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November 22nd 2020

Market Review

U.S. stocks finished the week with a mixed performance. The Dow Jones Industrial Average shed 0.7% during the week to close at 29,263.48. The S&P 500 fell 0.8% from last week’s close to finish at 3,557.54. The Nasdaq in contrast gained 0.2 percent for the week to end at 11,854.97. Both Dow and the and S&P 500 recorded their first weekly declines in three weeks, while the Nasdaq booked its second positive week in three. Among the key S&P sectors, energy was by far the best weekly performer, while utilities dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 23.7.

Short-Term Technical Condition

Despite the fact that the market finished slightly lower for the week, the short-term oriented uptrend of the market remains well in force for the time being. From a pure price point of view, the S&P 500 is still trading more than 100 points above the bearish threshold from the Trend Trader Index. This indicates that the pure price driven short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 3,452. Additionally, we can see that both envelope lines of this reliable indicator continued to push higher, indicating steadily increasing support and resistance levels for the S&P 500. This can be still seen as another quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy price-driven uptrend. If we analyze the underlying trend momentum (of this ongoing price trend), we can see that it still remains positive as the Modified MACD has not flashed a bearish crossover signal so far. Nevertheless, we can also see that its short-term gauge has lost some steam recently and has, therefore, confirmed the development of the S&P 500 during the last week. The same is true if we look at the Advance-/Decline 20 Day Momentum Indicator. Although this indicator has lost some steam recently, it remains far away from being bearish. As a result, the recent slow-down can be still categorized as healthy breather rather than being the start of a stronger trend-reversal.

The main reason why this consolidation can be still classified as healthy is because our entire short-term oriented breadth indicators continued to strengthen last week. This is an outright positive technical signal, as it shows that the current up-trend of the market is still widely backed by a broad basis. Thus, the recent decline in major indexes was mainly driven by heavy weighted stocks in the index rather than being the result of a broad based selling pressure. This can be seen if we focus on the NYSE New Highs/New Lows Indicator, as the number of stocks hitting a fresh 52 week high showed solid readings throughout the week (especially at the beginning), while there were hardly any stocks around which were pushed to a new yearly low. These are quite confirmative numbers, as they indicate a still strong demand all across the board. Consequently, the High-/Low-Index Daily widened its bullish gap, measured from last Friday’s close. Consequently, the likelihood that the current rally might run out of fuel soon is extremely low for the time being. This can be also seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators clearly strengthened their bullish signals last week. This shows that the momentum of advancing stocks as well as advancing volume is still improving on relatively high levels. Thus, both indicators have definitely not confirmed the latest decline of the S&P 500. Basically, we receive a quite similar picture if we have a closer look at the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Both indicators continued to push higher for the week and have, therefore, reached the highest level for weeks. Thus, the current upside participation within the broad market looks extremely healthy for the time being. A fact, which is also supported by solid readings in short-term up-volume. With such bullish readings all across the board, the current slow-down can be still classified as healthy breather (within an ongoing uptrend) rather than the beginning of a longer lasting and sustainable trend-reversal. Thus, any upcoming weaknesses should be definitely limited in price and time.

On the contrarian side, we can see that the recent consolidation has started to have its designated impact on short-term optimism. As mentioned several times in previous market comments, when sentiment is getting too extreme in combination with strong bullish readings across the board, a period of consolidation or even some nasty washout-days are quite common. Although these days are hard to time, they relieve overbought conditions and dampen short-term optimism, which is then often the basis for further growth. Indeed, the latest consolidation period relieved overbought conditions (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and caused a lot of fear among individual investors (since the number of bulls on Wall Street dropped significantly last week). Nevertheless, sentiment still remains a bit elevated (WSC Dumb Money Indicator, WSC Put-/Volume Ratio and the z-score of the All CBOE Options Put-/Call Ratio Indicator) and, therefore, further sentiment driven consolidation (washouts) cannot be ruled out at the moment. This might also explain the fact that the WSC Capitulation Index still remains bearish from a pure signal point of view but is about to drop by half of its rise soon (which triggers then a bullish signal). Additionally, from a pure seasonal point of view (Presidential Cycle), the market should face some tailwinds up until December. The only super red flag on the horizon is still coming from the Smart Money Flow Index which has not confirmed the latest rally so far. Given the fact that this indicator remains quite mid- to long-term oriented, it could be possible to see another round of huge selling pressure next year. Although this is a quite concerning signal so far, we keep ignoring it as long as our remaining indicators remain bullish.

Mid-Term Technical Condition

Another reason, why we stick to our strategic bullish outlook is because the mid-term oriented technical condition of the market also remains outright robust for the time being. First of all, our reliable Global Futures Trend Index jumped to its highest level for weeks and passed the bullish 90% threshold last week. In such a situation, every upcoming short-term weakness should be regarded just as a healthy breather within an ongoing uptrend. Another quite bullish signal is coming from the WSC Sector Momentum Indicator which is trading at very solid levels and even (slightly) increased last week. This is telling us that most sectors within the S&P 500 are per definition still in a mid-term oriented uptrend. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all industries (except energy) is still trading above the one from riskless money market (dropping 5 percentage points from last week). These facts are another indication that the risk appetite among investors remains quite high (and, therefore, it is a way too early to throw in the towel).

This view is also supported by the fact that the current mid-term oriented trend of the market is still strongly confirmed by mid-term oriented market breadth. First of all, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to strengthen in the last couple of trading sessions and have reached their highest levels for weeks! As a result, they have clearly formed an outright bullish divergence to the current levels of the S&P 500 (which is of course a healthy breadth signal). However, probably the most important bullish signal is coming from mid-term oriented advancing issues and mid-term oriented up-volume as both gauges strengthened significantly last week. As already mentioned several times, a healthy bull-market is always accompanied by strong up-volume and a solid number of advancing issues. As matter of fact, it was good to see a strong recovery here (since with such strong readings, the risk of a sudden and fast-paced correction should be extremely low). In addition, the Modified McClellan Oscillator Weekly has finally also managed to flash a bullish crossover signal, indicating that the mid-term oriented tape momentum remains outright constructive. This healthy mid-term oriented tape condition is also supported by the fact that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) has reached its highest levels for months. This is telling us that the majority of all U.S listed stocks remains in a robust mid-term oriented (price-driven) up-trend. With such strong mid-term oriented readings all across the board, the total upside participation still looks too robust to justify a stronger and sustainable trend-reversal. Thus, we strongly believe that it is a way too early to take the chips from the table – at least from the current point of view.

Long-Term Technical Condition

The same applies for the long-term oriented picture of the market as we saw further improvements there as well. The WSC Global Momentum succeeded to stay at the highest level possible, showing that currently 100% of all local equity markets around the world are trading above their long-term oriented trend-lines. This is telling us that the current bull-market remains global in scope. Moreover, the Global Futures Long Term Trend Index continued to gain further strengths and also reached its highest level for months, indicating that the long-term oriented uptrend of U.S. equities remains well intact. Also the relative strength of nearly all risky markets was also holding up quite well, which is another indication for the current risk-on market environment. And in addition, we can also observe significant improvements in long-term market breadth, as the readings from our entire long-term oriented tape indicators (High-/Low Index Weekly, the Modified McClellan Volume Oscillator Weekly, SMA 200) strengthened last week.

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

The situation remains quite unchanged compared to last week. With broadening strengths across the board, we received further confirmation that the current rally is not at risk of fading out soon. Thus, the recent negative price action can be still classified as healthy breather and should not taken too seriously at the moment (since it should turn out to be limited in price and time). As a result, we stick to our strategic bullish outlook as we are expecting further gains into the years end. A fact which can also be observed if we focus on our Big Picture Indicator, which is still moving around within 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 renewed major trend reversal. For that reason, we would recommend that aggressive traders to stick in the bullish camp (as long as our short-term oriented indicators remain strong), whereas conservative members should also remain invested.

Stay tuned!