December 22nd 2019

Market Review

U.S. stocks rallied for the week, lifting the benchmark indexes to new record highs. The Dow Jones Industrial Average rose 1.2 percent for the week to end at 28,455.09. The S&P 500 gained 1.5 percent over the week to 3,221.23. The benchmark index for American equities posted its fourth consecutive weekly gain and had its best weekly performance since August. The Nasdaq soared 2.1 percent in five trading days to 8,924.96. The tech-heavy also recorded its best weekly performance since August. Most key S&P sectors ended in positive territory for the week. Industrials and financials were the only decliners. The Chicago Board Options Exchange Volatility Index, a gauge of options prices known as VIX, ended at 12.5.

Strategy Review

In our last week’s comment we highlighted the fact that we remained strategically bullish as the underlying tape condition was giving absolutely no reason to worry. To be more precise, our indicator framework showed that the latest up-trend (positive time-series momentum) of the S&P 500 was backed by a strong demand all across the board and was, therefore, not only driven by a few heavy weighted stocks in the index. In such a situation, we are a committed supporter of the trend-following strategy (rather than being a contrarian) since the risk of a sharp trend-reversal (momentum crash) tends to be outright low. As a matter of fact, our strategic bullish outlook remained unchanged since the recent risk-/reward ratio still looked outright attractive. In fact, the market continued to reach further record highs last week, whereas the S&P 500 also had its best weekly performance since August. Consequently, the big question is if we see further rallying or if it is already time to search a perfect exit-point to jump off the bandwagon?

Short-Term Technical Condition

Obviously, the readings from our entire short-term oriented trend-indicators continued to strengthen last week. The S&P 500 is currently trading 80 points above the bearish threshold from the Trend Trader Index, indicating that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 3,140. Additionally, both envelope lines of this reliable indicator are still smoothly drifting higher, which is another quite positive trend signal (as it indicates higher highs and higher lows on a rolling 20 day basis). Also the underlying price driven momentum of the market remains outright robust at the moment as the Modified MACD strengthened its bullish signal and has, additionally, not shown any signs of weakness so far. Another quite bullish trend signal is coming from the Advance-/Decline 20 Day Momentum Indicator, which finished the week also at quite solid levels and has, therefore, clearly confirmed the latest high of the S&P 500. So all in all, the current up-trend of the market still looks outright bullish at the moment.

If we focus on our short-term oriented breadth indicators, we can see that all of them continued to strengthen on quite bullish levels last week. This is an outright positive technical signal, as it shows that the majority of all NYSE listed stocks participated in the latest gains we saw. Consequently, the current up-trend of the market is still widely backed by a broad basis. The most important signal is coming from the NYSE New Highs/New Lows Indicator, as the amount of stocks hitting a fresh 52 weeks’ high reached outright bullish levels last week. Especially on Friday, we saw 272 (!) new yearly highs and only 9 new yearly lows. These are outright confirmative numbers, as they indicate an outright strong demand all across the board. Consequently, the High-/Low-Index Daily widened its bullish gap last week, which is another 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, indicating that the momentum of advancing stocks as well as advancing volume is still gearing up on relatively high bullish levels. Also the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) showed a quite strong upside participation and both indicators are still trading in solid bullish territory. With such positive short-term readings, we believe that the risk of a stronger and sustainable negative trend-reversal should to be extremely limited for the time being. As a matter of fact, further record highs into deeper December/early January are quite likely.

From a pure contrarian point of view, we can see that the market has still a bit room left to grow until it will get too complacent. This can be seen if we focus on the z-score from the Daily Put-/Call Ratio All CBOE Options, which is still slightly trading above its bearish threshold, whereas the WSC Capitulation Index is still indicating a risk-on market environment (at least for now). Additionally, we can see that market sentiment also improved over the last couple of weeks, whereas the number of bulls has also not reached critical values yet. Nevertheless, if the market continues to rise with such a speed, it will be just a question of time until these values grow into complacent territory. If this is the case, we would not be surprised to see a distribution phase ahead. But now we are not there yet and more importantly, market breadth remains too strong to get concerned at the moment. Hence, we are also ignoring the latest negative signal from the Smart Money Flow Index – at least for now.

Mid-Term Technical Condition

Another reason, why we stick to our strategic bullish outlook is due to the fact that the mid-term oriented technical condition of the market remains also quite robust. First of all, our reliable Global Futures Trend Index continued to show outright positive momentum as its gauge closed above the extremely bullish 90 percent threshold last week. In such a situation, every upcoming short-term weaknesses should be limited in price and time. Another quite bullish signal is coming WSC Sector Momentum Indicator which is still drifting higher on very solid levels. This is telling us that most sectors within the S&P 500 are per definition in a mid-term oriented 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 4.3 percent). These facts are another indication that the risk appetite among investors remains quite high (and, therefore, our strategic bullish view remains unchanged).

This current mid-term oriented up-trend of the market is strongly confirmed by mid-term oriented market breadth. First of all, our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to strengthen in the last couple of trading sessions and are, thus, confirming the recent record high of the S&P 500! In other words, the recent high was widely supported by a broad basis, which is an absolutely healthy breadth signal. Moreover, mid-term oriented advancing issues and mid-term oriented up-volume continued to gain more bullish ground and are trading well above their bearish counterparts. These are outright bullish signals, since the risk of a stronger correction is extremely low with such strong readings. Also our Modified McClellan Oscillator Weekly increased once again last week, indicating that the mid-term oriented tape momentum remains constructive. And finally, also the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) reached the highest levels for months, indicating that the majority of all NYSE listed stocks are still per definition in a robust mid-term oriented up-trend. All in all, these facts signal that the total upside participation within the market is still positive, which is another indication that it is still a way too early to take the chips from the table – at least from the current point of view.

Long-Term Technical Condition

Basically, the same applies for the long run, as the long-term oriented uptrend of the market remains well intact. Our WSC Global Momentum spiked to outright bullish levels showing that currently 90 percent of all local equity markets around the world are trading above their long-term oriented trend-lines. Moreover, the Global Futures Long Term Trend Index continued to gain further strengths at quite bullish levels, indicating that the long-term oriented uptrend of U.S. equities remains well intact. This can be also seen if we take a look at the Global Relative Strength Index as the relative strength of U.S. equities remains the most attractive one from a pure cross-sectional point of view. 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, SMA 200) also strengthened last week.

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

Our base call remains unchanged compared to last week. The market is exactly following our expected path so far. In other words, the current time-series momentum of the S&P 500 is still strongly backed by a broad basis. As a matter of fact, our strategic bullish outlook remains unchanged compared to last week. So as long as our Big Picture Indicator keeps moving around within its bullish quadrants, the current rally is not in danger of fading out at the moment. Thus, we strongly believe to see further record highs into deeper December/early January. So all in all, the current risk-/reward ratio still looks extremely attractive at the moment and, therefore, we would advise our conservative members to hold their equity exposure, while aggressive short-term traders should remain bullish.

Stay tuned!