May 3rd 2020

Market Review

After a strong rally until Wednesday (that helped major indexes to post their best April in years), losing sessions on Thursday and Friday left major benchmarks with minor losses on the week. In the end, the Dow Jones Industrial Average dipped 0.2 % over the week to end at 23,723.69. The S&P 500 recorded also a weekly 0.2 % decline to close at 2,830.71. The Nasdaq lost 0.3% from last Friday’s close to finish at 8,604.95. Among the key S&P sectors, the energy sector was the greatest gainer for the week, while utilities led decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 37.2.

Strategy Review

In our last week’s comment, we explained the underlying tape condition of the market still looked too supportive to trigger a stronger trend-reversal, but it also looked too weak to justify further sustainable rallying. Thus, we expected to see further bullish biased consolidation and, therefore, our strategic bullish outlook remained unchanged compared to the previous week. Moreover, we said that – from a pure technical point of view – such a consolidation period was always a fork in the road with two directions during that time period. The first one would mean that we see an improving quality in the underlying tape structure (increase of new yearly highs, improving up-volume, advancing issues and more stocks above 20/50 SMA …) which would be then the basis for further rallying. The alternative direction means that existing tape divergences would be piling up, which would then be the basis for a significant trend-reversal/momentum crash/sell-off (e.g. 2020, late 2019, early/mid 2018, early 2016, mid 2015 or 2011 …). As a result, we said that the quality of the underlying market tape structure would give us further guidance which scenario was going to happen. Worth mentioning is the fact that such a process could normally take a couple of days/weeks, whereas the tilt between corrective and supportive consolidation could get sometimes quite narrow. A fact, which can be also observed if we focus on our WSC Big Picture Indicator, as its gauge was jumping between the boarders of the “Corrective Bounce” and “Stabilization Process” quadrants back and forth in the past couple of days. Thus, the development of our tape indicators remain key area of focus right now.

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend of the market remains quite unchanged compared to last week. The S&P 500 is still trading 68 points above the bearish threshold from the Trend Trader Index. In this context, the short-term oriented price driven up-trend of the market remains intact as long as the S&P 500 does not drop below 2,762. On top of that, we can see that both envelope lines of this reliable indicator are still strongly drifting higher on a quite fast pace, signaling that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. More importantly, the underlying momentum of this strong price driven trend is still outright positive, since the Modified MACD has not shown any signs of weaknesses yet, whereas the Advance-/Decline 20 Day Momentum Indicator closed at outright confirmative levels (although it declined at the end of the week). Hence, the latest declines can be described as noise rather than the beginning of further selling pressure (at least from a trend-point of view).

More importantly, our entire short-term oriented tape indicators were holing up quite well or even strengthened (although the market finished in slightly negative territory last week). This is an outright confirmative short-term oriented trend signal, as it indicates that the tape quality improved even though the market finished flat for the week. In other words, the latest selling pressure at the end of the week was mainly driven by profit taking rather than being the result of a fire sale. The most encouraging signal is coming from the High-/Low-Index Daily. After weeks of a literally paralyzed status, this indicator finally succeeded to flash a very small bullish crossover signal last week. The main rationale behind that signal is the fact that there are hardly any numbers of new yearly lows on NYSE (although the market sold off significantly on Friday). To be more precise, we even saw a very minor increase of new yearly highs, a fact which is quite bullish given the recent circumstances. Basically, the same is true if we focus on the Modified McClellan Oscillator Daily and on the Modified McClellan Volume Oscillator Daily. Both indicators gained more bullish ground last week, indicating an increase in advancing issues and advancing volume on a short-term time perspective. A fact which can also be observed if we focus on the Upside-/Downside Volume Index Daily. The only weaker signal is coming from the SMA (20/50) as their gauges dropped on Friday, erasing their weekly gains and leaving them nearly unchanged (on a weekly basis). So all in all, the underlying tape quality of the market remained quite robust or even improved, indicating that the current consolidation period is still quite bullish in its nature. Therefore, the risk of a sudden and stronger trend-reversal should remain quite limited – at least for the time being.

On the contrarian side, we can see that the latest declines on Thursday and Friday caused a tremendous amount of fear among market participants. This can be seen if we focus on the CBOE Volatility Index and the Daily Put-/Call Ratio All CBOE Options Indicator as the put-/call ratio spiked to 1.18 on Friday. On top of that, we can see that the amount of bears spiked to 50 again. Consequently, the market is  climbing a huge wall of worry, leaving enough room for positive surprises. On the other hand, we can see that our reliable Smart Money Flow Index has not shown any major signs of weaknesses yet, whereas our WSC Capitulation Index is still indicating a risk-on market environment for the time being. So from a pure contrarian point of view, there should be still enough room left until the market gets too complacent.

Mid-Term Technical Condition

Another reason, why it might be a bit too early to take the chips form the table is the fact that the mid-term oriented tape condition of the market showed some small signs of improvement last week. This is mainly due to the fact that our reliable Global Futures Trend Index finally succeeded to pass the important 60% threshold and finally got back to bullish consolidation area. Worth mentioning here is the fact that a few weeks ago, this gauge was trading at the absolute bottom of 0%. So, from a pure technical point of view, the market got back into a quite bullish biased set-up and, therefore, the risk of another correction cycle should be non-existent (as long as this gauge trades above 60%). Also, the gauge from our WSC Sector Momentum Indicator was holding up quite well last week (although it still keeps trading in bearish territory), signaling the trend participation of all major key sectors within the S&P 500 remains stable (albeit on low levels). A fact, which can be also observed if we focus on our Sector Heat Map as the momentum score of riskless money market remained unchanged (although the market finished slightly negative for the week).

Examining mid-term oriented market breadth reveals a quite unchanged setting compared to the last week. This becomes obvious if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line), as all of them remained unchanged on a weekly basis or only slightly increased, respectively. The same applies if we look at the SMA (100/150). Friday’s declines erased the weekly gains and left both gauges nearly unchanged on a weekly perspective. In addition we should not forget that both gauges are still trading in deep bearish territory. Friday’s declines also erased the weekly gains from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, leaving them unchanged on a weekly basis. If we examine the Modified McClellan Oscillator Weekly it seems that its bearish gauge has reached its bottom. So, despite the fact that we can observe some small improvements, the readings from our entire mid-term oriented tape indicators remain weak at the moment. However, if we consider the improvements on a short-term time perspective, we think they might show some signs of recovery soon. But for now, their readings can be still seen a small red flag on the horizon.

Long-Term Technical Condition

The long-term oriented trend of the market shows the same picture as last week. The WSC Global Momentum Indicator is still trading at the lowest level possible (0%) and not shown any bullish moves so far. This is an indication that there are absolutely no local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) which are trading above their long-term oriented trend lines. Also our Global Futures Long Term Trend Index, which has been decreasing for weeks now, continued to drop. This fact is telling us that the long-term oriented trend of U.S. equities is quite damaged at the moment. While our WSC Global Relative Strength Index remained nearly unchanged compared to the previous week, it also reveals that the relative strength of all risky markets is trading far below the one from U.S. Treasuries. This is an indication that we are still quite early in the current up-cycle. If we examine our long-term oriented tape indicators we can see that the Modified McClellan Volume Oscillator Weekly seems to bottom out. The SMA 200 in contrast remains unchanged compared to the last week and the High-/Low Index Weekly showed some improvements.

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.

Bottom Line

Despite the fact that we saw some increased selling pressure at the end of the week, the underlying tape condition was holding up extremely well or even improved in some cases. Additionally, we have seen a lot of fear within our contrarian indicator recently. All these ingredients are telling us that the technical condition of the market improved and has, therefore, still enough room to surprise on the upside. A fact, which can be also observed if we focus on our Big Picture Indicator, which managed to close in the middle of its stabilization process quadrant. Anyhow, that does not necessarily mean that the market will take off tomorrow, but the chances for a stronger rallying (up-days) are definitely increasing on a fast pace. So as long as the underlying tape condition remains supportive,  there are no major deal-breakers visible and, hence, our strategic bullish view remains unchanged. Consequently, we think it would make sense that aggressive traders should stick in the bullish camp, whereas conservative investors should also remain invested. Nevertheless, we also think it would make sense to adjust the latest stop-loss limit to 2,727 (intraday price), just in case thinks change quite quickly during the week.

Stay tuned!