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January 3rd 2021

Market Review

U.S. stocks finished the final week in positive territory with the main benchmarks reaching new record highs. The Dow Jones Industrial Average gained 1,4% over the week to close at a record of 30,606.48. The S&P 500 recorded the same weekly gain of 1.4% and finished also at a record of 3,756.07. The Nasdaq ended at 12,888.28 and increased 0.7% over the past week. Major indexes finished 2020 solidly. The tech-heavy Nasdaq gained 43.6% this year, posting its best one-year performance since 2009. The S&P 500 closed 2020 with a 16.3% gain. The Dow Jones Industrial Average rose 7.3% in 2020. Nearly all key S&P sectors ended in positive territory for the week, led by the utilities sector; the energy sector was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 22.8.

Short-Term Technical Condition

From a pure price point of view, the short-term trend of the market remains intact as the S&P 500 closed 76 points above the bearish threshold from the Trend Trader Index. Consequently, this pure price driven uptrend of the market remains intact as long as the S&P 500 keeps trading above 3,680. Given the fact that we have seen higher highs and higher lows for the past 20 days, both envelope lines of this reliable indicator are still drifting higher. Hence, the resistance/support levels for the S&P 500 are increasing as well, which is another quite constructive price trend signal for now. Nevertheless, the situation looks quite different if we analyze the underlying momentum of that short-term oriented price-driven uptrend. There we can see that the Modified MACD has still not succeeded to flash a bullish crossover signal yet, whereas the Advance-/Decline 20 Day Momentum Indicator has also not shown any serious improvements in the latest trading sessions (although its gauge is still trading in solid bullish territory). As a result, both indicators are showing a quite bearish divergence to the S&P 500 (especially if we consider the fact that the broad index hit a record closing on Thursday). These are early indications that the current price driven rally might slightly run out of steam soon (which of course increases the risk of a potential short-term oriented trend break). As you probably know by now, a short-term oriented trend break must not necessarily lead to further strong losses since it could be just the result of a healthy breather. As a matter of fact, we analyze if such a potential slow-down or even a trend break is caused by a few heavy weighted stocks (e.g. Apple, Facebook, Alphabet, Tesla) in the index, or if it is a result of a weak demand all across the board. If the second one holds, a potential trend-break could easily transform into a stronger pullback immediately since there is no safety net around to cushion such a move. Consequently, short- to mid-term market breadth will give us further guidance what will happen if we see a short-term oriented price driven trend break in the next couple of trading sessions.

Analyzing short-term oriented market breadth also reveals that a healthy breather is getting increasingly likely. This is based on the fact that most of our short-term oriented tape indicators started to recede from very high bullish levels. Hence, the current situation can be described as bullish but not fully confirmative. Both, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to widen their bearish gaps last week. This is telling us that the underlying tape momentum (advancing volumes and advancing issues) of the broad market continued to weaken last week. This can be also observed if we analyze the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges are still trading above or (far) above their 50 percent threshold, they did not fully confirm the latest record of the S&P 500 (especially the SMA 20). Consequently, the latest record high was achieved with a slightly weaker basis, meaning that it was mainly driven by large-caps and not by a stronger demand across the board. This indication is underpinned by the fact that we saw a small reduction in the number of stocks hitting a fresh yearly high last week. Hence, the bullish signal of the High-/Low Index Daily slightly weakened for the week. So, all in all, the overall tape situation is telling us that the chances for a healthy breather/slow-down are definitely accumulating. However, right now, it is still a bit too early to get too nervous about that fact since any upcoming slow-down/consolidation can be still categorized as healthy in its nature. This is based on the fact that the underling tape condition still remains too bullish (albeit not confirmative) to justify a stronger and sustainable trend-reversal at the moment. Nevertheless, the signs for a healthy breather are accumulating and, therefore, we would not be surprised to see some form of slow-down or even increased (limited) down-testing ahead.

On the contrarian side, we can see that the increased sentiment driven volatility over the past weeks had definitely it designated impact on short-term optimism. This is mainly due to the fact that most of our relevant option- and sentiment based indicators have turned neutral recently (WSC Put-/Volume Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator and the AII CBOE Call-/Put Ratio Oscillator). Nevertheless, we can see that the recent sentiment driven volatility had hardly any stronger impact on dumb money (WSC Dumb Money Indicator, AII Bulls & Bears Survey) or on the bullishness in the option market (z-score of the All CBOE Put-/Call Ratio Daily). Consequently, further increased sentiment driven washout-events can be expected. If we put this into context with weakening market breadth, we would not be surprised to see some kind of stronger washout-events ahead. Another warning signal is coming now from the Smart Money Flow Index, which has also not confirmed the latest high of the Dow Jones Industrial Average. The only positive signal is coming from the WSC Capitulation Index, which is still showing a risk-on market environment at the moment. This would fit into our view, that any upcoming selling pressure would just turn out to be part of a healthy consolidation process (at least from the current point of view).

Mid-Term Technical Condition

This view is also confirmed by the fact that the mid-term oriented up-trend of the market still looks quite strong for the time being. Hence, it is a way too early to get bearish from a pure strategic point of view. To be more precise, the gauge of our reliable Global Futures Trend Index still keeps trading at the upper end (98%) of its extremely bullish trading area and has not shown any weaknesses for the past 4 weeks. Additionally, from a pure price point of view the mid-term oriented uptrend remains also well intact since the WSC Sector Momentum Indicator finished the week 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 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 at 0%. These facts are another indication that the risk appetite among investors remains quite high.

Another main fact why we believe that it is still a way too early to panic right now is due to the fact that the current mid-term oriented up-trend of the market is still strongly confirmed by mid-term oriented market breadth. As long as this is the case, the current bull market is definitely not at risk of fading out soon. To be more precise, 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 once again, all our advance-decline indicators rocketed for the week and have reached their highest readings for months (Advance-/Decline Line Daily, Advance-/Decline Line Weekly) or were at least holding up quite well (Advance-/Decline Volume Line). Therefore, most of them have fully confirmed the latest record of the S&P 500 (on a mid-term time perspective). Another encouraging signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150), as both gauges have not shown any signs of weaknesses so far. Also, mid-term oriented advancing issues as well as mid-term oriented up-volume were holding up quite well. With such solid readings all across the board, we remain outright bullish at the moment, since any potential (sentiment driven) weaknesses or consolidation period should turn out to be limited in price and time.

Long-Term Technical Condition

The same applies for the long-term oriented picture of the market as we saw improvements here as well. Currently, 100% of all local equity markets (which are covered by the Global Momentum Heat Map) are trading above their long-term oriented trend lines, since the WSC Global Momentum once again succeeded to stay at the highest level possible. This is another outright strong indication that the current bull-market remains global in scope. Therefore, it is not a big surprise at all that the Global Futures Long Term Trend Index continued to gain further strengths, showing that the long-term oriented uptrend of U.S. equities remains well intact. Above all, we can see that the relative strength of nearly all risky markets remains positive, which is another indication for the current risk-on market environment. More importantly, this long-term oriented uptrend is widely backed by strong readings in our long-term oriented market breadth indicators (High-/Low Index Weekly, the Modified McClellan Volume Oscillator Weekly, SMA 200).

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, the WSC Sector Rotation Strategy and the WSC Inflation Proof Retirement Portfolio reached a new high during last week.

Bottom Line

If we consider the quite bullish readings on a mid-term time horizon, we think it is a way too early to bet on a major trend-reversal. Therefore, our strategic bullish outlook remains unchanged compared to last week. Nevertheless, given quite persistent optimism among the crowd together with increasing bearish divergences within some of our short-term oriented indicators the air is getting slightly thinner on the upside. As a matter of fact, the chances for a healthy but quite rocky consolidation period are definitely increasing on a very fast pace. So all in all, we would advise our conservative members to hold their equity exposure, whereas aggressive short-term traders should remain bullish biased as long as our Big Picture Indicator keeps moving around within its supportive quadrants. Nevertheless, given the fact that we could see some increased volatility (whereas even a limited short-term oriented trend-break cannot be ruled out), we also think it is definitely time for aggressive traders to reduce high leverage/high beta trades or take profits from highly sensitive call options/short volatility trades.

Stay tuned!