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December 27th 2020

Market Review

Although we saw a stronger washout-event on Monday morning, U.S. stocks finished the holiday-shortened week nearly unchanged. For the week, the Dow Jones Industrial Average eked out a small gain of 0.1% to close at 30,199.87. The S&P 500 declined 0.2% during the week to end at 3,703.06. The Nasdaq rose 0.4% for the week to end at 12,804.73. Among the key S&P sectors, the financial sector was the best weekly performer, while energy dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed at 21.5.

Short-Term Technical Condition

From a pure price point of view, the bullish trend-status of the market remains unchanged compared to the previous week as the S&P 500 closed far above the bearish threshold of the Trend Trader Index. Additionally, both envelope lines of this indicator are still drifting higher, as we constantly saw higher highs and higher lows on a rolling 20 day basis.  Although these signals indicate a quite strong (price-driven) up-trend on the first place, we can also see that the underlying momentum of this uptrend continued to slow down recently. First, the Modified MACD continued to show a widening bearish gap, whereas the Advance-/Decline 20 Day Momentum Indicator has been declining for the past three weeks. Consequently, both indicators have started to form a small bearish divergence to the current levels of the S&P 500. Currently, it is still a bit too early to get concerned about these facts since the S&P 500 is still trading (far) above the bearish threshold from the Trend Trader Index, plus the Advance-/Decline 20 Day Momentum Indicator remains bullish from a pure signal point of view. Nevertheless, we would not be surprised if the overall trend pace continues to slow down a bit in the next couple of trading session.

Currently, a potential trend slow down or even a short-term oriented trend-break would be just part of a healthy breather rather than the start of a more significant pullback. This is based on the fact that short-term market breadth still looks quite confirmative and, therefore, it is still a bit too early to bet on a major trend-reversal. The percentage of stocks which are trading above their short-term moving averages (20/50) is telling us that the majority of all U.S. listed stocks remains in a short-term oriented up-trend at the moment. Consequently, the current price driven uptrend of the S&P 500 is backed by a broad basis. Additionally, there were hardly any stocks around which dropped to a new yearly low (not even on Monday), whereas the number of new highs has not shown any signs of major weaknesses yet.  Hence, the High-/Low Index Daily even succeeded to widen its bullish gap (and has, therefore, even formed a small bullish divergence recently). The only negative signals are coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators have not shown any signs of recovery so far. This is telling us that the momentum of advancing volume and advancing issues remains negative. Currently, this is not a major issue yet since our remaining tape indicators remain strong. Moreover, we can see that short-term oriented up-volume (Upside-/Downside Volume Index Daily) has recently started to pick up again and still remains positive from an absolute point of view. So all in all, the short-term oriented uptrend of the market is still backed by a broad basis. Hence, it is still a bit too early to get concerned about a potential slow-down as it should turn out to be just part of a healthy (sentiment driven) breather rather than the start of a sustainable trend reversal.

On the contrarian side the situation remains almost unchanged compare to last week (as the market continued to digest the extreme complacent we saw over the past few weeks). Although the number of bulls in the AII Bulls & Bears remained almost unchanged compared to last week, we can see that most of our remaining option- and sentiment based indicators continued to softened their bearish signal or even turned neutral last week (All CBOE Put-/Call Ratio Daily, AII CBOE Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator, WSC Dumb Money Indicator, the WSC Put-/Volume Ratio and the WSC Put-/Volume Ratio Oscillator, WSC Dumb Money Indicator). This damper was mainly driven by the increased down-testing on Monday morning, where the S&P 500 futures traded almost 2.5 percent lower. Worth mentioning is the fact that this increased down-testing was just the typical outcome of the expected sentiment driven consolidation period, which we already explained precisely in our previous market forecasts. Although a few contrarian indicators turned already neutral, there are still some bearish signals around. Therefore, further sentiment driven volatility looks quite likely. Nevertheless, we can see that this process has gone quite far already since the gauge of the WSC Capitulation Index continued to drop deeper into its risk-on market environment territory, whereas the Smart Money Flow Index continued to show some relative strength versus the Dow Jones Industrial Average. Another positive factor is coming from the seasonal point of view (Presidential Cycle) as the market often faces stronger tailwinds in the last trading days of the year. As a matter of fact, further sentiment driven down-testing should be continued to be ignored.

Mid-Term Technical Condition

Another reason why any upcoming consolidation period/slow-down should turn out to be healthy in its nature is based on the fact that our entire mid-term oriented indicators keep trading at quite confirmative levels for the time being. The gauge of our reliable Global Futures Trend Index keeps trading at the upper end (98%) of its extremely bullish trading area and is, therefore, telling us that the underlying mid-term oriented uptrend of the market remains extremely powerful at the moment. We would only get quite cautious if the gauge shows strong negative momentum. This would be a strong indication that a short-term oriented consolidation period could turn out to be stronger in terms of price and time than other typical healthy consolidation periods. Right now, this is absolutely not the case at all and, therefore, it is a way too early to bet on a sustainable trend-reversal (at least from the current point of view). Also, from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator has not shown any weaknesses so far. This indicates that the current mid-term oriented uptrend of the market is driven by all sectors within the S&P 500. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market remains at zero percent and keeps trading below all other sectors.

More importantly, the mid-term oriented trend of the market is still strongly backed by mid-term oriented market breadth. The strongest bullish signal is definitely coming from our Modified McClellan Oscillator Weekly as it succeeded to widen its quite gap. Hence, the positive momentum of mid-term oriented advancing issues remains extremely strong at the moment. Additionally, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) showed stronger signs of recovery or even improved last week. Consequently, they have not confirmed the latest sideways trading action of the S&P 500. Basically, the same is true if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) as both gauges finished the week with outright confirmative readings. In other words, currently more than 85% of all listed U.S. stocks remain in a mid-term oriented price driven uptrend. Hence, the current mid-term oriented up-trend of the S&P 500 still looks absolutely broad-based at the moment. Such a broader tape confirmation can also be seen if we focus on mid-term oriented advancing issues and mid-term oriented up-volume as both indicators are still trading well above their bearish counterparts. As a matter of fact, we are definitely expecting further gains on a mid-term time horizon (and, therefore, we definitely stick to our strategic bullish outlook for now).

Long-Term Technical Condition

The long-term oriented technical picture of the market also remains quite robust. Our WSC Global Momentum has been trading at the highest possible level for 7 weeks now and indicates that 100% of all local equity markets (which are covered by the Global Momentum Heat Map) are trading above their long-term oriented trend lines. This is an 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 also reached its highest level during the week, showing that the secular bull-market 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. More importantly, this long-term oriented uptrend is widely backed by strong readings in our long-term oriented market breadth indicators (High-/Low Index Weekly, the Modified McClellan Volume Oscillator Weekly, SMA 200).

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. Moreover, since the momentum score of Financials rose above average and above the one of the S&P 500 we received a buy signal for that sector within our WSC Sector Rotation Strategy.

Bottom Line

Even though further sentiment driven volatility looks quite likely (on a short-term time perspective), the overall tone remains outright bullish. The main rationale behind that view is that the current price driven up-trend is backed by a broad basis in every important timeframe. Consequently, there is absolutely no fundamental reason to change our base case scenario for the time being as we think it is still a way too early to take any counter-trend activities. A fact that 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 major trend reversal. Therefore, we believe that conservative investors should remain invested, whereas aggressive short-term traders should also remain long (but they should bear in mind that painful down-days cannot be ruled out the moment).

Stay tuned!