admin No Comments

October 31st 2021

Market Review

In  line with our latest call, U.S. stocks rallied for the week, pushing the major indexes to new record highs. The Dow Jones Industrial Average gained 0.4% in the past five days to finish at 35,819.56. The S&P 500 added 1.1% over the week to finish at 4,605.38. The Nasdaq rose 2.7% during the week to 15,498.39. All three major averages closed at record highs and posted their fourth positive week in a row. The Nasdaq gained 7.2% for October, while the S&P 500 gained 6.9%. The Dow rose 5.8% for its best month since March. Among the key S&P sectors, discretionary was the best weekly performer, while financials dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed at 16.3.

Short-Term Technical Condition

The positive time-series momentum of the S&P 500 remains well intact. On Friday, the index managed to close 164 points  above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 4,441. Furthermore, we can also see that both envelope lines of this reliable indicator started to drift higher on a very fast pace. This shows that the resistance/support levels for the S&P 500 are increasing as well (which is another quite encouraging price trend signal at the moment). Analyzing the underlying momentum (of this bullish price trend) reveals a similar picture. Both trend lines of the Modified MACD have reached their highest levels for weeks and have, therefore, confirmed the latest all-time high of the S&P 500. The situation is a bit different if we focus on the Advance-/Decline 20 Day Momentum Indicator. Although this trend indicator has reached quite healthy levels recently, it could be a bit stronger (if we consider the current level of the S&P 500). Given the fact that this indicator tends to be a leading one a minor trend-slow down cannot be ruled out at the moment.

This view is widely confirmed by short-term market breadth as the momentum of advancing issues and advancing volume (Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily) started to slow down a bit. Nevertheless, the underlying upside-participation within the ongoing short-term oriented uptrend still looks quite healthy for the time being. The number of stocks hitting new highs are still outpacing the number of new lows by a larger extend. Consequently, the bullish gauge of the High-/Low Index Daily closed at quite confirmative levels. This is telling us that the latest high of the S&P 500 was definitely packed by a broad basis rather than being driven by just a handful of heavy-weighted stocks in the index. Additionally, the current short-term oriented up-trend is still supported by positive short-term oriented up-volume (Upside-/Downside Volume Index Daily) and the majority of stocks which are trading above their short-term moving averages (20/50). Although both indicators remain bullish from a purely signal point of view, their readings could be a bit stronger (if we consider the current record levels of the S&P 500). This shows that the market internals started to lose some steam on quite bullish levels. Consequently, we would not be surprised to see some kind of slow-down (healthy breather) ahead. Currently, any potential slow-down will not have the power to trigger a sustainable trend-reversal (since the current upside participation still remains too strong). Thus, it is definitely a bit too early to get concerned if we see some weak trading days ahead.

Further ingredients for increased volatility are coming from the contrarian side. There we can see that the level of complacent has started to increase significantly recently (AII Bulls/Bears Survey, WSC Dumb Money Indicator, Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio and the WSC Put-/Volume Ratio Oscillator). Moreover, the Smart Money Flow Index has not fully confirmed the strong up-day on Friday and, therefore, the Fisher Transformation of the WSC Capitulation Index is just trading slightly below its bearish threshold. Such a high degree of complacent often leads to increased volatility, stronger down-days (washout-days) or other forms of consolidations to dampen short-term optimism. Currently, short-term market breadth remains too strong that such events could have the potential to trigger a sustainable trend-reversal. Therefore, any upcoming weaknesses should turn out to be limited in price and time.

Mid-Term Technical Condition

This view is also supported by quite robust mid-term oriented trend signals. The Global Futures Trend Index continued to increase and closed out the week at 83%, confirming the latest record of the S&P 500. Historically, such strong readings (in combination with bullish mid-term-oriented tape signals) never led to any stronger trend-reversal in the past. As a result, this can be interpreted as outright bullish technical signal for the time being and, therefore, further gains are highly likely. Thus, the overall market environment remains quite positive for the time being. This can also be seen if we focus on the WSC Sector Momentum Indicator, which is still trading in solid bullish territory. This shows that the mid-term oriented price 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 the riskless money market keeps trading at 0% and below all other sectors. Thus, we think it is a way too early to change our strategic bullish view.

The current mid-term oriented uptrend is still getting support from improving mid-term oriented market breadth. First of all, after weeks of declines, the Modified McClellan Oscillator Weekly has finally started to bottom out, indicating that the momentum of advancing stocks is improving. This can also be seen if we focus on our advance-decline indicators since they were holding up quite well (Advance-/Decline Line Daily, Advance/-Decline Line Weekly). Only the Advance-/Decline Volume Line decreased, showing a divergence to the S&P 500. An improving tape confirmation is also coming from mid-term oriented advancing issues and mid-term oriented up-volume, as both indicators succeeded to flash a bullish crossover signal. Also the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) was holding up quite well (although both gauges could be a bit stronger given the current levels of the broad index). Thus, we received further confirmation that it is a bit too early to get concerned at the moment.

Long-Term Technical Condition

The long-term oriented trend of the market remains nearly unchanged compared the previous week. The WSC Global Momentum Indicator slightly increased for the week and shows that 58% 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. Also, our Global Futures Long Term Trend Index was holding up quite well and signals that the long-term oriented uptrend of U.S. equities remains well intact. Moreover, the relative strength of all risky markets slightly improved compared the previous week. Still 4 markets are trading below U.S. Treasuries. If we examine our long-term oriented tape indicators, we can see that the High-/Low Index Weekly improved while the SMA 200 and the Modified McClellan Volume Oscillator Weekly remained nearly unchanged.

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. Moreover, we are proud to announce that WSC Model Portfolio Composite and the WSC Sector Rotation Strategy reached a new all-time high last week.

Bottom Line

Our outlook remains unchanged compared to the previous week. Even though sentiment driven washout days cannot be ruled out, there is no fundamental reason to change our strategic bullish outlook for the time being. The market has been exactly following our expected path so far and given the outright bullish tape structure, we think that any further upcoming sentiment driven washout-day/consolidation period should turn out to be limited in price and time. A fact, which can also be seen if we focus on our Big Picture Indicator, which is still moving around within its bullish quadrant. As long as this is the case, we think it might be a bit too early to take the chips from the table. For that reason, we think it would make sense for our conservative members to remain invested, whereas aggressive traders should stick in the bullish camp.

Stay tuned!