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April 4h 2021

Market Review

U.S. stocks finished out the holiday shortened pre-Easter week with gains. For the week, the Dow Jones Industrial Average eked out a gain of 0.2% to end at 33,153.21. Crossing the 4,000 threshold for the first time, the S&P 500 finished at a record of 4,019.87 and booked a weekly but quite volatile gain of 1.1%. The Nasdaq jumped 2.6% during the week to end at 13,480.10. Wall Street just wrapped up March with solid gains. The Dow Jones Industrial Average and the S&P 500 climbed 6.6% and 4.3%, respectively, last month. The Nasdaq gained 0.4% in March. All industry groups in the Standard & Poor’s 500 Index ended in positive territory for the week, led by the technology sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 17.3.

Short-Term Technical Condition

Not surprisingly, the short-term oriented up-trend of the market continued to strengthen last week. Currently, the S&P 500 trades more than 69 points above the bullish envelope line from the Trend Trader Index. So, from a purely price point of view, the short-term oriented uptrend remains intact as long as the S&P 500 does not close below 3,902. Moreover, both envelope lines of the Trend Trader Index started to increase on a fast pace, which is another constructive technical signal at the moment. More importantly, the momentum of this price driven uptrend has also started to accelerate recently (which is another important bullish fact at the moment). The Modified MACD turned bullish on Monday, whereas the  Advance-/Decline 20 Day Momentum Indicator also jumped to its highest level for weeks. As a result our entire indicators closed at quite supportive (or even at confirmative) levels and, therefore, the latest all-time high looks quite solid at the moment (at least from a purely trend point of view).

This view is also partly confirmed by short-term market breadth as we saw stronger signs of improvements last week. A quite encouraging tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Although both indicators are still trading in negative territory, the first one nearly flashed a bullish crossover signal and the second one softened its bearish ride. These facts are telling us that the underlying tape momentum started to recover, albeit on low levels. This can also be seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). There we can see that the upside participation increased compared to the previous week and got back into bullish territory (SMA 20) or strengthened its bullish signal (SMA 50). Although this looks quite bullish from a purely signal point of view, both signals could be definitely a bit stronger if we consider the current level of the S&P 500.  A fact, which can also be observed if we focus on the NYSE New Highs/New Lows Indicator Daily. There, we can observe that the number of new lows decreased significantly, whereas the new highs closed at quite supportive, albeit not really confirmative, levels. This shows that the latest high was driven by a combination of a stronger recovery in the broad market as well as by a few strong performing mega-stocks in the index. In total, the ratio between new highs and new lows looked quite healthy as the High-/Low-Index Daily managed to widen its bullish gap significantly last week. Thus, the current technical condition of the market transformed back into a more supportive set-up than compared to last week. Worth mentioning is the fact that as long as we have more new highs than new lows, the underlying tone should remain supportive. A fact, which can be also observed if we focus on the Upside-/Downside Volume Index Daily. All in all, the underlying tape condition recovered last week and has, therefore, diminished its negative divergence we talked about last week. This can definitely be interpreted as a quite bullish development, although the overall tape condition still looks a bit weak-kneed from an absolute point of view.

The situation on the contrarian side remains quite unchanged compared to last week. The number of bulls in the AII Bulls & Bears continued to increase on quite elevated levels, whereas the Dumb Money Indicator is also indicating increased speculation. This shows that a lot of firepower is already invested and, therefore, the expected speed and magnitude of the recent rally is highly likely to slow down in the next couple of weeks. A fact, which is also supported from a seasonal point of view (Presidential Cycle & Decennial Cycle), since the market should remain in a slow-growth period at least up the second quarter. On the other hand, we can see that the option market remains quite neutral whereas the WSC Capitulation Index is still indicating a risk-on market environment.

Mid-Term Technical Condition

If we analyze the mid-term oriented technical condition of the market, the risk of an imminent market top scenario also softened since the gauge of the Global Futures Trend Index showed stronger signs of bottoming out in the bullish consolidation area (after its fast and therefore, quite worrisome decline from the previous week). This is a quite important signal, as it shows that the underlying mid-term oriented trend of the market has recovered recently. Although this could be interpreted as quite positive signal, we should also not forget that its gauge should be definitely a bit stronger (if we consider the recent record of the S&P 500). Thus, the market remains vulnerable for further slow-growth down the road. However, as long as the gauge of this reliable indicator remains above 60%, it is a way too early to issue a strategic sell signal (since the market internals have definitely a bullish tilt). In addition, the WSC Sector Momentum Indicator succeeded to increase last week. This is an indication that most sectors of the S&P 500 are in a strong mid-term oriented uptrend. This setting is also supported by our Sector Heat Map since the momentum score of the riskless money market remains at 0%. Consequently, it is definitely a bit too early to pull the trigger at the moment since the risk of a stronger and sustainable short-term oriented pullback looks quite limited for the time being.

Examining mid-term oriented market breadth reveals also a recovery as the picture generally improved compared to the previous weeks. This becomes obvious if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line), as all of them gained bullish ground last week. Nevertheless, their increases could have been stronger if we consider that the broad index hit a new record last week. Also, the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) increased for the week. The only weaker signals are coming from the Modified McClellan Oscillator Weekly as well as from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Although all three gauges were holding up quite well though, they did not show any real improvements last week. Hence, they are not fully confirming the bounce of the S&P 500, but still, they are indicating that the overall tape momentum remains positive for the time being. So, all in all, our mid-term oriented tape indicators are telling us that any upcoming short-term oriented weaknesses should not lead to a stronger pullback at the moment.

Long-Term Technical Condition

The long-term oriented trend of the market remains positive. Although the WSC Global Momentum Indicator slightly decreased last week, it indicates that still 97% 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 has not shown any signs of weakness recently, signaling that the long-term oriented trend of U.S. equities remains intact. In addition, the relative strength of all risky markets was still holding up quite well compared to treasuries. If we examine our long-term oriented tape indicators, we can see that the SMA 200 improved, while the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly weakened.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. Since the momentum score of technology dropped below average and below the momentum score of the S&P 500 we received a sell signal for that sector within our WSC Sector Rotation Strategy.

Bottom Line

If we consider the recent recovery within our indicator framework, the market has definitely started to sort out its negative divergences we mentioned last week. As a result, the overall tone should remain quite bullish. A fact, which can be also observed if we focus on our WSC Big Picture Indicator, which managed to jump back into its outright bullish quadrant already at the beginning of the week. As a result, our strategic bullish outlook remains unchanged compared to last week. The only major reason of concern is the high bullish sentiment at the moment. With such a high number of bulls on Wall Street a lot of positive news is priced in already – leaving the market vulnerable for disappointments. Consequently, there is still a high chance left that the current volatile but bullish biased slow growth period will continue for a while. In such an environment, we think it would make sense that aggressive traders should remain flexible (with a long bias), whereas conservative members should remain invested.

Stay tuned!