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January 26th 2020

Market Review

Due to a negative Friday, U.S. stocks finished the four-day week in negative territory. The Dow Jones Industrial Average slumped 1.2% over the week to 28,989.73. The S&P 500 booked a weekly loss of 1.0% to finish at 3,295.47. The Nasdaq shed 0.8% for the week to end at 9,314.91. Nearly all key S&P sectors ended in negative territory for the week, led by energy. The utilities sector led gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped to 14.6.

Strategy Review

In our last week’s market forecast we mentioned the fact that – on a very short-time frame – a short-lived consolidation and/or stronger washout day to dampen short-term optimism could not be ruled out. In fact, on Friday the S&P 500 lost nearly 1% and, therefore, the S&P 500 recorded its biggest one-week drop since August.

Short-Term Technical Condition

Despite the fact that the market finished in negative territory for the week, the short-term oriented trend of the market remains intact. This is due to the fact that the S&P 500 is still trading 34 points above the bearish threshold from the 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 3,261 (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 as both envelope line of the Trend Trader Index are still increasing. This indicates that the latest declines can be still described as profit taking rather than the beginning of a longer-lasting down-trend (at least from the current point of view). This can be also seen if we focus on our Modified MACD and our Advance-/Decline 20 Day Momentum Indicator as both indicators succeeded to stay bullish, although the Modified MACD is about to flash a bearish crossover signal soon. So from a pure time-series momentum point of view, the market remains in a positive up-trend and, therefore, the latest sentiment driven washout day has still a supportive tilt. Moreover, we should not forget that the short-term oriented trend of the market is only a limited picture about the current condition of the market as it includes a lot of noise. Therefore, it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate, when the price action of the momentum of the market is slowing down. In such a situation, short- to mid-term market breadth will give guidance if the current short-term oriented bearish trend will lead to further stronger losses or if it was only caused by too much market noise (profit taking or just from a few heavy weighted stocks in the index). In other words, it will determine our degree of confidence within these trend/momentum signals. So if short- to mid-term market breadth remains strong, the impact of a short-term oriented trend-break should be quite limited in price and time. In normal circumstances, a consolidation period/sentiment driven washout-period is considered to be a healthy one as long as short-term to mid-term market breadth remains supportive or is at least forming some bullish divergences. In such a case, any short-term oriented trend break can be ignored as the market is just taking a (healthy) breather within an ongoing uptrend. Otherwise, it is highly likely that such a consolidation period is just a harbinger of a more significant pullback/correction.

From a current point of view, short-term market breadth still looks quite constructive although the recent washout has definitely left its mark on the readings of some of our short-term oriented tape indicators. This becomes obvious if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators had to take a hard hit last week. This is telling us that the underlying breadth momentum of advancing  issues and advancing volume lost further supportive ground. Basically, the same is true if we focus on the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Both gauges decreased for the week and the first one (SMA 20) also dropped below its bullish threshold. On the other hand, we still can see that the remaining market internals remain pretty robust (given the recent circumstances). This becomes quite obvious if we examine the NYSE New HighsNew Lows Indicator. There we can see that the number of stocks hitting a fresh yearly high kept trading at extremely confirmative levels, whereas the number of stocks which were pushed to a new yearly low have not shown any  stronger negative spike so far. Consequently, it was not a big surprise at all that the High-/Low-Index Daily was holding up quite well and remains, therefore, quite bullish. On top of that, we can see that the Upside-/Downside Volume Index Daily is far away from being bearish, which is another piece of evidence that the latest decline was mainly driven by profit taking (and not the result from a stronger selling pressure all across the board).

Probably the most important signal this week is coming from the contrarian side. There we can see that the latest washout-day on Friday caused a lot of fear in the option market (as the daily put-/call ratio soared). Therefore, the recent washout-day has started to have its expected impact on short-term optimism, which is definitely in line with our recent outlook. As a consequence, most of our option based indicators (Daily Put-/Call Ratio All CBOE Options, All CBOE Options Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator and the WSC Put-/Volume Ratio) softened their outright bearish signals. Nevertheless, we can see that most of them still remain quite bearish and, therefore, further (limited) selling pressure/volatility cannot be ruled out. On the other hand, we can see that the WSC Capitulation Index is still indicating a risk-on market environment, whereas the Presidential Cycle is also suggesting a consolidation period into mid-February rather than a significant pullback.

Mid-Term Technical Condition

This would be in-line with the fact that the mid-term oriented technical condition of the market still reveals a quite robust picture. This becomes obvious if we focus on the gauge from the Global Futures Trend Index, which is solidly trading in the bullish area (although we saw a stronger selling pressure last week). This can be seen as a quite bullish trend signal, as the market never faced a stronger correction with readings above 60 percent. Also our WSC Sector Momentum Indicator advanced last week and reached the highest levels for months. This signals that the majority of sectors of the S&P 500 remain in a mid-term oriented uptrend. These bullish facts are also supported by our Sector Heat Map as the momentum score from riskless money market (currently at 0%)  keeps trading below all other sectors. In our view, this is another indication that the underlying mid-term oriented time-series momentum of market still remains persistent.  Given the fact that our entire mid-term oriented indicators remain bullish or have not shown any serious signs of weakness so far, we think that any upcoming short-term oriented pullback should be limited in price and time. As a matter of fact, we strongly believe that it is definitely a way too early to bet on a major trend-reversal at the moment.

On top of that, we can see that this current mid-term oriented time-series momentum of the market is also widely confirmed by mid-term oriented market breadth (although it showed some signs of fatigue last week). Our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) were holding up quite well compared to the broad market. Moreover, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume remained stable last week and are, therefore, still 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 again increased its bullish gap last week. This indicates that the underlying momentum of advancing stocks on a mid-term time horizon still remains positive. The only weaker mid-term breadth signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150), although both indicators are still bullish from a pure signal point of view. All in all these facts are telling us that it might be a bit too early to pull the trigger yet as the current weakness can be still described as healthy in its nature (at least for now).

Long-Term Technical Condition

The long-term oriented trend of the market remains unchanged and clearly supports our view that the current consolidation still looks quite supportive in its nature. Although our WSC Global Momentum Indicator slightly decreased on very high bullish levels on Friday, it is far away from being bearish. Currently it shows us that 84% 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 a matter of fact, the current bulls-run can be still described as global in scope. Above all, our reliable Global Futures Long Term Trend Index succeeded once again to gain more bullish ground last week, which is also a very supportive momentum signal at the moment. Another quite supportive fact is the our WSC Global Relative Strength Index was holding up quite well, indicating that it might be a bit too early to panic right now. Basically, the same is true if we focus on our long-term market breadth indicators. There we can see that the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly strengthened considerably, while the SMA 200 slightly weakened last week.

Model Portfolios

As the momentum score of financials fell below average and below the one from the S&P 500 in our Sector Heat Map, we received a sell-signal for that ETF in our WSC Sector Rotation Strategy. There were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. Moreover, we are proud to announce that the WSC Dynamic Variance Portfolio reached a new all-time high last week. 

Bottom Line

Our key call remains unchanged compared to last week. With quite stretched signals within our short-term trend indicators, further sentiment driven consolidation/volatility into early February cannot be ruled out. However – from the current point of view – any further upcoming washout-days/selling pressure/consolidation period can be still categorized as non-corrective/bullish biased as the mid- to long-term condition of the market still remains outright robust. A fact, which can be also seen if we focus on our Big Picture Indicator, which is still moving around within its bullish quadrant. Thus, our strategic bullish outlook remains unchanged.

Stay tuned!