July 19th 2020

Market Review

U.S. stocks finished the week mostly with hefty gains. The Dow Jones Industrial Average gained 1.3% for the week to close at 26,671.95, whereas the S&P 500 advanced 2.3% in the same time period to finish at 3,224.73. Both averages posted their third straight weekly gain. However, the tech’s struggle this week led to a pronounced divergence between the Nasdaq and two other major indexes. Hence, the tech-heavy index fell 1.1% for its first weekly loss in three to close at 10,503.19. Most key S&P sectors finished higher, led by industrials, while the technology sector ended in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded lower, near 25.7.

Short-Term Technical Condition

According to our short-term oriented indicators, the bullish trend-status from the S&P 500 remains unchanged. To be more precise, the S&P 500 closed 115 points above the bearish threshold from the Trend Trader Index. Furthermore, both envelope lines of this reliable price trend indicator are drifting higher, indicating that the resistance/support levels for the S&P 500 are increasing as well. This is a quite strong technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. However, the most important signals are coming from the Modified MACD and the Advance-/Decline 20 Day Momentum as both indicators strengthened their bullish signals for the week. This is telling us that the momentum of the ongoing price trend continued to improve. Consequently, our entire short-term oriented trend indicators have confirmed the latest gains of the S&P 500.

More importantly, the current time-series momentum of the market is still backed by a broad basis. As a result, the risk of a sudden trend-reversal remains outright low for the time being. The most important signal is coming from the NYSE New Highs/New Lows Indicator. There we can see that the number of stocks hitting a new 52 weeks’ high is trading at quite comfortable bullish levels, whereas we have not seen any bearish spike in the ones dropping to a new yearly low so far. This is a quite confirmative signal as it shows that the underlying momentum of all NYSE listed stocks remains positive. Consequently, the High-/Low-Index Daily slightly extended its bullish gap during the last couple of trading sessions. This is another strong indication that the current rally might not run out of fuel soon. Another quite encouraging signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators flashed a stronger bullish crossover signal last week. This shows that the momentum of advancing stocks as well as advancing volume is gearing up again. These are strong signals showing that the market internals are getting back on track. Therefore, we expect that the S&P 500 will have enough power to break above the latest post Covid-19 high at 3,232. This view is also confirmed by the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Both gauges spiked into quite bullish territory, indicating the latest gains were fully driven by a broad basis (which is an outright positive signal). All in all, with such positive short-term oriented readings across the board, we strongly believe to see further rallying into deeper summer.

The only major red flags are coming from the contrarian side. There we can see that most of our option-based indicators have turned bearish or have even strengthened their bearish signals recently (All CBOE Put-/Call Ratio, Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio and the WSC Dumb Money Indicator). This indicates a lot of speculation/greed within the market. If this trend continues, we would be surprised if the market is trading much higher in mid-August, when the option expiring date is due. Coincidentally, this is also the timeframe when the market should face stronger head winds from a cyclical point of view (Decennial Cycle). On the other hand, we can see that a lot of market participants remain quite pessimistic as the number of bears on Wall Street remains extremely high. As a matter of fact, there is still a lot of dry powder on the sideline which could drive prices higher. As long as this is the case, the “buy the dip” mentality will remain a strong driver. If we put all these signals together, the most likely outcome would be further gains but with increased volatility/nasty down-days. This would dampen short-term speculation and lead to the cause that the market would be able to continue to climb the wall of worry (at least from a pure contrarian point of view).

Mid-Term Technical Condition

This bullish view is also supported by the fact that our mid-term-oriented uptrend remains well intact. Consequently, we strongly believe that any upcoming sentiment driven volatility/down-testing should be limited in price and time. First of all, our Global Futures Trend Index remains nearly unchanged compared to the previous week as it keeps trading well above the 90% threshold and has, additionally, not shown any signs of weaknesses so far. As long as this is the case, it is definitely a way too early to get bearish from a pure strategic point of view. This bullish base case scenario is also confirmed by a pure price point of view, as the WSC Sector Momentum Indicator increased once again for the week. This is telling us that most sectors within the S&P 500 remain in a mid-term-oriented price driven uptrend. This can be also seen if we examine our Sector Heat Map as the momentum score of riskless money market keeps trading at quite low levels (currently at 10.2%) whereas most sectors within the S&P 500 are trading above the momentum score from riskless money market. All these facts are another indication that the underlying trend-force remains quite strong (and, therefore, our strategic bullish view remains unchanged for now).

This strong bullish mid-term-oriented uptrend is still strongly confirmed by mid-term-oriented market breadth. Our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) increased for the week and, thus, have not shown any signs of bearish divergences yet! Additionally, the Modified McClellan Oscillator Weekly continued to widen its bullish gap, indicating that the momentum of advancing stocks improved on a mid-term time horizon. This picture is also supported by the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Although the SMA 150 is still trading in bearish territory, both gauges advanced considerably last week. This is another indication for our summer rally base case scenario as it shows that the underlying trend participation is gearing up again. Such a broader tape confirmation can also be seen if we concentrate on mid-term oriented advancing issues as well as mid-term oriented up-volume since both indicators have not shown any signs of weaknesses yet. From a pure mid-term-oriented tape perspective, it also looks like that the market will have enough power to break substantially above its latest post Covid-19 high at 3,232 soon. As a matter of fact, we do not see any reason to change our strategic bullish outlook for now.

Long-Term Technical Condition

The long-term oriented trend of the market also showed further signs of improvements last week. First, our Global Futures Long Term Trend Index increased significantly, indicating that the long-term oriented trend of U.S. equities is regaining momentum. In addition, our WSC Global Momentum Indicator succeeded to pass the bullish threshold, indicating that currently 52% 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 the highest level since the correction started yearly this year. Moreover, also our WSC Global Relative Strength Index slightly increased compared to the previous week (although it also reveals that the relative strength of all risky markets is trading far below the one from U.S. Treasuries). If we examine our long-term oriented tape indicators, we can see that all of them (Modified McClellan Volume Oscillator Weekly, SMA 200, High-/Low Index Weekly) improved 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 broadening strengths across the board, we received further confirmation that the current summer rally is not at risk of fading out soon. Thus, we strongly believe that the S&P 500 will break above the latest post Covid-19 high soon. 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 as we are expecting further gains into deeper summer. 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. However, given the increased greed within the option market it could be also possible that the ongoing rally will be accompanied by stronger (intraday) swings and/or by some stronger down-days (to dampen short-term optimism). Consequently, aggressive traders should focus on buying the dips instead of chasing the market too aggressively on the upside, whereas conservative investors should remain invested.

Stay tuned!