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March 14th 2021

Market Review

U.S. rallied strongly bounced for the week, with the major indexes posting new record highs. For the week, the Dow Jones Industrial Average gained 4.1% to close at a new all-time high of 32,778.64. The S&P 500 ended the week 2.6% higher at 3,943.34. The Nasdaq closed at 13,319.86 and recorded a weekly gain of 3.1%. All key S&P sectors ended in positive territory for the week, led by the discretionary sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 20.7.

Strategy Review

Over the past three weeks, we received a growing number of evidence that the market was at risk of entering a corrective top-building process. To be more precise, a typical top building process always starts with a limited pullback (3-7%), which is then followed by a stronger counter-trend rally that often pushes the market towards, or even slightly above its old bull market high. If such a counter-trend rally is not confirmed by improving market breadth, it will not be sustainable in its nature. The result is a typical bull-trap, as the market faces another but stronger down-leg which pushes the market to a new low. This is then of course, just the beginning of a longer-lasting down-trend. On the other hand, if such a bounce is accompanied by an improving tape condition, the whole event can be categorized as healthy breather/process within an ongoing bull market. Worth mentioning is the fact that such a process could take days or even weeks, whereas the tilt between supportive and corrective could get also quite narrow sometimes. In rare circumstances, it is also possible to see an immediately correction-leg, without any corresponding bounce event.

Basically, that was the main reason why we recommended our conservative members to place a stop-loss limit last week. Although most of our indicators still looked quite bullish from a pure signal point of view, the incredible speed and the magnitude of the deterioration within our indicators looked quite worrisome back then. Even though these signals were neglecting an immediate correction scenario in the first place, the situation could have easily escalated within days (if the deterioration had continued with such a speed). In the end, no stop-loss limit has been triggered so far as the market strongly bounced last week. Anyhow, the big question is if the recent bounce is just part of a typical market top or if it is the beginning of a new and sustainable up-trend?

Short-Term Technical Condition

From a purely price point of view, the short-term oriented trend of the market turned positive again. This is based on the fact that the S&P 500 closed 32 points above the bullish threshold from the Trend Trader Index. As a result, the price driven trend should remain supportive as long as the S&P 500 does not drop below 3,851 (bearish envelope line of the Trend Trader Index). Although this can be interpreted as positive price signal in the first place, we can also see that both envelope lines continued flattening out. As a result, the current price trend of the market has still somehow a flattish tilt. Basically, the same is true if we analyze the underlying trend momentum of this price driven trend. Although the Modified MACD turned bullish on Friday, its signal is still extremely weak-kneed at the moment. As a matter of fact, it has not fully confirmed the latest recovery of the S&P 500. The same is true if we focus on our Advance-/Decline 20 Day Momentum Indicator. Despite the fact that the gauge of this reliable indicator strengthened for the week, it has not fully confirmed the latest high of the S&P 500. Given the fact that this indicator tends to be a leading one, further short-term volatility cannot be ruled out. Furthermore, if we consider the fact that the recent recovery rally might be just part of a typical top building process, these two non-confirmative signals can be definitely interpreted as short-term warning signals (at least from a purely trend point of view).

Analyzing short-term market breadth reveals a completely different picture. There we can see that the recent upside participation within the recent recovery rally was surprisingly broad-based. As a result, the recent recovery rally has definitely the potential to be the beginning of a new and sustainable up-trend rather than being the vanguard of a major market top. During the whole previous week we saw outright strong spikes in the number of stocks hitting a fresh yearly high, whereas there were hardly stocks around which dropped to new lows. As a result, the High-/Low-Index Daily has formed a quite bullish divergence to the current level of the S&P 500 as it widened its bullish gap significantly last week. These are definitely first indications of a high-quality recovery. A fact which can also be seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators managed to flash a bullish crossover signal last week, indicating that the market internals (advancing issues and advancing volume) are gearing up momentum again. A fact that is also confirmed by the Upside-/Downside Volume Index Daily since its bullish gauge jumped back to quite confirmative levels. Another strong tape signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50) since the majority of stocks participated in the recent recovery. With such confirmative signals all across the board the current short-term oriented uptrend of the market looks quite sustainable in its nature. Thus, it might be a bit too early to bet on another significant down-leg at the moment.

On the contrarian side, we can see that the market is quite overbought (Advance-/Decline Ratio and Upside-/Downside Volume Ratio) and, therefore, we would not be surprised to see some form of profit taking ahead. Apart from that fact, there are currently hardly any red flags visible. The option market is far away from being excessive (AII CBOE Put-/Call Ratio, Equity Options Call-/Put Ratio Oscillator, AII CBOE Call-/Put Ratio Oscillator and the WSC Put-/Volume Ratio Oscillator). The WSC Capitulation Index is still indicating a risk-on market environment, since the Smart Money Flow Index has not increased its bearish divergence recently. The only negative signals are coming from the WSC Put-/Volume Ratio, the WSC Dumb Money Indicator and from a seasonal point of view (Presidential Cycle). There we can see that the market environment tends to be quite sideways volatile for the next couple of months. However, given the current short-term oriented tape condition of the market, the downside potential should be definitely capped at the moment.

Mid-Term Technical Condition

This bullish view is supported by the fact that our entire set of mid-term-oriented indicators managed to strengthen their bullish signals last week. Probably the most important signal was that the gauge of our reliable Global Futures Trend Index bottomed out last week and is, therefore, heading back to the upper edge of the bullish consolidation area (currently at 84%). Consequently, as long as this gauge does not show stronger signs of negative momentum again, the underlying tone should remain positive. Hence, the risk of a major market top is definitely off the table – at least from a current point of view. This coincides with the fact that also the purely price driven mid-term oriented uptrend of the market also improved last week (WSC Sector Momentum). A fact, which can be also observed if we focus on our Sector Heat Map since the momentum score of the riskless money market dropped 9 percentage points and is, therefore, trading well below all relevant key sectors (except utilities).

More importantly, we also see stronger improvements in mid-term oriented market breadth (although the S&P 500 only gained 2.4% for the week). In particular, the stronger improvements in mid-term oriented advancing issues as well as mid-term oriented up-volume are telling us that the latest demand was quite broad based in its nature. A fact, which can be also observed if we focus on the Modified McClellan Oscillator Weekly which managed to get back on track (after having formed a quite threatening rounding top two weeks ago). This is telling us that the underlying momentum of advancing stocks on a mid-term time horizon improved. Another sound mid-term breadth signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) as both gauges finished the week at quite confirmative levels (which is also neglecting a imminent blow-off top market scenario). A fact, which is also underlined by the fact that our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily and Advance-/Decline Line Weekly) rocketed to record levels last week. In the end, mid-term oriented market breadth is telling us that any upcoming short-term oriented weaknesses should not lead to another significant down-leg at the moment.

Long-Term Technical Condition

Even the long-term oriented trend of the market showed stronger signs of improvements last week. The Global Futures Long Term Trend Index has not shown any weaknesses so far, 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 now trading above their long-term oriented trend lines. Thus, the current bull market still looks quite 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 U.S. Treasuries. If we examine our long-term oriented tape indicators (SMA 200, Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly), we can see that all of them also improved significantly last week.

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 Consumer Discretionary rose again above average and above the score of the S&P 500 we received a buy signal for that sector within our WSC Sector Rotation Strategy. Moreover, we are proud to announce a new all-time high in the WSC Sector Rotation Strategy.

Bottom Line

Although we had expected to see some kind of low-quality bounce to complete a text-book like top-building process in our base case scenario, the recent recovery rally was definitely backed by an extremely broad basis. As a result, the recent move can be definitely categorized as healthy in its nature, which is of course neglecting any kind of corrective top-building scenario – at least for the moment. Consequently, the underlying tone turned quite bullish again and, therefore, any upcoming weaknesses should not lead to stronger selling pressure down the road. If we consider the underlying tape condition, even the opposite is true. A fact that can also be observed if we focus on our Big Picture Indicator, as its gauge jumped back into its outright bullish quadrant already on Friday. Consequently, we would recommend our conservative members to remove their stop-loss limit (and increase their exposure on weak-trading days for those who took profit). Aggressive traders should focus on the long-side again as long as our short-term oriented indicator framework remains constructive.

Stay tuned!