December 6th 2020

Market Review

U.S. stocks continued to rally, pushing the major indexes to new record highs. The Dow Jones Industrial Average posted a weekly increase of 1% to finish at a record of 30,218.26. The S&P 500 gained 1.7% over the week to close at a record of 3,699.12. The Nasdaq advanced 2.2% during the week to 12,464.23, a record high as well. All averages booked their fourth weekly gain in five weeks. Most key S&P sectors ended in positive territory for the week, led by the energy sector. The utilities sector was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended below 20.8.

Short-Term Technical Condition

In line with our recent call, the market continued to push higher last week. More importantly, this advance was fully confirmed by our entire short-term oriented indicators, which remain quite bullish for the time being. If we analyze the pure price driven trend, we can see that the S&P 500 is now trading 117 points above the bearish threshold from the Trend Trader Index. Consequently, this pure price driven uptrend of the market remains intact as long as the S&P 500 keeps trading above 3,581. Given the fact that we have seen higher highs and higher lows within the past 20 days, both envelope lines of this reliable indicator are still drifting higher on a quite fast pace. Hence, the resistance/support levels for the S&P 500 are increasing as well, which is another quite constructive technical trend signal at the moment. If we focus on the underlying trend momentum, we can see that the Modified MACD also strengthened its bullish status during last week and has, therefore, fully confirmed the latest all-time high of the S&P 500. This view is also confirmed by the Advance-/Decline 20 Day Momentum Indicator which closed slightly closed below record-levels last week. So form a pure momentum point of view, the uptrend of the market remains well in force for the time being.

More importantly, short-term market breadth reveals that the current upside participation within the ongoing short-term oriented uptrend looks quite broad based at the moment. In such an environment, we argue against acting contrarian (by taking any kind of short-selling activities) since the chances for a stronger and sustainable momentum-crash (trend-reversal) should remain quite low. First of all, we saw a solid number of stocks which hit a fresh yearly high (especially on Friday), whereas we hardly saw any stocks which were pushed to a new yearly low. Thus, the gauge of the High-/Low-Index Daily widened its bullish gap. This tells us that the latest gains were definitely driven by the whole market instead of being just the result of a large-cap driven rally. Another positive tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators are not only trading at their highest levels for months, but they also widening their bullish gaps last week. This is telling us that the momentum of advancing issues and advancing volume still has enough positive momentum to support the current uptrend. A fact which can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges are trading in solid bullish areas, indicating that the current uptrend is supported by the majority of all listed U.S. stocks. Another encouraging fact is that the short-term up-volume (Upside-/Downside Volume Index Daily) also gained more bullish ground last week. With such solid signals all across the board, it is highly unlikely that the current year-end rally will run out of fuel soon – at least from the current point of view.

Currently, the only major red-flags on the horizon are coming from the contrarian side. There we can see that short-term optimism is getting increasingly stretched as nearly our entire option based- as well as sentiment driven indicators strengthened their negative signals last week (AII Bulls & Bears survey , All CBOE Put-/Call Ratio Daily, AII CBOE Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator, WSC Dumb Money Indicator, the WSC Put-/Volume Ratio and the WSC Put-/Volume Ratio Oscillator). Moreover, we can see that the Smart Money Flow Index has not confirmed the latest rally, which is another mid-term oriented warning signal. Consequently, the market is getting increasingly vulnerable for sentiment-driven washout-events in form of stronger down-days. Anyhow – as already mentioned last week – given the strong short-term oriented market breadth we keep ignoring this strong negative signals for now (since any upcoming down-day should be limited in price and time). Moreover, it looks like the market is following the Presidential Cycle and not its Decennial Cycle, which is another short-term positive signal for now. Nevertheless we are quite aware of the fact sooner or later that the increased sentiment will become a huge burden for the market.

Mid-Term Technical Condition

The mid-term oriented up-trend of the market still looks outright healthy for the time being. Hence, it is a way too early to get bearish from a pure strategically point of view. To be more precise, the gauge of the reliable Global Futures Trend Index continued to show positive momentum above its extremely bullish 90 percent threshold. Additionally – from a pure price point of view – the mid-term oriented uptrend remains also well intact since the WSC Sector Momentum Indicator continued to crawl higher on outright bullish levels. This is telling us that the majority of all underlying sectors within the S&P 500 remain in a powerful mid-term oriented uptrend at the moment. This can be also seen if we examine our Sector Heat Map as the momentum score of all sectors remains above the one from riskless money market, which remained at 0%. These facts are another indication that the risk appetite among investors remains quite high.

Over and above, the current mid-term oriented uptrend is still strongly backed by mid-term oriented market breadth. As long as this is the case, the current bull market is definitely not at risk of fading out soon. To be more precise, the Modified McClellan Oscillator Weekly continued to show a widening bullish gap last week, indicating that the underlying tape momentum remains quite positive for the time being. And once again, all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) rocketed for the week and have reached their highest readings for months. Therefore, they have fully confirmed the latest record 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), as both gauges have not shown any signs of weaknesses so far. However, by far the most important mid-term oriented breadth signal is based on the fact that mid-term oriented advancing issues as well as mid-term oriented up-volume have risen to outright confirmative levels over the past weeks. With such strong readings all across the board, we remain outright bullish at the moment (since any potential (sentiment driven) weaknesses should turn out to be limited in price and time).

Long-Term Technical Condition

The same applies for the long-term oriented picture of the market as we saw further improvements here as well. Currently, 100% of all local equity markets (which are covered by the Global Momentum Heat Map) are trading above their long-term oriented trend lines since the WSC Global Momentum succeeded to stay at the highest level possible. This is another outright strong indication that the current bull-market remains global in scope. Therefore, it is not a big surprise at all that the Global Futures Long Term Trend Index continued to gain further strengths, showing that the long-term oriented uptrend of U.S. equities remains well intact. Above all, we can see that the relative strength of nearly all risky markets remains positive, which is another indication for the current risk-on market environment. More importantly, this long-term oriented uptrend is widely backed by strong readings in our long-term oriented market breadth indicators (High-/Low Index Weekly, the Modified McClellan Volume Oscillator Weekly, SMA 200).

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. Moreover, we are proud to announce that the WSC Model Portfolio Composite, the WSC Sector Rotation Strategy and the WSC Inflation Proof Retirement Portfolio reached a new high during last week.

Bottom Line

With confirmative strengths across the board, we received further confirmation that the expected year-end rally is not at risk of fading out soon. Thus, any potential sentiment driven washout-even should be limited in price and time. As a result, our strategic bullish base case scenario remains unchanged as we are expecting further gains ahead. A fact which can also be observed if we focus on our Big Picture Indicator, which is still moving around within its bullish quadrant. As long as this is the case, and as long as we do not see any negative spikes in new lows, in combination with a strong weakening Global Futures Trend Index it is a way too early to take any counter trend activities. For that reason, we would recommend that aggressive traders should stick in the bullish camp, whereas conservative members should also remain invested.

Stay tuned!