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February 21st 2021

Market Review

U.S. stocks finished the week with a mixed performance. For the week, the Dow Jones Industrial Average eked out a small gain of 0.1% to close at 31,494.32. The S&P 500 finished the week with a decline of 0.7% to finish at 3,906.71. The Nasdaq slid 1.6% for the week to end at 13,874.46. Among the key S&P sectors, energy was the top performer and health care the worst. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded lower, near 22.1.

Short-Term Technical Condition

Even though the broad index finished in slightly negative territory for the week, the short-term oriented trend of the market remains intact. The S&P 500 is still trading 67 points above the bearish threshold from the Trend Trader Index. Consequently, the pure short-term oriented price trend of the market remains bullish as long as the S&P 500 does not close below 3,839 (lower threshold from the Trend Trader Index). Also, from a pure structural point of view, the short-term oriented trend of the market has not turned bearish as both envelope lines of the Trend Trader Index are still increasing steadily. This indicates that the latest weaknesses can be still described as a healthy breather rather than the beginning of a longer-lasting down-trend (at least from the current point of view). This can be also seen if we focus on our Modified MACD and our Advance-/Decline 20 Day Momentum Indicator as both indicators succeeded to stay bullish (although the Modified MACD looks like it is about to flash a bearish crossover signal soon). So, from a pure time-series momentum point of view, the market remains in a positive up-trend and, therefore, the latest sentiment driven declines have still a supportive tilt. Moreover, we should not forget that the short-term oriented trend of the market is only a limited picture about the current condition of the market as it includes a lot of noise. Therefore, it is not unusual that some our short-term oriented trend indicators tend to deteriorate, when the price action of the momentum of the market is slowing down. In such a situation, short- to mid-term market breadth will give guidance if the current short-term oriented bearish trend will lead to further stronger losses or if it was only caused by too much market noise (profit taking or just from a few heavy weighted stocks in the index). In other words, it will determine our degree of confidence within these trend/momentum signals. If short- to mid-term market breadth remains strong, the impact of a short-term oriented trend-break should be quite limited in price and time.

Although the readings from most of our short-term oriented tape indicators slightly weakened for the week, the quality of the current short-term oriented uptrend still looks quite supportive at the moment. This can be seen very well if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Despite the fact that that both indicators lost some bullish ground last week, their overall level still remains quite bullish. This shows that the current price driven up-trend of the S&P 500 is still backed by an extremely broad basis. On top of that, we can see that there are still enough stocks around which are hitting a fresh yearly high, whereas the number of stocks which were pushed to a new yearly low has not shown any negative spikes so far. As a result, the High-/Low Index Daily still remains quite bullish (although it has lost some ground recently). Basically, the same is true if we focus on the Upside-/Downside Volume Index Daily. The only negative signal is coming from the Modified McClellan Oscillator Daily, since it flashed a small bearish crossover signal last week. This is telling us that the momentum of advancing issued started to slow down a bit. On the other hand side, this slow-down was not really supported by strong volume since the Modified McClellan Volume Oscillator Daily managed to widen its bullish gap last week. Despite the fact that the market slowed down a bit, we can see that the current short-term oriented uptrend of the market still looks quite broad-based in its nature. As a result, we strongly believe that it is still a way too early to bet on a sustainable trend reversal (even if we see further bullish biased trading action ahead).

On the contrarian side, we can see that the recent slow-down started to have a positive impact on the option market. There we can see that most of our option based oscillators (Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator) dropped to neutral levels. This shows that the momentum of call (put) options being bought decreased (increased) in the last couple of trading sessions. Although this can be interpreted as a quite positive signal, the put-/call ratios (AII CBOE Put-/Call Ratio and the WSC Put-/Volume Ratio) still are showing a high degree of speculation in the market. A fact, which can be also observed if we focus on the WSC Dumb Money Indicator. On the other hand, we can see that big guys increased their exposure since the Smart Money Flow Index reduced its bearish divergence to the Dow Jones Industrial Average. A fact, which is also confirmed by the WSC Capitulation Index. Even from a pure seasonal point of view (Decennial Cycle), the market should face some further, albeit volatile tailwinds up until mid-March.

Mid-Term Technical Condition

This view is also widely confirmed by the mid-term oriented technical condition of the market, which still reveals a quite robust picture at the moment. This becomes obvious if we focus on the gauge from the Global Futures Trend Index as it has not shown any weaknesses recently and is trading in outright bullish territories (97%). This can be seen as a very bullish trend signal, since the market never faced a stronger correction with readings above 60%. On top of that we can see that our WSC Sector Momentum Indicator remains unchanged compared to the previous week and is trading at solid bullish levels. This signals that most sectors of the S&P 500 remain in a strong mid-term-oriented uptrend at the moment. These bullish facts are also supported by our Sector Heat Map as the momentum score from riskless money market (currently at 0%) is still trading below all other sectors. In our view, this is another indication that the underlying mid-term-oriented trend of market still remains persistent. As a result, we strongly believe that any upcoming short-term oriented weaknesses should be limited in price and time (and, therefore, it is still a way too early to take the chips from the table).

More importantly, the current mid-term oriented time-series momentum of the market still looks extremely broad-based in its nature. While our Advance-/Decline Line Daily remains almost unchanged compared to last week, the Advance-/Decline Volume Line and Advance-/Decline Line Weekly jumped to their highest levels for years (and have, therefore, formed a quite positive divergence to the current level of the S&P 500). Moreover, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading far above their bearish counterparts. As long as both indicators remain bullish in combination with readings above 60% within our Global Futures Trend Index, it is definitely too early to get concerned about a potential (stronger) pullback. Another encouraging signal is coming from the Modified McClellan Oscillator Weekly, which succeeded to improve last week. This indicates that the underlying momentum of advancing stocks on a mid-term time horizon continued to improve on very bullish levels. Another sound mid-term breadth signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both gauges finished the week at quite confirmative levels and have not shown any signs of major weaknesses yet. With such strong bullish readings in mid-term market breadth, it is just a question of time until we see further strong rallying. As a result, it is a way too early to get concerned if we see some increased (sentiment-driven) volatility ahead.

Long-Term Technical Condition

The long-term uptrend of the market remains well in force and, therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index keeps trading at the highest levels for years, indicating that the current bull-market of U.S. equities is still gaining momentum. Basically, we receive the same picture globally. The WSC Global Momentum Indicator shows that 100% 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. Thus, the current bull market remains global in scope. Moreover, also our WSC Global Relative Strength Index was holding up quite well and reveals that the relative strength of all risky markets is trading far above the one from U.S. Treasuries. If we examine our long-term oriented tape indicators, we can see that the SMA 200 remained unchanged, while the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly improved significantly, giving absolutely no reason to worry right now.

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. Moreover, we are proud to announce that the WSC Sector Rotation Strategy reached a new high during the previous week.

Bottom Line

Given the fact that the current uptrend is backed by a broad basis and on multiple time-frames, our strategic base case scenario remains unchanged compared to last week. On a very short-time frame further painful sentiment driven wash-out events cannot be ruled out. Nevertheless, the down-side potential of the ongoing consolidation period should be quite capped if we consider the current tape structure of the market. A fact, which can be also observed if we focus on our Big Picture Indicator (since its gauge already jumped back into its bullish quadrant in the middle of the week). As long as this is the case, it might be a way too early to take any counter-trend activities. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should buy into any upcoming weaknesses!

Stay tuned!