October 25th 2020

Market Review

U.S. stocks finished the week with small losses. The Dow Jones Industrial Average dropped 1% over the week to 28,335.57. The S&P 500 booked a small weekly loss of 0.5% to finish at 3,465.39. The Nasdaq shed 1.1% for the week to end at 11,548.28. Among the key S&P sectors, commercial services led advancers, while technology led decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 27.6.

Short-Term Technical Condition

From a pure price point of view, the bullish trend-status from the S&P 500 remains unchanged compared to the previous week as the S&P 500 managed to close slightly above the bullish threshold of the Trend Trader Index. Above all, both envelope lines of this reliable indicator are still drifting higher as we have seen slightly higher highs and higher lows within the past 20 days. Consequently, the underlying short-term oriented trend-structure of the market remains quite bullish so far. A fact which can be also observed if we focus on the gauge of the Advance-/Decline 20 Day Momentum Indicator which reached the highest level for months during last week. Consequently, it has formed an outright bullish divergence to the current levels of the S&P 500, which is another supportive fact at the moment. The only weak signal is coming from the Modified MACD, which flashed a tiny bearish crossover signal last week. Such a situation often occurs, when the price action of the market has slowed down for a couple of trading days. Normally, as long as our short-term oriented market breadth indicators remain bullish, we would not even take a bearish Modified MACD too seriously as it would only indicate some signs of short-term exhaustion. Consequently, short-term market breadth is key area of focus as it will tell us if the current slowdown/consolidation period can be still classified as healthy or if it has gotten a more corrective tilt recently.

If we focus on our short-term market breadth indicators, we can see that the recent slow-down had hardly any major impact as the readings from most of our tape indicators still remain quite supportive at the moment. As a result, the recent consolidation still looks quite healthy in its nature. Especially the NYSE New Highs minus New Lows Indicator is telling us that last week’s decline was mainly driven by a few heavy weighted stocks in the index rather than being driven by the broad market. This is because there was only a small reduction in the new highs, whereas the number of stocks hitting a fresh yearly new low remained quite depressed. As a consequence, the High-/Low Index Daily was holding up quite well. The same is true if we have a look at the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges are trading well above their 50 percent bearish threshold, indicating that the majority of all NYSE-listed stocks are per definition in a short-term oriented uptrend. Above all, we can see that the Modified McClellan Volume Oscillator Daily slightly increased its bullish gap while the Modified McClellan Oscillator Daily succeeded to defeat a bearish crossover signal. This shows that the momentum of advancing volume and advancing stocks still remains positive so far. A fact, which can be also observed if we focus on the Upside-/Downside Volume Index Daily, since up-volume is still trading far above down-volume so far, which  is another strong piece of evidence that the current consolidation period remains quite bullish-biased in its nature. So in the end, it looks like that the current uptrend of the market is still strongly backed by a broad basis and, therefore, it might be a bit too early to switch into the bearish camp.

On the contrarian side we can see that the latest consolidation period started to have its expected impact on short-term optimism. To be more precise, in our last week’s market comment we said that we expected to see some kind of sentiment driven consolidation (or even some nasty pullbacks) as optimism was getting too extreme. These sentiment driven consolidation events are important catalyst as they relieve overbought conditions and dampen short-term optimism, which is then often the basis for further growth. This is only true if short-term market breadth remains supportive during that time period.  Indeed, the recent consolidation period caused increased hedging activity and, therefore, the readings of most of our option based indicators (Daily Put-/Call Ratio All CBOE Options Indicator, WSC Put-/Volume Ratio, WSC Dumb Money Indicator) softened their quite bearish signals. Although this can be interpreted as a quite positive development, most of our option based indicators still remain quite bearish from a pure signal point of view. A fact, which is also confirmed by quite negative readings from the WSC Capitulation Index and the Smart Money Flow Index. As a result, we think there is a good chance to see further sentiment driven consolidation ahead. This picture might fit into the seasonal context (President Cycle and Decennial Cycle), where the market often trades sideways until early November. On the other hand, the down-side potential should also remain capped (from a pure contrarian point of view) since there are still enough bears on the sideline waiting for a good entry point.

Mid-Term Technical Condition

Another reason why we think it is a way too early to get bearish from a strategic point of view is based on the fact that the mid-term oriented uptrend of the market remains well intact at the moment. Despite the fact that the gauge from our reliable Global Futures Trend Index slightly deceased last week, it still keeps trading at the upper range (81%) of the bullish consolidation area. Moreover, it is worth mentioning the fact that as long as the gauge from this indicator remains above its 60% threshold, any short-term driven consolidation period/pullback should be limited in price and time (of course only in combination with quite solid readings in mid-term market breadth, which is the case right now). In addition, we can see that the gauge from our WSC Sector Momentum Indicator has been trading at solid levels for weeks, indicating that most sectors within the S&P 500 remain in a powerful mid-term oriented up-trend at the moment. Another supportive fact is that the momentum score of riskless money market (from our Sector Heat Map) has not changed for 3 weeks and remains at 10.5%. Additionally all sectors (except energy) have still a higher momentum score than riskless money market. As a result, there is no reason to challenge our strategic bullish outlook for now.

The mid-term oriented uptrend of the market shows nearly the same setting as in the previous week. Namely, that most of our indicators slightly improved, although some of them still remain a bit weak-kneed from a pure signal point of view. The most encouraging signals are coming once again from our advance-decline indicators, as all of them strengthened (Advance-/Decline Line Daily and Advance-/Decline Line Weekly) or even jumped to the highest level for weeks (Advance-/Decline Volume Line). Also the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) finished the week with small gains, while the Modified McClellan Oscillator Weekly remained nearly unchanged. The only weaker signals are coming from the Advance-/Decline Index Weekly (which still succeeded to stay bullish) and from the Upside-/Downside Volume Index Weekly (which has not managed to turn bullish yet). As already pointed out last week, their developments look quite encouraging but we would like to see further improvements here. Otherwise it could be possible that the current consolidation period might transform into a longer-lasting sideways market. However, right now these signals still look quite supportive and, therefore, it is still a bit too early to take these facts too seriously at the moment.

Long-Term Technical Condition

The long-term oriented trend of the market showed also signs of improvements last week. The WSC Global Momentum Indicator increased by another 9 percentage points and signals that now 77% 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 remains quite globally in scope. Another encouraging signal is coming from our Global Futures Long Term Trend Index which once again jumped to its highest level for years. This indicates that the S&P 500 remains in a strong technical bull market for the time being. Furthermore, our WSC Global Relative Strength Index shows increased risk-appetite among investors. Also our long-term market breadth indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and SMA 200) 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 Dynamic Variance Portfolio and the WSC Sector Rotation Strategy.

Bottom Line

The situation remains quite unchanged compared to the last week. Even though increased sentiment driven volatility could not be ruled on a short-term time perspective, there is no major reason to change our strategic bullish view for now. To be more precise, with quite supportive/bullish biased readings (especially on a mid-term time perspective), any upcoming slowdown/weaknesses should turn out to be limited in price and time. A fact that can also be observed if we focus on our Big Picture Indicator which is still moving around its bullish quadrant. As long as this is the case, and as long as we do not see any negative spikes in new lows, in combination with a strong weakening Global Futures Trend Index, it is a way too early to bet on a major trend reversal. Hence, we would recommend our conservative members to remain invested, whereas aggressive short-term traders should focus on the long side as long as our short-term oriented indicators remains bullish.

Stay tuned!