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June 21st 2020

Market Review

In line with our latest call, U.S. stocks recovered significantly last the week. The Dow Jones Industrial Average gained 1.0% for the week to finish at 25,871.46. The S&P 500 added 1.8% on the week to close at 3,097.92. The broad index recorded its fourth positive week in five. The Nasdaq jumped 3.7% for the week to end at 9,946.12. Among the key S&P sectors, health care was the best weekly performer, while utilities dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 35.1.

Short-Term Technical Condition

Although the S&P 500 finished the week on a higher note, the short-term oriented uptrend of the market has shown some small signs of fatigue recently. From a pure price point of view, the short-term oriented trend status of the market turned from bullish to neutral as the S&P 500 closed between the two envelope lines of the Trend Trader Index on Friday. Worth mentioning is the fact that this signal was mostly triggered by strong rising envelope lines rather than being the result of an extraordinary weak market. Basically, this is still a quite supportive signal since rising envelope lines are indicating that we saw higher highs and higher lows within the past 20 days. As a matter of fact, the recent neutral signal should not be taken too seriously right now. Nevertheless, if we consider the underlying trend momentum, we receive a different picture. First, the Modified MACD has not turned bullish so far, whereas the Advance-/Decline 20 Day Momentum Indicator has started to lose ground at very high bullish levels. In the end, the short-term oriented trend of the market still looks quite supportive/bullish biased, but with such readings we would not be surprised to see some form of consolidation ahead. To evaluate if such a consolidation period/slow-down will turn out to be healthy or more corrective in its nature, short- to mid-term market breadth is a key area of focus. In normal circumstances, a consolidation period is considered to be healthy as long as short-term to mid-term market breadth remains somehow supportive or is at least showing some form of bullish divergences. In such a case, any short-term oriented trend break can be ignored as the market is just taking a (healthy) breather within an ongoing uptrend. Otherwise, if short-term market breadth is collapsing, the consolidation is getting a more corrective tilt and is, therefore, just a vanguard of a more significant/longer-lasting pullback.

Currently, our entire short-term oriented tape indicators remain somehow supportive, but we can also see some non-confirmation within their readings. If we have a closer look at the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50), we can see that 74% of all Russell 3000 listed stocks keep trading above their 50 day moving average, whereas only 38% managed to close above their 20 day moving average. This is telling us that the current short-term oriented price driven uptrend of the market is losing some steam on a very short-time perspective (20 days), but is still strongly backed by a broad basis so far (as the metric on the 50 days’ time frame remains outright strong). As long as this metric stays above 50 percent, any upcoming weaknesses of the S&P 500 should not lead to a stronger correction since there is a strong safety net around to cushion such a move. This can be also seen if we focus on the NYSE New HighsNew Lows Indicator, as the number of stocks which are hitting a yearly new high is still outpacing the yearly new lows. Thus, the High-/Low-Index Daily strengthened its bullish signal. Consequently, if we do not see a stronger spike in new lows (or just a reduction in new highs) the overall set-up should remain bullish biased. A fact that can be also observed if we focus on the Upside-/Downside Volume Index Daily. Although its bullish gauge has come down recently, it is still far away from flashing a bearish crossover signal. Nevertheless, the total number of new highs should be much stronger if we consider the current levels of the S&P 500. This is another indication that market might be at risk to enter a consolidation period soon. Moreover, we can also see that the underlying momentum of advancing stocks as well as advancing volume is slowing down, since the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are about to flash a bearish crossover signal soon. In such a situation, it is not unusual to see some increased volatility ahead as the ongoing uptrend of the market is losing momentum. All in all, the market looks quite at risk to enter a consolidation period. However – from a current point of view – any upcoming sideways trading action/increased volatility still should remain bullish biased and, therefore, healthy, in its nature.

On the contrarian side, we can see that most of our option based indicators (All CBOE Options Put-/Call Ratio, WSC Put-/Volume Ratio, Equity Options Put-/Call Ratio Oscillator, All CBOE Put-/Call Ratio Oscillator) continued to soften their bearish signal, indicating that the recent volatility caused a reduction in short-term optimism. Nevertheless, their overall signals (especially in the z-score of the Daily Put-/Call Ratio All CBOE Options) remain quite bearish, which is another ingredient for increased volatility ahead. Given the quite supportive but still somehow weak market breadth, we would not be surprised to see some bullish biased sideways trading ahead. On top of that, we can see that the WSC Capitulation Index is about to flash a risk-off market environment. This is another indication that we might see some rocky sessions ahead on a short-term time perspective. However, the situation looks a bit different if we focus on the more mid-term oriented AII Bulls & Bears survey. There we can see that the number of bears spiked last week, showing that a lot of negative news is already priced in. Moreover, this is telling us that the market still has enough room to climb the wall of worry, which is a quite bullish mid-term-oriented signal.

Mid-Term Technical Condition

Right now, the mid-term-oriented condition of the market is giving no reason to worry right now as it still reveals a quite robust picture. This becomes obvious if we focus on the gauge from the Global Futures Trend Index which has been solidly trading around the important 90 percent threshold. This is an outright strong bullish trend signal, as the market never faced a stronger correction with readings above 60 percent. Consequently, as long as this gauge does not show strong negative momentum and stays additionally above 60 percent, any upcoming consolidation period should turn out to be limited in price and time. Another positive mid-term-oriented trend signal is coming from the WSC Sector Momentum Indicator as it continued to trade at outright robust bullish levels. This signals that most sectors of the S&P 500 remain in a mid-term-oriented price driven uptrend. These bullish facts are also supported by our Sector Heat Map as the momentum score from riskless money market (currently at 2.4%) is now trading at the lowest level for weeks. In our view, this is another indication that the positive mid-term-oriented time-series momentum of market remains persistent. Given the fact that our entire mid-term-oriented indicators remain bullish or have not shown any serious signs of weakness so far, we think that any upcoming short-term oriented consolidation period should be limited in price and time. Hence, we strongly believe that it is a way too early to bet on a major trend-reversal right now (even though we might see some nasty down-days).

On top of that, we can see that this current positive mid-term-oriented time-series momentum of the market is also widely confirmed by mid-term-oriented market. First of all, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) increased last week. Moreover, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading well above their bearish counterparts (although they have lost a bit bullish ground recently). As long as both indicators remain bullish in combination with readings above 60 percent within our Global Futures Trend Index, it is definitely a bit too early to change our strategic bullish view. Another very encouraging signal is coming from the Modified McClellan Oscillator Weekly which succeeded to widen its bullish gap. This indicates that the mid-term-oriented momentum of advancing stocks remains positive. Another encouraging fact is that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) strengthened their bullish signals last week (although the SMA 150 remains bearish from a pure signal point of view). Given the quite bullish/supportive signals on a mid-term time horizon, we strongly believe that any upcoming short-term oriented breadth will turn out to be healthy in its nature.

Long-Term Technical Condition

The long-term oriented trend of the market shows again the same picture as in the previous weeks. The Global Futures Long Term Trend Index continued its bearish ride, indicating that U.S. equities remain in a recovery and not in a normal risk-on mode. This can be also seen if we focus on the WSC Global Relative Strength Index, since the momentum of most risky markets has not changed significantly as the relative strength of U.S. Treasuries is still leading the race. Nevertheless, according to the WSC Global Momentum Indicator we can also see that global markets are recovering since 29 percent of all local equity markets around the world – which are covered by our Global ETF Momentum Heat Map – managed to close above their long-term oriented trend lines. If we examine our long-term market breadth indicators, we can see that all of them strengthened last week. This is especially true for the Modified McClellan Volume Oscillator Weekly, as it widened its bullish gap and, thus, indicates that the long-term market internals are gearing up. Also, our High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average showed also a very positive development 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

Even though further increased volatility could not be ruled on a short-term time perspective, there is no major reason to change our strategic bullish view for now. To be more precise, with quite supportive/bullish biased readings (especially on a mid-term time perspective), any upcoming slowdown/weaknesses should turn out to be limited in price and time. Thus, it is definitely a way too early to bet on a stronger and sustainable trend-reversal. A fact that can also be observed if we focus on our Big Picture Indicator which is still moving around 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, any upcoming consolidation period should turn out to be healthy in its nature. Hence, we would advise our conservative members to hold their equity exposure, whereas aggressive short-term traders should focus buying the dips instead of chasing the market too aggressively on the upside. Moreover, it would make sense to reduce leverage when the market is about to slow down a bit.

Stay tuned!