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March 29th 2020

Market Review

Despite Friday’s declines, U.S. major averages posted strong gains for the week, with the Dow Jones Industrial Average and the S&P 500 booking double-digit weekly gains. The Dow Jones Industrial Average rocketed 12.8% week to date to close at 21,636.78. The blue-chip benchmark recorded its biggest one-week gain since 1938. The S&P 500 finished at 2,541.47 and gained 10.3% this week for its best weekly performance since March 2009. The Nasdaq also had its biggest weekly gain in 11 years, rising 9.1% and closing at 7,502.38. Since their peaks, the Dow still stands 26.8% below its record high, the S&P 500 is down 25% from its Feb. 19 peak and the Nasdaq is off 23.6% from its all-time high. All key S&P sectors succeeded to close in positive territory for the week, led by the utilities sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 65.5.

Strategy Review

In our last week’s comment, we predicted that the market was about to hit an important bottom, as we had seen typical bottom building patterns within our indicator board. To be more precise, we said that we expected to see some further down-testing ahead before the market should face a strong and longer-lasting counter trend rally. As a result, we advised our aggressive members to close profitable short-positions and to focus on the long-side again. In fact, after we had seen some more selling pressure on Monday, the S&P 500 finally rallied 10.3% for the week. Another important message in that context was that the underlying tape quality of the expected counter-trend rally would give us further guidance, if we had seen the worst already or if further selling pressure could be expected. Thus, we advised our conservative members (focused on capital preservation) still to wait on the sideline since further final bottom confirmation was needed. Given the strong rally from last week, the market entered the next step in our projected path. Consequently, the big question is if the recent counter-trend rally was just a flash in the pan or the beginning of a longer-lasting stabilization process?

Short-Term Technical Condition

The short-term oriented trend condition of the market clearly improved compared to last week (although the readings from our specific indicators still remain bearish from a pure signal point of view). If we analyze the pure price driven short-term oriented trend of the market, we can see that it managed to turn almost neutral, since the S&P 500 only closed 39 points below the bearish threshold of the Trend Trader Index. Although this 401 point recovery (compared to last week) looks quite encouraging, we should not forget that both lines of the Trend Trader Index are still decreasing on a very fast pace. So according to this indicator, the latest rally can be still classified as bounce rather than the beginning of a new and sustainable uptrend. The situation looks quite different if we analyze the underlying trend-momentum measured by the Advance-/Decline 20 Day Momentum Indicator and the Modified MACD. The gauge from the Advance-/Decline 20 Day Momentum Indicator showed a very strong recovery last week and has, hence, clearly confirmed the latest gains of the broad index. Another quite encouraging signal is coming from the Modified MACD. Despite the fact that it had narrowly missed to flash a bullish crossover signal (by less than 2 point), we saw a strong surge in the short-term oriented trend line of this reliable indicator. This is telling us that we might have seen the worst already, since heavy losses would be necessary to bring this short-term oriented gauge back to its former low. Moreover, any renewed selling pressure would likely just produce a quite strong bullish divergence! Above all, we received the first (somehow) positive signals from both trend momentum indicators since the bear-market had started in February which is another sign that the market just has entered a stronger stabilization/bottom building process.

Moreover, it was good to see that our short-term oriented market tape indicators also showed some stronger signs of recovery last week (although they have not fully turned bullish yet). The most encouraging signal is coming from the High-/Low-Index Daily, which narrowed its bearish gap considerably and has, therefore, clearly confirmed the rally from last week. The main rationale behind that fact is a very strong reduction in the number of new yearly lows – especially if we consider the negative record readings two weeks ago. We even saw a very minor increase of new highs, a fact which we had not seen since the bear-market started in February. This indicates that the market internals are strengthening on a very fast pace since the latest rally was definitely driven by strong demand rather than being the result of short-covering. This is telling us that the quality of the latest rally was extremely high. A signal that we have been waiting for. Basically, the same is true if we focus on the Modified McClellan Oscillator Daily and on the Modified McClellan Volume Oscillator Daily. Both indicators succeeded to flash a quite strong bullish crossover signal last week, indicating a huge increase in advancing issues and advancing volume. A fact, which can be also observed if we focus on the Upside-/Downside Volume Index Daily. Only the percentage of stocks which are trading above their short-term oriented moving averages (20/50) still remain weak, although we saw at least a recovery on the 20 day time frame. So all in all, the underlying tape quality of the latest counter-trend rally was extremely high and, therefore, we strongly believe that we have seen the worst already. Even if we see another down-leg towards 2,191, such a move would only produce a lot of bullish divergences (which would then also result in a bullish view).

On the contrarian side, we can see that the fear remains persistent. This is an outright positive signal as the majority is still quite cautious regarding the latest recovery. This can be seen if we focus on our option based indicators (Daily Put-/Call Ratio All CBOE Options Indicator, AII CBOE Put-/Call Ratio Oscillator and the Equity Options Put-/Call Ratio Oscillator) which still remain quite bullish (although we saw a massive rally last week). Another major bullish signal is coming from the  AII Bulls & Bears Survey, as the amount of bears spiked to 51. This is telling us that a huge amount of bad news is already priced in, leaving a lot of room for the market to rally on small positive news. Another encouraging bullish signal is coming from the Smart Money Flow Index, as its gauge reached almost a new high last week. This is telling us that the big guys are betting on a very strong and fast recovery from that current crisis. A fact, which can be also observed if we focus on the WSC Capitulation Index.

Mid-Term Technical Condition

On a mid-term time horizon, the technical condition of the market still looks quite vulnerable at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index is still trading at the lowest level for months and, hence, far away from passing its 60 percent bullish threshold! As already mentioned a couple of times – from a formal point of view – the current correction cycle will be not be over as long as its gauge keeps trading below that important threshold! Therefore, it was good to see that its gauge has shown some positive momentum recently, as it bottomed out! Nevertheless, we cannot ignore the fact that its gauge has not fully confirmed the latest rally from the S&P 500! Consequently, the risk of further sharp and nasty pullbacks remain quite high (although we strongly believe that we have seen the worst already). Also from a pure price point of view, the market still remains in a mid-term oriented down-trend as the WSC Sector Momentum Indicator is still trading in bearish territory. This signals that the momentum score of all sectors within the S&P 500 (except technology at 100%) keeps trading below the momentum score of riskless money market within our Sector Heat Map (currently at 90%).

Examining mid-term oriented market breadth reveals a small recovery as the picture generally improved compared to the previous weeks. This becomes obvious if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line), as all of them (slightly) increased during the last week and are confirming the latest move from the S&P 500. A very weak bullish signal is also coming from the SMA (100/150), as they also started to bottom out. But as on the short term time frame, we should not forget the fact that both gauges are still trading at their lowest levels for years. In addition, we can see that also the readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly (slightly) improved compared to the previous weeks. The only indicator where we have not seen any recovery at all is the Modified McClellan Oscillator Weekly. So, despite the fact that we can observe some small improvements, the readings from our entire mid-term oriented tape indicators remain outright bearish at the moment. However, if we consider the strong improvements on a short-term time perspective, we think they might show some signs of recovery soon.

Long-Term Technical Condition

Not surprisingly, the long-term oriented trend of the market has not shown any significant signs of recovery so far. The WSC Global Momentum Indicator remains at the bottom end of its scale and, thus, the lowest level for years. This signals that 0% 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. This is telling us that the market still remains in a technical bear market for now. Also our Global Futures Long Term Trend Index continued its bearish ride (although it is still trading in bullish territory), indicating a difficult environment for US equities. Nevertheless, we can see a very small recovery in the relative strength score of all risky markets. Nevertheless, all of them are trading below the one from U.S. Treasuries (which is another indication for a risk-off market environment). Focusing on our long-term oriented tape indicators reveals an intermingled picture. While the Modified McClellan Volume Oscillator Weekly worsened last week and widened its bearish gap, the High-/Low Index Weekly and the SMA 200 showed some small signs of recovery.

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.

Bottom Line

Last week, the market entered the next stage in our projected path. More importantly, the quality of the expected latest bounce was particularly high. Consequently, we strongly believe that we have seen the worst already – at least for now. That does not necessarily mean that we see further strong rally ahead, but we strongly believe that the market has now entered a bottom building/stabilization process. So even if we see another correction leg towards 2,191, we strongly believe that it will be just part of a typical bottom building process. This base case scenario remains in place as long as our short-term oriented indicators remain supportive (since this would then lead to a recovery within our mid-term oriented framework soon). In the best case, we see another period of (limited) weaknesses which is again not confirmed by our short-term oriented indicators. Such a move could then act as basis for  further volatile gains into Q2. On the other side, we should also not forget that the market still remains – technically speaking – in a bear market, since our entire mid- to long-term oriented indicators remain bearish. As a matter of fact, it could be possible that we see another wave of selling pressure later this year, plus there is still a very small chance that the whole set-up on a short-term time perspective is getting (extremely) worse again (not preferred scenario). This would be the case if we see again hefty spikes in new lows and fast deteriorating signals within currently quite bullish short-term oriented tape indicators. Nevertheless, given the quite attractive risk-/reward ratio at the moment, we think it would  make sense for conservative members to get back into the market. The best approach would be by buying stepwise into weaknesses instead of chasing the market too aggressively on the upside. Moreover, we think an additionally safety net in form of a stop-loss limit (closing price) at 2,150 would make sense. Outright conservative investors could also wait until we receive further confirmation within our mid-term oriented indicator framework (e.g. Global Futures Trend Index).

Stay tuned!