April 12th 2020

Market Review

U.S. stocks finished the holiday-shortened week sharply higher Thursday, with the main indexes recovering about half of their losses that were racked up in late March. For the week, the Dow Jones Industrial Average rocketed 12.7% to close at 23,719.37. The S&P 500 finished at 2,789.82 and gained 12.1% this week for its best weekly performance since 1974! The Nasdaq booked a weekly gain of 10.6% and closed at 8,153.58, its best week since 2009. From its recent March 23 low, the Dow is up 25.0%, the S&P 500 is up 22.3% from that point and the Nasdaq is up 18.2%. All key S&P sectors succeeded to close in positive territory for the week, led by the materials sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 41.7.

Strategy Review

Three weeks ago, we told our members that the market was about to rock bottom. As a consequence, we said that aggressive traders should cover profitable short-positions and focus on the long side again, whereas conservative members should also begin to raise exposure. In fact, one day later the S&P 500 hit rock-bottom and since then, the broad benchmark index rallied incredible 27%. Although this rally underlines the predictive power of our investment process, the theoretical 24% loss which was avoided (since the S&P 500 hit our suggested intra-day stop-loss limit at 2,890) is still the most important fact to mention here. Because avoiding a strong reduction in the purchasing power is still the most important driver for long-term success. Anyhow, right now we pay particular attention the quality of the current rally since the tape condition will tell us if the market is at risk for another limited pullback or if we see further strong rallying ahead.

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend condition of the market continued to strengthen. The S&P 500 is now trading 207 (!) points above the bullish envelope line from the Trend Trader Index (and even 327 points above the bearish one), indicating that the market is now trading in a powerful short-term oriented uptrend. As a consequence, the pure price driven short-term oriented trend turned extremely bullish and remains intact as long as the S&P 500 does not close below 2,461. Moreover, both envelope lines from the Trend Trader Index started to form a rounding bottom, confirming our base case scenario. More importantly, this pure price driven uptrend is also support by the Modified MACD, which widened its bullish gap significantly, indicating further gains ahead. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, which rocketed into strong bullish territory last week, fully confirming the latest gains we saw. Given the fact that we saw a strong surge in both indicators, we strongly believe that any upcoming weakness would most likely just produce a bullish divergence in their readings, as extremely heavy losses would be necessary to bring their gauges back to their former low! Consequently, we received further confirmation for our bullish base case scenario.

This view is also confirmed by short-term market breadth as we also saw major signs of improvements last week. The most encouraging tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both recovered significantly last week and have, therefore, also confirmed the latest gains we saw. On top of that, both indicators are telling us that the underlying tape momentum is strongly getting back on track. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50) as both gauges recovered significantly last week. The SMA 20 even rocketed to the highest level for months. Another encouraging signal is coming from the High-/Low-Index Daily, which almost flashed a bullish crossover signal last week, confirming our view that 2,191 should represent the final low (at least for now). The main reason for this bullish momentum is the fact that we have recently seen a significant reduction in the number of new lows, in combination with a minor increase of new highs. This indicates that the market internals are strengthening as the latest recovery was driven by a strong demand rather than by short-covering. This is another piece of evidence for our base case scenario, where we think that we have seen the worst already.

On the contrarian side, we can see that there is still enough dry power on the sideline to fuel the rally even more. According to the AII bulls & bears survey, there are still more bears than bulls around, whereas Smart Money remains extremely bullish at the moment. So if the rally continues, the fear of missing out (FOMO) will kick in and will act as additional strong driver in the current market environment. Another interesting fact is that the option market also still remains a bit cautious (Daily Put-/Call Ratio All CBOE Options Indicator, AII CBOE Put-/Call Ratio Oscillator and the Equity Options Put-/Call Ratio Oscillator), which is another positive ingredient in the current market environment.

Mid-Term Technical Condition

Despite the fact that the conditions on a short-term time frame are brightening, the technical mid-term condition of the market still remains quite weak/vulnerable for the time being. This is mainly due to the fact that the gauge from the Global Futures Trend Index is still trading far below its 60 percent bullish threshold! As already mentioned a couple of times – from a formal point of view – the current correction cycle will be not be over as long as its gauge keeps trading below that important threshold! Therefore, it was good to see that its gauge has shown some strong positive momentum recently, as it succeeded to touch the bearish consolidation range last week! Still, the risk for nasty pullbacks remains quite high (although we strongly believe that we have seen the worst already). The main rationale behind this fact is that the mid-term oriented price trend of the market still remains intact and has also shown some small bullish signs recently. This can be seen if we focus on the WSC Sector Momentum Indicator, which seems to bottom out. But still this indicator is trading in the negative territory. This is telling us that the momentum score of all sectors within the S&P 500 (except technology at 100%) keeps trading below the momentum score of riskless money market (at 95.5%) within our Sector Heat Map. Therefore, it was good to see that this indictor once again showed some signs of stabilization last week.

Examining mid-term oriented market breadth reveals a recovery as the picture improved compared to the previous weeks (and is, therefore, behaving like expected). This becomes obvious if we focus on our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line Weekly), as all of them gained bullish ground last week and are confirming the latest move from the S&P 500. Also the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) increased for the week, although both gauges are still trading far below the bullish threshold. In addition, the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly improved last week. The only weak signal is coming from our Modified McClellan Oscillator Weekly. But this is not a big surprise if we consider the current circumstances. So all in all, these signals are telling us that we might have seen the worst already (at least on an intermediate basis) and, therefore, any upcoming pullback within the ongoing recovery should be limited in price and time (as long as we see further improvements within our short-term oriented indicator framework)!

Long-Term Technical Condition

Not surprisingly, the long-term oriented trend of the market has not shown any significant signs of recovery. The WSC Global Momentum Indicator is still trading at the lowest level possible (0%). This signals that there are absolutely no local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) which are trading above their long-term oriented trend lines. Also our Global Futures Long Term Trend Index has not shown any bullish signs recently. This indicates that the long-term oriented trend of U.S. equities is still quite damaged at the moment. Although our WSC Global Relative Strength Index slightly improved last week and it reveals that the relative strength of all risky markets is trading below the one from U.S. Treasuries (which is another indication that we are still quite early in the current up-cycle). Focusing on our long-term oriented tape indicators reveals that the Modified McClellan Volume Oscillator Weekly weakened while the High-/Low Index Weekly and the SMA 200 showed some bullish gains.

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 quality of the recent rally was quite high and, therefore, the market is still following our expected path. Thus, we stick to our recovery scenario as long as our short-term oriented indicators continue to improve (or show bullish divergences if we see some weaker days). So even if we see another period of stronger weaknesses ahead, we think they will just be part of the ongoing stabilization/recovery process (as long as our indicator framework remains supportive). Moreover, to justify further rallying from current levels, it is important that our mid-term oriented indicators continue to improve also over the next couple of days/weeks. Consequently, our short-term oriented tape indicators should remain key area of focus. However, right now there are no major deal-breakers visible and, hence, our strategic bullish view remains unchanged. Consequently, we think that aggressive traders as well as conservative investors should remain invested. However, we also think it would also make sense to adjust the latest stop-loss limit to 2,400 (closing price), just in case thinks change quite quickly during the week.

Stay tuned!