December 20th 2020

Market Review

In line with our recent call, U.S. stocks closed out a quite volatile week with gains, with all three major benchmarks reaching new records during the week. For the week, the Dow Jones Industrial Average eked out a small gain of 0.4% to end at 30,179.05. The S&P 500 gained 1.3% in that period to close at 3,709.41. The Nasdaq outperformed with a 3.1% gain for the week to end at 12,755.64. Nearly all key S&P sectors finished in positive territory for the week, led by the technology sector. Energy was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 21.8.

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend of the market remains almost unchanged compared to last week. The S&P 500 closed far above the bearish threshold of the Trend Trader Index, indicating that the pure short-term oriented up-trend of the market remains intact as long as the broad index does not drop below  3,642. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher, indicating that the support/resistance levels for the S&P 500 are increasing as well. This is a quite healthy technical signal as higher highs and higher lows are a typical pattern for a strong uptrend, at least from a pure price point of view. If we focus on the underlying trend momentum (of this price driven uptrend), can see that the Modified MACD has not succeeded yet to flash a bullish crossover signal, indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. Although the indicator is still trading at quite bullish levels, it has dropped recently and has, therefore, not fully confirmed the latest all-time high of the S&P 500. Currently, these signals are still a bit too weak to be taken too seriously at the moment. Consequently, they are just signaling some form of slow-down/bullish biased consolidation rather than being the start of a major-trend reversal.

This view is widely confirmed by short-term market breadth. Even though the momentum of advancing issues and advancing volume (Modified McClellan Volume Oscillator Daily) stalled or even turned negative (Modified McClellan Volume Oscillator Daily), the overall short-term market breadth condition of the market still looks quite constructive for the time being. Thus, it is still a bit too early to get concerned about a sustainable trend-reversal. The main rationale behind that view is that the percentage of stocks which are trading above their short-term moving averages (20/50) improved for the week (and have, therefore, closed at quite confirmative levels). This indicates that it is a bit too early to get too cautious at the moment. Additionally, we saw very healthy readings in the total number of stocks hitting a fresh yearly high, plus hardly any stocks hitting a new yearly low. Consequently, the bullish gauge of the High-/Low Index Daily closed at quite confirmative levels. With such broad based momentum scores, the risk of a sustainable trend-reversal should remain extremely low. Additionally, the current short-term oriented up-trend is still supported by short-term oriented up-volume (although it could be a bit stronger if we consider the current levels of the S&P 500). Despite the fact that short-term oriented market breadth started to lose some steam on high bullish levels, its overall readings remain too strong to get concerned at the moment. Consequently, the risk of a sustainable trend break still remains low (although some small clouds are already visible).

On the contrarian side, we can see that the extreme complacent continued to soften last week. For example, the number of bulls in the AII Bulls & Bears survey dropped significantly to close at 43%, whereas most of our remaining option- and sentiment based indicators also softened their bearish signal 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, WSC Dumb Money Indicator). This damper was mainly driven by the increased volatility/down-testing (especially at the beginning and the end of the week). Worth mentioning is the fact that this increased volatility was just the typical outcome of the expected sentiment driven consolidation period, which we already explained precisely in our previous market forecast. Currently, there is still some elevated optimism visible and, therefore, further sentiment driven volatility looks quite likely. Apart from that we can see that the WSC Capitulation Index is still indicating a risk-on market environment, whereas the Smart Money Flow Index has shown some signs of stronger stabilization recently. Another positive factor is coming from the seasonal point of view (Presidential Cycle) as the market often faces stronger tailwinds in the last trading days of the year.

Mid-Term Technical Condition

This bullish 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 gauge from our reliable Global Futures Trend Index remains on the upper edge of its extremely bullish 90 percent threshold (98%). Consequently, as long as this gauge does not show stronger signs of negative momentum, it is a way too early to get concerned about any upcoming short-term oriented volatility. Also, from a pure price point of view, the mid-term oriented uptrend of the market remains well intact as the WSC Sector Momentum Indicator continued to gain more bullish ground last week. This indicates that all main sectors in the S&P 500 remain in a strong mid-term oriented price driven up-trend and are, therefore, confirming the current levels of the S&P 500. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market remains at zero percent.

More importantly, the mid-term oriented up-trend still looks quite broad based in its nature since mid-term oriented market breadth has not shown any signs of weaknesses yet. Especially, the Modified McClellan Oscillator Weekly continued to gain more bullish ground last week and widened its gap significantly. This is telling us that that the momentum of mid-term oriented advancing issues remains extremely strong for the time being. As a matter of fact, the recent all-time high of the S&P 500 is still packed by a broad basis. This can be also seen if we focus on our advance-decline indicators since the Advance-/Decline Line Daily and Advance-/Decline Line Weekly jumped to their highest levels for years. Only the Advance-/Decline Volume Line has shown some signs of non-confirmation recently. However, this small divergence can be definitely ignored at the moment since the remaining tape indicators remain outright strong. This becomes quite obvious if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both gauges succeeded to improve for the week. A steady increase over weeks is an outright strong confirming tape signal, especially when the market scores one record after the other. This signals that the current rally is still quite broad based in its nature. Such a broader tape confirmation can also be seen if we focus on mid-term oriented advancing issues as well as mid-term oriented up-volume as both indicators are trading well above their bearish counterparts. As a matter of fact, any upcoming weaknesses should turn out to be limited in price and time (at least form the current point of view).

Long-Term Technical Condition

The long-term oriented technical picture of the market continued to show further signs of improvements last week. The WSC Global Momentum keeps trading at 100 percent, indicating that all local equity markets around the world (which are covered by the WSC Global ETF Momentum Heat Map) keep trading above their long-term oriented trend-lines at the moment.  Above all, we can see that our WSC Global Relative Strength Index improved last week and reveals that the relative strength of all risky markets is trading far above the one from U.S. Treasuries. Also, our Global Futures Long Term Trend Index continued its bullish journey, closing at the highest level for years. Analyzing long-term market breadth also reveals a very solid picture. While the bullish signals from the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly improved significantly, the percentage of stocks which are trading above their (200) day moving average reached the highest level in 2020.

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. Moreover, we are proud to announce that the WSC Model Portfolio Composite, the WSC Sector Rotation Strategy and the WSC Inflation Proof Retirement Portfolio reached a new high during last week.

Bottom Line

Our strategic bullish view remains unchanged compared to last week. Even though further sentiment driven volatility cannot be ruled out on a short-term time perspective, we think it is a way too early to take any counter-trend activities. The main rationale behind that view is that the current price driven up-trend is backed by a broad basis in every important timeframe. Thus, every upcoming sentiment driven down-testing 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 within 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. Therefore, we believe that conservative investors should 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!