January 19th 2020

Market Review

U.S. stocks rallied for the week, lifting the benchmark indexes again to new record highs. The Dow Jones Industrial Average advanced 1.8% for the week to end at 29,348.10. The S&P 500 gained nearly 2% over the week to 3,329.62. The Nasdaq soared 2.3% from last Friday’s close to 9,388.94. The major averages all hit record highs on Friday. For the week all three benchmark indexes also posted their largest percentage gains since August last year. The Dow has been up for five of the past six weeks, with a year-to-date return of 2.8%. The S&P 500 has been up for two consecutive weeks, with a year-to-date return of 3.1% and the Nasdaq has risen for six straight weeks, with a year-to-date return of 4.6%. Most key S&P sectors ended in positive territory for the week, led by utilities. The energy sector was the only decliner. The CBOE Volatility Index (VIX), a gauge of options prices known as VIX, ended at 12.10.

Short-Term Technical Condition

The readings from our entire short-term oriented trend-indicators continued to strengthen or regained bullish momentum last week and have, therefore, not shown any signs of weaknesses yet. The S&P 500 is currently trading 87 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 3,242. 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 got back on track as the Modified MACD strengthened its bullish signal since it showed a widening bullish gap last week. The only weaker signal is coming from the Advance-/Decline 20 Day Momentum Indicator as it slightly decreased on quite bullish levels and, hence, did not fully confirme the latest record of the S&P 500. Since this indicator tends to be a leading one, the pace of the current rally may slow down a bit soon (at least from a pure trend point of view).

Examining our short-term oriented breadth indicators reveals that nearly all of them continued to strengthen 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 widely backed by a broad basis. The most important signal is coming from the NYSE New Highs/New Lows Indicator, as the number of stocks hitting a fresh 52 weeks’ high showed massive bullish spikes last week. Especially on Friday, we saw 339 (!) new yearly highs and only 7 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 tremendously widened its bullish gap during the last couple of trading sessions. This 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 (or got back on track), showing 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 during the week. With such positive short-term oriented readings all across the board, we strongly believe that the risk of a stronger and sustainable trend-reversal should to be extremely limited for the time being.

Unchanged compared to last week, the only major red flags are coming from the contrarian side. There we can see that our entire option based indicators (Daily Put-/Call Ratio All CBOE Options, All CBOE Options Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator and the WSC Put-/Volume Ratio) reached outright bearish levels last week. In some cases, we have not seen such bearish levels for years. From a pure contrarian point of view, this is telling us that a lot of good news is already factored in and, therefore, the market is getting increasingly vulnerable for negative driven (political and macroeconomic) news flow. In such situations, the market often faces stronger washout-days or even a longer lasting consolidation period (since a lot of good news is already factored in). This is a scenario which is also drawn by the Presidential Cycle, since the time period from January until mid of February is often accompanied by increased volatility and nasty pullback, although the underlying tone remains positive. Interestingly, the main-stream media has also started to talk about the relatively high optimism and maybe this might be the reason why the amount of bulls started to decrease significantly compared to last week. This can be seen as a quite positive signal as the crowd starts to get nervous about the increased optimism within the market. Another quite bullish fact is that our Smart Money Flow Index has shown some relative strength against the Dow Jones Industrial Average recently and, therefore, the WSC Capitulation Index grew deeper into bullish territory (indicating a risk-on market environment). So from a pure contrarian point of view, the situation is not quite clear at the moment. Nevertheless, we think with such strong short-term oriented tape readings any upcoming sentiment-driven washout should be limited in price and time.

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 succeeded to stay above the extremely bullish 90 percent threshold last week. In such a situation, every upcoming short-term weakness should be regarded just as healthy breather within an ongoing uptrend. Another quite bullish signal is coming WSC Sector Momentum Indicator which is trading at very solid levels and even (slightly) increased last week. This is telling us that most sectors within the S&P 500 are per definition still 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 is still trading above the one from riskless money market (currently trading at 0 percent). These facts are another indication that the risk appetite among investors remains quite high (and, therefore, our strategic bullish view remains unchanged).

More importantly, the current mid-term oriented setting 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 and widened its bullish gap, 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 outright 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

The same applies for the long run, as the long-term oriented uptrend of the market remains well intact. Our WSC Global Momentum reached the highest level for months, showing that currently 97 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. Also the relative strength of nearly all risky markets was also holding up quite well, which is another indication for the current risk-on market environment. And in addition, we can also observe significant 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 considerably 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, the WSC Dynamic Variance Portfolio and, therefore, also the WSC Model Portfolio Composite reached a new all-time high last week.

Bottom Line

Even though it is possible to see increased volatility ahead, our strategic bullish outlook remains unchanged compared to last week. Given the outright bullish tape structure all across the board, we think that any further upcoming news-flow or sentiment driven washout-day/consolidation period should turn out to be limited in price and time – at least for the time being. A fact, which can be also seen if we focus on our Big Picture Indicator, which is still moving around within its bullish quadrant. As long as this is the case, we think it might be a bit too early to take the chips from the table. Therefore, we think aggressive short-term traders should remain bullish as long as our short-term oriented indicators remain bullish, whereas conservative investors should hold their equity exposure.

Stay tuned!