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August 29th 2021

Market Review

U.S. stocks finished the week in the green, with two benchmarks hitting record highs. The Dow Jones Industrial Average rose 0.9% in five trading days to end at 35,455.80. The S&P 500 added 1.5% over the week to finish at 4,509.37. The Nasdaq Composite gained 2.8% during the week to 15,129.50. Most key S&P sectors ended in positive territory for the week, led by the energy sector. Utilities lead decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.

Short-Term Technical Condition

So far, the short-term oriented (price-driven) up-trend of the market has not been broken yet as the S&P 500 closed 41 points above the bearish threshold from the Trend Trader Index. Therefore, from a purely price point of view, the market remains in a short-term oriented uptrend as long as the S&P 500 does not drop below 4,428. In addition, both envelope lines of the Trend Trader Index are still rising, indicating that, from a purely structural point of view, the underlying tone remains supportive. Unchanged compared to last week,  the situation still looks quite different if we focus on the underlying momentum of this short-term oriented uptrend. This is based on the fact that the bearish divergences between the S&P 500 and the Modified MACD, respectively the Advance-/Decline 20 Day Momentum Indicator, have not been sorted out yet. Although, the Modified MACD managed to flash a small bullish crossover signal last week, the signal itself is still a way too weak to be taken too seriously at the moment. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, as its gauge should be (much) higher if we consider the current record levels of the S&P 500.

Basically, we receive the same picture if we analyze the latest short-term oriented upside participation within the ongoing short-term oriented uptrend. Despite the fact that the latest gains led to some form of recovery within some of our short-term oriented tape indicators, most of them are still showing a quite narrow based rally. This applies in particular to the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. While the Modified McClellan Oscillator Daily has not succeeded to turn bullish yet, the Modified McClellan Volume Oscillator Daily, in contrast, has flashed a stronger bullish crossover signal on quite low levels recently. This is telling us that the latest rally was accompanied by strong up-volume, although this buying power was mainly focused on a few stocks (as the total number of advancing issues did not show any stronger spike last week). Also, the total number of stocks hitting a fresh yearly high can be best described as supportive, albeit this ratio is quite far away from being confirmative at the moment. So, if we observe a stronger spike in new lows, we would not be surprised to see a stronger trend break within our short-term oriented trend indicators. Anyhow, this has not been the case so far, as our High-/Low-Index Daily has succeeded to strengthen its low bullish signal recently. Currently, the only real bullish signals are coming from the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50), as both gauges jumped back into solid bullish areas.

On the contrarian side, we can see that the market is slightly overbought at the moment (Upside-/Downside Volume Ratio Daily) and, therefore, we would not be surprised if the pace is slowing down next week. The WSC Capitulation Index is still indicating a risk-on market environment, although it continued to move towards its bearish threshold last week. This is based on the fact that the Smart Money Flow Index did definitely not confirm the latest high of the Dow Jones Industrial Average (which is another mid-term oriented warning signal). Unchanged compared to last week the market should approach rough waters within the next couple of weeks (Presidential Cycle). This is based on the fact that – historically – the market usually hits its high in a post-election year around mid-/late summer. Apart from that fact, most of our option- and sentiment based indicators remain quite neutral for the time being.

Mid-Term Technical Condition

The mid-term oriented condition of the market slightly deteriorated compared to the previous week. This is based on the fact that the gauge of the Global Futures Trend Index continued to decline and even touched the important 60% threshold. Hence, the gauge is far away from confirming the current level from the S&P 500. As already mentioned a couple of times, as long as the gauge keeps trading below 60%, the risk of a stronger pullback remains outright high (of course only in combination with weak or bearish readings in mid-term oriented market breadth). On the other hand side, even if we do not see a stronger trend-reversal immediately, as long as the gauge of this indicator remains near or below this threshold (again, in combination with weak mid-term market breadth), the upside potential of the broad market should be somehow capped as well! However, from a purely price point of view, the mid-term oriented uptrend of the market still remains intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This indicates that most sectors within the S&P 500 are still in a mid-term oriented up-trend (as we have not seen a stronger pullback so far). This can also be seen if we focus on our Sector Heat Map as the momentum score of all sectors keeps trading far above the one from riskless money market (currently at 0.0 percent).

More importantly, the mid-term oriented market breadth condition shows a quite intermingled picture at the moment (and is, therefore, still not confirming the mid-term oriented price driven uptrend of the market). Despite the fact the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) slightly improved and succeeded to get back into the bullish area, both gauges are far away from confirming the current level of the S&P 500. This is telling us that a lot of stocks did not participate within the latest rally we saw. On top of that we can see that the bullish gauge from the Advance-/Decline Index Weekly just managed to close slightly above its bearish counterpart. This is indicating a still quite weak-kneed mid-term oriented tape structure at the moment. Also, the Upside-/Downside Volume Index Weekly has not managed to turn bullish yet although it slightly improved last week on quite low levels. This is a quite bearish-biased signal, as in the past all corrections were accompanied by bearish or outright weak readings within both indicators (together with a Global Futures Trend Index score below 60%). In addition, the overall mid-term oriented tape momentum continued to show signs of exhaustion as the bearish gap from the Modified McClellan Oscillator Weekly continued to widen. The only positive signal is coming from our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line). So from a purely mid-term oriented tape perspective, it still looks like that the current rally is mainly driven by a few heavy weighted stocks in the index (and, therefore, the market remains quite vulnerable from a pure technical point of view).

Long-Term Technical Condition

The long-term oriented technical picture of the market showed some signs of improvements. Our WSC Global Momentum Indicator rebounded by 13 percentage points and indicates that 68% 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. Although the Global Futures Long Term Trend Index slightly decreased for another week, it still keeps trading at very high bullish levels (indicating that the bull-market for U.S. equities remains intact). If we focus on the WSC Global Relative Strength Index we can see that the most risky markets has also gained some ground versus riskless money market recently. The situation looks a bit different if we focus on long-term market breadth. There, we can see that the long-term oriented upside participation still remains quite weak-kneed (SMA 200, the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly) and is, therefore, not fully confirming the signals of our long-term oriented trend indicators.

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. Additionally, we are proud to announce that the WSC Model Portfolio Composite and the WSC All Weather Portfolio reached a new high last week.

Bottom Line

Currently, our base call remains unchanged compared to last week. Although the S&P 500 reached a new all-time high last week, we still remain cautious from a strategic point of view. This is based on the fact that the current positive time-series momentum is still mainly driven by heavy weighted stocks in the index (whereas the broad market is strongly lagging behind). Thus, a reversal in these heavy weighted stocks could easily trigger a significant sell-off, since there is no safety net around to cushion such a move. From a technical point of view, such a large-cap rally is always a fork in the road. Because during that time period, two scenarios are possible: Either we see a healthy rotation back into small caps, which would lead to significant improvements within our short- to mid-term tape indicators). Or, we see that these divergences are piling up, which could then easily lead to a significant trend-reversal/sell-off (e.g. in early 2016, mid 2015 or 2011). Therefore, the quality of the underlying market tape structure will give us further guidance. Worth mentioning is the fact that such a process could take a couple of days or even weeks, whereas the tilt between corrective and supportive consolidation could also turn out to be quite narrow. Although we saw some smaller improvements within our indicator framework, further upside participation is needed to change our cautious view. So, in the end, we think conservative members should stay on the sideline, whereas experienced short-term traders should focus on the short side if we a significant break in the Trend-Trader Index.

Stay tuned!