside Volume Index Daily. The only weak signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Despite the fact that both indicators still remain bullish from a pure signal point of view, their overall levels could be a bit stronger if we consider the current levels from the S&P 500. However, given the outright strong tape condition at the moment, this minor bearish divergence can be definitely ignored at the moment. In other words, with such strong signals all across the board, it is highly unlikely that the recent rally will run out of fuel. As a consequence, we think that the market is heading towards new records soon, which is definitely in line with our strategic bullish outlook.

From a pure contrarian point of view, the market is slightly overbought (Upside-/Downside Volume Ratio Daily) and, therefore, it could be possible to see some languish trading sessions ahead. Apart from that fact, we can see that market sentiment recovered from outright bearish levels but still remains quite cautious at the moment. In our view, this is a very important bullish driver since further rallying will definitely cause some panic buying which should fuel the rally even more. If we focus on the option market we can see that most market participants remain quite neutral at the moment (z-score) and, therefore, there is still some room left until the market gets too complacent. A quite interesting fact is that the WSC Capitulation Index showed a bearish spike last week. As a matter of fact, it could be possible that the market might need a few attempts to break above its latest record high. This view would be also confirmed by the fact that the market normally faces some stronger headwinds until end of October (Presidential Cycle).

Mid-Term Technical Condition

Another main reason, why we believe it is still a way too early to bet on a major trend-reversal is due to the fact that our entire mid-term oriented indicators remain bullish and even strengthened significantly last week. Currently, the gauge from the Global Futures Trend Index is trading well above its bullish 60 percent threshold and has, additionally, not shown any signs of negative momentum so far. This can be interpreted as quite strong technical trend signal, as such strong readings (in combination with bullish mid-term oriented tape signals) never led to any stronger correction/trend-reversal in the past! Also the gauge from our WSC Sector Momentum Indicator picked up momentum at quite confirmative bullish levels last week, indicating that many sectors of the S&P 500 remain in a mid-term oriented uptrend. These bullish facts are absolutely supported by our Sector Heat Map as the momentum score of riskless money market (from our Sector Heat Map) decreased to 11 percent last week! Based on these sound facts, we strongly believe to see new multiple record highs soon.

This view is also driven by the fact that the current mid-term oriented time-series momentum of the market is also strongly confirmed by mid-term oriented market breadth. Like in the previous weeks, 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 and some of them reached their highest levels for years. Consequently, they have clearly formed a quite bullish divergence if we consider the current level of the S&P 500! Another strong positive mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as the bullish gauge from both indicators spiked significantly last week. This is probably the most important signal, as it indicates a solid underlying demand (and has additionally, wiped out some bearish divergences). And also our Modified McClellan Oscillator Weekly succeeded to further increase its bullish gap last week. And finally, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) also strengthened last week. All these facts signal that the total upside participation within the market is extremely broad based at the moment, which is another indication that there is still some room left before major troubles might be due.

Long-Term Technical Condition

Once again, the long-term oriented trend of the market showed also stronger signs of improvements last week. The WSC Global Momentum Indicator increased by 19 percentage points (!) last week and signals that now 80 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. As pointed out several times, this is a quite supportive technical signal, as it shows that the current rally/recovery is globally in scope. And this is another indication for our case, that the current rally could push the market towards multiple highs within the next weeks. Furthermore, our WSC Global Relative Strength Index shows increased risk-appetite among investors. The only weak signal is coming once again from our WSC Long Term Trend Index, which continued to lose some momentum at outright high bullish levels. Examining our long-term market breadth indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average), also reveals that all of them continued to strengthen.

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. As the momentum score of financials rose above average and above the one from the S&P 500 within our Sector Heat Map, we received a buy signal for that ETF within our WSC Sector Rotation Strategy. Moreover, we are proud to announce that the WSC All Weather Model Portfolio reached a new all-time high last week. The portfolio scored a whopping 19 percent on a year-to-date basis.

Bottom Line

The market is exactly following our expected path so far. In other words, the current time-series momentum of the S&P 500 is still strongly backed by a broad basis. As a matter of fact, our strategic bullish outlook remains unchanged compared to last week. So as long as our Big Picture Indicator keeps moving around within its bullish quadrants, the current rally is not in danger of fading out at the moment. Thus, we strongly believe to see new record highs soon (although the market might need a few attempts). So all in all, the current risk-/reward ratio still looks extremely attractive at the moment and, therefore, we would advise our conservative members to hold/increase their equity exposure, while aggressive short-term traders should keep buying the dips.

Stay tuned!