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June 7th 2020

Market Review

U.S. stocks rallied for the week, with one major average scoring a record close. The Dow Jones Industrial Average jumped 6.8% over the week to close at 27,110.98. The blue-chip index is only down 5.0% year to date after dropping as much as 34.6% in 2020. The S&P 500 rocketed 4.9% for the week to finish at 3,193.93. Friday’s rally put the S&P 500 down just 1.1% for 2020. At one point this year, the broader market index was down 30.3%. The Nasdaq ended at 9,814.08 and climbed 3.4% over the past week. The heavy-tech index became the first of the three major averages to climb back to an all-time high, advancing to 9,814.08 on Friday and touching an intraday record of 9,845.69. After tumbling as much as 25% earlier this year, the tech-heavy index is now 9.3% higher for 2020. All key S&P sectors ended in positive territory for the week, led by the energy sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 24.5.

Short-Term Technical Condition

In line with our outlook, the market continued to push significantly higher last week. Consequently, it is not a big surprise at all that the short-term oriented uptrend of the market remains well in force. Currently, the S&P 500 is trading 237 points (!) above the bearish threshold from the Trend Trader Index, indicating that the short-term oriented (price driven) up-trend of the market remains intact as long as the S&P 500 does not drop below 2,956. Furthermore, we can observe both envelope lines of this reliable indicator drifting higher on a quite fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This is an outright constructive technical signal since higher highs and higher lows are a typical pattern for a healthy price-driven uptrend. If the analyze the underlying momentum of this price driven uptrend, we can observe that the Modified MACD also strengthened last week and has, therefore, clearly confirmed the latest rally of the S&P 500. The same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator as its gauge jumped to the highest level for months. All in all, the current time-series momentum of the S&P 500 still looks outright positive and, therefore, it might be a bit too early to bet on a stronger trend-reversal (at least from a pure price point of view).

To avoid typical momentum crashes, it is essential to analyze if the prevailing trend of the market is driven by only a few heavy weighted stocks in the index or by a broad basis. If the second one holds, the probability that the prevailing trend continues is extremely high, since it is based on a broad demand and vice versa. Currently, the underlying trend participation of the ongoing uptrend looks extremely healthy since our entire short-term oriented market breadth indicators strengthened their bullish signals last week. First, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) continued to grow deeper into bullish territory, whereas the SMA 50 reached the highest level for months. This is a strong indication that the prevailing time-series momentum of the S&P 500 is outright strong since 89/94 percent of all Russell 3000 stocks are currently trading in a short-term oriented uptrend. On top of that, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not shown any signs of weaknesses yet as both indicators widened their bullish gaps significantly last week. This is telling us that the prevailing trend is still strongly supported by advancing issues and advancing volume right now. This can be also seen if we focus on the Upside-/Downside Volume Index Daily, since the amount of up-volume reached the highest levels for years. Additionally, we saw a healthy spike in the total number of all NYSE-listed stocks which reached a fresh 52 weeks high, whereas we saw absolutely no stocks hitting a fresh yearly on Friday. Thus, the bullish gauge of the High-/Low-Index Daily also strengthened. All in all, we can see that the prevailing short-term oriented uptrend of the S&P 500 is currently backed by an outright broad basis. With such strong signals across the board, we think that the risk of a fast and strong trend-reversal should be quite low for the time being.  Consequently, we think that the current rally will still have enough fuel to push higher.

The only major red flags are still coming from the contrarian side. There we can see that most of our option-based indicators remain bearish or have even strengthened their bearish signals recently (WSC Put-/Volume Ratio, Equity Options Put-/Call Ratio Oscillator, All CBOE Put-/Call Ratio Oscillator). This indicates a lot of speculation/greed within the market, which is a quite bearish signal on the horizon. On the other hand, we can see that the number of bears dropped significantly within the AII Bulls & Bears survey. Thus, a lot of market participants were forced to get back into the market, causing this strong melt-up from last week. A fact we had already predicted two weeks ago. Anyhow, according to the AII Bulls & Bears survey there are still some bears left to push prices higher, but the air is already getting a bit thinner (at least from a sentiment point of view). Moreover, we can see that the WSC Capitulation Index is still indicating a risk-on market environment for the time being. If we put all these signals together, the red flags are increasing on a fast pace. However, right now we are not there yet since market breadth remains too strong and there are still enough bears around to push prices higher. Nevertheless, we should not forget that this increase greed will become a huge burden sooner or later (if we do not see some nasty washout days in between to dampen short-term optimism). On a very short-term time perspective, the market is quite overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Ratio Daily). Consequently, it could be possible to see a healthy breather in the first couple of trading sessions.

Mid-Term Technical Condition

Another reason why we keep ignoring the contrarian indicators for now is because our entire mid-term-oriented indicators also continued to strengthen last week. The most important signal is coming from the Global Futures Trend Index, which almost passed the outright bullish 90% threshold last week. This is an outright positive trend signal, since in such a situation any upcoming short-term oriented weaknesses should be limited in price and time (of course only together with strong readings in mid-term market breadth). Consequently, as long as this indicator keeps rising or keeps trading above 60%, the current rally is definitely not at risk fading out soon. Secondly, our WSC Sector Momentum Indicator also continued to strengthen significantly last week and is now trading in solid bullish territory. This shows that most sectors of the S&P 500 managed to get back into a mid-term-oriented price-trend. This view is also supported by the fact that the momentum score of riskless money market (from our Sector Heat Map) continued to drop significantly for the week (by 11 percentage points to 15.7%). As a matter of fact, we strongly believe it is a way too early to change our bullish strategic outlook.

Another reason for our bullish base case scenario is the fact that our entire mid-term-oriented tape indicators continued to improve significantly last week. Therefore, the current mid-term oriented positive time-series momentum of the market is well supported by the broad market. Especially, the Modified McClellan Oscillator Weekly succeeded to flash a bullish crossover signal last week, indicating that the overall tape momentum is outright positive for the time being. And all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) increased for the week. The Advance-/Decline Line Weekly even reached a record level. Therefore, these indicators are clearly confirming the current melt-up of the S&P 500! Another encouraging signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both indicators strengthened significantly last week. But while the SMA 150 has still not succeeded to pass the bullish threshold, the SMA 100 rocketed to the highest level for months. The strong increase of both gauges indicates that the total upside participation within the market looks very broad based, which is another indication that it might be a bit too early to take the chips from the table. Another important mid-term-oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both indicators reached outright bullish levels last week. Normally, as long as mid-term oriented advancing issues as well as mid-term oriented up-volume are trading well above their bearish counterparts, any upcoming short-term oriented weaknesses should be limited in price and time. So given the quite bullish signals all across the board, we strongly believe that to see further gains down the road.

Long-Term Technical Condition

While the long-term oriented picture of the market showed a quite negative picture in the previous weeks, it has finally started to (slightly) brighten up. The first positive sign is coming from our WSC Global Momentum Indicator. Although its gauge is still trading in the bearish area, it rocketed 33 percentage points last week to 45% (and, thus, nearly passed the threshold). This indicates that 45% of all local equity markets around the world – which are covered by our Global ETF Momentum Heat Map – managed to get back above their long-term oriented trend lines. Two weeks ago, this gauge was trading at the absolute bottom (0%). Also, the momentum of all risky markets strengthened last week if we take a closer look at our WSC Global Relative Strength Index (but still the relative strength of all risky markets is trading below the one from U.S. Treasuries). The only weak signal is coming from our Global Futures Long Term Trend Index which has still not succeeded to stop its decrease. If we examine our long-term market breadth indicators, we can see that all of them strengthened or even turned bullish last week. This is especially true for the Modified McClellan Volume Oscillator Weekly, as it flashed a bullish crossover signal last week. This indicates that the long-term market internals are gearing up. Also, our High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average showed also a very positive development 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

Our bullish base case scenario remains unchanged compared to last week. Even though it could be possible to see some nasty sentiment driven washout days, there is no fundamental reason to change our strategic bullish outlook for now. The market is following our forecasted path so far and given the outright bullish tape structure, we think that any upcoming weaknesses should turn out to be limited in price and time. A fact, which can be also seen if we focus on our Big Picture Indicator, which managed to get back into its bullish quadrant a couple of days ago. As long as this is the case, it is a way too early to take the chips from the table. Hence, aggressive short-term traders should focus on buying the dips, whereas conservative investors should remain invested.

Stay tuned!