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February 16th 2020

Market Review

Despite Friday’s muted trading moves, U.S. stocks posted back-to-back weekly gains with two benchmarks reaching new records. The Dow Jones Industrial Average rose 1.0% from the week-ago close to 29,398.08. The S&P 500 climbed 1.6% for the week to 3,380.16 and hit a record closing. The Nasdaq gained 2.2% over the week to 9,731.18 and also hit an all-time closing high. All key S&P sectors ended in positive territory for the week, led by the utilities sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 15.

Strategy Review

The S&P 500 hit a record high last week and is up almost 5% on a year-to-date basis. Worth mentioning is the fact that most of the performance was made within the past two weeks. Consequently, investors who had become scared by the increased volatility in January or got negatively influenced by the daily noise created by financial mainstream media (e.g. Corona Virus) could have missed out much performance already. We told our members not to panic/stick in the bullish camp or even to add exposure since our framework had told us it had been a way too early to take the chips from the table. To be more precise, our indicator board showed us that the increased volatility was just the result of too much optimism in the market rather than being the result of broad based selling all across the board. Consequently, we sticked to our strategic bullish outlook, whereas we even expected to see an impulsive rally towards new highs after sentiment had hit contrarian levels. In fact, over the past two weeks the market rallied strongly and is, therefore, heading down our projected path so far.

Short-Term Technical Condition

Not surprisingly, the market remained in a bull-mode last week. Consequently, it is not a big surprise that the short-term oriented uptrend of the market remains well in force at the moment. To be more precise, the S&P 500 is now trading 80 points above the bearish threshold from the Trend Trader Index. This is telling us that the pure price driven short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 3,300. Furthermore, we can see that both envelope lines of this reliable indicator continued to grow, indicating that the resistance/support levels for the S&P 500 are still increasing. This can be seen as an outright constructive technical signal as higher highs and higher lows are a typical pattern for a healthy price-driven uptrend. If we focus on the underlying trend momentum, we can see that the bullish status from the Modified MACD also strengthened during the last week and did, therefore, clearly confirm the latest breakout of the S&P 500. The only weaker signal is coming from the Advance-/Decline 20 Day Momentum Indicator. Although its gauge remains bullish, it lost some momentum last week and, hence, did not fully confirm the weekly performance of the S&P 500. As this indicator tends to be a leading one, we would not be surprised if the pace is likely to slow down a bit.

Another reason, why this small bearish divergence can be ignored is based on the fact that the current short-term oriented uptrend is still strongly backed by the broad market. Consequently, the current upside participation within the whole market still looks quite healthy at the moment. As a result, the chances for a sudden and stronger momentum-crash remains quite limited at the moment. To be more precise, the strong increase in the number of stocks which hit a fresh yearly high grew towards outright confirmative levels, whereas we hardly saw any stocks which were pushed to a new yearly low.  As a consequence, the gauge of the High-/Low-Index Daily continued to widen its bullish gap. This is telling us that the latest gains were not caused by a few mega caps but they were a result from a strong demand all across the board. Another positive tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both of them improved significantly last week (whereas the first one even managed to flash a bullish crossover signal). This shows us that the current short-term oriented tape condition is regaining momentum. A fact which can be also observed if we focus on the  Upside-/Downside Volume Index Daily. The only weaker signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Despite the fact that both indicators got back into the bullish territory, their overall performance could be a bit stronger if we consider the current levels of the S&P 500. However, given the outright strong tape condition at the moment, this minor bearish divergence can be definitely ignored at the moment. In other words, with such strong signals all across the board, it is highly unlikely that the current rally will run out of fuel soon. As a result, we think that the market will continue to hit several record highs into late Q1, which is definitely in line with our strategic bullish outlook.

The only major red flag is coming from the contrarian side at the moment. This is mainly due to the fact that most of our contrarian indicators started to get back into negative territory again or have even strengthened their bearish signals recently (Daily Put-/Call Ratio All CBOE Options, All CBOE Options Put-/Call Ratio Oscillator, WSC Put-/Volume Ratio, Equity Options Put-/Call Ratio Oscillator, Smart Money Flow Index and the WSC Capitulation Index). If we consider the outright bullish trend and confirmative trend-structure at the moment, the market is facing the same set-up like at the beginning of the year. Several weeks ago, the outbreak of the Corona Virus was a convenient excuse to dampen short-term optimism since we saw several (consecutive) negative down-days back then. Consequently, we would not be surprised to see some sentiment driven washout-days or even a volatile consolidation period soon and the mainstream media will have definitely no problem to find a new scapegoat for such events. This scenario would coincide with the fact that the Presidential Cycle suggests volatile but quite bullish biased rallying up until early April.

Mid-Term Technical Condition

This view is also supported by the fact that our entire mid-term oriented indicators are giving no reason to worry right now (as all of them remain quite bullish or even strengthened their bullish signal last week). Currently, the gauge from the Global Futures Trend Index is heading back to the upper area of the bullish consolidation range and, thus, is trading far above its 60% threshold. This can be interpreted as a quite strong positive technical trend signal, as such strong readings (in combination with bullish mid-term oriented tape signals) never led to any stronger correction/trend-reversal in the past! Also the gauge from our WSC Sector Momentum Indicator was holding up quite well last week, indicating that most sectors of the S&P 500 remain in a mid-term oriented price driven uptrend. These bullish facts are absolutely supported by our Sector Heat Map as the momentum score of all sectors (except energy at 0% like in the previous week) remains above the one from riskless money market (which dropped to 10%).

Our strategic bullish view is also driven by the fact that the current positive mid-term oriented time-series momentum of the market is also strongly confirmed by mid-term oriented market breadth. First of all, our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily and the Advance-/Decline Line Weekly) increased in the last couple of trading session. Another positive mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both gauges succeeded to widen their bullish gaps. This is telling us that the underlying demand of the market still remains quite constructive at the moment. This can be also observed if we focus on the Modified McClellan Oscillator Weekly since it managed to increase its bullish gap last week. Consequently, the underlying mid-term oriented tape momentum of the market remains well in force at the moment. And finally, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) also slightly strengthened their bullish signals last week. All these facts are indicating that the total upside participation within the market is still quite broad based at the moment and, therefore, there is still some room left until major troubles might be due.

Long-Term Technical Condition

The long-term oriented trend of the market showed also stronger signs of improvements last week. The WSC Global Momentum Indicator increased by 3 percentage points and signals that now 74% 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. As pointed out several times, this is a quite supportive technical signal, as it shows that the current rally/break-out is quite globally in scope. Moreover, this is another indication for our unchanged base case that the current rally will push the market towards multiple highs this year. Furthermore, our WSC Global Relative Strength Index still shows increased risk-appetite among investors. The strongest signal is coming from our WSC Long Term Trend Index, which rocketed to the highest level for years. Examining our long-term market breadth indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and SMA 200) also reveals that all of them continued to strengthen last week.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Rotation Strategy and the WSC Dynamic Variance Portfolio. Moreover, we are proud to announce that the WSC Sector Rotation Strategy and the WSC Dynamic Variance Portfolio reached another new all-time high last week.

Bottom Line

Even though it is possible to see some sentiment driven volatility soon, our strategic bullish outlook remains unchanged compared to last week. Given the outright bullish tape structure all across the board, we think that any further upcoming news-flow or sentiment driven washout-day/consolidation period should turn out to be limited in price and time. A fact, which can be also seen if we focus on our Big Picture Indicator, which is still moving around within its bullish quadrant. As long as this is the case, we think it might be a bit too early to take the chips from the table. Therefore, we think aggressive short-term traders should remain bullish/add exposure in weak trading days, whereas conservative investors should hold their equity exposure.

Stay tuned!