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December 29h 2019

Market Review

In line with our latest outlook, U.S. stocks rallied for the holiday-shortened week, pushing the main indexes again to fresh records. The Dow Jones Industrial Average booked a weekly gain of 0.7 percent to close at a record of 28,645.26. The S&P 500 climbed 0.6 percent for week to a record high of 3,240.02. The Nasdaq increased 0.9 percent from last Friday to 9,006.62, hitting a new intraday high earlier in the session. The main U.S. indexes are close to their best annual performance since 2013 and may yet put in a return not seen since 1997 depending on trading on the final two days of the year next week. The Dow Jones Industrial Average is up 22.8 percent year-to-date basis, the S&P 500 is up 29.3 percent and the Nasdaq 35.7 percent. Most key S&P sectors ended in positive territory for the week, led by the discretionary sector. Utilities were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 13.4.

Short-Term Technical Condition

Right in line with our outlook, the market continued to push higher last week. As a matter of fact, it is not a big surprise at all that our entire short-term oriented trend indicators remain quite bullish – at least from a pure signal point of view. If we analyze the pure price driven trend, we can see that the S&P 500 is now trading 79 points above the bearish threshold from the Trend Trader Index. Consequently, the pure price driven uptrend of the market remains intact as long as the S&P 500 keeps trading above 3,161. As we have seen higher highs and higher lows within the past 20 days, both envelope lines of this reliable indicator are still drifting higher on a quite fast pace. This means that the resistance/support levels for the S&P 500 are increasing as well, which is another quite constructive technical trend signal for now. Examining the trend momentum reveals that the Modified MACD also strengthened its bullish status during last week (highest level for months) and has, therefore, clearly confirmed the latest all-time high of the S&P 500. This view is also confirmed by the Advance-/Decline 20 Day Momentum Indicator which closed at quite solid bullish levels last week. Nevertheless, we can also see that it has not fully confirmed the latest record high of the S&P 500 as the gauge slightly dropped during the week. Since this indicator tends to be a leading one, we now received the first (trend-driven) signal that the pace of the current rally may slow down a bit soon.

As a healthy/sustainable trend should always be backed by a broad basis, it was good to see that the current short-term oriented uptrend is still widely confirmed by our short-term market breadth indicators (as all of them continued to improve last week). This is a quite positive technical signal, as it shows us that the recent records were well supported by a relatively broad basis. This becomes quite obvious if we analyze the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators clearly strengthened their bullish signals, indicating that the momentum of advancing stocks as well as advancing volume is still improving within the ongoing up-trend. Above all, we saw a quite healthy number of stocks which are hitting a fresh yearly high last week, whereas the number of stocks which were pushed to a new yearly low fell almost to zero. This is another extremely bullish ingredient, since we never saw a stronger trend reversal with such low readings in new yearly lows. However – given the quite confirmative levels in new highs – it was not a big surprise at all that the High-/Low-Index Daily also continued to increase and widened its bullish gap. Consequently, these two indicators are telling us that the positive momentum of the broad market is still quite robust and, therefore, it is still a bit too early to get concerned about the current bull-run. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Even though their gauges slightly declined on Friday, both indicators are still trading in solid bullish territory. This indicates that the majority of NYSE listed stocks remains in a strong short-term oriented uptrend and is, therefore, giving no reason to worry right now. As a result, the risk of a sustainable trend-reversal (momentum crash) looks quite limited for the time being.

The only major super red flag is coming from the contrarian side, since nearly all of our sentiment and option based indicators turned bearish or even strengthened their bearish signal last week (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). This is telling us that the majority of market participants is betting on a continuation of the current rally and, therefore, a lot of good news is already priced in. Consequently, it could be possible that such increased optimism will force the market into a consolidation period soon or that we might see some nasty washout-days. However, given the outright bullish tape structure at the moment, any upcoming sentiment driven sell-offs should be limited in price and time – at least for now.

Mid-Term Technical Condition

Another reason, why we stick to our strategic bullish outlook is based on the fact that the mid-term oriented technical condition of the market still remains quite robust for the time being. First of all the gauge from our reliable Global Futures Trend Index continued to increase and managed, therefore, to pass the outright bullish 90 percent threshold. This circumstance can be seen as very constructive technical signal, as it clearly confirmed our latest multiple record highs scenario. In addition, the WSC Sector Momentum Indicator is still trading at a very solid level and even slightly increased in the previous week. This is signaling that most sectors within the S&P 500 remain in mid-term oriented (price driven) uptrend. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all industries (except energy) is still trading above the one from riskless money market (currently trading at 4.2 percent). These facts are another indication that the risk appetite among investors remains quite high (and, therefore, our strategic bullish view remains unchanged – at least for now).

This view is also based on the fact that the current mid-term oriented up-trend of the market is still widely confirmed by mid-term oriented market breadth. This becomes obvious, if we focus on our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly, Advance-/Decline Volume Line) as all of them gained further bullish ground last week. Consequently, they also reached new record highs and are, therefore, fully confirming the latest record high of the S&P 500! Another important mid-term oriented tape signal is coming from mid-term oriented advancing issues and mid-term oriented up-volume as both gauges closed far above their bearish counterparts. This is a quite positive fact, since we have never seen a stronger/longer-lasting pullback with such strong readings in both indicators. This view is also confirmed by the fact that our Modified McClellan Oscillator Weekly increased once again last week, indicating that the mid-term oriented tape momentum still remains constructive. Consequently, it is not a big surprise that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) has also reached its highest level for months, indicating that the majority of all NYSE listed stocks remains in a robust mid-term oriented up-trend. All in all, our indicator framework is telling us that the upside participation within the broad market remains outright broad based and, hence, we think it is still a bit too early to take the chips from the table.

Long-Term Technical Condition

The same applies for the long-term oriented technical condition of the market. The WSC Global Momentum Indicator is telling us that more than 90 percent (!) of all local equity markets around the world are trading above their long-term oriented trend-lines. This is showing us that the current bull-market is broad-based and global in scope. This can be also seen if we have a closer look at the Global Relative Strength Index as the relative strength of all risky markets was holding up quite well. And in addition, we can also observe improvements in long-term market breadth, as the readings from our entire long-term oriented tape indicators (High-/Low Index Weekly, the Modified McClellan Volume Oscillator Weekly) strengthened last week or remained unchanged (SMA 200).

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. The allocation of the WSC Sector Rotation Strategy remains unchanged. 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 sentiment looks outright stretched currently, 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 upcoming 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.

Stay tuned!