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May 24th 2020

Market Review

U.S. stocks ended the week with solid gains. The Dow Jones Industrial Average gained 3.3% over the week to close at 24,465.16. The S&P 500 advanced 3.2% for the week to finish at 2,955.45. The Nasdaq advanced 3.4% over the past five days to end at 9,324.59. Nearly all key S&P sectors ended in positive territory for the week, led by the industrials sector. Health care was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed around 28.2.

Strategy Review

In our last week’s comment, we said that – from a pure price point of view – the market remained at the lower end of its trading range. However, the situation looked quite different from a market breath perspective, as our entire indicators showed that the underlying trend force had weakened significantly. Consequently, we said that the trading range transformed back into a more corrective setup and, thus, we got a more cautious view back then. Moreover, we said that it was not unusual that the tilt between corrective and supportive consolidation could get sometimes quite narrow. Therefore, we needed to see some stronger price action below 2,780 first, before we would issue a strategic sell signal. Another main rationale behind that call was based on the fact that there were still too many positive signals on the contrarian side, which did not fit into the puzzle. Consequently, another (final) large-cap driven overshoot (towards the upper limit of the trading range) could not be ruled out back then. In fact, the market strongly bounced last week, whereas the S&P 500 reached almost the upper range of its current trading range (2,766 and 2,980). A level, where the S&P 500 already traded several times since late April. Consequently, the big question is if we see a break above the upper range or if this move was just a final large-cap driven overshoot (which will be faded again)?

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend of the market clearly turned bullish last week. This is mainly due to the fact that the S&P 500 increased for the week and managed, therefore, to close 84 points above the bearish and 37 points above the bullish envelope line of the Trend Trader Index. So from a pure price point of view, the short-term uptrend of the market remains intact as long as the S&P 500 does not drop below 2,872 (bearish threshold from the Trend Trader Index). Furthermore, we can see that both envelope lines of this reliable indicator started to rise again on a fast pace, which is another constructive trend signal at the moment. More importantly, the overall trend momentum (of this price driven trend) also strengthened as the both trend lines from Modified MACD showed also an increasing bullish gap. As long as this indicator remains bullish, it is currently quite unlikely to see any major trend-reversal ahead (at least on a short-term time perspective). This view is also confirmed by the Advance-/Decline 20 Day Momentum Indicator, which increased for the week. The only small negative signal here is that this indicator did not fully confirm the latest advance of the S&P 500. But apart from that fact, our entire short-term oriented trend indicators look quite bullish at the moment.

More importantly, our entire short-term oriented market breadth indicators got back on track last week. This is telling us that the current short-term oriented uptrend is packed by a broader basis compared to last week and, therefore, the chances of a stronger trend-break decreased (at least from the current point of view). First of all, the gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily succeeded to flash a small bullish crossover signal, indicating that the momentum of advancing issues and the momentum of advancing volume turned positive again. This is a very important tape signal as it shows that the ongoing trend is not only driven by a handful of stocks in the index. Nevertheless, the short-term gauges of both indicators have not reached a new high so far. Therefore, the overall set-up remains supportive but not overwhelmingly bullish. This can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges succeeded to get back to solid bullish levels. Especially SMA 20 jumped to the highest level for month (79%). Nevertheless, both signals should be handled with care at the moment. In a longer-lasting trading range (exceeding 20 or 50 days) both averages tend to flatten out. As a result small price chances could trigger stronger moves in both directions. Therefore, it is also important to have a closer look at the NYSE New Highs Minus New Lows Indicator. There we can see that the amount of new lows has not shown a bearish spike so far, whereas the amount of new highs kept trading at low but stable readings. As a result, the High-/Low-Index Daily flashed a small bullish crossover signal on Tuesday. Although this can be also interpreted as a supportive signal, the amount of new highs still remain a bit too low (compared to the current levels of the S&P 500). So all in all, the overall short-term oriented set-up looks quite supportive again, but given the current circumstances the S&P 500 might face several headwinds again to overcome the upper limit of its current trading-range.

On the contrarian side, the situation remains quite patchy at the moment. On the one hand side, we can see that the momentum of call options is increasing on a fast pace as most of our option based oscillators (WSC Put-/Volume Ratio, Equity Options Put-/Call Ratio Oscillator, All CBOE Put-/Call Ratio Oscillator) grew into bearish territory. Also our Dumb Money Indicator flashed a bearish signal, indicating that the greed among the crowd is increasing on a fast pace. On top of that, we can see that the Smart Money Flow Index slightly lost momentum since late April, whereas the WSC Capitulation Index is still signaling a risk-off market environment (although it has lost some momentum recently). All these facts can be seen as grey clouds on very short-term time perspective. On the other hand side, we can see that the amount of bears still keeps trading at outright high levels. This can turn out to be a strong bullish driver on a mid-term basis, since there should be still enough dry powder on the side line.

Mid-Term Technical Condition

However, another major reason why our cautious view has gotten a bit more relaxed recently is based on the fact that our entire mid-term oriented indicators strengthened last week. This becomes obvious if we examine the gauge from the Global Futures Trend Index as it managed to get back into the bullish consolidation area and above the 60% threshold. This is a very important trend signal, as it shows that the ongoing consolidation period transformed back into a more supportive set-up. Also our WSC Sector Momentum Indicator strengthened its signal significantly last week and finally managed to get back into bullish territory. This is an indication that the mid-term oriented price driven trend of the market improved compared to the previous weeks and that more and more sectors of the S&P 500 are getting back on track. This can be also seen if we examine our Sector Heat Map which showed some stronger improvements last week; the momentum score of riskless money market dropped by 21 percentage points to 33,7% (which is an extremely bullish momentum signal at the moment).

On top of that, we can see that this current mid-term oriented up-trend of the market is now also widely 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 in the last couple of trading sessions or were at least holding up quite well. Hence, they are clearly confirming the recent gains of the S&P 500! However, the most important mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both indicators managed to flash a bullish crossover signal last week. This is a very healthy tape signal, as it indicates a strong underlying demand all across the board. Moreover, with such strong readings in both indicators, the risk of a sudden correction is extremely low. Anyhow, also our Modified McClellan Oscillator Weekly narrowed its bearish gap and is about to flash a bullish crossover signal soon (showing a recovery in the momentum of mid-term oriented advancing issues on NYSE). In addition, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) also strengthened, although both gauges are still bearish from a pure signal point of view. So in the end, we saw an extremely healthy recovery within our mid-term oriented breadth indicators, indicating that the current side-ways trading transformed into a more sustainable set-up.

Long-Term Technical Condition

The long-term oriented trend of the market has not shown any significant signs of recovery so far. The WSC Global Momentum Indicator has been trading for weeks at the lowest level possible (0%) and absolutely not shown any bullish moves so far. This signals that there are absolutely no local equity markets around the world (covered by our Global ETF Momentum Heat Map) which managed to get back above their long-term oriented trend lines. Also our Global Futures Long Term Trend Index has not succeeded to stop its bearish ride and dropped to the lowest level for months. This signals that the long-term oriented trend of U.S. equities is quite damaged at the moment. And although our WSC Global Relative Strength Index slightly improved last week, it reveals that the relative strength of all risky markets is trading below the one from U.S. Treasuries. But some positive signals are coming from our long-term oriented tape indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and SMA 200) as all of them showed some bullish developments last week.

Model Portfolios

If we have a closer look at our Model Portfolios, we can see that there were no changes in the allocation advice from the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. As the underlying risk management indicator (WSC Sector Momentum Indicator) of the WSC Sector Rotation Strategy turned bullish again, the portfolio is switching back into more risky sectors.

Bottom Line

From a pure price point of view, the market managed to close in the upper range of its ongoing trading range. A fact that we have already seen several times since late April. However, what is now different compared to the previous times is the fact that this move was accompanied by stronger signals within our mid-term-oriented indicator framework. With such supportive readings (especially in the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index) together with a bullish Global Futures Trend Index, the risk of breaking below the lower boundary of the trading range looks quite limited (as long as these indicators remain bullish). As a matter of fact, the overall mid-term situation looks quite supportive for the time being. A fact, which can be also observed if we focus on the WSC Big Picture Indicator, as its gauge managed to get slightly back into the bullish quadrant. A signal we have not seen since the latest crisis started. However, the situation on a very short-time perspective looks a bit different. Most of our contrarian indicators flashed already some early warning signals, plus the readings of some of our short-term oriented tape indicators could be a bit stronger (if we consider the current level of the S&P 500). As a matter of fact, it could be possible that the latest rally attempt will get faded again before we might see another break-out attempt. So, in the end, we think it would make sense for our conservative members to remain invested, whereas aggressive traders should stick in the bullish camp. Nevertheless, we also think it would make sense to adjust the stop-loss limit to 2,790 (closing price) just in case the things change quickly during the week.

Stay tuned!