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October 11th 2020

Market Review

U.S. stocks ended the week with solid gains. The Dow Jones Industrial Average gained 3.3% over the week to close at 28,586.90. The S&P 500 logged a 3.8% rise for the week to finish at 3,477.13. The Nasdaq ended at 11,579.94 and jumped 4.6% over the past week. All key S&P sectors ended in positive territory for the week, led by the materials sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 25.

Strategy Review

In mid-September, we received a growing number of evidences that the market was about to enter a quite corrective consolidation period. More precisely, our indicator framework showed that only due to the strong (out-)performance of a few mega-caps, the S&P 500 was holding up quite well, although the broad market was already faltering on a fast pace. In the past not every weak tape structure led to a correction, but every correction started with a weak tape structure. Thus, we warned our members that the situation was getting increasingly dangerous since a trend-reversal within these few heavy-weighted stocks could easily trigger a stronger correction as there was literally no safety net around to cushion such a move. Given the fact that the tape condition even continued to worsen in late September, our strategic outlook obviously turned bearish back then. As a result, we recommended our conservative members to step onto the sideline as the opportunity cost of not being invested was extremely low. Moreover we said that even if we did not see a stronger pullback correction immediately, we would prefer to sacrifice 2 to 3% upside potential to receive an all-clear signal again instead of running the risk of participating a fast-paced correction. Although the S&P 500 had fallen by more than 3% after our call, it recovered strongly within the past two weeks. After our indicator framework showed major signs of improvements already at the beginning of the week, the big question is if the current correction cycle has already come to an end or if the recent recovery will turn out to be corrective in its nature?

Short-Term Technical Condition

The short-term oriented up-trend of the market got back on track on Monday, as the readings from our entire short-term oriented trend indicators turned bullish on that day. This bullish trend continued to strengthen during the week, as the S&P 500 managed to close nearly every single day above the bullish envelope line of Trend Trader Index. As a result, both envelope lines of the Trend Trader Index bottomed out, which is another quite bullish price driven trend signal at the moment. More importantly, the underlying momentum of this price driven uptrend also increased significantly as the Modified MACD flashed a quite strong bullish signal already at the beginning of the week. Consequently, the risk of a stronger and sudden price trend reversal should remain low as long as this indicator remains bullish. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, which also jumped into outright bullish territory last week, confirming the latest gains we saw. Thus, the latest price action of the S&P 500 can be definitely seen as start of a new and sustainable short-term oriented uptrend, instead of being just a corrective bounce. This view is confirmed by fact that any possible upcoming weakness would most likely just produce a bullish divergence in the readings of our short-term oriented trend indicators, as extremely heavy losses would be necessary to bring their gauges back to their former low. A fact, which is quite unlikely if we consider the positive developments all across the board – at least from a current point of view.

More importantly, such a sudden trend-break scenario is also neglected by the fact that short-term market breadth also showed major signs of improvements during the last week. The most encouraging tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators flashed a strong bullish crossover signal on Monday and continued to strengthen this signal during the whole week. Hence, both indicators are definitely confirming the latest gains of the S&P 500 as the underlying tape momentum is getting back on track in a fast manner. This can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50) as both gauges jumped back to the highest level since late August. This is telling us that the majority of all U.S. equities got back into an extreme powerful short-term oriented uptrend. Another interesting fact here is that both indicators have formed a quite bullish divergence if we consider the current level of the S&P 500. Another quite encouraging signal is coming from the High-/Low-Index Daily. After turning nearly bearish two weeks ago, it managed to widen its bullish gap considerably last week. The main reason for this is the fact that we have recently seen a quite strong reduction in the number of new lows, in combination with a quite encouraging increase of new highs. This is telling us that the latest gains were mainly driven by an outright strong demand all across the board (rather than being the result from short-covering) as the market internals have strengthened enormously. A fact, which can be also observed if we focus on the Upside-/Downside Volume Index Daily. This is another piece of evidence that the market has now entered a new and sustainable uptrend and, therefore, we strongly believe that have seen the worst already.

On the contrarian side, we can see that the market is quite overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Ratio Daily), plus some of our option based indicators (All CBOE Put-/Call Ratio Daily, WSC Put-/Volume Ratio Indicator and the WSC Dumb Money Indicator) flashed a fresh albeit small bearish signal last week. As a matter of fact, we would not be surprised to see some form of short-lived washout event next week. Apart from that fact, the situation looks increasingly bullish here as well. The WSC Capitulation Index dropped by more than half of its rise (whereas its Fisher Transformation is also about to flash an all-clear signal soon), telling us that we might have seen the worst already. A fact, which is also supported from a pure seasonal point of view (Presidential Cycle and Decennial Cycle) as the market often faced renewed tailwinds in mid-October (after a quite difficult time period before). This scenario is also supported by the fact that there is still enough dry power on the sideline (number of bears on Wall Street) to push prices higher on a mid-term time perspective.

Mid-Term Technical Condition

Probably the most important reason why we strategically turn bullish again is because we saw a strong recovery of the Global Futures Trend Index (which is one of our most important mid-term oriented trend indicator). To be more precise, its gauge jumped by more than 25 percentage points and did, therefore, reach the upper range of its bullish consolidation area last week. As a result this indicator is trading far above its important 60% threshold, which is definitely neglecting any potential bear case scenario – at least for the time being. Another bullish mid-term oriented trend signal is coming from the WSC Sector Momentum Indicator. There we can see that most sectors within the S&P 500 remain in a strong mid-term oriented price-driven up-trend. A fact, which can be also seen if we examine our Sector Heat Map as the momentum score of riskless money market dropped by 2 percentage points last week. In addition, the momentum score of all sectors (except energy) remains above the one from riskless money market.

If we focus on mid-term oriented market breadth, we basically get the same set-up as we have on a short-term time frame. First of all, our advance-decline indicators (Advance-/Decline Line Weekly, Advance-/Decline Line Daily, Advance-/Decline Volume Line) strengthened considerably last week. Hence, some of them have even reached a new all-time high and have, therefore, formed an outright bullish divergence recently. Another important mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both indicators managed to flash a bullish crossover signal last week. This is a quite healthy tape signal, as it indicates an increasing underlying demand all across the board. Moreover, with such solid readings in both indicators, the probability of a sudden correction dropped significantly. Additionally, also our Modified McClellan Oscillator Weekly narrowed its bearish gap, whereas the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) grew also to outright confirmative levels. This is quite an interesting detail, since we have hardly seen such a strong move within one week. Anyhow, in the end we saw an extremely healthy recovery within our entire mid-term oriented breadth indicators (whereas some of them have even formed a quite bullish divergence recently). So all in all, it looks like that the current mid-term oriented uptrend is strongly backed by a broad basis and, therefore, further gains into deeper Q4 can be expected.

Long-Term Technical Condition

Not surprisingly, also the long-term oriented uptrend of the market gained further bullish ground last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for U.S. equities, whereas the our WSC Global Momentum Indicator shows that this bull market remains global in scope (as 71% of all global markets are trading above their long-term oriented trend-lines at the moment). Also our WSC Global Relative Strength Index was holding up quite well and reveals that the relative strength of risky markets remains more attractive that an the one from U.S. Treasuries. Another positive signal is coming from long-term market breadth as our entire long-term oriented breadth indicators (Modified McClellan Volume Oscillator Weekly, SMA 200 and the High-/Low Index Weekly) also showed stronger signs of recovery 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 Dynamic Variance Portfolio and the WSC Sector Rotation Strategy.

Bottom Line

If we consider the speed and the magnitude of the recent tape recovery, the underlying technical condition of the market got definitely a quite bullish tilt again. A fact, which can be also observed if we focus on our WSC Big Picture Indicator, which managed to jump back into its outright bullish quadrant already at the beginning of the week. As a result, we think it is time to upgrade our strategic view to bullish again, as the risk of a imminent correction has diminished significantly. Thus, we think it would make sense for our conservative members to get back into the market, since the current risk-/reward ratio looks quite attractive again – at least from the current point of view. Aggressive traders should focus on the long side again, as long as our short-term oriented indicators remain bullish. However, given the quite fast changing market environment, we would not be afraid of issuing a strategic sell signal immediately, if we see a stronger deterioration within our indicator framework.

Stay tuned!