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January 17th 2021

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average shed 0.9% over the week to 30,814.26. The S&P 500 booked a weekly loss of 1.5% to finish at 3,768.25. The Nasdaq also lost 1.5% over that time period to end at 12,998.50. Of the S&P sectors, energy was the best weekly gainer while comm. services led the decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 24.3.

Short-Term Technical Condition

Although the market finished in negative territory for the week, the short-term oriented trend of the market remains intact. The S&P 500 is still trading 43 points above the bearish threshold from the Trend Trader Index. Consequently, the pure short-term oriented price trend of the market remains bullish as long as the S&P 500 does not close below 3,725 (lower threshold from the Trend Trader Index). Also, from a pure structural point of view, the short-term oriented trend of the market has not turned bearish yet as both envelope lines of the Trend Trader Index are still increasing. As a result, the price driven uptrend of the market remains quite constructive for the time being. A fact which is also supported by the Advance-/Decline 20 Day Momentum Indicator which slightly improved for the week. Consequently, it has formed a small bullish divergence to the current levels of the S&P 500, which is another supportive fact at the moment. The only weak signal is coming from the Modified MACD, which flashed a tiny bearish crossover signal last week. Such a situation often occurs, when the price action of the market has slowed down for a couple of trading days. Normally, as long as our short-term oriented market breadth indicators remain bullish, we would not even take a bearish Modified MACD too seriously as it would only indicate some signs of short-term exhaustion (short-term breather). Consequently, short-term market breadth is key area of focus as it will tell us if the current slowdown/consolidation period can be still classified as healthy or if it has gotten a more corrective tilt recently.

If we focus on our short-term market breadth indicators, we can see that the recent slow-down had hardly any negative impact so far (as the readings from most of our tape indicators remain supportive). As a result, the recent price action can be still classified as a healthy breather within an ongoing uptrend. Especially the NYSE New Highs minus New Lows Indicator is telling us that last week’s decline was mainly driven by profit taking rather than being the result of broad-based selling pressure. This view is based on the fact that there was only a smaller reduction in the new highs, whereas the number of stocks hitting a fresh yearly new low remained quite depressed (4 stocks only). Consequently, the High-/Low Index Daily was holding up quite well (and did, therefore, not confirm the latest decline on Friday). The same is true if we have a look at the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges were holding up quite well and are trading far above their 50 percent bearish threshold. This indicates that the majority of all NYSE-listed stocks remains per definition in a short-term oriented uptrend. Consequently, the recent weaknesses in the S&P 500 should not be taken too seriously at the moment. Above all, we can see that the Modified McClellan Volume Oscillator Daily and the Modified McClellan Oscillator Daily also slightly improved last week. This fact is telling us that the momentum of advancing volume and advancing stocks still remains positive so far. Focusing on the Upside-/Downside Volume Index Daily also reveals that the recent selling pressure was not supported by down-volume. This is another strong piece of evidence that the current consolidation period remains quite bullish-biased in its nature. So, in the end, it looks like that the current uptrend of the market is still strongly backed by a broad basis and, therefore, it might be a bit too early to get nervous about the this sentiment driven washout event.

Although we saw some negative price action last week, the recent sentiment driven washout event/breather had hardly any impact on short-term optimism. Basically, quite the opposite is true since further contrarian indicators turned bearish or even strengthened their bearish signal last week  (WSC Dumb Money Indicator, WSC Put-/Volume Ratio, the All CBOE Put-/Call Ratio Daily, Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio Oscillator and the AII Bulls & Bears Survey). As a result, further painful down-testing cannot be ruled out on a very short-time frame. However, given the strong tape condition we would not expect anything more than typical short-lived washout-events (which is basically the same call like last week). This might also explain why the Smart Money Flow Index has shown some positive strengths recently, whereas the WSC Capitulation Index is far away from indicating a risk-off market environment.

Mid-Term Technical Condition

Examining the mid-term oriented technical condition of the market also reveals a very robust picture at the moment. This becomes obvious if we focus on the gauge from the Global Futures Trend Index, which is still trading at the top end of its outright bullish area. As a result, this reliable indicator has not confirmed the weekly decline of the S&P 500. Worth mentioning is the fact that its gauge has been trading at this top level for the past 5 weeks. With such strong bullish readings, the market never faced a stronger and sustainable trend-reversal in the past. Consequently, this is another reason why it is a way too early to get concerned about the latest (sentiment driven) decline. Basically, the same is true if we focus on the WSC Sector Momentum Indicator, which remained stable at outright bullish levels. This implies that the majority of sectors in the S&P 500 remains in a mid-term oriented price driven up-trend. These bullish facts are also supported by our Sector Heat Map as the momentum score from riskless money market remains at 0% and, hence, keeps trading well below all relevant key sectors. In our view, this is another indication that the positive mid-term oriented time-series momentum of market remains well intact. Thus, we strongly believe that it is definitely a way too early to bet on a major trend-reversal for the time being.

More importantly, the current positive mid-term oriented time-series momentum of the market is still strongly backed by a broad basis. While our Advance-/Decline Volume Line dropped for the week, the Advance-/Decline Line Daily and Advance-/Decline Line Weekly jumped to their highest levels for years. Thus, both gauges have, therefore, clearly formed a positive divergence to the current level of the S&P 500. Moreover, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume also improved during the week and are trading far above their bearish counterparts. As long as both indicators remain bullish in combination with readings above 60% within our Global Futures Trend Index, it is definitely a bit too early to pull the trigger. Another encouraging signal is coming from the Modified McClellan Oscillator Weekly, which succeeded to widen its bullish gap significantly. This indicates that the underlying momentum of advancing stocks on a mid-term time horizon improved (although major indexes closed lower for the week). Another sound mid-term breadth signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both gauges improved for the week and finished at quite confirmative levels. With such strong bullish readings in mid-term market breadth, it is just a question of time until we see further strong rallying. As a result, it is a way too early to get concerned about the latest sentiment driven consolidation period (at least for now).

Long-Term Technical Condition

The long-term oriented trend of the market showed also signs of improvements last week. The WSC Global Momentum Indicator has not shown any weaknesses and remains at the highest level possible. Hence, it signals that 100% 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. As pointed out several times, this is a quite supportive technical signal, as it shows that the current bull market remains quite globally in scope. Another encouraging signal is coming from our Global Futures Long Term Trend Index which succeeded to stay at the highest level for years. This indicates that the S&P 500 remains in a strong technical bull market for the time being. Furthermore, our WSC Global Relative Strength Index shows increased risk-appetite among investors. Also, our long-term market breadth indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and SMA 200) continued to strengthen last week.

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.

Bottom Line

Given the fact that the current uptrend is backed by a broad basis and on multiple time-frames, our strategic base case scenario remains unchanged compared to last week. On a very short-time frame further painful sentiment driven wash-out events cannot be ruled out. Nevertheless, the down-side potential of the ongoing consolidation period should be quite capped if we consider the current tape structure of the market. A fact, which can be also observed if we focus on our Big Picture Indicator (since its gauge already jumped back into its bullish quadrant in the middle of the week). As long as this is the case, it might be a way too early to take any counter-trend activities. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should buy into any upcoming weaknesses!

Stay tuned!