admin No Comments

September 5th 2021

Market Review

U.S. stocks finished the week with a mixed performance. Closing at 35,369.09, the Dow Jones Industrial Average shed 0.2% in five trading days. The S&P 500 logged a 0.6% gain for the week to finish at 4,535.43. The Nasdaq posted a weekly advance of 1.6% and finished at 15,363.52. Among the key S&P sectors, health care was the best weekly performer, while financials dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.4.

Short-Term Technical Condition

According to the Trend Trader Index, the purely short-term oriented price trend of the S&P 500 remains intact. On Friday, the S&P 500 closed 50 points above the bullish threshold of this reliable short-term oriented trend indicator. Furthermore, we can see that both envelope lines of this indicator are still drifting higher as well. This can be seen as a quite supportive (price) trend signal as it indicates higher highs and higher lows within the past 20 days. More importantly, also the underlying momentum of the short-term oriented price trend of the S&P 500 improved last week. This is based on the fact that the Modified MACD managed to widen its bullish gap. As a result, the indicator minimized its negative divergence (compared to the S&P 500) since stronger losses would be necessary to trigger a bearish crossover signal again. Moreover, the price momentum of the broad market also showed some signs of recovery/stabilization as the gauge of the Advance-/Decline 20 Day Momentum closed in positive territory last week. Nevertheless, it should be definitely a bit stronger if we consider the current levels of the S&P 500. So all in all, the short-term oriented trend picture of the market continued to improve (although not all negative divergences have been sorted out so far).

If we analyze the upside-participation of the latest gains, we can see that the narrow based rally has started to broaden out recently. Probably the most important signal is coming from the NYSE New Highs/New Lows Indicator since there was a steady increase in the number of stocks hitting a fresh yearly high during the whole week (whereas there were hardly any stocks which dropped to a new yearly low). Thus, the gauge of the High-/Low-Index Daily widened its bullish gap significantly. This is signaling that the latest gains were (finally) driven by a broader market instead of being just the result of a large-cap driven overshoot. A fact which can also be observed if we examine the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both gauges widened their bullish gaps significantly last week. This is telling us that the momentum of advancing issues and advancing volume is improving on a fast pace. Basically, the same is true if we focus on the Upside-/Downside Volume Index Daily and the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Nevertheless, the overall level of both gauges (20/50) could be a bit stronger, if we consider the current levels of the S&P 500. However, given the recent quite broad-based upside participation, the risk of a short-term oriented trend-reversal has reduced fairly.

On the contrarian side, we can see that nearly our entire option- and sentiment-based indicators (AII CBOE Put-/Call Ratio, AII Bulls/Bears Survey, WSC Dumb Money Indicator, AII CBOE Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio and the AII Bulls & Bears Survey) remain quite neutral at the moment. The only negative signals are coming from the WSC Capitulation Index and the Smart Money Flow Index since both indicators have not confirmed the latest gains we saw. Especially, the WSC Capitulation Index is now indicating a risk-off market environment and, therefore, we would not be surprised to see some form of increase volatility ahead. This might coincide with the fact that – from a purely seasonal point of view – the market should approach increased headwinds in the next couple of weeks (Presidential Cycle).

Mid-Term Technical Condition

Examining the mid-term oriented technical condition of the market, we get nearly the same picture as we have on a short-term time frame. The mid-term uptrend of the market strengthened significantly last week. To be more precise, our reliable Global Futures Trend Index improved by 20 percentage points (!). As a result, it jumped back to the upper part of its bullish consolidation area. Hence, the current reading of this reliable indicator is clearly confirming the recent rally of the S&P 500 (which is a quite bullish mid-term oriented signal). Also, our WSC Sector Momentum Indicator slightly improved. As this indicator measures how many key sectors remain in a mid-term oriented up-trend, this is another positive mid-term oriented trend signal at the moment. These bullish facts are also supported by our Sector Heat Map as the momentum score of all sectors remains above the one from riskless money market. So, from a purely price point of view, many key sectors continued to drift higher on an absolute basis which is another supportive trend signal at the moment.

If we analyze the current upside participation of this mid-term oriented uptrend we also saw smaller signs of improvements (albeit on quite low levels). The positive signals are coming from the Advance-/Decline Line Weekly and the Advance-/Decline Line Daily as both of them improved. Only the Advance-/Decline Volume Line showed a small bearish divergence compared to the broad index. On the other hand, the Advance-/Decline Index Weekly, the Upside-/Downside Volume Index Weekly as well as the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) finished the week nearly unchanged. From a purely signal point of view, these indicators remain bullish biased (albeit on quite low levels). The Modified McClellan Oscillator Weekly, in contrast, even weakened last week and has not succeeded to turn bullish yet. Even though we saw smaller improvements within our mid-term oriented tape indicators, most of them can be still described as being supportive (on quite low levels) rather than being confirmative at the moment.

Long-Term Technical Condition

The long-term oriented technical picture of the market remains nearly unchanged compared to the previous week. Our WSC Global Momentum Indicator decreased by 3 percentage points and indicates that 65% 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. Also, our Global Futures Long Term Trend Index slightly decreased for another week, but still keeps trading at very high bullish levels (indicating that the bull-market for U.S. equities remains intact). Examining our WSC Global Relative Strength Index reveals that all risky markets have also gained some ground recently. The situation looks a bit different if we look at 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

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 our WSC Model Portfolio Composite, the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio reached new all-time highs last week.

Bottom Line

Given the stronger improvements all across the board (especially on a short-term time perspective), it looks like that the recent large-cap driven rally transformed back into a more broad-based up-trend. If this development continues, it is just a question of time until we see further improvements within our mid-term oriented tape indicators too (which are still a bit weak-kneed at the moment). As a result, the risk of a stronger trend-reversal has clearly diminished – at least from a current point of view. Thus, we think it is time to upgrade our strategic view to slightly bullish again. Worth mentioning is the fact that we are not afraid of issuing a strategic sell signal immediately (if short-term market breadth deteriorates again since capital appreciation is the most important driver for success). But currently, the risk-/reward ratio looks quite attractive again. For that reason, we think it would make sense for conservative members to raise exposure again (by buying into weaknesses rather to chase the market too aggressively on the upside). However, given the still weak-kneed signals on a mid-term time perspective, it would also make sense to place a stop-loss limit around 4,365. This stop loss limit should act as additionally safety net just in case things change quickly during the week.

Stay tuned!