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January 5th 2020

Market Review

Although U.S. stocks dropped sharply on Friday, they closed the holiday-shortened week nearly unchanged. Still the major benchmarks reached new record highs during the week. The Dow Jones Industrial Average dipped 0.04% over the week to end at 28,634.88. The S&P 500 recorded a weekly 0.2% decline to close at 3,234.85. The Nasdaq advanced 0.2% from last Friday’s close to finish at 9,020.77. Among the key S&P sectors, the industrials sector was the greatest gainer for the week, while materials led decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.

Short-Term Technical Condition

Even though the market finished nearly flat for the week, the positive short-term oriented time-series momentum of the S&P 500 remains well intact. If we have a closer look at our trend indicators, we can see that the S&P 500 closed 50 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 3,184. Furthermore, we can also see that both envelope lines of this reliable indicator are still drifting higher on a quite fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as another quite encouraging technical trend signal, as the market continued to make higher highs and higher lows within the past 20 days. This solid short-term oriented price driven up-trend is also still confirmed by the bullish Modified MACD, although the gap between both trend-lines slightly narrowed last week. This is telling us that the pace is about to slow down a bit, whereas the overall tone remains quite bullish – at least for now. This can be also seen if we focus on the Advance-/Decline 20 Day Momentum Indicator, since its gauge started to weaken on very high bullish levels. As this indicator tends to be a leading one, it could be possible to see a short-lived but healthy consolidation ahead.

Another main reason, why we still remain bullish is due to the fact that the underlying trend participation all NYSE listed stocks within the current short-term oriented up-trend looks quite broad-based at the moment (even though we saw a stronger sell-off on Friday). In particular, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily strengthened their bullish signals, indicating that the underlying breadth momentum of the market is giving no reason to worry right now. In other words, the sell-off on Friday was not confirmed by a huge number of declining stocks nor by a spike in decline volume. Consequently, this pullback was just the result of some profit taking rather than being the result of some stronger selling all across the board. This can be also observed if we focus on the NYSE New Highs/New Lows Indicator. During the whole week we saw a solid number of NYSE-listed stocks which reached a new yearly high, in combination with quite depressed readings of stocks which dropped to a new yearly low! Even on Friday, the number of stocks which dropped to a new low did not spike at all. As a result, the High-/Low-Index Daily is still far away from flashing a bearish crossover signal. Only the percentage of stocks which are trading above their short-term oriented moving averages (20/50) deteriorated on very bullish levels, whereas both gauges are still trading well above their bearish threshold. Hence, given the still quite solid short-term oriented readings all across the board, we think that the risk of a stronger and longer-lasting trend-reversal remains limited – at least for the time being.

On the contrarian side, we can see that the latest pullback on Friday has started to have its designated impact on short-term optimism as most of our contrarian indicators (Daily Put-/Call Ratio All CBOE Options, AII Bulls & Bears Survey, Smart Money Flow Index, All CBOE Options Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator and the WSC Put-/Volume Ratio) softened their bearish signals, whereas some of them even turned neutral last week. This indicates that the crowd started to get concerned about the continuation of the current rally, which is a quite positive fact. Nevertheless, we can also see that most of our contrarian indicators remain quite bearish from a pure signal point of view and, therefore, we would expect to see further washout-days ahead (whereas the down-side potential should remain capped). This view is even in line with the Presidential Cycle, since the time period from January until mid of February is often accompanied by increased volatility and nasty pullback, although the underlying tone remains positive.

Mid-Term Technical Condition

Analyzing the mid-term oriented technical condition of the market reveals almost the same picture as on a short-term time perspective, as it also has not shown any signs of weakness yet. Especially, the gauge from our reliable Global Futures Trend Index succeeded to stay in the bullish top area and above the 90 percent threshold. This is telling us that the risk of a sudden stronger correction is outright low. Mainly because its gauge closed far above the “threatening” 60 percent threshold, plus short- to mid-term market breadth remains outright confirmative for now. Basically, the same is true if we analyze the pure price driven mid-term-oriented trend of the market as our WSC Sector Momentum Indicator keeps trading at solid bullish levels. This can be also seen if we focus on our Sector Heat Map as the momentum score of all sectors (now even energy) are now above the one from riskless money market (currently at 0%).

This broader based up-trend participation can also be observed if we focus on mid-term oriented market breadth. First of all, the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly increased their bullish gaps during the week (although the S&P 500 finished flat for the week). This is a very important fact, since it shows us that the latest pullback on Friday should not be taken too seriously at the moment. However, the most encouraging signals are coming from our entire our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly, Advance-/Decline Volume Line), as all of them reached new record levels last week. In addition, the Modified McClellan Oscillator Weekly also showed a widening bullish gap last week, indicating that the momentum of advancing stocks is still improving. And like on the short-term time frame, only the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) could be a bit stronger, if we consider the fact that the market reached a new-all time high on Thursday. Anyhow, right now it is a bit too early to get concerned about this fact as the overall mid-term oriented technical picture continued to improve last week. As a matter of fact, we received even more confirmation for our strategic bullish view.

Long-Term Technical Condition

The long-term bullish status of the market remains unchanged. The Global Futures Long Term Trend Index gained more bullish ground last week and is indicating a technical bull-market for the S&P 500. Our WSC Global Momentum Indicator keeps also trading at one of the highest levels and is telling us that 90% of all global markets which are covered by the Global ETF Momentum Heat Map are trading above their long-term oriented trend-lines. This shows that most equity markets around the world are participating within the ongoing bull-market. Our WSC Global Relative Strength Index shows a quite neutral picture as the relative strength of all risky markets remained unchanged. But on the other hand side, our Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly succeeded to widen their bullish gaps considerably, while the percentage of stocks which are trading above their 200 day moving average were holding up quite well.

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 All Weather Model Portfolio, the WSC Sector Rotation Strategy and, therefore, also the WSC Model Portfolio Composite reached a new all-time high last week.

Bottom Line

Even though we are still expecting to see further increased volatility ahead, our strategic bullish outlook remains unchanged compared to last week. The market is exactly following our expected path so far and given the outright bullish tape structure, we think that any further upcoming sentiment driven washout-day/consolidation period should turn out to be limited in price and time – at least for the time being. 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. Aggressive short-term traders should remain also bullish as long as our short-term oriented indicators remain bullish. Nevertheless, given the expected increase in volatility it would make sense to reduce leverage/high beta trades or other highly sensitive call options/short volatility trades. Stay tuned!