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January 10th 2021

Market Review

U.S. stocks rose for the week, sending the main benchmarks again to record levels. For the week, the Dow Jones Industrial Average advanced 1.6% to 31,097.97 to top its closing high from the previous week. The S&P 500 climbed 1.8% from last week’s close to a record of 3,824.68. Both the Dow and S&P 500 posted four-day winning streaks. The Nasdaq advanced 2.4% from last Friday’s close to 13,201.98. Most key S&P sectors ended in positive territory for the week, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell to 21.6.

Short-Term Technical Condition

After a short but hefty wash-out day on Monday, the market continued to push higher last week. More importantly, this advance was strongly confirmed by our entire short-term oriented indicators (which got back on track or even strengthened their bullish signals last week). If we analyze the pure price driven trend, we can see that the S&P 500 is now trading 131 points above the bearish threshold from the Trend Trader Index (after turning slightly neutral on Monday). Consequently, this pure price driven uptrend of the market remains intact as long as the S&P 500 keeps trading above 3,693. Given the fact that we saw mostly higher highs and higher lows within the past 20 days, both envelope lines of this reliable indicator are still drifting higher and have not formed any rounding top yet. Hence, the resistance/support levels for the S&P 500 are increasing as well, which is another quite constructive technical trend signal at the moment. If we focus on the underlying trend momentum, we can see that the Modified MACD managed to flash a bullish crossover signal on Wednesday. Therefore, it confirmed the latest all-time high of the S&P 500. Also the Advance-/Decline 20 Day Momentum Indicator has shown some strength in bullish territory recently, although it did not fully confirm the bounce of the broad index on Friday. So, form a pure momentum point of view, the uptrend of the market showed some stronger signs of recovery last week.

More importantly, short-term market breadth also improved and reveals that the upside participation within the ongoing short-term oriented uptrend turned quite broad based again. Especially the strong sell-off day on Monday was not confirmed by our tape indicators, whereas during the week all of them even strengthened their bullish signals (or turned bullish again). First of all, we saw a solid number of stocks which hit a fresh yearly high (especially at the end of the week), whereas we saw absolutely no stocks which were pushed to a new yearly low (especially on Monday). Thus, the gauge of the High-/Low-Index Daily spiked to outright confirmative levels and has, therefore, wiped out the negative tendencies from last week. This tells us that the latest gains were definitely driven by the whole market instead of being just the result of a large-cap driven rally. Another positive tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators succeeded to flash a bullish crossover signal during the week, indicating that the healthy breather has come to an end.  In other words, it showed that the current short-term oriented uptrend is again supported by an increasing number of advancing issues and advancing volume. In such an environment, the chances for a stronger and sustainable momentum-crash (trend-reversal) should remain extremely low. A fact which can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges booked a solid weekly gain (especially the SMA 20), indicating that the recent gains are well supported by the majority of all listed U.S. stocks. Another encouraging fact is that the short-term up-volume (Upside-/Downside Volume Index Daily) also gained quite confirmative bullish ground last week. With such solid signals all across the board, it is highly unlikely that the current melt-up will run out of fuel soon – at least from the current point of view.

On the contrarian side, we can see that the strong washout-day on Monday only had a short-lived impact on market sentiment, since it slightly started to ramp up again afterwards. This can be seen if we focus on our relevant option- and sentiment based indicators, which slightly turned negative or showed again bearish tendencies last week (WSC Dumb Money Indicator, WSC Put-/Volume Ratio and the All CBOE Put-/Call Ratio Daily). Moreover, we can see that a lot of investors switched (or were forced to switch) into the bullish camp (Bulls & Bears survey), which also partly explains the strong start into the year. This shows that a lot of good news is already priced in, leaving the market vulnerable for temporary negative surprises. However, given the strong tape condition we would not expect anything more than typical short-lived washout-evens (like the one we saw at the beginning of the week). This might also explain why the Smart Money Flow Index has shown some positive strength recently, whereas the WSC Capitulation Index is far away from indicating a risk-off market environment.

Mid-Term Technical Condition

The mid-term oriented up-trend of the market still looks outright healthy for the time being. Thus, it is a way too early to turn bearish from a pure strategically point of view. First, the gauge of the reliable Global Futures Trend Index managed to stay above its extremely bullish 90 percent threshold (98%). Second – from a pure price point of view – the mid-term oriented uptrend remains also well intact since the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far (and keeps trading at outright bullish levels). This is telling us that the majority of all underlying sectors within the S&P 500 remain in a powerful mid-term oriented price driven uptrend at the moment. This can be also seen if we examine our Sector Heat Map as the momentum score of all sectors remains above the one from riskless money market (which remained unchanged at 0%). As pointed out in our previous comment, these facts are another indication that it might be a way too early to bet on a sustainable trend-reversal.

Over and above, the powerful mid-term oriented uptrend is still strongly backed by mid-term oriented market breadth. Hence, the current bull market is definitely not at risk of fading out soon. Once again, the Modified McClellan Oscillator Weekly continued to show a widening bullish gap last week, indicating that the underlying tape momentum remains quite positive for the time being. And also all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) increased again, reaching their highest readings for months or even years. Consequently, all of them are fully confirming the latest record of the S&P 500! Also, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) showed a solid improvement for the week. However, by far the most important mid-term oriented breadth signal is based on the fact that mid-term oriented advancing issues as well as mid-term oriented up-volume have risen to outright confirmative levels in the last couple of trading sessions. With such strong readings all across the board, our bullish base case scenario remains unchanged since any potential (sentiment driven) weaknesses should turn out to be limited in price and time.

Long-Term Technical Condition

Also the long-term oriented trend of the market continued to show further signs of improvements last week. The Global Futures Long Term Trend Index keeps trading at the highest level for years, indicating that the long-term oriented up-trend of U.S. equities is still gaining momentum on high bullish levels. Basically, we receive the same picture globally. The WSC Global Momentum Indicator shows that 100% 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 all of them (SMA 200, 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 Dynamic Variance Portfolio and the WSC Sector Rotation Strategy. Moreover, we are proud to announce that the WSC Model Portfolio Composite and the WSC Sector Rotation Strategy reached a new high during last week.

Bottom Line

Given the fact that the current uptrend is backed by a broad basis and on multiple time-frames, our strategic base case scenario remains unchanged compared to last week. On a very short-time frame further sentiment driven wash-out events cannot be ruled out. However, given the fact that short-term market breadth turned quite bullish again, any upcoming weaknesses should be limited in price and time (instead of being the start of a longer-lasting and volatile consolidation period). A fact, which can be also observed if we focus on our Big Picture Indicator (since its gauge already jumped back into its bullish quadrant in the middle of the week). As long as this is the case, it might be a way too early to take any counter-trend activities. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should buy into any upcoming weaknesses!

Stay tuned!