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February 28th 2021

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average lost 1.8% over the week to 30,932.37. The S&P 500 booked a weekly loss of 2.5% to close at 3,811.15. The Nasdaq shed 4.9% for the week to end at 13,192.34. Most key S&P sectors ended in negative territory for the week, led by discretionary. The energy sector was the only gainer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped to 28.

Short-Term Technical Condition

Although we expected to see further sentiment driven washout-events ahead, the recent weakness turned out to be quite strong since the S&P 500 closed 37 points below the bearish threshold from the Trend Trader Index on Friday. As a result, the pure short-term oriented price trend (time-series momentum) of the S&P 500 turned slightly negative on that day. Additionally, we can see that the underlying trend momentum of this price driven trend also turned quite negative as the Modified MACD had flashed a strong bearish crossover signal already at the beginning of the week. As a result, further down-testing cannot be ruled out on a very short time frame. Nevertheless, the short-term oriented price up-trend of the market has not completely broken yet, since both envelope lines of the Trend Trader Index have not formed a bearish rounding top yet. As a result, the recent trend-break can be categorized as non-sustainable so far (at least from a pure price point of view). This non-confirmation can be also seen if we focus on the Advance-/Decline 20 Day Momentum Indicator as its gauge was holding up relatively well (if we consider the magnitude of the latest decline). Hence, it has not confirmed the latest price action of the S&P 500. In times of increased volatility, it is not unusual that our short-term oriented trend indicators give contradicting signals. In such a situation, short- to mid-term market breadth will give us further guidance if the recent weakness has the potential to transform into a more significant pullback or if it was just the realization of increased volatility.

Despite the fact that the latest pullback had definitely left its mark on our short-term oriented tape indicators, most of the selling pressure can be still explained by profit taking (rather than being the result of broad based selling pressure). This view is based on the fact that the latest pullback only caused a stronger reduction in new highs, rather than triggering a strong spike in new lows. As long as this is the case, the market internals should remain supportive. Not surprisingly, the bullish gauge of the High-/Low Index Daily was holding up relatively well and has, therefore, not confirmed the latest pullback of the S&P 500. Basically, the same is true if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). There we can see that the latest decline caused only a deterioration within a very short time frame (20 days), whereas on a 50 days perspective the majority of stocks remains in a short-term oriented uptrend so far. Thus, it might be a bit too early to bet on a sustainable trend reversal (at least from a current point of view). Nevertheless, we should also not forget that the underlying tape momentum of the market (Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily) still looks quite damaged at the moment and, therefore, further volatile down-testing cannot be ruled out at the moment. A fact, which can be also observed if we focus on the Upside-/Downside Volume Index Daily as it slightly turned bearish last week. As long as we do not see a recovery here, the situation should remain tense. So all in all, the recent selling pressure can be still described as non-sustainable, although the degree of confidence is also slightly reduced (if we consider the weak but still somehow supportive readings within our short-term oriented tape indicators).

On the contrarian side, the situation is getting increasingly bullish. The latest (sentiment) driven down-testing caused a stronger spike in the daily put-/call ratio. Consequently, the z-score of the AII CBOE Put-/Call Ratio is gradually moving out of its bearish territory, indicating stronger signs of capitulation. This view was confirmed by the fact that the WSC Capitulation Index dropped to outright bullish levels last week, indicating that the spread between smart buying activities and dumb money selling  accelerated last week. A fact, which can be also observed if we focus on the Smart Money Flow Index. Moreover, from a pure seasonal point of view (Decennial Cycle), the market should also receive some tailwinds up until mid-March. Currently, the only negative signals are still coming from the WSC Put-/Volume Ratio Oscillator and the WSC Dumb Money Indicator. As a result, increased volatility is likely although the signs for a stabilization are accumulating.

Mid-Term Technical Condition

On a mid-term time horizon, the recent move can be still classified as a bullish biased consolidation period rather than the start of a stronger correction. This is mainly due to the fact that the gauge from the Global Futures Trend Index closed in the upper part of its bullish consolidation area (88%). Nevertheless, we should not forget that the gauge dropped by 9 percentage points during the last week. This is a quite strong move, if we consider the fact that the market only lost about 2.5% for the week. So, if this trend continues it might be just a question of time until it drops below its bullish 60% threshold. If this is the case, the current consolidation has definitely the potential to trigger a stronger correction (in combination with weakening market breadth). However, right now we are far away from such a signal and, therefore, the underlying tone remains supportive. As a result, the current short-term oriented deterioration looks also capped on the downside – at least from the current point of view. Another supportive fact is that the WSC Sector Momentum Indicator was also holding up quite well and is still trading in solid bullish areas, indicating that most sectors of the S&P 500 remain in a mid-term oriented uptrend. This can be also seen if we have a closer look at our Sector Heat Map. Although the momentum score of riskless money market increased by 2.4 percentage points last week, all other sectors (except utilities at 0%) are trading far above. Consequently, it still looks like a way too early to throw in the towel.

Another main reason why we believe that the downside potential of the market remains rather capped (at least from the current point of view) is due to the fact that the current mid-term oriented up-trend of the market is still widely confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly gained more bullish ground last week, indicating that the overall tape momentum remains quite positive for the time being (although it narrowed its bullish gap at the end of the week). Moreover, as long as mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading (far) above their bearish counterparts, it is a bit too early to get concerned about the current technical condition of the market. Another encouraging signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). If we focus on its recent development, we can see that both indicators were holding up quite well and are still trading in solid bullish territory. The only really weak signals are coming from our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line). All in all, the mid-term oriented market breadth picture indicates that the total upside participation within the market still looks quite supportive. This is another indication that the current weaknesses should not lead to an end of the current bull-market.

Long-Term Technical Condition

The long-term oriented technical condition of the market is also giving any reason to worry right now. The WSC Global Momentum shows that the current bull market remains global in scope as 97% of all local equity markets around the world (which are covered by the WSC Global ETF Momentum Heat Map) remain in a long-term oriented uptrend. Another encouraging signal is coming from our Global Futures Long Term Trend Index which even succeeded to increase last week 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 indicates increased risk-appetite among investors and that all markets have a higher relative strength score than U.S. Treasuries. Analyzing long-term market breadth also reveals a quite solid picture. While the High-/Low Index Weekly succeeded to improve and to widen its bullish gap, the Modified McClellan Volume Oscillator Weekly remained nearly unchanged and the SMA 200 was at least holding up quite well.

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. Moreover, since the momentum score of Energy and Industrials rose above average and above the one of the S&P 500 we received a buy signal for that sector within our WSC Sector Rotation Strategy.

Bottom Line

With quite stretched signals within some of our short-term oriented indicators, further down-testing and/or increased volatility cannot be ruled out on a short-term time perspective. However, as long as we do not see a strong negative spike in new lows plus a fast declining gauge of the Global Futures Trend Index, the down-side potential of the recent weaknesses should remain quite capped (preferred scenario). Moreover, we can see that our contrarian indicators are getting increasingly bullish, plus historically the market often hit an important low at the end of February (Presidential Cycle). As a matter of fact, we stick to our base scenario, where we think it could be possible to see further down-testing in the next couple of days, which could then be the basis for another recovery rally into deeper Q1. Consequently, we would advise our conservative members to remain invested, whereas our aggressive traders should also remain in the bullish camp as long as we do not see a significant spike in new lows and/or break-down within our remaining short-term oriented indicators. Nevertheless, we also think it would make sense to reduce leverage in such an volatile market environment.

Stay tuned!