March 21st 2021
U.S. stocks finished the week with small losses. The Dow Jones Industrial Average fell 0.5% in five trading days to end at 32,627.97. The S&P 500 booked a 0.8% loss over the week and closed at 3,913.10. The Nasdaq dropped 0.8% for the week as well to end at 13,215.24. Among the key S&P sectors, discretionary was the best weekly performer, while financials dragged. The CBOE Volatility Index (VIX), Wall Street’s so-called fear index, increased to 16.96.
Short-Term Technical Condition
From a purely short-term oriented price point of view, the trend status of the S&P 500 turned neutral after it had slightly dropped within both envelope lines of the Trend Trader Index on Friday. Despite the fact that we saw an increased selling-pressure at the end of the week, the underlying trend structure of the market still remains quite supportive. This is based on the fact that both envelope lines of Trend Trader Index are slightly drifting higher in a very smooth way. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a solid uptrend -at least from a purely price point of view. According to our momentum indicators, the trend-force of the current short-term oriented uptrend remains intact, but has started to show some signs of fatigue recently. This can be seen if we focus on the Modified MACD and the Advance-/Decline 20 Day Momentum Indicator as both indicators weakened last week, although they still remain bullish from a purely signal point of view. So from this perspective, further volatile but bullish biased trading action into deeper March looks quite likely.
This view coincides with the fact that short-term market breadth has lost some grip on high bullish levels recently and looks, therefore, still a way too strong to justify a sustainable trend-reversal. As a result, volatile bullish biased trading action looks quite likely. This can be seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators nearly flashed a bearish crossover signal last week (albeit on very high levels). This shows that the short-term oriented tape momentum of the broad market started to slow down a bit. This can also be seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges are trading far above their 50 percent threshold, they decreased last week and have, therefore, formed a small bearish divergence to the current level of the S&P 500. Consequently, it could be possible to see some rocky sessions ahead although the underlying tone still looks quite bullish biased. A fact, which is also confirmed by the NYSE New Highs/New Lows Indicator. The recent weaknesses was only caused by profit taking, since we have only seen a reduction in new highs recently rather than a strong bearish spike in new lows. This was the main reason why the High-/Low-Index Daily reduced its bullish gap, although the indicator itself is far away from flashing a bearish crossover signal at the moment. So, all in all, our entire tape indicators are telling us that it is definitely a way too early to bet on a major trend reversal. However, if we also consider their weak momentum, a period of bullish biased sideways trading into deeper March looks quite likely.
On the contrarian side, there are hardly any negative signals around. The WSC Capitulation Index is still signaling a risk-on market environment, whereas the recent price action of the S&P 500 has resolved overbought conditions as the gauges of the Advance-/Decline Ratio and Upside-/Downside Volume Ratio dropped back into neutral territory. Although we have seen an acceleration in the selling of put options recently (WSC Put-/Volume Ratio Oscillator), the option market is far away from being excessive (AII CBOE Put-/Call Ratio, Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator). According to the AII Bulls & Bears survey, sentiment remains a bit stretched since the number of bulls reached almost 50 percent. As a result, a lot of investors are already invested, leaving hardly any room for a stronger melt-up. This is another sign that the market might have entered a bullish biased but volatile slow-growth period. A fact, which is also confirmed by a seasonal point of view (Presidential Cycle).
Mid-Term Technical Condition
Another reason, why we believe that it is still too early to sell is due to the fact that our mid-term oriented indicators succeeded to strengthen last week. The gauge from our Global Futures Trend Index managed to pass the 90% threshold and got back into the bullish area. As long as we see positive momentum here (and readings above 60%), any upcoming short-term oriented down-testing/volatility should turn out to be limited in price and time (of course only together with strong readings in mid-term market breadth). Thus, the recent increase can be seen as a quite positive mid-term oriented trend-signal. A fact, which can also be observed if we focus on the WSC Sector Momentum Indicator. Although we saw a stronger sell-off at the end of the week, the gauge of this mid-term oriented trend-indicator improved last week. This shows an increase of sectors in the S&P 500, which remain in a mid-term oriented price driven uptrend. This setting is also supported by our Sector Heat Map since the momentum score of the riskless money market has dropped for two consecutive weeks (currently at 5.9%). Additionally, there is currently only one sector (utilities) which is trading below the momentum score of the riskless money market sector! Consequently, the risk of a stronger and sustainable short-term oriented pullback looks quite limited for the time being.
More importantly, the current mid-term oriented uptrend of the market is still strongly confirmed by mid-term oriented market breadth. Thus, we do not think that equities appear to be at risk of facing a stronger correction soon. Especially, the Modified McClellan Oscillator Weekly was holding up quite well, indicating that the overall tape momentum remains quite constructive for the time being. However, the most important bullish signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. There, we can see that both indicators slightly strengthened their bullish signals for the week, although the market was trading lower for the week. This shows us that the market internals still look too robust to get concerned about the recent price action we saw. On top of that, all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have not shown any serious weak signals in the last couple of trading sessions. This indicates that the broad market is holding up quite well and remains, therefore, in a solid mid-term-oriented uptrend. A fact, which can also be observed if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) as both gauges are above 80%. In the end, given the quite strong mid-term-oriented signals across the board, we think it is too early to turn bearish from a purely strategic point of view.
Long-Term Technical Condition
The same applies for the long-term oriented picture of the market as we saw further improvements here. Currently, 100% of all local equity markets (which are covered by the Global Momentum Heat Map) are trading above their long-term oriented trend lines since the WSC Global Momentum succeeded to stay at the highest level possible. This is another outright strong indication that the current bull-market remains global in scope. Therefore, it is not a big surprise at all that the Global Futures Long Term Trend Index signals that the long-term oriented uptrend of U.S. equities remains well intact. Above all, we can see that the relative strength of nearly all risky markets remains positive, which is another indication for the current risk-on market environment. If we examine our long-term oriented tape indicators, we can see that the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly improved significantly, while the SMA 200 remained nearly unchanged.
Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. Since the momentum score of Consumer Discretionary dropped again below average and below the momentum score of the S&P 500 we received a sell signal for that sector within our WSC Sector Rotation Strategy.
Given the quite weak but still bullish biased readings in our short-term oriented indicator framework, the market looks vulnerable for further consolidation/increased volatility into deeper March/early April. Such a bullish biased but volatile slow-growth period is also quite likely if we put sentiment and seasonality into context. On the other hand, we can see that the current mid-term oriented uptrend is still backed by an extremely broad basis. As a result, the underlying tone of the market remains bullish. Thus, the risk of a sustainable trend-reversal is still quite low for the time being. A fact, which can also be observed if we focus on our Big Picture Indicator which keeps trading in its outright 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. As a result, we think aggressive traders should remain in the bullish camp but should reduce leverage, since we expect to see increased volatility ahead. Conservative members should hold their equity positions, since our bullish outlook remains unchanged.