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March 20th 2022 |

Key Takeaways

  • We upgrade our strategic outlook from cautious to bullish
  • New uptrend is establishing but expect high volatility
  • Short-term oriented indicators critical to watch within the next couple of days
  • Time to get back into the market buy building up exposure (especially on weak trading days)

Market Review |

U.S. stocks posted strong gains for the week. The Dow Jones Industrial Average gained 5.5% week to date to close at 34,754.93. The S&P 500 finished at 4,463.12 and rocketed 6.1% this week. The Nasdaq jumped 8.1% for the week and finished at 13,893.84. Nearly all key S&P sectors succeeded to close in positive territory for the week, led by the discretionary sector. Energy was the only loser. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 23.9.

Short-Term Technical Condition

After the strong gains, the market was able to get back into a short-term-oriented uptrend last week. From a purely price point of view, the S&P 500 managed to close 117 points above the bullish envelope line of the Trend Trader Index. This is a sign, that the latest gains could have, indeed, the potential to be the beginning of a new uptrend rather than being just an oversold bounce. This view is also based on the fact that Modified MACD flashed a solid bullish crossover signal last week. This shows that the positive price trend is now also backed by strong momentum. Nevertheless, there is still a chance left that the latest gains will turn out to be an oversold bounce rather than the beginning of a new and sustainable uptrend. The main rationale behind that is that the current up-trend still looks a bit fragile in its nature since both envelope lines of the Trend Trader Index have still been drifting lower so far. Additionally, we can see that the Advance-/Decline 20 Day Momentum Indicator has not turned bullish yet (although it recovered strongly last week). As pointed out in our several times in our previous market timing forecasts, it is not unusual that some or even all of our short-term-oriented trend indicators tend to improve (or even turn bullish) during a stronger oversold bounce within an longer-lasting correction cycle. Therefore, the main challenge in such a market environment is to differentiate if such stronger gains have the potential to transform into a new and sustainable up-trend or if they were just the result of an oversold bounce (mainly driven by short-covering). To do so, analyzing the participation rate within that trend will give further guidance since a healthy and sustainable trend should be always backed by the broad market and not only be driven by a few heavy weighted stocks in the index.

Analyzing the upside participation rate of the broad market within the latest gains indicates a quite strong demand. Thus, the latest gains have definitely the potential to be the beginning of a longer-lasting recovery rather than just being an oversold bounce. The latest rally was definitely supported by strongly surging advancing issues and advancing volume on NYSE (since the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed strong bullish crossover signals last week). A fact, which can also be observed if we focus on the Upside-/Downside Volume Index Daily which shows that the volume of advancing stocks has now finally exceeded the volume of declining stocks.  Consequently, the latest recovery was driven by the whole market and not only by a few heavy weighted stocks in the index (which is a quite healthy tape signal for the time being). 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). Both indicators recorded a strong weekly surge and also managed to jump back into bullish territory last week. This reveals that the majority of U.S. listed stocks got back into a short-term-oriented uptrend again. Another solid bullish signal is coming from the NYSE New Highs minus New Lows Indicator since we saw a strong reduction in the number of new lows throughout the week (whereas on Friday the new highs finally overtook the new lows). This is telling us that the latest gains were also driven by the broad market and were not only the result from short-covering (since short-covering reduces just the number of new lows but does not increase the number of new highs). Still the number of new highs could be much stronger if we consider the weekly performance of the broad index. Consequently, the averaged new highs and new lows (High-/Low-Index Daily) remains bearish from a purely signal point of view. All in all, the positive trend (time-series momentum) of the S&P 500 is now backed by a broader basis. Therefore, the latest gains have definitely the potential to mark the start of a new and sustainable uptrend rather than just  being an oversold bounce (like the one in late January until mid-February). Nevertheless, we should not forget that some of our short-term-oriented tape indicators could still be a bit stronger from an absolute level and, therefore, we would not be surprised if the pace is likely to slow down a bit in the next couple of trading sessions.

Sentiment-wise we can see that the market is quite overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Ratio Daily). Thus, we would not be surprised to see some choppy sessions ahead. On the other hand, we can see that Smart Money continued to build up exposure (Smart Money Flow Index and the WSC Capitulation Index), whereas the number of bears in the AII Bulls & Bears survey dropped to contrarian levels. This is quite trend-confirmative since there is enough fire power on the side-line to push prices higher. On the other side, we can see that the readings within most of our option based indicators (Daily Put-/Call Ratio All CBOE Options, the AII CBOE Call-/Put Ratio Oscillator and the WSC Put-/Volume Ratio) remain neutral to modestly bullish. In our option, the fear within the option market still looks a bit subdued for a typical bottom. Thus, it could be possible that a potential new uptrend comes along with increased volatility.

Mid-Term Technical Condition

The mid-term-oriented condition of the market still looks a bit weak-kneed at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index is still trading closely above the bearish threshold (21.7%) and far below its important 60% threshold. As already mentioned a couple of times, from a purely formal point of view, the current correction cycle is not over yet. Therefore, the recent recovery still looks quite fragile in its nature – at least for now. Hence, it was encouraging to see that the gauge of the Global Futures Trend Index started to bottom out and additionally has shown some small signs positive momentum recently.  As long as this is the case, the overall situation for the short-term should be supportive. A fact, which can also be observed if we focus on the WSC Sector Momentum Indicator (which measures the purely mid-term oriented price trend of the market). Although this indicator still remains bearish, it has shown some kind of stabilization recently. This fact is also illustrated in our Sector Heat Map as the momentum score of riskless money market dropped by 5 percentage points last week to end at 28.4%. Although these signs can be interpreted as a positive development, the relative strength of riskless money market still remains quite high from an absolute point of view.

The mid-term-oriented upside participation rate shows a quite improving picture. This is based on the fact that our entire advance-decline indicators significantly increased for the week (Advance-/Decline Volume Line, Advance-/Decline Line Daily and the Advance-/Decline Line Weekly). Hence, they are fully confirmed the latest gains of the S&P 500. Also, the gauges of the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) strongly increased, although they have not succeeded yet to get back into the bullish area. This shows that the mid-term-oriented negative trend has started to narrow recently. On the other hand, we can see that the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly have not improved at all. This shows that the number of mid-term-oriented advancing issues and mid-term-oriented up-volume remains weak. Basically, the same is true if we focus on the Modified McClellan Oscillator Weekly. Right now, this is not an imminent show-stopper, but if we do not see a stronger recovery here, the risk that the latest recovery will be faded again would remain high.

Long-Term Technical Condition

The long-term-oriented picture of the market also showed some signs of improvements last week. The latest gains were global in scope since the WSC Global Momentum increased by 16 percentage points. This is telling us that now 35.5% of all important local equity markets around the world are trading above their long-term-oriented trend lines. Another quite risk-on signal is coming from the WSC Global Relative Strength Index since the relative strength of U.S. equities was picking up again. Only the Global Futures Long Term Trend Index has not shown any signs of stabilization yet, indicating that the long-term-oriented price trend of the S&P 500 looks extremely weak-kneed. If we examine our long-term-oriented tape indicators, we can see that the SMA 200 and the Modified McClellan Volume Oscillator Weekly improved (although they have not turned bullish yet), while the and the High-/Low Index Weekly weakened.

Model Portfolios

Last week, there were no changes within the our model portfolios (WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Dynamic Variance Portfolio and the WSC Sector Rotation Strategy).

Bottom Line

On a short-term time frame, the fresh uptrend is definitely backed by a broader basis. Thus, the quality of the latest recovery looks quite high.  A fact which can also be observed if we focus on gauge of the Big Picture Indicator, which jumped back into its recovery quadrant in the middle of the week. As mentioned in the description of the Big Picture Indicator, in such a regime, it is quite difficult to differentiate if the recovery process is sustainable or just part of a stronger bear-market rally. Currently, it looks like the recovery has legs and as long as we see further strengthening in our short-term-oriented indicator framework, the situation should remain supportive. Thus, the risk of further stronger down-testing has diminished – at least from the current point of view. On the other hand side, there are still some weak signals around (especially on a mid-term time horizon). That is the reason why the WSC Mid-Term Composite has not managed to flash bullish signal so far. Consequently, there is still also a chance that the current recovery will fade out again at some point in time. Currently, this is pure speculation but we will monitor our short-term-oriented indicators closely within the next couple of days/weeks. Nevertheless, given the current development of our signals it is time to upgrade our strategic view from cautious to bullish since the downside potential looks quite capped at the moment. Worth mentioning is the fact that we are not afraid of issuing a strategic sell signal immediately (if the quality starts to diminish again since capital preservation remains the most important driver for success). But currently, the risk-/reward ratio looks attractive again – at least for the time being. For that reason, we think it would make sense for conservative members to raise exposure again (by buying into weaknesses rather to chase the market too aggressively on the upside).

Stay tuned!