April 19th 2020

Market Review

In line with our recent outlook, U.S. stocks closed out the week with solid gains. For the week, the Dow Jones Industrial Average soared 2.2% to end at 24,242.49. The S&P 500 gained 3.0% to close at 2,874.56. The Nasdaq jumped 6.1% to end at 8,650.14. The major averages were all up more than 25% from their late-March lows. Nearly all key S&P sectors finished in positive territory for the week, led by the health care sector. Financials were the biggest decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 38.2.

Short-Term Technical Condition

Not surprisingly, the short-term oriented uptrend of the market continued to strengthen and remains, therefore, well in force at the moment. The S&P 500 is now trading 314 points (!) above the bearish threshold from the Trend Trader Index. This is telling us 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 2,564. Additionally, both envelope lines of this reliable indicator continued to drift higher, which is another typical pattern for a healthy price-driven uptrend. Essentially, the same is true if we focus the underlying trend momentum since the Modified MACD has not shown any signs of weaknesses so far, indicating further gains ahead. Also the Advance-/Decline 20 Day Momentum Indicator has clearly confirmed the latest gains of the S&P 500. So all in all, the current time-series momentum of the market looks quite strong and, therefore, it might be a bit too early to bet on a stronger trend-reversal at the moment.

More importantly, this positive time-series momentum is still backed by a broad basis and, therefore, the current upside participation within the whole market still looks quite healthy at the moment. As a result, the chances for a sudden and stronger momentum-crash remain quite limited at the moment. To be more precise, the number of stocks which hit a fresh yearly high overtook the amount of stocks which were pushed to a new yearly low. Thus, the gauge of the High-/Low-Index Daily continued to narrow its bearish gap and nearly managed to flash a bullish crossover signal. This is a strong piece of evidence that the current rally is not only driven by a few mega caps in the index, but also by a strong demand all across the board. As long as this is the case, the current risk-on market environment should not be at risk of fading out immediately. Another positive tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both of them improved significantly last week. This is telling us that the momentum of advancing stocks and advancing volume (tape momentum) remains outright strong at the moment. A fact which can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). While the SMA 20 recovered and jumped back to 83%, the SMA 50 also showed stronger signs of recovery last week (although it still remains quite bearish from a pure signal point of view). The only weaker signal is coming from the Upside-/Downside Volume Index Daily which slightly weakened for the week, but still finally succeeded to flash a small bullish crossover signal on Friday. However, given the outright strong tape condition at the moment, this minor weak signal can be definitely ignored currently. In other words, with such signals all across the board, it is highly unlikely that the current uptrend will run out of fuel immediately.

On the contrarian side, we can see that the fear of missing out (FOMO) is still forcing a lot of bears into the bullish cap. As already mentioned several times in our previous market comments, this process is probably still one of the most important driver right now (at least from a pure contrarian point of view). Another outright bullish signal is coming from the Smart Money Flow Index and the WSC Capitulation Index, which are still confirming the current recovery rally. However, the first grey clouds on the horizon are coming from the option market, since most of our indicators there (Daily Put-/Call Ratio All CBOE Options Indicator, AII CBOE Put-/Call Ratio Oscillator and the Equity Options Put-/Call Ratio Oscillator) turned quite neutral last week. If we analyze that development, we would not be surprised to see further rallying in the next 1-3 weeks, which would then lead to quite bearish readings within our option market indicators and to an increasing/decreasing amount of bulls/bears. Historically, this was often the time when such a recovery rally faced its first stronger trend-reversal. Right now we are not there yet and, therefore, it looks like the market has still a bit room left to rally until the crowd gets too complacent.

Mid-Term Technical Condition

This view is also supported by the fact that our entire mid-term oriented indicators are showing some forms of recovery. Although the gauge from the Global Futures Trend Index is still trading below the important 60% threshold (currently at 46%), it has shown strong signs of recovery recently and is, hence, quickly heading back to the bullish consolidation area. This can be interpreted as a quite strong positive technical trend signal, since as long as this gauge continues to show strong positive momentum, the risk of another significant down-leg should be quite limited in price and time. Also the gauge from our WSC Sector Momentum Indicator started to increase after it had formed a rounding bottom two weeks ago, indicating that we have seen the worst already. But still this indicator is trading in deep negative territory. This signals that the momentum score of most sectors within the S&P 500 are still trading below the momentum score of riskless money market within our Sector Heat Map. Although, this can be interpreted as a quite bearish signal, we should not forget that this indicator showed some stronger improvements last week (as the momentum score of riskless money market dropped by 12 percentage points to 83,7%). Consequently, we would expect to see further improvements here if the market continues to rally.

Examining mid-term oriented market breadth reveals that the current recovery still looks outright fragile/weak in its nature. This becomes quite obvious if we focus on our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily and the Advance-/Decline Line Weekly) as all of them have not really confirmed the latest gains of the S&P 500. However, the most concerning signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as both indicators have not shown stronger signs of recovery yet. This is telling us the underlying mid-term oriented demand still looks extremely weak-kneed at the moment. This can be also observed if we focus on the Modified McClellan Oscillator Weekly which (again) decreased for the week but finally showed the first signs of a bottom out. In other words, to justify further strong and especially sustainable gains, we definitely need to see stronger improvements here. Therefore, it was good to see that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) improved considerably last week. Although both gauges are still trading in the negative area, they have been at least steadily increasing for the last weeks. So in the end, our mid-term oriented indicators are telling us that the market still remains somehow vulnerable on a mid-term time frame. However, right now it’s a bit too early to get concerned about that fact as the short-term oriented trend of the market still remains outright bullish. Nevertheless, we will monitor the development of these indicators in the next couple of weeks, since we definitely need to see stronger improvements here to justify further rallying. Otherwise, the market will be highly at risk for another significant down-leg/correction (although we would not expect to see a new bear-market low). Nevertheless, right now we are not there yet since our entire short-term oriented indicators remains outright bullish at the moment, but the clouds are gathering.

Long-Term Technical Condition

The improvements on a short- to mid-term time perspective had hardly any positive effects on the long-term picture so far. The WSC Global Momentum Indicator is still trading at the lowest level possible (0%), indicating that no local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) managed to get back above its long-term oriented trend line. A fact, which is also confirmed by our Global Futures Long Term Trend Index, which has not shown any bullish signs so far. These circumstances can be also observed if we focus on the WSC Global Relative Strength Index. The only positive signals on a long-term time perspective are coming from market breadth. There we can see that the SMA 200 continued to strengthen last week (although they are still trading in quite negative territory), whereas also our High-/Low Index Weekly showed some signs of recovery. Only the Modified McClellan Volume Oscillator Weekly, in contrast, weakened, although it looks like that it is about to bottom out soon.

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 quality of the current rally still looks quite supportive and, therefore, our strategic bullish outlook remains unchanged compared to last week. So even if we see some washout days or even some form of consolidation, we think any of these events will be just part of the ongoing recovery process. Nevertheless, the market is now entering levels where we would also like to see some stronger improvements within our mid-term oriented indicators as well. If this is not the case, the risk for a second wave of increased selling pressure will be outright high (once our short-term oriented indicators turn bearish again). Right now it is still a bit too early to get concerned about that fact, but we will keep an close eye on the development of our mid-term oriented indicator framework within next couple of weeks. Ideally, we see further rallying until the crowd gets quite complacent (measured by the option market and the AII Bulls & Bears survey), in combination with a sudden weakening tape structure in that time period. Depending on the degree of the deterioration, we either see a longer-lasting consolidation period, a limited pullback or even another limited correction which would then, typically, be the basis for another longer-lasting recovery. However, from the current point of view, such a scenario is pure speculation and, therefore, our indicator framework will give us further guidance which scenario is most likely to happen in the future. Anyhow, right now there are no major deal-breakers visible and, hence, our strategic bullish view remains unchanged. Consequently, we think that aggressive traders should stick in the bullish camp, whereas conservative investors should remain invested. Nevertheless, we also think it would make sense to adjust the latest stop-loss limit to 2,650 (closing price), just in case thinks change quite quickly during the week.

Stay tuned!