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June 5th 2022  |

Key Takeaways

  • We stick to our strategic bullish outlook.
  • Quality of the current short-term-oriented uptrend looks quite high.
  • Latest declines were mainly driven by heavy weighted tech stocks rather than being the result of broad-based selling pressure.
  • Sentiment could be a strong catalyst in the current market environment.

Market Review |

U.S. stocks finished the holiday-shortened week lower. The Dow Jones Industrial Average lost less than 1% over the week to 32,899.70. The S&P 500 booked a weekly loss of 1.2% to finish at 4,108.54. The Nasdaq dropped 1% percent for the week to end at 12,012.73. Nearly all key S&P sectors ended in negative territory for the week, led by the health care sector. Energy was the best weekly performer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 24.8.

Short-Term Technical Condition

From a purely price point of view, the short-term-oriented trend of the market remains intact as the S&P 500 closed 134 points above the bearish threshold from the Trend Trader Index. Although the envelope lines of the Trend Trader have not succeeded yet to bottom out, this positive price trend is still backed by strong momentum. These facts are reflected by our Modified MACD (which widened its bullish gap) and by our Advance-/Decline 20 Day Momentum Indicator (which even improved on Friday, when the broad index declined). Although these are good news in the first place, the trend of the market is only giving a limited picture of the underlying the short-term-oriented condition of the market. Consequently analyzing, the quality of the current short-term-oriented trend (aka market breadth) will give us more information about the condition of the current trend.

Analyzing the current upside participation within that trend shows a solid picture. Thus, the current short-term-oriented trend quality still looks quite constructive for the time being. First of all, the current short-term-oriented uptrend is widely supported by a positive momentum in advancing stocks (Modified McClellan Oscillator Daily) and in advancing volume (Modified McClellan Volume Oscillator Daily). Also the solid readings in the percentage of stocks trading above their 20 day moving average (SMA 20) and the strong improvements of the percentage of stocks trading above their 50 day moving average (SMA 50) indicate that the current short-term-oriented uptrend is backed by a broad basis. Additionally, the volume in advancing stocks is still surpassing the volume in declining ones (Upside-/Downside Volume Index Daily). Thus, the recent decline on Friday should not be taken too seriously – at least for the time being. Worth mentioning is the fact that overall volume on NYSE was also quite thin on Friday (NYSE volume). And finally, the number of stocks reaching a new yearly high is still outpacing the ones reaching a new yearly low. As a result, the High-/Low Index Daily succeeded to flash a tiny bullish crossover signal. So all in all, the current recovery still looks quite solid it its nature (albeit we saw increased volatility last week). Moreover, it tells us that the latest declines on Friday were mostly the result of heavy-weighted tech-stocks rather than being the result of broad-based selling pressure.

On the sentiment side, we can see that the recent weak weekly performance of the S&P 500 has definitely relieved overbought conditions (Upside-/Downside Ratio Daily and the Advance-/Decline Ratio Daily), whereas overall market sentiment (AII Bulls & Bears survey) remans outright pessimistic. These negative values could be a huge catalyst in the current market environment, once these market participants are forced to get back into the market.  On the other hand, we can see that the option market remains supportive (z-score of the Daily Put-/Call Ratio All CBOE Options), whereas Smart Money has also started to build up positions recently. As a matter of fact, the WSC Capitulation Index flashed a buy signal on Friday.

Mid-Term Technical Condition

Although the mid-term-oriented condition of the market showed some improvements last week, it still looks a bit weak-kneed. The most positive signal is coming from our Global Futures Trend Index which rocketed by double digit percentage points last week. Still, it remains in the middle of its bearish consolidation area. As long as this is the case, the current correction cycle is far away from being over – at least from a purely formal point of view. But as mentioned already last week, as long as the gauge of this reliable indicator shows stronger signs of positive momentum, the recent recovery will definitely have legs. This view is also confirmed by our WSC Sector Momentum Indicator, which has started to bottom out recently. This is telling us that the sectors within the S&P 500 started to outperform riskless money market on a relative basis. This is also reflected in our Sector Heat Map, as the momentum score of riskless money market declined by 5 percentage points (to 57%). Despite these improvements, the current mid-term picture still looks quite fragile in its nature – at least for now.

The quality of this mid-term-oriented downtrend still looks quite high at the moment. Thus, there is still also a chance that the current recovery will fade out again at some point in time. Currently, the momentum of mid-term-oriented declining stocks remains negative (Modified McClellan Oscillator Weekly), plus the majority of all U.S. listed stocks remain in a mid-term-oriented downtrend at the moment (SMA 100/ SMA 150). Additionally, our entire advance-/decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Weekly and Advance-/Decline Line Daily) did not show any significant improvements last week. Further serious negative signals are coming from the  Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly (since both indicators strengthened their negative signals last week). As long as this is the case, the current recovery still looks quite fragile in its nature.

Model Portfolios

Last week, there were no changes within our ETF Model Portfolios (WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, WSC Sector Rotation Strategy).

Bottom Line

On a short-term time frame, the uptrend of the S&P 500 is definitely backed by a broad basis. Thus, the latest declines on Friday should not be taken too seriously – at least for the time being. A fact which can also be observed if we focus on gauge of the Big Picture Indicator, which is still indicating a “Stabilization” market regime. As mentioned in the description of the Big Picture Indicator, in such a regime, it is quite difficult to differentiate if the recovery process is sustainable or just part of a stronger bear hmarket rally. Currently, it looks like the recovery has legs and as long as we see further strengthening in our short- to mid-term-oriented indicator framework, the situation should remain supportive. Thus, the risk for another correction leg should remain low. On the other hand side, the signals on a mid-term time perspective (WSC Mid-Term Composite) remain quite weak-kneed. Consequently, there is still also a chance that the current recovery will fade out again at some point in time if we do not see a stronger recovery there. Currently, this is pure speculation but we will monitor the development of our mid-term-oriented indicators closely within the next couple of days/weeks. However, given the latest development of our indicators, we stick to our strategic bullish outlook.

Stay tuned!