December 13th 2020

Market Review

U.S. stocks finished the week with small losses. The Dow Jones Industrial Average dropped 0.6% over the week to 30,046.37. The S&P 500 booked a weekly loss of 1% to finish at 3,683.46. Both the Dow and S&P 500 posted their first weekly declines in three weeks. The Nasdaq shed 0.7% for the week to end at 12,377.87. Of the S&P sectors, energy was the only gainer, while all other sectors declined. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 23.3.

Short-Term Technical Condition

Although the market finished in negative territory for the week, the short-term oriented trend of the market remains intact. The S&P 500 is still trading 48 points above the bearish threshold from the Trend Trader Index. Consequently, the pure short-term oriented price trend of the market remains bullish as long as the S&P 500 does not close below 3,615 (lower threshold from the Trend Trader Index). Also, from a pure structural point of view, the short-term oriented trend of the market has not turned bearish yet as both envelope lines of the Trend Trader Index are still increasing. As a result, the price driven uptrend of the market still remains quite constructive for the time being. The situation looks slightly different, if we focus on the momentum of this price-driven uptrend. There we can see that the Modified MACD flashed a small bearish crossover signal last week, 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 in outright bullish territory, it slightly dropped for the week. Given the fact that this indicator is a leading one, it could be possible to see further volatile but bullish biased consolidation into next week. The main reason, why we strongly believe that the recent consolidation is still bullish biased is based on the fact that most of our short-term oriented trend indicators still remain bullish. Furthermore, it is not unusual that some or even all of our short-term oriented trend indicators tend to deteriorate (or even turn bearish) if the market is entering a volatile consolidation period. Therefore, the main challenge is to differentiate between a healthy and a corrective consolidation process. Normally, a consolidation can be classified as healthy as long as our short- to mid-term oriented market breadth indicators remain supportive. In such a situation, the trend-break is most likely being caused by a temporarily weakness in heavy weighted stocks in the index (whereas the remaining market is holding up quite well) or just by profit taking activities (which is a quite typical phenomenon after a stronger rally). Both are not fundamental reasons to trigger a sustainable trend-reversal. Thus, these bearish signals in short-term oriented trend indicators can be ignored as they are just part of a healthy breather. The situation would be different, if a consolidation period is accompanied by an extremely weakening tape structure. In such a situation, a potential trend-break is driven by a broad basis and is, therefore, often just the harbinger of a more significant pullback.

From a current point of view, the readings from most of our short-term market breadth indicators still remain too strong to justify a sustainable trend-reversal. In other words, the recent consolidation period/volatile trading action can be still classified as healthy in its nature. This becomes obvious if we examine the NYSE New HighsNew Lows Indicator. There we can see that the number of stocks hitting a fresh yearly high kept trading at quite confirmative levels (during the whole week), whereas the number of stocks which were pushed to a new yearly low is nearly zero. Thus, the High-/Low-Index Daily continued to widen its bullish gap. Both signals are telling us that the latest weekly decline was mainly driven by a handful of heavy weighted stocks in the index, rather than being the result of broad based selling pressure. A fact, which can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges slightly decreased for the week, they show that the majority of all U.S. listed stocks remain in a short-term oriented price driven uptrend. On top of that we can see that the momentum of advancing issues remains positive (Modified McClellan Volume Oscillator). The only negative signal is coming from the Modified McClellan Volume Oscillator Daily, which shows that the momentum of up-volume slightly turned negative last week. However, given the fact that up-volume is still outpacing short-term down-volume (Upside-/Downside Volume Index Daily), this bearish signal can be definitely ignored at the moment. So, from a current market breadth perspective, the recent slow-down is still part of a healthy consolidation period rather than being the beginning of a sustainable trend-reversal.

Unchanged compared to last week, the only super red flags are still coming from the contrarian side as most of our option based- as well as sentiment driven indicators remain bearish (AII Bulls & Bears survey , 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). As already mentioned over the past couple of weeks, such a high degree of complacent often leads to a sentiment driven consolidation period, which is accompanied by increased volatility/nasty but limited sell-off days to dampen short-term optimism. In fact, the recent consolidation period has started to have its designated impact on short-term optimism, since we saw a stronger spike in the put-/call ratio on Friday. Nevertheless, there is still a bit room left and, therefore, we would not be surprised to see further rocky sessions into expiration next week. Apart from that, we can see that the recent consolidation period has already reached its mature stage since it has relieved overbought conditions (Upside-/Downside Volume Ratio Daily and the Advance-/Decline Ratio Daily), plus the WSC Capitulation Index dropped significantly last week. Additionally, the Smart Money Flow Index has shown some positive momentum recently, whereas the market should also face some seasonal tailwinds into the last weeks of the year (Presidential Cycle).

Mid-Term Technical Condition

Examining the mid-term oriented technical condition of the market also reveals a very robust picture at the moment. This becomes obvious if we focus on the gauge from the Global Futures Trend Index, which is still trading at the top end of its outright bullish area and has, therefore, not confirmed the weekly decline of the S&P 500. With such bullish readings, the market never faced a stronger and sustainable trend-reversal in the past. Consequently, this is another reason why it is a way too early to get concerned about the latest weekly decline. Basically, the same is true if we focus on the WSC Sector Momentum Indicator, which continued to advance at outright bullish levels. This implies that the majority of sectors in the S&P 500 strengthened their mid-term oriented price driven up-trend. These bullish facts are also supported by our Sector Heat Map as the momentum score from riskless money market remains at 0% and, hence, keeps trading well below all relevant key sectors. In our view, this is another indication that the underlying mid-term oriented time-series momentum of market remains well intact. Thus, we strongly believe that it is definitely a way too early to bet on a major trend-reversal for the time being.

More importantly, the current mid-term oriented time-series momentum of the market is still strongly backed by a broad basis. While our Advance-/Decline Volume Line dropped for the week, the Advance-/Decline Line Daily and Advance-/Decline Line Weekly jumped to their highest levels for years (and have, therefore, formed a positive divergence to the current level of the S&P 500). Moreover, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading far above their bearish counterparts. As long as both indicators remain bullish in combination with readings above 60% within our Global Futures Trend Index, it is definitely a bit too early to pull the trigger. Another encouraging signal is coming from the Modified McClellan Oscillator Weekly, which succeeded to widen its bullish gap significantly. This indicates that the underlying momentum of advancing stocks on a mid-term time horizon improved (although major indexes closed lower for the week). Another sound mid-term breadth signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both gauges finished the week at quite confirmative levels, since they have not shown any signs of major weaknesses yet. With such strong bullish readings in mid-term market breadth it is just a question of time until we see further strong rallying. As a result, it is a way too early to get concerned about the latest sentiment driven consolidation period.

Long-Term Technical Condition

Even the long-term oriented trend of the market also continued to show further signs of improvements last week. The Global Futures Long Term Trend Index continued to push higher, indicating that the long-term oriented up-trend of U.S. equities is still gaining momentum on high bullish levels. Basically, we receive the same picture globally. The WSC Global Momentum Indicator shows that 100% of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend lines. Thus, the current bull market remains global in scope. Moreover, also our WSC Global Relative Strength Index was holding up quite well and reveals that the relative strength of all risky markets is trading far above the one from U.S. Treasuries. If we examine our long-term oriented tape indicators, we can see that the SMA 200 remained unchanged, while the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly improved significantly, giving absolutely no reason to worry right now.

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

The situation remains unchanged compared to last week. With quite confirmative strengths across the board, the current uptrend is not at risk of fading out soon. Thus, the current (sentiment driven) consolidation period should be limited in price and time (although further volatile session into expiration are quite likely).  As a result, our strategic bullish view remains definitely unchanged as we are expecting further gains ahead. A fact which 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 take any counter trend activities. For that reason, we would recommend that aggressive traders should stick in the bullish camp, whereas conservative members should also remain invested.

Stay tuned!