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July 26th 2020

Market Review

U.S. stocks finished a volatile week slightly in negative territory. For the week, the Dow Jones Industrial Average slipped 0.7% to finish at 26,469.89, snapping a three-week winning streak. The S&P 500 dipped 0.2% in five trading days to end at 3,215.63. The broad-index posted its first weekly decline in four. The Nasdaq finished at 10,363.18 and lost 1.3% this week for its first back-to-back weekly losses since May. Among the key S&P sectors, energy was the best weekly performer, while technology dragged. Most key S&P sectors finished in red, led by financials. The CBOE Volatility Index (VIX) – seen by many investors as the best “fear gauge” on Wall Street – traded above 25 on Friday.

Short-Term Technical Condition

Even though the market finished in negative territory for the week, the short-term oriented trend of the market remains intact. The S&P 500 is still trading 66 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 3,149 (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 lines of the Trend Trader Index are still increasing steadily. This indicates that the latest declines can be still described as healthy breather 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 looks like it 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. 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.

From a current point of view, short-term market breadth still looks quite constructive. This becomes obvious if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators even succeeded to (slightly) widen their bullish gaps. This is telling us that the underlying breadth momentum of advancing issues and advancing volume gained 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). Although both gauges decreased at the end of the week, they were holding up quite well and finished the week nearly unchanged. Also, the remaining market internals remain quite robust. Especially 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 quite confirmative levels, whereas the number of stocks which were pushed to a new yearly low have not shown any 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).

On the contrarian side we can see that the latest volatility had a quite healthy impact on sentiment, since most of our option based indicators (All CBOE Put-/Call Ratio, Equity Options Call-/Put Ratio Oscillator, WSC Put-/Volume Ratio and the WSC Dumb Money Indicator) softened their bearish signals or even turned neutral. This shows that the fear among market participants is increasing a again – a fact which can be also observed if we have a closer look at the AII Bulls & Bears Survey as the number of bears increased towards record levels again. As a matter of fact, there is still a lot of dry powder on the sideline which could drive prices higher. Moreover, it leaves the market better positioned to rally on small positive surprises. Nevertheless, we would not be surprised to see some further increased (bullish biased) volatility ahead, since the option market is still a bit too complacent in our point of view. However, from a pure cyclical point of view (Presidential Cycle), the market could also face some tailwinds in the next couple of weeks. This coincides with the fact that the WSC Capitulation Index is also indicating that the market might get back into a risk-on mode soon.

Mid-Term Technical Condition

This view is in-line with the fact that the mid-term oriented technical condition of the market also reveals a quite robust picture. This becomes obvious if we focus on the gauge from the Global Futures Trend Index. It did not only slightly strengthen its bullish signal (also at the end of the week when the whole market decreased), but it is also solidly trading in the bullish area and above the 90% threshold. This can be seen as a very bullish trend signal, since the market never faced a stronger correction with a rising gauge and readings above 60%. On top of that we can see that our WSC Sector Momentum Indicator continued to advance and has, therefore, reached the highest levels for months. This signals that most 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 10.5%) keeps trading below all other sectors (except energy). 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 a way too early to bet on a major trend-reversal for the time being.

On top of that, we can see that this current mid-term-oriented time-series momentum of the market is also fully confirmed by mid-term-oriented market breadth, which has absolutely not shown any signs of fatigue so far. First of all, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) improved during the week. Moreover, we can see that also mid-term oriented advancing issues as well as mid-term oriented up-volume improved last week and are, therefore, 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 widened its bullish gap last week. This indicates that the underlying momentum of advancing stocks on a mid-term time horizon remains positive. And finally, also the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) slightly improved on a weekly basis. All these facts are telling us that it is too early to chance our strategic bullish outlook since the current weakness can be still described as healthy in its nature rather than being the start of a major down-turn.

Long-Term Technical Condition

The long-term oriented trend of the market also showed stronger signs of improvements last week. The WSC Global Momentum Indicator increased by another 3 percentage points last week and signals that now 55 percent 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 pointed out several times, this is a quite supportive technical signal, as it shows that the current rally/recovery is globally in scope. And this is another indication for our case, that the current rally could push the market higher within the next weeks. Furthermore, our WSC Global Relative Strength Index strengthened, signaling increased risk-appetite among investors. Another strong signal is coming from our WSC Long Term Trend Index, which continued to improve last week. Examining our long-term market breadth indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average) also reveals that all of them continued to strengthen.

Model Portfolios

If we have a closer look at our Model Portfolios, we can see that there were no changes in the allocation advice from the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. As the underlying momentum score of Materials and Health Care rose above average and above the one from the S&P 500, we received a buy signal for these two ETFs within our WSC Sector Rotation Strategy. Moreover, we are proud to announce that the WSC All Weather Portfolio reached a new all-time high last week.

Bottom Line

With broadening strengths across the board, we received further confirmation that the current summer rally is not at risk of fading out soon. Thus, any upcoming (sentiment driven) breather should turn out to be limited in price and time. In addition, there is still enough dry powder left to push prices higher since the number of bears on Wall Street remains high. As a result, we stick to our strategic bullish outlook as we are expecting further gains into deeper summer. A fact which can also be observed if we focus on our Big Picture Indicator, which is still moving around within 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 it is a way too early to bet on a major trend reversal. However, given the still somehow increased greed within the option market it could be also possible to see further increased volatility (to dampen short-term optimism). Consequently, aggressive traders should focus on buying the dips instead of chasing the market too aggressively on the upside, whereas conservative investors should remain invested. Stay tuned!