admin No Comments

December 15th 2019

Market Review

U.S. stocks finished the week in positive territory with the main benchmarks posting record highs on Friday. The Dow Jones Industrial Average gained 0.4 percent over the week to 28,135.38. The S&P 500 recorded a weekly rise of 0.7 percent to finish at 3,168.80. The Nasdaq advanced 0.9 percent for the week to close at 8,734.88. Most key S&P sectors finished higher, led by technology. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.6.

Short-Term Technical Condition

In line with our strategic view, the market pushed higher last week. Consequently, it is not a big surprise that the short-term oriented uptrend of the market remains in force at the moment. To be more precise, the S&P 500 is now trading 51 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 3,117. Furthermore, we can see that both envelope lines of this reliable indicator are increasing, indicating that the resistance/support levels for the S&P 500 are doing so as well. This can be seen as an outright constructive technical signal as higher highs and higher lows are a typical pattern for a healthy price-driven uptrend. If we focus on the underlying price trend momentum, we can see that the bullish status from the Modified MACD also strengthened during the previous week as its gauge even succeeded to flash a small bullish crossover signal. Hence, this indicator is clearly confirming the latest rally from the S&P 500. This fact is also supported by our Advance-/Decline 20 Day Momentum Indicator, which also strengthened last week. So all in all, the current time-series momentum of the S&P 500 looks outright bullish at the moment, indicating further gains ahead (at least from a pure trend point of view).

More importantly, the current short-term oriented uptrend is strongly backed by the broad market since the underlying tape condition of the market improved significantly last week. Consequently, the current upside participation within the whole market recovered significantly, and, therefore, the chances for a stronger momentum-crash remains quite limited at the moment. Especially, the strong increase in the number of stocks which were hitting a fresh yearly high grew towards quite confirmative levels, whereas we hardly saw any stocks which were pushed to a new yearly low.  As a consequence, the bullish gauge of the High-/Low-Index Daily continued to widen its bullish gap, indicating that the latest gains were not caused by a few mega-caps but they were a result from a strong demand all across the board. On top of that, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily started to increase and both indicators even succeeded to flash a bullish crossover signal. This shows us that the current short-term oriented uptrend is widely confirmed by positive momentum in advancing issues and advancing volume. This strong up-volume can be also seen if we focus on the Upside-/Downside Volume Index Daily. The only weaker signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Despite the fact that both indicators are trading in solid bullish territory, their overall levels could be a bit stronger if we consider the current levels from the S&P 500. However, given the outright strong tape condition at the moment, this minor bearish divergence can be definitely ignored at the moment. In other words, with such strong signals all across the board, it is highly unlikely that the recent surge will run out of fuel. As a consequence, we think that the market is heading towards further records soon, which is definitely in line with our strategic bullish outlook.

On the contrarian side, the situation can be described as quite neutral at the moment. The option market as well as market sentiment is not indicating any kind of extreme positioning, whereas the WSC Capitulation Index is still indicating a risk-on market environment. Although this indicator started to increase on low levels, it is still trading well below its threshold. Worth to mention is also the fact that the Smart Money Flow Index also started to minimize its bearish divergence which is another positive signal for now.

Mid-Term Technical Condition

Another main reason, why we believe it is still a way too early to bet on a major trend-reversal is due to the fact that our entire mid-term oriented indicators remain bullish and even strengthened last week. The gauge from the Global Futures Trend Index picked up further momentum last week and grew into the middle part of the bullish consolidation area, hence trading well above the important 60 percent threshold. This can be interpreted as a quite strong technical trend signal, as such strong readings (in combination with bullish mid-term oriented tape signals) never led to any stronger correction/trend-reversal in the past! Also the gauge from our WSC Sector Momentum Indicator has not shown any weakness so far, indicating that most underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we examine our Sector Heat Map as the momentum score of all sectors (except energy which has been trading at 0 percent for weeks) remains above the one from riskless money market (which dropped to 6.4 percent). These facts are another indication that the risk appetite among investors remains quite high (and, therefore, our strategic bullish view remains unchanged).

This view is also driven by the fact that the current mid-term oriented time-series momentum of the market is also strongly confirmed by mid-term oriented market breadth, which improved significantly last week. First of all, our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily and the Advance-/Decline Line Weekly) increased and also reached their highest levels for years. Another strong positive mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as the bullish gauge from both indicators increased significantly last week. This is probably the most important tape signal, as it indicates a solid underlying demand. And also our Modified McClellan Oscillator Weekly succeeded to (slightly) increase its bullish gap last week. And finally, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) was also holding up quite well. All these facts signal that the total upside participation within the market is broad based at the moment, which is another indication that there is still some room left before major troubles might be due.

Long-Term Technical Condition

The long-term technical condition of the market has not shown any weaknesses in the last couple of trading sessions. We can see that the gauge from the WSC Global Momentum is trading at solid bullish levels, indicating that most local equity markets around the world (in detail 68 percent) are also participating within the current rally. Also, the Global Futures Long Term Trend Index is trading at solid levels and has even started its bullish ride finally (after a longer period of decrease). In addition, the relative strength of nearly all risky markets was also holding up quite well, which is another indication for the current risk-on market environment. However, the most important fact is that long-term market breadth in the U.S. still 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 increased its bullish gap last week. In addition, the percentage of stocks which are trading above their long-term oriented moving averages (200) and also our High-/Low Index Weekly continued to strengthen their bullish signals.

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

Given the quite strong improvements all across the board, it looks like that the current up-trend on multiple time-frames is backed by a broad basis. Hence, the risk of a stronger trend-reversal is quite low at the moment and, therefore, our bullish strategic view remains unchanged compared to last week. Moreover, we think it is time to remove the safety net stop-loss since the WSC Big Picture Indicator jumped back into is outright bullish quadrant. As a matter of fact, the current risk-/reward ratio looks quite attractive at the moment. Stay tuned!