July 12th 2020

Market Review

U.S. stocks continued to push higher in a quite volatile week. The Dow Jones Industrial Average booked a 0.9% weekly gain to end at 26,075.30. The S&P 500 recorded a 1.7% gain over the week and closed at 3,185.04. The Nasdaq rocketed 4.0% for the week to close at 10,617.44. For the year, the Dow Jones Industrial Average and the S&P 500 are down 8.6% and 1.4%, respectively, while the Nasdaq is up more than 18%. Among the key S&P sectors, the comm. services sector was the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 27.3.

Short-Term Technical Condition

In line with our latest call, the market remained in a bull-mode last week. Therefore, it is not a big surprise that the readings from our entire short-term oriented trend indicators improved or even turned bullish last week. First, the positive time series momentum of the S&P 500 continued to strengthen as the S&P 500 managed to close 109 points above the threshold from the Trend Trader Index. This is telling us that the pure short-term oriented price trend of the market remains intact as long as the S&P 500 does not drop below 3.076. More importantly, the momentum of that price driven uptrend is regaining speed since the Modified MACD managed to flash a small bullish crossover signal last week. Thus, we received further confirmation for our view that the latest consolidation is transforming back into a more bullish environment. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator jumped back into the positive territory and is, therefore, confirming the latest gains of the S&P 500. All in all, the short-term uptrend of the market looks quite bullish and, therefore, we would not be surprised to see a retest of the latest post-corona high at 3,232 soon.

This view is also confirmed by our short-term oriented breadth indicators, since the risk of sustainable trend-reversal (momentum crash) remains quite low for the time being. The most supportive tape signal is still coming from the NYSE New Highs/New Lows Indicator. There we can see that the number of stocks which are hitting a fresh yearly high is still trading at a quite healthy level (74), whereas the ones which have been pushed to a new yearly low have not shown any signs of a negative spike so far (8). As a result, the High-/Low-Index Daily strengthened its bullish signal. With such strong readings it is a way too early to bet on a major trend reversal. A fact, which can be also observed if we focus on the Upside-/Downside Volume Index Daily. On the other hand, we would not be surprised if the S&P 500 will need a few attempts to break above 3,232 (latest post-corona high) on a sustainable basis. The main rationale behind that call is that the underlying tape momentum still looks a bit too weak to justify such a strong up-leg for the time being. This can be seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators have not shown any signs of a stronger recovery yet. Even though these signals are not a huge deal-breaker for now, they show that the tape momentum of the broad market is still lagging a bit. This can be also obsered if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges remained unchanged (SMA 20) or even decreased for the week (SMA 50), although the S&P 500 managed to gain 1.7%. This is telling us that the latest gains were mainly driven by large caps rather than being the result from a strong demand across the board. This is not a serious issue right now, but it also shows us that the market might need a few attempts to break above the latest post-correction high (at least from the current point of view).

On the contrarian side, the situation remains almost unchanged compared to last week. According to the AII Bulls & Bears survey most market participants remain bearish, indicating that a lot of bad news is already priced in, leaving the market better positioned to rally on (minor) positive surprises – at least on a mid-term time perspective. On a very short-time frame, we can see that the greed is increasing since the Equity Options Put-/Call Ratio Oscillator, the WSC Put-/Volume Ratio and the WSC Dumb Money Indicator grew into bearish territory, plus the Smart Money Flow Index has not confirmed the latest gains of the Dow Jones Industrial Average. From a pure contrarian point of view, we would not be surprised to see further increased volatility and/or even a stronger washout day to dampen short-term optimism before further gains can be expected.

Mid-Term Technical Condition

Another reason why believe that the current correction risk is outright low is because the mid-term-oriented uptrend of the market remains well intact. To be more precise, the Global Futures Trend Index succeeded to pass its outright 90% bullish threshold and is, therefore, clearly confirming the current levels of the S&P 500. As long as the gauge of this reliable indicator does not show negative momentum and remains above 60%, any upcoming weaknesses should be limited in price and time. However, also from a pure price point of view, the mid-term-oriented uptrend of the market looks quite solid as WSC Sector Momentum Indicator grew towards comfortable bullish levels. This picture is also supported by our Sector Heat Map as the momentum score of riskless money market has not shown any signs of strong positive momentum recently. Thus, our strategic bullish outlook remains unchanged compared to last week.

This view is widely supported by the fact that mid-term-oriented market breadth still looks quite constructive (and is, therefore, giving no reason to panic right now). Consequently, we do not think that equities appear to be at risk of facing a high single digit drop on a very short time frame. Especially, the Modified McClellan Oscillator Weekly increased its bullish gap, indicating that the overall tape momentum remains quite constructive for the time being. Another positive signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both bullish gauges from these indicators are still trading far above their bearish counterparts, signaling that the market internals still look healthy for the time being. Also our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Volume Line, Advance-/Decline Volume Line) show a quite solid picture, as all of them finished the week nearly unchanged.  This indicates that the broad market is still participating within the ongoing mid-term-oriented uptrend. The same applies to the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) as they also finished the week nearly unchanged. All in all, with such strong mid-term-oriented across the board, the chances for a stronger summer rally are increasing on a very fast pace.

Long-Term Technical Condition

Another positive signal is that the long-term oriented trend of the market also showed some signs of improvements last week. First, our WSC Global Momentum Indicator bottomed out last week, indicating that – from a pure technical point of view – U.S. equites are back in a bull market. Also the gauge from our WSC Global Momentum Indicator improved last week and indicates that currently 39% 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. In addition, also our WSC Global Relative Strength Index slightly increased compared to the previous week (although it also reveals that the relative strength of all risky markets is trading far below the one from U.S. Treasuries). If we examine our long-term oriented tape indicators, we can see that the Modified McClellan Volume Oscillator Weekly and the SMA 200 were holding up quite well while the High-/Low Index Weekly succeeded to flash a bullish crossover signal (which is another supportive long-term oriented tape signal).

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

Given the increased greed on the contrarian side in combination with quite supportive but not rally confirmative short-term oriented tape signals, we would not be surprised to see some rocky sessions ahead. Nevertheless, we received further confirmation for our summer rally scenario since the mid-term oriented technical condition of the market continued to strengthen on very high bullish levels. In addition, there is still enough dry power left to push prices higher since the number of bears on Wall Street remains high. As a matter of fact, our strategic bullish outlook remains unchanged compared to last week as the underlying tone remains outright positive. A fact which 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 it is a way too early to bet on a major trend reversal. Therefore, we believe that conservative investors should remain invested, whereas aggressive traders should continue to buy the dips (instead of chasing the market too aggressively on the upside).

Stay tuned!