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January 2nd 2022  |

Market Review |

U.S. stocks finished the final week with a mixed performance. The Dow Jones Industrial Average gained 1,1% over the week to close at 36,338.30. The S&P 500 recorded a weekly gain of 0.7% and finished at 4,766.18. The Nasdaq ended at 15,644.97 and dropped 0.3% over the past week. All three benchmarks hit new records during the week and finished the month higher. December marked the Dow’s fifth-straight monthly gain and the Nasdaq recorded a six-month winning streak. In addition, all major indexes finished 2021 solidly. The S&P 500 rose 26.9% in 2021, marking the benchmark’s third straight positive year. The Dow and Nasdaq also notched three-year winning streaks, gaining 18.7% and 21.4% for the year, respectively. Nearly all key S&P sectors ended in positive territory for the week, led by the real estate sector; the comm. services sector was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 17.2.

Short-Term Technical Condition

According to the Trend Trader Index, the purely short-term-oriented price trend of the S&P 500 strengthened last week. On Friday, the S&P 500 closed 57 points above the upper envelope line of this reliable short-term-oriented trend indicator. Furthermore, we can see that now also both envelope lines of this indicator started to increase as well. This can be seen as another supportive (price) trend signal as it indicates higher highs and higher lows within the past 20 days. Additionally, also the underlying momentum of the short-term-oriented price trend of the S&P 500 improved last week. This is based on the fact that the Modified MACD managed to widen its bullish gap, whereas the gauge of the Advance-/Decline 20 Day Momentum jumped back into solid bullish territories last week. In summary, the short-term-oriented trend of the market improved quite fairly. However, the short-term-oriented trend of the S&P 500 is only giving limited picture about the real underlying condition of the market. This is based on the fact that the price information of the S&P 500 is often misleading as a few heavy weighted stocks (e.g. Apple, Microsoft, Amazon, Facebook, etc.) within the index could produce false breakouts. In such a situation, the underlying trend quality (participation rate within that trend) will give further guidance about the sustainability of such a price trend.

If we analyze the upside participation of the latest gains, we can see that the narrow based rally has started to broaden recently. One important signal is coming from the NYSE New Highs/New Lows Indicator as we saw a solid number of stocks hitting a fresh yearly high during the whole week (whereas there were hardly any stocks which dropped to a new yearly low). Thus, the gauge of the High-/Low-Index Daily widened its bullish gap. This is telling us that the latest gains were (finally) driven by a broader market instead of being just the result of a large-cap driven overshoot. A fact which can also be observed if we examine the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. While the first one widened its bullish gap significantly, the latter one succeeded to flash a bullish crossover signal. This is telling us that the momentum of advancing issues and advancing volume is also improving on a fast pace. Basically, the same is true if we focus on the Upside-/Downside Volume Index Daily since the absolute level of up-volume has now finally surpassed its bearish counterpart last week. The only weaker trend quality signals are coming from the percentage of stocks which are trading above their short-term-oriented moving averages (20/50). Despite the fact that both indicators managed to turn slightly bullish, their absolute levels should be definitely stronger if we consider the current level of the S&P 500. However, given the recent positive momentum within the majority of our trend quality indicators, the risk of a sudden trend reversal has reduced fairly.

Analyzing market sentiment shows a quite neutral picture at the moment. The gauges of our entire option based indicators remain or turned neutral (Equity Options Call-/Put Ratio Oscillator, WSC Dumb Money Indicator, z-score of the AII CBOE Put-/Call Ratio and the WSC Put-/Volume Ratio Oscillator). Moreover, we can see that the gauge of the WSC Capitulation Index dropped deeper into bullish territory, indicating a risk-on market environment.

Mid-Term Technical Condition

Examining the mid-term-oriented technical condition of the market, reveals nearly the same picture as we have on a short-term time frame. The mid-term uptrend of the market strengthened last week. Although our reliable Global Futures Trend Index has not succeeded yet to pass the important 60% threshold, it still improved significantly by 18 percentage points (!). Hence, this improvement is clearly a quite positive trend signal. Thus, as long as this indicator keeps showing a positive momentum, the risk of a stronger pullback is definitely off the table.  Also, our WSC Sector Momentum Indicator has not shown any signs of weakness yet. As this indicator measures how many key sectors remain in a mid-term-oriented uptrend, this is another positive trend signal at the moment. These bullish facts are also supported by our Sector Heat Map as the momentum score of all sectors remains above the one from riskless money market. So, from a purely price point of view, many key sectors continued to drift higher on an absolute basis which is another supportive trend signal at the moment.

If we analyze the current quality (also known as the upside participation) of this mid-term-oriented uptrend, we also saw smaller signs of improvements (albeit on quite moderate levels). Positive signals are coming from our advance-decline indicators (Advance-/Decline Line Weekly, Advance-/Decline Line Daily and Advance-/Decline Volume Line) as all of them improved. Thus, the latest trend was definitely confirmed by a high absolute number of advancing stocks and advancing volume. Also, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) managed to get back into bullish territory. On the other hand, the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly are still weak, whereas the Modified McClellan Oscillator Weekly has not turned bullish yet. This shows that the recent recovery is still a bit weak-kneed as the number and momentum of mid-term-oriented advancing issues remains poorly, plus the absolute level of mid-term-oriented up-volume is still not confirming the recent break-out. Thus, there is some risk left that the recent recovery could fade again in some point in time as most of our mid-term-oriented trend quality indicator can be described as supportive (on quite low levels) rather than being confirmative at the moment.

Long-Term Technical Condition

The long-term-oriented technical picture of the market remains nearly unchanged compared to the previous week. Probably, the most important signal is coming from the WSC Global Momentum Indicator since it succeeded to improve by 19 percentage points last week. Consequently, the global bull market strengthened as 42% of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are now trading above their long-term oriented trend lines. The long-term trend for U.S. equities remains intact but continued to weaken. This is based on the fact that the Global Futures Long Term Trend Index slightly decreased for another week, but still keeps trading at solid bullish levels. Examining our WSC Global Relative Strength Index reveals that all risky markets have also gained some ground recently. Long-term market breadth shows an intermingled picture. While the SMA 200 and the High-/Low Index Weekly slightly increased, the Modified McClellan Volume Oscillator Weekly decreased. Hence, the long-term-oriented upside participation still remains quite weak-kneed.

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. The allocation of the WSC Sector Rotation Strategy remains unchanged.

Bottom Line

Although we expected to see some seasonal strength into the year end, the quality of that move turned out to be surprisingly strong. A fact which can also be observed if we focus on gauge of the Big Picture Indicator, which nearly jumped back into its recovery quadrant at the beginning of the week. Thus, the risk of further stronger down-testing has diminished – at least from the current point of view. On the other hand side, there are still some weak signals around (especially on a mid-term time horizon). That is the reason why the WSC Mid-Term Composite has not managed to flash bullish signal so far. Therefore, there is still also a chance that the current recovery will be faded again at some point in time. Currently, this is pure speculation but we will monitor our short-term-oriented indicators closely within the next couple of days/weeks. Nevertheless, given the current development of our signals it is time to upgrade our strategic view from cautious to bullish since the downside potential looks quite capped at the moment. Worth mentioning is the fact that we are not afraid of issuing a strategic sell signal immediately (if the quality starts to diminish again since capital preservation remains the most important driver for success). But currently, the risk-/reward ratio looks attractive again – at least for the time being. For that reason, we think it would make sense for conservative members to raise exposure again (by buying into weaknesses rather to chase the market too aggressively on the upside).

Stay tuned!