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May 16th 2021

Market Review

U.S. stocks experienced a roller-coaster week that saw the major averages drop several percentage points from Monday to Wednesday. The indexes have rebounded from the sell-off, but the sharp gains on Friday were not large enough to reverse weekly losses. Finally, they posted modest losses for the week. The Dow Jones Industrial Average slipped 1.1% in that time period to finish at 34,382.13. The S&P 500 dipped 1.4% in five trading days to end at 4,173.85. The Nasdaq finished at 13,429.98 and lost 2.3% this week. Among the key S&P sectors, the consumer staples sector was the best weekly performer, while discretionary dragged. The CBOE Volatility Index (VIX) – seen by many investors as the best “fear gauge” on Wall Street – traded near 18.8.

Short-Term Technical Condition

Focusing on our short-term oriented trend indicators reveals that the short-term oriented trend of the market looks quite neutral at the moment. This is mainly due to the fact that the S&P 500 managed to close between both envelope lines of the Trend Trader Index on Friday (after it had dropped below the bearish threshold during the week). In addition, both envelope lines of the Trend Trader Index started to flatten out, indicating that – from a purely structural point of view – the market remains in a consolidation mode. Currently, it looks like that this consolidation period will not be over soon, since the Modified MACD increased its bearish gap and has, therefore, not shown any signs of stabilization/bullish divergence so far. As a result, it might take a while until the market will get back into calm waters. However, another small positive sign is coming from our Advance-/Decline 20 Day Momentum Indicator as it strengthened at the end of the week and has, therefore, confirmed the bounce from the S&P 500. Consequently, the current consolidation period still looks quite constructive in its nature, although we would not be surprised to see further down-testing next week. Worth mentioning is the fact, that it is not quite unusual to see a lot of bearish or even fast changing signals within short-term oriented trend indicators during a volatile consolidation period. In consequence, 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.

Analyzing short-term market breadth reveals a quite intermingled picture at the moment. First of all, the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily flashed a bearish crossover signal, indicating that the overall tape momentum remains quite weak-kneed. On the other side, the High-/Low-Index Daily is still trading at a solid bullish levels and is, therefore, far away from being bearish (although it also decreased significantly last week). This is mainly due to the fact that we have not seen any stronger spike in the numbers of stocks hitting a fresh yearly low. In addition, the ones hitting a new high are still outpacing the new lows (NYSE New HighsNew Lows Indicator). This is telling us that the recent decline was mainly driven by profit taking rather than being the result of a broad based sell-off. Thus, as long as we do not see a stronger spike in new lows, it might be a bit too early to get too concerned about a major market correction. Moreover, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) turned bullish again on Friday. This is another indication that the current volatile consolidation period still remains supportive in its nature. On the other hand, if we consider the quite weak tape momentum indicators (Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator), we would not be surprised if the current consolidation might not be over soon.

Analyzing our contrarian indicators also reveals that it might be a bit too early to bet on a major market correction at the moment. The recent volatility caused a spike in our fear indicators (AII CBOE Put-/Call Ratio, WSC Put-/Volume Ratio, Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator) during the week, indicating that the market was due for a stronger reversal. Even after the strong rally, their readings still remain quite bullish (biased). Another positive signal is coming from the WSC Capitulation Index, which is still indicating a risk-on market environment. This is based on the fact that the Smart Money Flow Index decreased its bearish divergence to the Dow Jones Industrial Average, showing that the big guys have not sold during the recent sell-off. This is another reason, why it might be a bit too early to bet on a major correction. The only negative signal is coming from a seasonal point of view. According to our cycles, the market could enter a longer-lasting range-bound trading scenario up until end of June before further stronger gains into July can be expected.

Mid-Term Technical Condition

This view is also confirmed by the fact that the mid-term oriented uptrend remains intact so far. Despite the fact that the gauge from our reliable Global Futures Trend Index deceased last week by 16 percentage points, it still keeps trading at the middle of the bullish consolidation area (78%). Moreover, it is worth mentioning the fact that as long as the gauge from this indicator remains above its 60% threshold, any short-term driven consolidation period/pullback should be limited in price and time (of course only in combination with quite solid readings in mid-term market breadth, which is the case right now). In addition, we can see that the gauge from our WSC Sector Momentum Indicator has been trading at solid levels for weeks and has absolutely not shown any weaknesses recently. This is indicating that most sectors within the S&P 500 remain in a powerful mid-term oriented up-trend at the moment. Another supportive fact is that the momentum score of the riskless money market (from our Sector Heat Map) has not changed for weeks and remains at 0%. Additionally, all other sectors have still a higher momentum score than riskless money market.

More importantly, the mid-term oriented trend still looks quite broad based since mid-term oriented market breadth has not shown any signs of weaknesses yet. Especially, the Modified McClellan Oscillator Weekly continued to gain more bullish ground last week, telling us that the momentum of mid-term oriented advancing issues remains quite strong for the time being. This can also be seen if we focus on our advance-decline indicators since they were either holding up quite well (Advance-/Decline Line Daily, Advance-/Decline Volume Line) or even increased (Advance-/Decline Line Weekly) for the week. Such a solid tape confirmation is also coming from mid-term oriented advancing issues and mid-term oriented up-volume (as both indicators still remain quite bullish for the time being). Basically, we receive the same picture if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). As a matter of fact, any upcoming weaknesses should turn out to be limited in price and time (at least form the current point of view). Thus, there is no reason to challenge our strategic bullish outlook for now.

Long-Term Technical Condition

The long-term oriented technical picture of the market also remains quite robust. Our Global Futures Long Term Trend Index continued to push (slightly) higher, indicating that the long-term oriented up-trend of U.S. equities is still gaining momentum on very high bullish levels. Basically, we receive the same picture globally. Although the WSC Global Momentum Indicator slightly decreased for the week, it shows that 90% 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. Thus, the current bull market remains global in scope. Moreover, also our WSC Global Relative Strength Index was holding up quite well and reveals that the relative strength of all risky markets is trading far above the one from U.S. Treasuries. If we examine our long-term oriented tape indicators, we can see that the SMA 200 remained unchanged, while the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly improved significantly, giving absolutely no reason to worry right now.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Momentum Portfolio and the WSC Dynamic Variance Portfolio.

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 still be categorized as non-corrective/bullish biased (since 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. As a result, we think it is still a way too early for 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 within its bullish consolidation 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 might be a bit too early to get concerned about the latest volatility. 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 short-term catalyst. Nevertheless, short-term momentum still remains too weak-kneed to justify a sustainable V-shaped recovery towards new record highs. Consequently, we would not be surprised to see further volatile, albeit bullish biased trading action ahead.

Stay tuned!