admin No Comments

June 27th 2021

Market Review

U.S. stocks ended the week with solid gains pushing the main indices to new record highs. The Dow Jones Industrial Average rocketed 3.4% percent over the week to end at 34,433.84. Notching its biggest weekly gain since early February, the S&P 500 rallied 2.4% for the week and closed at a record high of 4,280.70. The Nasdaq increased 2.4% from last Friday’s close to finish at 14,360.39. All key S&P sectors finished positive for the week, led by the energy sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 15.6.

Strategy Review

In our last week’s comment, the short-term oriented trend-force of the market showed some stronger signs of exhaustion, whereas the mid-term oriented condition still looked outright bullish back then. In such a constellation, the market normally just takes a healthy breather within an ongoing uptrend. Therefore, it was not a big surprise at all that our strategic bullish outlook remained unchanged. Nevertheless, we also said that the risk for increased but limited down-testing and/or a longer-lasting consolidation period would remain high as long as we do not see a stronger recovery within our short-term oriented indicator framework. Additionally, the speed and magnitude of the short-term deterioration was another indication for such a scenario. However, after our short-term oriented indicator framework showed stronger signs of improvements already at the beginning of the week, the big question is if the recent recovery is sustainable in its nature or just part of an oversold bounce?

Short-Term Technical Condition

According to the Trend Trader Index, the purely short-term oriented price trend of the S&P 500 turned bullish on Tuesday and continued to strengthen afterwards. On Friday, the S&P 500 closed 40 points above the bullish threshold of this reliable short-term oriented trend indicator. Additionally, both envelope lines have not been affected by the recent weaknesses, which is another positive price driven trend signal for the time being. More importantly, the underlying momentum of this short-term oriented price trend also turned positive again. This is based on the fact that the Modified MACD managed to flash a small bullish crossover signal on Thursday. Although this signal still looks quite weak-kneed at the moment, any upcoming weaknesses would most likely just produce a bullish divergence in its readings (as extremely heavy losses would be necessary to bring this short-term oriented gauge back to its former low). As a result, a threatening bearish crossover signal should not be taken too seriously at the moment. Basically, the same if true if we focus on the Advance-/Decline 20 Day Momentum. Despite the fact that its gauge has not fully confirmed the latest recovery of the S&P 500, it is still trading far above its bearish threshold. Even though the latest recovery within our short-term oriented trend indicators looks quite encouraging, it should be always counterchecked with our breadth indicators (to make sure it is broad-based and, therefore, sustainable in its nature).

The main rationale behind that fact is that a strong and healthy uptrend should always be backed by a broad basis. If this is not the case, the whole move can be classified as corrective bounce since there is an increased risk that the market faces a sudden and stronger trend-reversal (since the whole move was only driven by few heavy-weighted and/or oversold stocks in the index). Analyzing the latest gains reveals a quite broad based upside participation. First of all, we saw a solid and a steady increase in the number of stocks hitting a fresh yearly high during the whole week, whereas there were hardly any stocks which dropped to a new yearly low (6 on Friday). Thus, the gauge of the High-/Low-Index Daily succeeded to widen its bullish gap. This is signaling that the latest gains were definitely driven by the whole market instead of being just the result of an oversold bounce and/or large-cap driven rally. A fact which can also be observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges recovered significantly for the week and finally succeeded to pass the bullish threshold on Wednesday. Nevertheless, the overall level of both indicators could be a bit stronger, if we consider the current levels of the S&P 500. Basically, the same is true if we focus on the Upside-/Downside Volume Index Daily, which also turned bullish last week. Anyhow, the only weaker signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators still remain bearish. Nevertheless, the short-term gauges of both indicators have started to show some signs of bottoming out recently. This is telling us that the momentum of advancing issues and advancing volume is improving (albeit on low levels). So all in all, given the stronger recovery all across the board, the latest price action of the S&P 500 can be definitely classified as new sustainable uptrend rather than being an oversold/corrective bounce. Nonetheless, we would not be surprised to see some kind of slowdown ahead as the market has gone a bit too far (if we compare the S&P 500 with the absolute levels of our short-term oriented breadth indicators).

On the contrarian side, the market is slightly overbought (Upside-/Downside Volume Ratio). This is another indication that the pace is likely to slow down a bit. Focusing on our option- and sentiment-based indicators reveals that the overall level of greed looks quite muted at the moment. The only negative signal is coming from the WSC Dumb Money Indicator and the WSC Put-/Volume Ratio Oscillator. However, if we consider the fact that the S&P 500 has just reached a new all-time high, we would have definitely expected more bulls on Wall Street or significantly lower put-/call ratios. Another positive signal is coming from the WSC Capitulation Index, which almost dropped by half of its rise. This is another indication that we might have seen the worst already.

Mid-Term Technical Condition

This view is also supported by the fact that our entire mid-term-oriented indicators have not shown any serious signs of weaknesses yet. Although our Global Futures Trend Index slightly decreased for the week, it is still touching the bullish threshold (89%) and, hence, is far away from being bearish. Also, the gauge from our WSC Sector Momentum Indicator remains nearly unchanged compared to the previous week and is trading in solid bullish territory. This indicates that the mid-term oriented price driven up-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 remains above the one from riskless money market. Thus, it is definitely a bit too early to change our strategic bullish view – at least for now.

This view is also confirmed by quite robust signals and a recovery in mid-term oriented market breadth. All our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) improved for the week (whereas especially the Advance-/Decline Volume Line showed strong signs of recovery). Thus, they have fully confirmed the latest record of the S&P 500! This is another strong piece of evidence that the recent high was definitely backed by a broad basis. A fact, which can also be observed if we examine the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Also, the Modified McClellan Oscillator Weekly (slightly) gained more bullish ground last week, indicating that the overall tape momentum remains positive for the time being. The only small weaker signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Despite the fact that both indicators still remain quite bullish form a purely signal point of view, they have lost some ground recently. Currently, both indicators remain too strong to take this small bearish divergence too seriously at the moment. So all in all, we can see that the mid-term oriented upside participation still looks quite healthy (and, therefore, the recent short-term oriented weaknesses had literally no impact so far). Thus, we strongly that it might be a bit too early to take the chips from the table.

Long-Term Technical Condition

The long-term oriented trend of the market remains nearly unchanged compared to the previous weeks. Our WSC Global Momentum Indicator slightly improved for the week and indicates that 84% 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 bull market remains quite globally in scope. Another encouraging signal is coming from our Global Futures Long Term Trend Index which also succeeded to improve and is trading at the highest levels for years. This indicates that the S&P 500 remains in a strong technical bull market for the time being. Furthermore, our WSC Global Relative Strength Index also strengthened and exhibits an increased risk-appetite among investors. Also, our long-term market breadth indicators improved last week (Modified McClellan Volume Oscillator Weekly, SMA 200) or remained stable at least (High-/Low Index Weekly).

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Momentum Portfolio and the WSC Dynamic Variance Portfolio.

Bottom Line

Given the minor bearish divergence in our short-term oriented indicator framework a temporary slow-down/consolidation cannot be ruled out at the moment. However, what is now different compared to our previous market comment is the fact that short-term market breadth showed stronger signs of recovery last week. Thus, the risk that any upcoming consolidation period/washout-day will lead to further stronger but limited losses has reduced significantly (since the overall short-term oriented situation transformed back into a healthier set-up). A fact, which can be also observed if we focus on the WSC Big Picture Indicator, as its gauge managed to get back into its outright bullish quadrant last week. Hence, our strategic bullish outlook remains unchanged. Therefore, it makes sense for conservative members to remain invested and/or to reinvest taken profits on weak trading days. Aggressive traders should focus on the long side again, as long as our short-term oriented indicators remain bullish.

Stay tuned!