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November 29th 2020

Market Review

U.S. equities finished the week by breaking another set of records. The Dow Jones Industrial Average rose 2.2% for the week to 29,910.37. Earlier in the week, the Dow jumped to an all-time high, breaking above 30,000 for the first time. The S&P 500 climbed 2.3% for week to a record of 3,638.35. The Nasdaq posted a weekly gain of nearly 3% to 12,205.85 and also closed at an all-time high. Nearly all key S&P sectors ended in positive territory. Energy was the best weekly performer, while real estate was the only decliner. The CBOE Volatility Index (VIX), Wall Street’s preferred fear gauge, traded near 20.8.

Short-Term Technical Condition

The short-term oriented uptrend of the market remains well in force. From a pure price point of view, we can see that the S&P 500 is currently trading 130 points above the bearish threshold from the Trend Trader Index. Therefore, the short-term oriented uptrend of the market remains intact as long as the S&P 500 does not drop below 3,508. Additionally, both envelope lines of this reliable indicator are still drifting higher on a fast pace, which is another quite positive trend signal (as it indicates higher highs and higher lows on a rolling 20 day basis). Also the underlying momentum of this price trend remains quite positive as the Modified MACD has not shown any signs of a bearish crossover signal so far. Thus, the risk of a sustainable trend reversal looks extremely low at the moment. This view is strongly confirmed by the Advance-/Decline 20 Day Momentum Indicator, which showed an extraordinarily strong surge during the week and has, therefore, clearly confirmed the latest record high of the S&P 500.

Even more important, short-term oriented market breadth also continued to strengthen last week. This is an outright positive signal, as it reveals that the majority of all NYSE listed stocks participated in the latest gains we saw. Consequently, the risk of a painful momentum crash looks outright low since the current short-term oriented up-trend of the market is widely backed by a broad basis. This can be seen if we focus on the NYSE New Highs/New Lows Indicator, as the number of stocks hitting a fresh 52 weeks’ high showed solid spikes (especially at the beginning of the week), while there were hardly any stocks around reaching a new yearly low. This is a quite confirmative signal as it shows that the underlying 52-week’s momentum of all NYSE listed stocks remains positive. Thus, the High-/Low-Index Daily continued to widened its bullish gap during the last couple of trading sessions. This is another strong indication that the current rally might not run out of fuel soon. This can be also seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators clearly strengthened their bullish signals. This indicates that the momentum of advancing stocks as well as advancing volume keeps improving at high bullish levels. Also the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) has not shown any weaknesses yet. With such positive short-term oriented readings all across the board, we strongly believe that the risk of a stronger and sustainable trend-reversal should be extremely limited for the time being.

On the contrarian side, we can see that the market is increasingly priced for perfection, making it extremely vulnerable to negative driven news-flow. According to the AII bulls & bears survey, we can see that the majority of market participants (dumb money) has bought in already or remains extremely bullish at the moment, whereas Smart Money still remains cautious. On top of that we can see that short-term optimism reached quite extreme levels as nearly our entire option based- as well as sentiment driven indicators turned bearish or strengthened their negative signals last week (All CBOE Put-/Call Ratio Daily, AII CBOE Call-/Put Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator, WSC Dumb Money Indicator, the WSC Put-/Volume Ratio and the WSC Put-/Volume Ratio Oscillator). With such a strong imbalance on the option market, the market is getting increasingly vulnerable for extremely hefty sentiment-driven washout-events (sell-offs) or some form of consolidation. As approximately 90 percent of all uncovered options tend to be an also-ran, there is an increased risk up until mid of December (when the option expiration date is due) to see some form of short-term weaknesses. This view would coincide with the fact that the first two weeks of December tend to be quite weak from a seasonal point of view (Presidential Cycle). According to the Decennial Cycle, even a limited sell-off into mid-December cannot be ruled out. However, given the strong market breadth any sentiment driven sell-off should be limited in price and time.

Mid-Term Technical Condition

This view is strongly supported by the fact that our entire mid-term-oriented indicators remain quite bullish or even strengthened their bullish signals last week. The Global Futures Trend Index continued to increase at outright bullish levels and has closed out the week at 97%. As a result, this indicator has clearly confirmed the latest gains of the S&P 500. In the past, such strong readings (in combination with bullish mid-term-oriented tape signals) never led to any stronger and sustainable correction/trend-reversal. Thus, the overall environment remains quite positive for the time being. This can be also seen if we focus on the WSC Sector Momentum Indicator, which shows that nearly all underlying sectors of the S&P 500 remain in a powerful mid-term oriented price driven uptrend. These bullish facts are additionally supported by our Sector Heat Map as the momentum score of riskless money market finally dropped to 0%. Thus, we think it is a way too early to change our strategic bullish view.

More importantly, the current mid-term oriented up-trend of the market is strongly confirmed by mid-term oriented market breadth. Once again, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) strengthened, whereas some of them even reached their highest levels for months. Consequently, the recent high was mainly driven by a broad basis, which is an absolutely healthy tape signal. A fact, which can be also observed if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). There we can see that the total upside participation in the current mid-term oriented uptrend remains outright strong. More importantly, mid-term oriented advancing issues and mid-term oriented up-volume are now finally trading well above their bearish counterparts. These are quite bullish facts, since strong readings in up-volume and advancing issues are absolute necessary ingredients for a healthy mid-term oriented uptrend. However, also our Modified McClellan Oscillator Weekly increased once again last week and widened its bullish gap. This is telling us that the underlying mid-term oriented tape momentum remains constructive. With such strong bullish readings all across the board, the current bull-market is not at risk of fading out soon. Consequently, we think it is definitely a way too early to take the chips from the table – at least from the current point of view.

Long-Term Technical Condition

The same positive signals and improvements are confirmed by the long-term oriented picture of the marked. The WSC Global Momentum succeeded to stay once again at the highest level possible, showing that currently 100% of all local equity markets around the world are trading above their long-term oriented trend-lines and that the current bull-market remains global in scope. In addition, the Global Futures Long Term Trend Index has not stopped its bullish ride yet and reached its highest level for months, indicating that the long-term oriented uptrend of U.S. equities remains well intact. Also, the relative strength of all risky markets has not shown any weaknesses so far, another indication for the current risk-on market environment. Examining long-term market breadth reveals that all our tape indicators (High-/Low Index Weekly, the Modified McClellan Volume Oscillator Weekly, SMA 200) increased significantly last week, with the SMA 200 hitting the highest level for years.

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.

Bottom Line

Even though increased sentiment driven volatility/washout-events could not be ruled within the next two weeks, there is absolutely 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 also remain long (but they should bear in mind that painful down-days cannot be ruled out the moment).

Stay tuned!