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March 28th 2021

Market Review

U.S. stocks wrapped an extremely volatile week that left the major averages mostly higher for the week. The Dow Jones Industrial Average soared 1.4% for the week to close at a new record of 33,072.88. The S&P 500 gained 1.4% in five trading days to 3,974.54, hitting a record closing high as well. The Nasdaq declined 0.6 over the week to end at 13,138.72. Most key S&P sectors closed higher for the week, led by the real estate sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 19.

Short-Term Technical Condition

Not surprisingly, the short-term oriented up-trend of the market slightly strengthened compared to last week. From a purely price point of view, we can see that the S&P 500 managed to close 46 points above the bullish envelope line from the Trend Trader Index. As a result, the short-term oriented up-trend should remain supportive as long as the S&P 500 does not drop below 3,872 (lower threshold of the Trend Trader Index). In addition, both envelope lines of this reliable indicator are still slightly increasing, which is another positive short-term oriented price driven trend-signal. Although these signals look quite constructive in the first place, we can also see that the underlying momentum of this price driven up-trend still remains quite weak-kneed. The Modified MACD has not managed to turn bullish yet, whereas the gauge of the Advance-/Decline 20 Day Momentum Indicator should be much stronger (especially if we consider the fact that the market reached a new all-time high on Friday). Consequently, both indicators did not confirm the latest price action of the S&P 500. In our point of view, this is another indication that current volatile bullish biased slow-growth period might continue for a while (at least from a purely trend-point of view).

Basically, the same is true if we evaluate the upside participation within the current short-term oriented uptrend. Despite the fact that the S&P 500 reached a new all-time high on Friday, most of our short-term oriented breadth indicators only improved moderately last week. Thus, the signals from most of our short-term oriented tape indicators can be described as somehow supportive, but not really confirmative at the moment. This applies in particular to the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators have not shown any signs of strengths recently. This is signaling that the underlying tape momentum of the market is still outright negative. This view is also supported by the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Although both gauges increased for the week, they are still trading at low bullish levels (SMA 50) or even in bearish territory (SMA 20). This is telling us that last week’s gains were only driven by a few heavy weighted stocks (large tech) rather than by a broad basis. A fact, which was also confirmed by the bearish readings of the Upside-/Downside Volume Index Daily. Hence, the recent record high looks a bit fragile in its nature. With such weak readings we would be surprised to see further strong rallying from current levels ahead. On the other hand, the down-side of the market also looks quite capped as long as there are more new highs than new lows (which is the case right now). But during the week, the opposite was the case. As a matter of fact, the High-/Low-Index Daily flashed a bearish crossover signal in the middle of the week and turned bullish again on Friday. So from a pure tape point of view, further volatile but somehow supportive range-bound trading looks quite likely – at least for the current point of view. Nevertheless, the development of our tape indicators are also telling us that the tilt between supportive and corrective has started to narrow on a fast pace recently. If this trend continues, the market is highly at risk to run into an important top. Right now we are not there yet, but the current rally looks increasingly vulnerable at the moment.

On the contrarian side, we can see that sentiment measured by the AII Bulls & Bears survey remains stretched. As mentioned a couple of times, with such high bullish readings a lot of firepower has already been invested, leaving the market vulnerable to negative driven news flows or at least for further range-bound trading. A fact, which is also supported from a seasonal point of view (Presidential Cycle & Decennial Cycle), since the market should remain in a slow-growth period at least up until early April. Another mid-term warning signal is coming from the Smart Money Flow Index, which has definitely not confirmed the latest high of the Dow Jones Industrial Average. If the SMFI is correct, then the market is highly likely to follow the Decennial Cycle rather than the Presidential Cycle this year. The readings on the option market remain mostly neutral, although the momentum of put-options has soared recently. Thus, the WSC Put-/Volume Ratio Oscillator flashed a bearish signal last week. As a result, further rocky sessions can be expected.

Mid-Term Technical Condition

From a purely signal point of view, the mid-term oriented uptrend remains intact. This is mainly due to the fact that the Global Futures Trend Index closed in the middle part of its bullish consolidation area bracket. Nevertheless, its gauge dropped significantly last week and, hence, did not confirm the latest record high of the S&P 500. Another major concern was the magnitude and the speed at which this indicator lost bullish ground last week. If this trend continues it might be just a question of time until this gauge drops below the important 60% bullish threshold. In such a situation, the market is highly at risk for further significant and, more importantly, sustainable losses. Consequently, we remain alert as such a move below 60% could happen within days. Moreover, this is another indication that the current rally is running out of fuel on a fast pace (although the current set-up still looks quite constructive – at least for now). On the other side, we can see that most sectors within the S&P 500 remain in a strong mid-term oriented price driven uptrend (since the WSC Sector Momentum Indicator increased for the week). This can also be observed if we examine our Sector Heat Map, as the momentum score of the riskless money market sector dropped to 0% and all other sectors are trading above.

Examining mid-term market breadth reveals that it started to show some signs of exhaustion last week. Despite the fact that the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) remains quite bullish from a purely signal point of view it decreased for the week. On top of that we can see that the bullish gauges from the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly also dropped last week. Consequently, their absolute bullish levels can be described as supportive but not overwhelmingly bullish at the moment. This is a quite concerning development, because 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%). Consequently, we will monitor all three indicators quite closely over the next couple of weeks (although all of them still remain quite supportive for the time being). However, another negative mid-term oriented signal is coming from the Modified McClellan Oscillator Weekly as it continued to narrow its bullish gap (indicating that the slow-down of the tape momentum continued last week). Our Advance-/Decline Indicators in contrast were holding up quite well (Advance-/Decline Line Daily and Advance-/Decline Volume Line), although some (Advance-/Decline Line Weekly) did not confirm the recent rally of the S&P 500. So, from a purely mid-term oriented tape perspective, it looks like the market is also running out of fuel and, therefore, the upside potential is getting increasingly thinner as well. On the other hand, the down-side potential of the market also looks quite capped (although the down-side risks have slightly started to increase recently).

Long-Term Technical Condition

The long-term oriented trend of the market remains positive. Although the WSC Global Momentum Indicator slightly decreased last week, it indicates that still 97% of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend lines. Also, our Global Futures Long Term Trend Index has not shown any signs of weakness recently, signaling that the long-term oriented trend of U.S. equities remains intact. In addition, the relative strength of all risky markets was still holding up quite well compared to treasuries. If we examine our long-term oriented tape indicators, we can see that the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly improved, while the SMA 200 weakened.

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.

Bottom Line

With quite stretched/non-confirmative signals in our short-term oriented indicators the upside potential of the market looks increasingly capped. Nevertheless, the current market environment can be still categorized as supportive, since most of our mid-term oriented indicators remain quite bullish/supportive – at least for now. A fact, which can also be observed if we focus on our Big Picture Indicator which keeps trading in its outright bullish quadrant. As long as this is the case, we think it might be a bit too early for our conservative members to take the chips from the table. Nevertheless, we can also observe that most indicators have started to show some stronger signs of non-confirmation recently (albeit on quite bullish levels). As a result, the tilt between supportive and corrective has begun to narrow recently. If this trend continues, the market is highly at risk of running into an important top sooner or later. Right now we are not there yet and, therefore, there is still a good chance that the market will sort out these negative divergences. Nevertheless, on a very short-time frame the current rally looks increasingly vulnerable at the moment. As a result, we think aggressive traders should be flexible and should keep leverage low in such a volatile market environment.

Stay tuned!