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October 18th 2020

Market Review

U.S. stocks finished a volatile week with small gains. For the week the Dow Jones Industrial Average eked out a small gain of 0.1% to finish at 28,606.31. The S&P 500 closed at 3,483.81 and recorded a weekly gain of 0.2%. The Nasdaq posted a weekly advance of 0.8% to end at 11,671.56. Both Dow and the S&P 500 notched their third straight weekly gain and the Nasdaq posted a four-week winning streak. Among the key S&P sectors, industrials was the best weekly performer, while the energy sector dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded more than 9.5 percent lower, near 27.4

Short-Term Technical Condition

The short-term oriented uptrend of the market remains well in force at the moment. The S&P 500 is now trading 121 points above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 3,362. Furthermore, we can see that both envelope lines of this reliable indicator continued to increase, indicating 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 price-driven uptrend. This view is confirmed by the fact that the underlying price momentum of this uptrend continued to strengthen, since the Modified MACD showed an increasing bullish gap during the week. As a matter of fact it has formed a quite bullish divergence as the S&P 500 finished almost flat for the week. On top of that we can see that the Advance-/Decline 20 Day Momentum Indicator has not shown any signs of non-confirmation yet, which is another outright bullish short-term oriented signal. So all in all, the current positive time-series momentum of the S&P 500 looks quite powerful at the moment, indicating further gains ahead.

More importantly, this short-term oriented uptrend is widely backed by the broad market since the underlying tape condition also improved last week. Consequently, the current upside participation within the whole market looks quite healthy at the moment and, therefore, the chances for a stronger momentum-reversal remain quite limited for the time being. This can be especially observed if we examine the NYSE New Highs minus New Lows Indicator, as the number of stocks hitting a fresh 52-weeks high was holding up very well while there are hardly any stocks around, which hit a fresh yearly low. As long as we do not see a significant spike in that number, the overall market environment should remain supportive. Given that positive development, the High-/Low-Index Daily remains quite bullish – especially if we compare it with the readings in late August where the S&P 500 reached its latest all-time high. This is a quite confirmative signal so far, as it shows that the recent rally is getting more broad-based in its nature (and is, therefore, not only driven by mega-cap tech stocks). On top of that, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not shown any signs of weaknesses yet and even continued their bullish ride last week (especially the latter one). This shows us that the current short-term oriented uptrend is widely confirmed by positive momentum in advancing issues and advancing volume. This stronger up-volume can be also seen if we focus on the Upside-/Downside Volume Index Daily. The only weaker (but still bullish) 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 are still trading in healthy bullish territories, their overall levels could be a bit stronger if we consider the current levels from 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 solid signals all across the board, it is highly unlikely that the recent rally will run out of fuel soon. As a consequence, we think that the market is heading towards new records soon, which is definitely in line with our strategic bullish outlook.

On the contrarian side, it could be possible that the S&P 500 needs a few attempts to break towards new record highs as the greed among the crowd is rising again (Daily Put-/Call Ratio All CBOE Options Indicator, WSC Put-/Volume Ratio, WSC Dumb Money Indicator). On the other hand, we can see that the fisher transformation of the WSC Capitulation has not turned bullish yet, whereas the Smart Money Flow Index has shown some weaknesses recently. Consequently, we would not be surprised to see some volatile sessions or even some nasty pullbacks ahead, to dampen short-term optimism. On the other hand, we can see that a lot of purchasing power is slowly getting back into the market since the number of bears continued do decrease significantly last week. Nevertheless, we can also see that there is still enough dry powder left to push prices higher, which is another supportive mid-term oriented fact. Last but not least, seasonality is also turning supportive again (Presidential Cycle).

Mid-Term Technical Condition

Another main reason, why we believe it is still a way too early to bet on a sustainable trend-reversal is due to the fact that our entire mid-term oriented indicators remain bullish and even strengthened last week. The gauge from the Global Futures Trend Index increased to 87.5% and is now trading at the upper edge of the bullish consolidation area. This can be interpreted as a strong 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 and is trading at quite confirmative bullish levels. This is indicating that most sectors of the S&P 500 remain in a mid-term oriented uptrend. Another supportive fact is that the momentum score of riskless money market (from our Sector Heat Map) has not shown any signs of strength last week. 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.

If we analyze our mid-term oriented market breadth indicators, they also show some signs of improvements, although some signals of them still remain a bit weak-kneed. The most important signals are coming from the Advance-/Decline Line Weekly and the Advance-/Decline Volume Line as both of them have reached new highs recently. Only the Advance-/Decline Line Daily showed a small bearish divergence compared to the broad index. Another positive mid-term oriented tape signal is coming from the Modified McClellan Oscillator Weekly which finally succeeded to bottom out last week and flashed a very tiny bullish crossover signal. On the other hand, the Advance-/Decline Index Weekly, the Upside-/Downside Volume Index Weekly as well as the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) finished the week nearly unchanged. So all in all, the developments look quite encouraging so far but we would like to see further improvements here. Otherwise it could be possible that the market might enter a longer-lasting consolidation period if all other indicators remain bullish. 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 uptrend of the market remains almost unchanged compared to the previous week. The most encouraging signal is coming from our Global Futures Long Term Trend Index, which 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. This bull market remains global in scope as the WSC Global Momentum Indicator shows that 68% of all global markets (which are covered from our Global ETF Momentum Heat-Map) are currently trading above their long-term oriented trend lines. Examining our WSC Global Relative Strength Index reveals that the relative strength of all risky markets keeps trading above the one from U.S. Treasuries, which is a quite positive signal for risky assets so far. Also our long-term oriented tape indicators (High-/Low Index Weekly and SMA 200) improved once again last week and the Modified McClellan Volume Oscillator Weekly even flashed a bullish crossover signal.

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

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!