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October 20th 2019

Market Review

All three major U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average fell sharply on Friday (more than 255 points) to 26,770.20 and declined, therefore, 0.2 percent for the week. The S&P 500 increased 0.5 percent for the week to finish at 2,986.20. The Nasdaq Composite closed at 8,089.54 and scored a 0.4 percent gain for the week. Both indexes were able to post modest gains for the week despite Friday’s decline. Among the key S&P sectors, health care was the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded below 14.5.

Strategy Review

In our last week’s comment, we highlighted the fact that the market looked vulnerable for further consolidation work into mid-October. This was mainly since the market internals looked too supportive to justify a larger sell-off and too weak to see further strong rallying ahead. Hence, we expected to see further range bound trading between 3,000 and 2,920. Moreover, we highlighted that such a consolidation is always a fork in the road and, therefore, market breadth would give us further guidance if the market will head into a make or break-set-up.
In fact, the S&P 500 traded mostly sideways last week since every rally attempt above 3,000 was immediately faded. More importantly, was the fact that the underlying technical condition of the market improved quite significantly, although the market finished nearly flat for the week.

Short-Term Technical Condition

To be more precise, the short-term oriented trend of the market continued to strengthen significantly last week. The S&P 500 managed to close 43 points above the bearish threshold from the Trend Trader Index. Above all, we can see that both envelope lines of this reliable trend indicator started to stabilize as well, which is another positive technical signal. So from a pure price point of view, the short-term oriented trend remains intact as long as the S&P 500 does not drop below 2,943 (lower envelope line of the Trend Trader Index). This view is also confirmed by the Modified MACD, which succeeded to flash a bullish crossover signal last week. This is telling us that the underlying trend momentum of the market is getting back on track. A fact, which can be also observed if we focus on the Advance-/Decline 20 Day Momentum Indicator as this indicator did not show any stronger signs of weakness last week. Given the fact that this indicator tends to lead price movements, such a strong increase also indicates further strengths ahead. So, from a pure price point of view, it looks like that the current short-term oriented up-trend of the market looks quite healthy at the moment. Nevertheless, we should also not forget that it is not unusual to see a lot of fast-changing trend signals, during a volatile consolidation process.

Therefore, short-term market breadth is a much more important source of information as it allows us to analyze the current trend structure in more detail. To be precise, if the ongoing short-term oriented uptrend of the market is well supported by a broad basis of underlying stocks, the chances for a sudden trend reversal (momentum crash) should remain quite limited and vice versa. As a matter of fact, it was good to see that market breadth strongly increased for the week, although major indexes just finished the week with a small gain. This is telling us that the underlying trend strength of the market is well supported by a broad basis and looks, therefore, quite sustainable/strong in its nature. Especially, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) continued to increase and got back (SMA 20) or grew further (SMA 50) into bullish territory. This indicates a quite healthy upside participation within the current trend-structure at the moment. On top of that, both the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily succeeded to flash a bullish crossover signal last week. This shows us that the underlying momentum of advancing issues and advancing volume turned positive last week, which is a quite healthy tape signal. This can be also seen if we focus on the New Highs minus New Lows Indicator as we saw a solid increase in the total number of all NYSE-listed stocks which reached a new high in combination with a quite low number of stocks which dropped to a new low (also on Friday)! Consequently, the High-/Low-Index Daily widened its bullish gap. In our opinion, with such solid signals all across the board, it is highly unlikely that the recent trend will run out of fuel on a very short time frame.

The main driver on the contrarian side remains outright negative market sentiment, indicating that a lot of bad news is already priced in. Thus, any kind of positive news could act as huge catalyst in the current market environment. To be more precise, the amount of bulls on Wall Street hit a multi-year low (!). This indicates that a lot of money managers are underweighting equities in their portfolios at the moment. Consequently, if the current rally continues a lot of them will be squeezed or will be forced to get back into the market. In consequence, this situation could lead to quite impulsive and strong up-days. Moreover, we can see that the option market is still far away from being euphoric although the market is just trading slightly below its all-time high. This is a quite interesting fact, since a lot of put options were wiped out on Friday (which was in-line with our view), but the amount of calls option did not rise significantly last week. Another supportive signal is coming from the WSC Capitulation Index, which dropped significantly since its latest high. As per last week’s report, the only negative mid-term signal is coming from a pure seasonal point of view (Presidential Cycle) and from the Smart Money Flow Index. If we consider their negative signals (on a mid-term horizon), it could be possible that any upcoming stronger rally will be faded later this year. However, right now the overall situation still looks too supportive and, therefore, we keep ignoring these signals for now.

Mid-Term Technical Condition

Another reason, why we ignore these signals is the fact that the mid-term oriented trend condition of the market clearly improved during the last week. This is mainly due to the fact that our reliable Global Futures Trend Index increased by more than 15 percentage points last week and got back in to the middle of the bullish consolidation area. So, from a pure technical point of view, the market got back into a quite bullish set-up and, therefore, the risk of a stronger/sudden pullback is definitely of the table right now. Also, the gauge from our WSC Sector Momentum Indicator keeps trading in solid bullish territory, signaling the current trend participation of all major key sectors within the S&P 500 remains in force. This can be also observed if we take a look at our Sector Heat Map as the momentum score of all sectors (except energy and health care like in the previous weeks) remains above the one from riskless money market (which recorded a weekly drop of 2 percentage points to 15.8 percent). In our view, this is another indication that the risk appetite among investors remains quite high.

More importantly, this mid-term oriented up-trend is also widely confirmed by our mid-term oriented market breadth indicators. The percentage of stocks which are trading above their mid-term oriented moving averages (100/150) gained more bullish ground last week and succeeded to pass the 50 percent bullish threshold. This indicates a rising up-trend participation, which is definitely an outright supportive set-up. In addition, the Modified McClellan Oscillator Weekly gained also more bullish ground, signaling that the underlying breadth momentum of the market remains quite strong. Another encouraging mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and from the Upside-/Downside Volume Index Weekly. Both indicators clearly increased their bullish gaps and have started, therefore, to confirm the current levels from the S&P 500! This is a very important signal, which we have been waiting for (as it tells us that the underlying set-up is getting a quite bullish tilt again). Normally, as long as both bullish gauges of these indicators are trading above their bearish counterparts, the underlying tape structure of the market remains healthy. For that reason, it looks like that the market is preparing itself for another rally attempt towards/above its latest bull-market highs.

Long-Term Technical Condition

Once again, our long-term oriented trend of the market remains supportive. Although our Global Futures Long Term Trend Index slightly decreased last week, it is still trading at a solid level and indicating that the long-term oriented trend of U.S. equities remains intact. Our WSC Global Momentum Indicator in contrast recorded a strong weekly gain of 16 percentage points and jumped back into the bullish area. Moreover, it indicates that 61 percent 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. Another small positive signal is once again coming from our WSC Global Relative Strength Index as the relative strength of nearly all risky markets slightly increased. If we focus on our long-term market breadth indicators, we can see the same picture as in the previous week. The Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly slightly weakened while the percentage of stocks which are trading above their 200 day moving average increased and finally succeeded to pass the bullish threshold.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Rotation Strategy and the WSC Dynamic Variance Portfolio. Moreover, we are proud to announce that the WSC All Weather Model Portfolio reached a new all-time high last week. The portfolio scored a whopping 18.5 percent on a year-to-date basis.

Bottom Line

Despite the market finished nearly unchanged for the week, the recent price action was definitely accompanied by stronger improvements within our indicator framework. This can be also seen very well if we focus on our Big Picture Indicator, which shows that the underlying condition of the market transformed from a bearish biased consolidation into a quite bullish set-up within just one week. Consequently, we strongly believe to see further strength into deeper Q4. If we consider the fact that market sentiment remains outright bearish, we would not even be surprised to see some stronger and impulsive up-days ahead. However, that does not necessarily mean that the market will take off immediately on Monday morning, but the ingredients for a new-highs scenario are definitely on the table right now. In the best case, we see some gap-closing down-testing towards 2,940/2,950 before the market is getting back on track. So in the end, our bullish strategic outlook remains definitely unchanged and, therefore, we would recommend our conservative members to remain invested (and to remove any outstanding stop-loss limits), whereas aggressive traders should add exposure if we see any kind of weak trading days ahead.

Stay tuned!