August 30th 2020

Market Review

In U.S. stocks ended another week with solid gains. The Dow Jones Industrial Average rose 2.6% over the week to close at 28,653.87. The S&P 500 jumped 3.3 percent for the week to finish at 3,508.01. The broad index closed its fifth straight week of gains for the first time this year. The benchmark is also on pace for its best August since 1984 when the index gained 10.63%. The Nasdaq closed at 11,695.63 and advanced 3.4% over the past five days, its fifth straight positive week for the first time since January. Apart from utilities, all key S&P sectors ended in positive territory for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 23.

Strategy Review

In our last week’s comment, we said that – from a pure price point of view – the market remained in a strong short-term oriented uptrend. However, the situation looked quite different from a market breadth perspective, as our entire indicators showed that the underlying trend force had weakened considerably. Consequently, we said that if we saw a short-term trend reversal, the chances for a stronger pullback remained quite high (as there was literally no safety-net around to cushion such a move). Thus, we got a more cautious view last week, although we said that we needed to see some negative price action towards 3,310 first before we would issue a strategic sell signal. The main rationale behind that call was that the Big Picture Indicator was still showing a quite positive market environment and, therefore, there was still a possibility to see a large cap driven overshoot which could then also lead to a re-strengthening of the broad market. In fact, after the market rallied strongly last week, the big question is if this rally was caused by a few mega-cap tech stocks in the index or if it was driven by a strong demand across the board. If the first one holds, we would receive further confirmation for a late-cycle suckers rally whereas the second scenario would indicate that the market environment transformed back into a healthier set-up.

Short-Term Technical Condition

Not surprisingly, the pure short-term oriented price driven uptrend of the market remains well intact since the S&P 500 managed to close 140 points above the bearish envelope line of the Trend Trader Index. Consequently, the price driven set-up remains supportive as long as the S&P 500 trades above 3,386 (bearish threshold from the Trend Trader Index). More importantly, the underlying trend-momentum of this price driven uptrend re-strengthened since the Modified MACD showed an increasing bullish gap again. Thus, the risk of a sudden short-term oriented trend reversal softened again compared to last week. Another positive signal is coming from the Advance-/Decline 20 Day Momentum Indicator. Although it did not fully confirm the latest advance of the S&P 500, it showed some stronger signs of recovery last week (which is another positive flag on the horizon).

However, the most important signals are currently coming from our short-term oriented market breadth indicators. There, we can see that most of them showed positive signs of recovery last week, indicating that the latest advance was broader in scope. As a matter of fact, the rally started to broaden out again, which is a quite supportive technical signal – at least for now. Therefore, the overall set-up can be described as supportive but not overwhelmingly bullish. This becomes obvious if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges managed to recover and to close above their bullish 50 percent threshold. Especially SMA 50 jumped back to quite confirmative levels (69%), indicating a re-strengthening of the current uptrend. This can be also seen if we focus on the Upside-/Downside Volume Index Daily, which managed to get back into bullish territory already earlier last week. However, the bullish signal should be definitely stronger if we consider the fact that the S&P 500 reached a new all-time high last week. A fact, which can be also observed if we focus on Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators did not show stronger signs of recovery last week. This shows that the momentum of advancing stocks and advancing volume on NYSE remains weak kneed. On the other hand, we can see that there are hardly any stocks around which are hitting a fresh yearly low on NYSE. Thus, as long as the new yearly highs are outpacing the new yearly lows, the overall market environment can be described as supportive. However, on the other hand side, we still can see that the total number of stocks hitting a new yearly high should be also much higher if we consider the fact that the S&P 500 reached a new record high last week. Therefore, the bullish gauge of the High-/Low Index Daily can be also described as supportive but not as confirmative for the time being. All in all, the overall short-term oriented set-up looks supportive again and, thus, the risk of a stronger trend reversal decreased again.

On the contrarian side, we can see that the number of bears on Wall Street fell quite considerably last week. This shows that a lot of market participants switched into the bullish camp, which might partly explain the strong rally from last week. Currently, there are still enough bears around to drive prices higher. On the other hand side, we can see that the current put-/call ratios remain a super-red flag at the moment, since most z-score of or option based indicators (Daily Put-/Call Ratio All CBOE Options, WSC Put-/Volume Ratio, All CBOE Call-/Put Ratio Oscillator and the Equity Options Call-/Put Ratio Oscillator Weekly) keep trading in outright bearish territory. This is a quite toxic situation since it shows a high degree of complacent (at least in the option market). Consequently, the risk of a sentiment driven washout day/sell-off remains high. On the other hand, we can also see that – from a pure seasonal point of view – the market often runs into an important top in the next two to three weeks. However, given the quite increasing tape structure for the time being, any upcoming sentiment driven washout day might not have enough power to trigger a stronger trend reversal (at least for the time being). Nevertheless, the increased values on the option side will become a burden for the market sooner or later.

Mid-Term Technical Condition

If we focus on the current mid-term-oriented trend structure of the market, we can see that the overall trend force continued to deteriorate, albeit on quite confirmative levels. This can be seen if we focus on the gauge from the Global Futures Trend Index, which did not manage to get back above its extremely bullish 90% threshold. Consequently, it did not fully confirm the latest record high of the S&P 500. On the other hand, as long as this indicator keeps trading above 60% (in combination with quite bullish mid-term market breadth), the risk of a stronger correction should be subdued. As a matter of fact, this indicator should always be counterchecked with our mid-term-oriented tape indicators. However, the pure price driven mid-term-oriented uptrend remains solid as the WSC Sector Momentum Indicator was holding up quite well last week. This shows that most sectors within the S&P 500 are still outperforming riskless money market on a relative basis. This can be also seen if we examine our Sector Heat Map which showed the same positive picture as in the previous week, namely that the momentum score of all sectors (except energy like in the previous weeks) keeps trading above the one from riskless money market (currently at 5.0 percent).

As mentioned above, mid-term market breadth remains key area of focus if any of our mid-term-oriented trend indicators start losing bullish ground. Currently, we can see that our core indicators here also showed somehow stronger signs of recovery last week. Especially, the readings of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) improved, although some of them could be definitely stronger if we consider the latest all-time high of the &P 500. However, the most important mid-term-oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as both indicators showed stronger signs of recovery last week. This is a quite healthy signal as it shows that the underlying mid-term-oriented demand increased again. Historically, every correction was accompanied by weak or bearish readings in these two indicators. Consequently, a weakening bullish signal in one of these indicators (in combination with a weakening Global Futures Trend Index) is often a serious warning signal. Therefore, it was good to see that both indicators got back on track. Above all, also the Modified McClellan Oscillator Weekly as well as the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) did not flash any major warning signal at the end of the week. In the end, we saw a quite healthy recovery within our mid-term-oriented breadth indicators, indicating that the current technical condition transformed back into a more sustainable set-up (at least for the time being).

Long-Term Technical Condition

Another positive signal is the fact that the long-term oriented trend of the market also showed some signs of improvements last week. The WSC Global Momentum Indicator gained another 6 percentage points and signals that now 74% 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. As pointed out several times, this is a quite supportive technical signal (especially in the current market environment), as it shows that the latest run-up was quite global in scope. Furthermore, all risky asset classes in our WSC Global Relative Strength Index showed stronger signs of momentum last week, signaling increased risk-appetite among investors. Last but not least, the WSC Long Term Trend Index reached its highest level for weeks, which is another indication that the market remains in a new bull-market. Examining our long-term market breadth indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and SMA 200) also reveals that all of them continued to strengthen significantly last week.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. The allocation of the WSC Sector Rotation Strategy remains unchanged.

Bottom Line

Given the increased greed on the contrarian side, the risk of a sentiment driven washout day(s) cannot be ignored for the time being. A thread which is already imminent for a couple of weeks right now. However, what is now different compared to our previous market comment is the fact that the market breadth showed stronger signs of recovery last week. As a matter of fact, the risk that such a washout event will trigger a stronger pullback reduced significantly since the overall situation transformed back into a healthier set-up. A fact, which can be also observed if we focus on the WSC Big Picture Indicator, as its gauge managed to get back into the middle of its quite 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 might be a bit too early to take any counter-trend activities. Nevertheless, we would advise our members not to take too much leverage/high-beta bets since the risk of a sentiment driven washout event remains high. Moreover, it makes sense to remove the stop-loss limit – at least for now.

Stay tuned!