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February 14th 2021

Market Review

All three major U.S. averages finished the week with decent gains to set another round of record closes. For the week, the Dow Jones Industrial Average advanced 1.0% to end at a record of 31,458.40. The S&P 500 also finished at a new record of 3,934.83 and booked a weekly gain of 1.2%. The Nasdaq advanced 1.7% from the week-ago close to 14,095.47, booking also another record close. Energy led gainers among the S&P’s 10 major sectors; utilities and discretionary were the only negative sectors for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 20.

Short-Term Technical Condition

In line with our expectations, the short-term oriented uptrend of the market strengthened as the readings of our entire short-term oriented trend-indicators continued to improve last week. The S&P 500 is now trading 116 points above the bearish threshold from the Trend Trader Index. This shows that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 3,815. Additionally, both envelope lines of this reliable indicator are still steadily increasing, indicating that the resistance/support levels for the S&P 500 are increasing as well. This is a quite supportive signal as higher highs and higher lows are a typical pattern for a healthy uptrend. Another important fact is that the underlying momentum of this short-term oriented price driven trend still looks solid as the Modified MACD widened its bullish gap last week. The only weaker signal is coming from the Advance-/Decline 20 Day Momentum Indicator. Although its gauge showed an improvement during the week, it slightly decreased at the end of the week. As a result it did not fully confirm the latest record of the S&P 500.

However, this small bearish trend divergence can be ignored since our entire short-term oriented market breadth (aka tape indicators) have clearly confirmed the latest breakout of the S&P 500. As a result, the risk of a fast-changing trend reversal is extremely low for the time being. Especially, the percentages of stocks which are trading above their short-term oriented moving averages (20/50) are telling us that the current short-term oriented uptrend is backed by a broad basis. A fact, which can be also observed if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators showed a widening bullish gap last week. This indicates that the current short-term oriented uptrend is widely supported by a positive momentum in advancing stocks and in advancing volume. Another quite confirmative fact is that we saw solid levels in the number of stocks which hit a fresh yearly high, whereas there were hardly any stocks which dropped to a new yearly low (5). Therefore, the High-/Low Index Daily strengthened its bullish signal for the week. As long as this is the case, the underlying short-term oriented tone of the market remains supportive. All these facts are telling us that the current short-term oriented uptrend is still well supported by a broad basis. With such solid signals across the board, it is highly unlikely that the recent rally will run out of fuel soon – at least on a short-term time perspective.

On the contrarian side, we can see that the increased greed in the option market (AII CBOE Put-/Call Ratio, WSC Put-/Volume Ratio, the WSC Put-/Volume Ratio Oscillator and the WSC Dumb Money Indicator) remains persistent. As a result, the risk of painful washout-days (like on Wednesday) remains persistent (since short-term market breadth remains too strong to trigger a short-term trend reversal). Moreover, we can see that the Smart Money Flow Index is still far away from confirming the current levels of the Dow Jones industrial Average. A fact, which can be also seen if we focus on the WSC Capitulation Index which is still indicating a risk-off market environment. As already mentioned last week, given the recent Hedge Fund squeeze these two indicators might be a bit flawed at the moment. Perhaps most important is the fact that there is still enough purchasing power on the sideline since the amount of bulls has not increased so far. So if markets continue to rally (which is our preferred scenario), a lot of purchasing power will be forced to get back into the market (which could lead to quite strong up-days). Even from a seasonal point of view (Decennial Cycle), the underlying tone should remain quite bullish until mid-march (before the market should face stronger headwinds afterwards).

Mid-Term Technical Condition

This view is also confirmed by the fact that the mid-term oriented up-trend of the market is giving no reason to worry right now. This is mainly because our reliable Global Futures Trend Index succeeded to increase by another 4 percentage points to 98%. With such solid readings (and in combination with supportive market breadth), any upcoming weaknesses should turn out to be limited in price and time. Therefore, it is definitely a way too early to change our strategic bullish base case scenario at the moment. A fact, which can be also seen if we focus on the WSC Sector Momentum Indicator which also kept trading at quite bullish levels last week. This is telling us that most sectors of the S&P 500 remain in a strong mid-term oriented price driven uptrend at the moment. This strong mid-term oriented price trend is also confirmed by our Sector Heat Map as the momentum score of riskless money market keeps trading at 0%.

More importantly, the mid-term oriented up-trend still looks quite broad based in its nature since our relevant tape indicators have not shown any signs of weaknesses yet. Especially, the Modified McClellan Oscillator Weekly is telling us that the momentum of mid-term oriented advancing issues still remains quite strong for the time being. Another quite confirmative signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). There we can see that the majority of stocks remains per definition in a strong mid-term oriented uptrend at the moment. As a matter of fact, the recent all-time high of the S&P 500 was definitely confirmed by a broad basis. A fact, which can be also seen if we focus on our advance-decline indicators since all of them (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and Advance-/Decline Volume Line) reached or even jumped to their highest levels for years. 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. So, all in all, our mid-term oriented tape indicators are telling us that it is definitely a way too early to take the chips from the table (since the odds for a stronger trend-reversal remain extremely low at the moment).

Long-Term Technical Condition

Not surprisingly, the long-term oriented technical condition of the market is giving no reason to worry right now. The WSC Global Momentum shows that the current bull market remains global in scope as 100% of all local equity markets around the world (which are covered by the WSC Global ETF Momentum Heat Map) remain in a long-term oriented uptrend. Especially, in the U.S. the long-term oriented price trend remains strong as the Global Futures Long Term Trend Index keeps trading at outright bullish levels. More importantly, this long-term oriented price trend is also confirmed by long-term oriented market breadth. To be more precise, the bullish signal of the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly improved significantly last week, whereas the percentage of stocks which are trading above their (200) keeps trading at bullish record levels. This shows that the current long-term oriented uptrend is still packed by an extremely broad basis.

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. As the underlying momentum score of Industrials dropped below average and below the one from the S&P 500, we received a sell signal for this ETF within our WSC Sector Rotation Strategy. Moreover, we are proud to announce that the WSC Model Portfolio Composite, WSC Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio reached a new high during the previous week.

Bottom Line

Given the fact that the current uptrend is backed by a broad basis and on multiple time-frames, our strategic base case scenario remains unchanged compared to last week. On a very short-time frame painful sentiment driven wash-out events cannot be ruled out. Nevertheless, if we consider the current tape structure of the market any upcoming weaknesses should be limited in price and time. A fact, which can be also observed if we focus on our Big Picture Indicator, which is still moving around in its outright bullish quadrant. In such a regime, trend-following remains the most profitable strategy. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders continue to buy the dips!

Stay tuned!