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May 2nd 2021

Market Review

U.S. stocks wrapped a busy week that left the major averages mostly unchanged for the week. The Dow Jones Industrial Average lost 0.5% for the week to close at 33,874.85. The blue-chip index rose about 2.7% in April and is up 10.7% year to date. The S&P 500 hit a closing record on Thursday and ended the week virtually unchanged at 4,181.17. The broad index notched its third straight month of gains in April, adding more than 5%. For the year, the index is up 11.3%. The Nasdaq declined 0.4% over the week to end at 13,962.68. Still the heavy-tech benchmark is up 5.4% month to date and 8.3% year to date. Most key S&P sectors closed higher for the week, led by the energy sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 18.6.

Short-Term Technical Condition

Although the market finished nearly unchanged for the week, the short-term oriented up-trend of the market remains intact. The S&P 500 is still trading 53 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 4,128 (lower threshold of the Trend Trader Index). Also, from a purely structural point of view, the short-term oriented trend of the market has not turned bearish yet as both envelope lines of the Trend Trader Index are still increasing on a fast pace. As a result, the price driven uptrend of the market remains quite powerful for the time being. The situation looks slightly different if we focus on the momentum of this price-driven uptrend. There, we can see that the Modified MACD flashed a small bearish crossover signal last week, indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. Although the indicator is still trading in outright bullish territory, it dropped for the week. Given the fact that this indicator is a leading one, further volatile but still bullish biased trading action looks quite likely. The main reason why we mention bullish biased here is based on the fact that most of our short-term oriented trend indicators still remain quite strong from a purely signal point of view. Furthermore, it is not unusual that some or even all of our short-term oriented trend indicators tend to deteriorate (or even turn bearish) if the market is entering a volatile consolidation period. Therefore, the main challenge is to differentiate between a healthy and a corrective consolidation process. Normally, a consolidation can be classified as healthy as long as our short- to mid-term oriented market breadth indicators remain supportive. In such a situation, a short-term oriented trend-break is just driven by a temporarily weakness in heavy weighted stocks in the index or the result of profit taking (which is a quite typical phenomenon after a stronger rally). Both are not fundamental reasons to trigger a sustainable trend-reversal. In such a situation, weak or bearish signals in short-term oriented trend indicators can be ignored as they are just part of a healthy breather. The situation would be different, if a consolidation period is accompanied by an extremely weakening tape structure. Here, a potential trend-break is driven by a broad basis and is, therefore, often just the harbinger of a more significant pullback.

Analyzing short-term market breadth is telling us that the current upside participation within the whole market still looks too broad-based to bet on a sustainable trend-reversal at the moment. Thus, the recent volatile trading action can still be classified as healthy breather rather than being the tipping point of a major trend-reversal. Especially, the NYSE New HighsNew Lows Indicator shows that the number of stocks hitting a fresh yearly high is still trading at quite confirmative levels, whereas there are hardly any stocks around hitting a new yearly low. Thus, the High-/Low-Index Daily continued to widen its bullish gap. Moreover, both signals are telling us that the latest weakness was mainly driven by a handful of heavy weighted stocks in the index, rather than being the result of broad-based selling pressure. A fact, which can be also observed 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 majority of all U.S. listed stocks remains in a short-term oriented price driven uptrend at the moment. Another positive signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators improved for the week, indicating that the momentum of advancing issues and advancing volume on NYSE still remains well intact. Focusing on the Upside-/Downside Volume Index Daily shows a similar picture. Although short-term down-volume has shown some signs of strengths recently, the Upside-/Downside Volume Index Daily is still far away from flashing a bearish crossover signal. So all in all, given the sound readings all across the board, the recent consolidation period can still be classified as healthy rather than being corrective in its nature. As a result, the risk for a stronger and sustainable trend-reversal still remains extremely low – at least for the time being.

On the contrarian side, we can see that the recent volatility continued to dampen speculation, which is still a quite positive factor at the moment. Especially, if we consider the fact that the S&P 500 is trading near record levels. Apart from market sentiment (WSC Dumb Money Indicator and the AII Bulls & Bears survey) our entire option based contrarian indicators (Daily Put-/Call Ratio All CBOE Options, AII Bulls & Bears Survey, Smart Money Flow Index, All CBOE Options Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator and the WSC Put-/Volume Ratio) remain or turned or neutral last week. Above all, we can see that the WSC Capitulation Index is still indicating a risk-on market environment (although its gauge increased for the week). As a result, any upcoming sentiment driven volatility should turn out to be healthy in its nature.

Mid-Term Technical Condition

Examining the mid-term oriented technical condition of the market also reveals a very robust picture at the moment. This becomes obvious if we focus on the gauge from the Global Futures Trend Index, which is trading in the upper bullish area and has, therefore, not confirmed the slight weekly decline of the S&P 500. With such bullish readings, the market never faced a stronger and sustainable trend-reversal in the past. Consequently, this is another reason why it is a way too early to get concerned about the latest weekly decline. Basically, the same is true if we focus on the WSC Sector Momentum Indicator, which keeps trading at outright bullish levels. This implies that the majority of sectors in the S&P 500 strengthened their mid-term oriented price driven up-trend. These bullish facts are also supported by our Sector Heat Map as the momentum score from riskless money market remains at 0% and, hence, keeps trading well below all relevant key sectors. In our view, this is another indication that the underlying mid-term oriented time-series momentum of market remains well intact. Thus, we strongly believe that it is definitely a way too early to bet on a major trend-reversal for the time being.

More importantly, the current mid-term oriented time-series momentum of the market is strongly backed by a broad basis. While our Advance-/Decline Volume Line finished the week nearly unchanged, the Advance-/Decline Line Daily increased since last Friday and the Advance-/Decline Line Weekly even reached its highest levels for years. These indicators have, therefore, formed a small 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 a bit too early to pull the trigger. Another encouraging signal is coming from the Modified McClellan Oscillator Weekly, which succeeded to widen its bullish gap. This indicates that the underlying momentum of advancing stocks on a mid-term time horizon improved (although major indexes closed slightly lower for the week). 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 gains on the horizon. As a result, it is a way too early to get concerned about the latest sentiment driven consolidation period.

Long-Term Technical Condition

The long-term oriented technical picture of the market also remains quite robust. Our Global Futures Long Term Trend Index continued to push (slightly) higher, indicating that the long-term oriented up-trend of U.S. equities is still gaining momentum on very high bullish levels. Basically, we receive the same picture globally. Although the WSC Global Momentum Indicator decreased for the week, it shows that 90% 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

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 technology dropped below average and below the one of the S&P 500 we received a sell signal for that sector within our WSC Sector Rotation Strategy. Additionally, we are proud to announce that the WSC Model Portfolio Composite, WSC Sector Rotation Strategy and the WSC Inflation Proof Retirement Portfolio reached a new high during the previous week.

Bottom Line

Our outlook remains unchanged compared to last week. Even though we are still expecting to see further increased volatility ahead, there is no fundamental reason to change our strategic bullish outlook for the time being. The market is 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 – at least for the time being. A fact, which can be also 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. Aggressive short-term traders should remain also bullish as long as our short-term oriented indicators remain bullish. Nevertheless, given the expected increase in volatility it would make sense to reduce leverage/high beta trades or other highly sensitive call options/short volatility trades.

Stay tuned!