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June 28th 2020

Market Review

Due to a sell-off on Friday, U.S. stocks finished the week in negative territory. The Dow Jones Industrial Average dropped 3.3% over the week to 25,015.55. The S&P 500 also booked a weekly loss of 3.3% to finish at 3,009.05. The Nasdaq shed 2.6 percent for the week to end at 9,757.22. All key S&P sectors ended in negative territory for the week, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 34.7.

Short-Term Technical Condition

From a pure price point of view the short-term trend clearly turned clearly bearish on Friday as the S&P 500 closed below the bearish threshold from the Trend Trader Index. Moreover, our reliable Modified MACD strengthened its bearish signal, indicating that further down-testing is highly likely. Nevertheless, from a pure structural point of view, the short-term oriented uptrend of the market has not completely broken yet as both envelope lines of the Trend Trader Index are still holding up quite well and have not formed a rounding top yet. The same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator. Although its gauge dropped significantly last week and did, therefore, confirm the recent sell-off on Friday, it remains bullish from a pure signal point of view (albeit on very low levels). These facts are telling us that the short-term oriented trend of the market has not completely turned bearish yet. This is a quite interesting fact, as the S&P 500 has now reached the lower boundary of its ongoing trading range. Consequently, the big question is if another rally attempt looks likely or if we will see further selling pressure ahead.

As pointed out in our previous forecast, during a consolidation period it is not quite unusual to see a lot of bearish or even fast changing signals within our short-term oriented trend indicators as there is obviously no specific trend when the market is trading sideways. As a matter of fact, short- to mid-term market breadth is a key area of focus to evaluate if a given consolidation period is just part of a healthy breather or the beginning of a more significant trend reversal.

If we focus on short-term oriented market breadth, we can see a quite exhausted environment. As already expected last week, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed a bearish crossover signal. This is telling us that the momentum of advancing stocks and advancing volume has turned negative on quite high levels recently. Also, the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) decreased significantly last week and even dropped into deep bearish territory (20 SMA). As a matter of fact, both indicators confirmed the latest sell-off on Friday. Nevertheless, we can also see that there are still more than 50 percent of all Russell 3000 listed stocks which are trading above their 50 days moving average. As a matter of fact, the underlying short-term oriented uptrend of the market remains somehow constructive. Consequently, it looks like the recent sell-off on Friday was mainly driven by profit taking rather than being the result of a panic driven broad based selling event. This becomes also obvious if we focus on the NYSE New Highs/New Lows Indicator. Here we can see that only the number of stocks which are hitting a fresh yearly high dropped slightly for the week, while the number of stocks which were pushed to a new yearly low have not shown any negative spike so far (although the broad index lost more than 3% for the week). This is another strong indication that the latest sell-off on Friday was only driven by profit taking. Consequently, it is not a big surprise at all that the High-/Low-Index Daily remains quite bullish for the time being. All in all, the underlying short-term oriented technical condition of the market still looks a bit too supportive to justify the start of a stronger correction. Consequently, we would not be surprised to see some form of recovery soon. On the other hand, we can see that the bullish impulses are missing as well. As a matter of fact, further volatile sideways trading looks quite likely within the next couple of trading sessions.

On the contrarian side, we can also see some form of capitulation indicating a minor bottom might be at hand soon. The sell-off on Friday caused a spike in the put-/call ratio and, therefore, the z-score of the All CBOE Put-/Call Ratio Daily grew further into neutral territory last week. Above all, CBOE Volatility Index closed lower compared to mid-June when the S&P 500 dropped to similar levels (indicating a lot of negative news is already priced in). The same is true if we focus on the AII Bulls & Bears survey as the number of bears on Wall Street continued to rise. This is showing that a lot of bad news is already priced in, leaving the market better positioned to rally on positive news-flow. This view is even supported from a pure cyclical point of view since the Decennial Cycle as well as the Presidential Cycle are indicting some form of tailwinds into September. However, on a very short-time frame further increased volatility is highly likely as the WSC Capitulation Index is still indicating a risk-off market environment.

Mid-Term Technical Condition

Another main reason, why we believe that such a scenario looks quite possible is because the mid-term-oriented uptrend of the market still looks quite healthy right now. Although our Global Futures Trend Index slightly decreased for the week and dropped into the upper range of its bullish consolidation area (84%), it is far away from being bearish. Consequently, the sell-off on Friday had literally zero impact on the reading of this indicator. As always mentioned in our previous market comments, as long as the gauge from this reliable indicator keeps trading above its 60% threshold, any upcoming weaknesses tend to be limited in price and time (of course only in combination with confirmative market breadth readings). Basically, this is the case right now and, therefore, it might be a bit too early to panic right now. Moreover, we can see that the most sectors within the S&P 500 remain in a strong mid-term oriented price driven uptrend as the WSC Sector Momentum Indicator is trading at quite encouraging bullish levels (although it slightly dropped on Friday). As a matter of fact, the underlying price trend of the S&P 500 looks quite bullish for now. This can be also observed if we examine our Sector Heat Map, as the momentum score from riskless money market is trading at very low levels (currently at 5.6%). In addition, most sectors within the S&P 500 are trading above the momentum score from riskless money market. In our view, this is another indication that the mid-term-oriented risk appetite among investors remains supportive.

Another main fact why we believe that it is still a way too early to panic right now is due to the fact that the current mid-term-oriented market breadth also looks too supportive at the moment to justify the beginning of a stronger and sustainable correction. Especially, the Modified McClellan Oscillator Weekly was holding up quite well last week, indicating that the overall tape momentum remains quite supportive for the time being. Another positive signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both bullish gauges from these indicators are still trading far above their bearish counterparts (although the market was down for the week). This is telling us that the internal mid-term-oriented demand for stocks still looks quite healthy. This picture is also confirmed from our entire advance-decline indicators. Although the Advance-/Decline Line Daily declined for the week, the Advance-/Decline Volume Line and especially the Advance-/Decline Line Weekly in contrast were holding up quite well and are, therefore, even showing a positive divergence to the broad market. This indicates that the broad market was holding up quite well and, consequently, a lot of selling pressure was caused by heavy weighted stocks in the index. The same applies if we examine the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). While the SMA 100 slightly decreased for the week and the SMA 150 even remained unchanged, both indicators did not confirm the weekly decline of the S&P 500. So all in all, our mid-term oriented indicator framework still remains quite supportive and, hence, it is a bit too early to chance our strategic bullish view – at least for the moment.

Long-Term Technical Condition

Not surprisingly, the long-term oriented trend of the market remains unchanged compared to the previous weeks. The gauge from our WSC Global Momentum Indicator dropped last week and indicates that currently only 16% 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, which has been decreasing for weeks now, dropped to the lowest levels for years. This fact is telling us that the long-term oriented trend of U.S. equities is quite damaged at the moment. While our WSC Global Relative Strength Index remained nearly unchanged compared to the previous week, it also reveals that the relative strength of all risky markets is trading far below the one from U.S. Treasuries. If we examine our long-term oriented tape indicators, we can see that the Modified McClellan Volume Oscillator Weekly and the SMA 200 weakened while the High-/Low Index Weekly slightly strengthened and nearly flashed a bullish crossover signal.

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

Even though we saw stronger selling pressure last week, we do not see a major reason to change our strategic bullish outlook for now. Although we could see some further painful down-testing ahead, the current consolidation can be still categorized as non-corrective/bullish biased, as most of our short- to mid-term oriented indicators still remain supportive or even quite bullish at the moment. Thus, our strategic bullish outlook remains unchanged and, therefore, we think it is still a way too early for our conservative members to take the chips from the table. A fact that can also be observed if we focus on our Big Picture Indicator which is still moving around 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, we think it might be too early to take the chips from the table. Moreover, we can see that the current consolidation period has started to have its designated impact on short-term optimism, which could act as another strong catalyst for a short-term relieve rally.

Stay tuned!