January 12th 2020

Market Review

All three major benchmarks indexes set new intraday highs Friday and posted solid gains for the week despite Friday’s weak close. The Dow Jones Industrial Average rose 0.7% from the week-ago close to 28,823.77. Earlier in the session, the 30-stock average broke above 29,000 for the first time ever. The S&P 500 advanced 0.9% for the week to 3,265.35. The Nasdaq gained 1.8% over the week to 9,178.86. Among the key S&P sectors, the communication services sector was the best weekly performer and energy the worst. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, edged lower to near 12.6.

Short-Term Technical Condition

In line with our strategic call, the market continued to push higher last week. Hence, it is not a big surprise at all that our entire short-term oriented trend indicators remain quite bullish – at least from a pure signal point of view. If we analyze the pure price driven trend, we can see that the S&P 500 is now trading 52 points above the bearish threshold from the Trend Trader Index. Consequently, the positive time series momentum of the stock market remains intact as long as the S&P 500 keeps trading above 3.213. Given the fact that we saw higher highs and higher lows within the past 20 days, both envelope lines of this reliable indicator are still drifting higher on a quite fast pace. As a matter of fact, the resistance/support levels for the S&P 500 are increasing as well, which is another quite constructive technical trend signal for the time being. The situation looks quite different if we focus on the overall trend strength/momentum of the S&P 500, since the Modified MACD nearly flashed a bearish crossover signal on very high levels last week. On top of that, we can see that our reliable Advance-/Decline 20 Day Momentum Indicator continued to decline at very high bullish levels. Thus, both indicators did not fully confirm the latest record high of the S&P 500. From a pure trend point of view, it looks like that the pace of the current rally is highly likely to slow down soon, although the underlying tone remains quite bullish.

This view is also confirmed by the fact that some of our short-term oriented breadth indicators have also started to weaken recently (although the S&P 500 scored a new record high last week). Consequently, the current short-term oriented tape condition can be described as supportive/bullish but not fully confirmative anymore. First, the Modified McClellan Volume Oscillator Daily and the Modified McClellan Oscillator Daily almost flashed a bearish crossover signal last week. This is telling us that the momentum of advancing stocks and advancing issues turned almost negative, indicating that the air is getting thinner. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges declined during the week and the SMA 20 even turned bearish. This is telling us that the short-term oriented tape condition has started to deteriorate. Although this is often a major ingredient for a stronger trend-reversal, the total number of all NYSE-listed stocks which are hitting a fresh yearly high (yearly low) remains too strong (weak) to justify such a move.  Even on Friday, we did not see any stronger spike in new lows, indicating that any upcoming washout day is just driven by profit taking (rather than being the result of broad-based selling activities). A fact, which can be also seen if we focus on the High-/Low-Index Daily, which has widened its bullish gap lately. As a result, it looks like that the current rally is slightly running out of steam and, therefore, it is possible to see a bullish biased slow growth /consolidation period in combination with increased volatility ahead.

After most of our contrarian indicators (Daily Put-/Call Ratio All CBOE Options, AII Bulls & Bears Survey, Smart Money Flow Index, All CBOE Options Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator and the WSC Put-/Volume Ratio) had softened their bearish signals two weeks ago, the latest new-high headlines caused another increase last week. This outright high optimism is telling us that a lot of good news is already factored in and, therefore, the market is getting increasingly vulnerable for negative driven (political and macroeconomic) news flow. If we consider the outright bullish option market, we would not be surprised if the market is trading significantly higher next Friday since the option expiring date is due on that day. Moreover, with such increased optimism we would not be surprised to see a consolidation period in combination with quite painful washout days ahead (whereas the down-side potential should remain capped). This view is even in line with the Presidential Cycle, since the time period from January until mid of February is often accompanied by increased volatility and nasty pullback, although the underlying tone remains positive.

Mid-Term Technical Condition

Another major reason why we strongly believe that the underlying tone remains bullish is due to the fact that the mid-term oriented trend-condition of the market remains well intact. As a result, it is still a way too early to get bearish from a pure strategic point of view, although a period of increased volatility is likely. To be more precise, the Global Futures Trend Index is still trading in outright bullish territory and, therefore, the risk of stronger and more importantly, sustainable bearish trend remains quite limited. This view is also confirmed from a pure price point of view, since the WSC Sector Momentum Indicator increased for the week. This is telling us that not one single sector within the S&P 500 has shown a negative mid-term oriented down-trend yet. This can be also seen if we examine our Sector Heat Map as the momentum score of all sectors remains above the one from riskless money market (which is currently at 0%). These facts are another indication that the underlying trend-force remains quite strong (and, therefore, our strategic bullish view remains unchanged).

This view is also widely confirmed by mid-term oriented market breadth, which still shows a quite healthy picture for now. Especially, the Modified McClellan Oscillator Weekly continued to widen its bullish gap last week, indicating that the overall tape momentum remains positive for the time being. And once again, our advance-decline indicators were holding up quite well (Advance-/Decline Volume Line) or even slightly increased for the week reaching record levels (Advance-/Decline Line Daily, Advance-/Decline Line Weekly). Therefore, they are confirming the latest all-time high of the S&P 500! Probably the most important mid-term oriented tape signal is the fact that mid-term oriented advancing issues as well as mid-term oriented up-volume were holding up quite well last week. Only the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) could be a bit stronger, if we consider the fact that the market reached a new-all time high on Friday. However, given the quite bullish mid-term oriented signals all across the board, this should not be seen as big deal-breaker at the moment.

Long-Term Technical Condition

The long-term technical condition of the market remains unchanged as it has not shown any weaknesses in the last couple of trading sessions. We can see that the gauge from the WSC Global Momentum increased once again to the highest levels for months, indicating that more the 96% of all local equity markets around the world are participating within the current rally. This clearly supports our strategic bullish outlook as it tells us that the current bull market remains global in scope. Also, the Global Futures Long Term Trend Index continued its bullish ride, whereas the WSC Global Relative Strength Index showed once again a quite neutral picture as the relative strength of all risky markets remained unchanged. However, the most important fact is that long-term market breadth in the U.S. remains constructive and is, therefore, confirming the current long-term oriented trend of the market. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly and our High-/Low Index Weekly substantially widened their bullish gaps. In addition, the percentage of stocks which are trading above their long-term oriented moving averages (200) were also holding up quite well.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Rotation Strategy and the WSC Dynamic Variance Portfolio. Moreover, we are proud to announce that the WSC All Weather Model Portfolio, the WSC Sector Rotation Strategy and, therefore, also the WSC Model Portfolio Composite reached a new all-time high last week.

Bottom Line

The short-term oriented condition has slightly started to deteriorate on very high bullish levels. As a matter of fact, the current short-term oriented technical condition of the market can be described as supportive but not really confirmative anymore. In such a situation, the uptrend of the market usually slows down for a couple of days before renewed strength can be expected. However, if we consider the increased optimism among the crowd, it is more likely that the market will soon face a volatile but bullish biased consolidation period instead (in combination with quite painful washout days). Right now, any upcoming washout day/consolidation period should be limited in price and time since the mid-term oriented technical condition of the market is giving no reason to worry right now. A fact, which can be also observed if we focus on Big Picture Indicator, which is still moving around within its bullish quadrants. Thus, we think it is time for aggressive traders to take some profits if we see a short-term oriented price trend break, whereas we think conservative investors should hold their equity exposure.

Stay tuned!