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February 9th 2020

Market Review

Despite Friday’s losses, U.S. stocks closed out the week with strong gains and with the three benchmarks reaching new records during the week. For the week, the Dow Jones Industrial Average soared 3.0% to end at 29,102.51. The S&P 500 jumped 3.2% to close at 3,327.71. The Nasdaq jumped 4.0% to end at 9,520.51. Nearly all key S&P sectors finished in positive territory for the week, led by the technology sector. Utilities were the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 15.5.

Short-Term Technical Condition

In line with our recent call, we saw the expected impulsive relieve rally last week. As a consequence, the short-term oriented uptrend of the market strengthened last week. This is mainly due to the fact that the pure price driven uptrend of the market got back on track, as the S&P 500 closed 46 points above the bearish threshold from the Trend Trader Index. This is telling us that that the short-term oriented price driven up-trend of the market should remain constructive as long as the S&P 500 does not drop below 3,281. Additionally, both envelope lines of this reliable indicator are still increasing, which is also another indication that the latest volatility was just part of a healthy breather. Also our Advance-/Decline 20 Day Momentum Indicator bounced back into bullish territory last week, although it has not fully confirmed the latest rally of the S&P 500. Basically the same is true if we focus on our Modified MACD which succeeded to flash a small bullish crossover signal last week. So in the end, our short-term oriented indicators recovered significantly for the week and got, therefore, back into bullish mode last week. Nevertheless, we can also see that not all of them have fully confirmed the latest rally of the S&P 500. As a matter of fact, it could be possible to see some further rocky sessions/increased volatility ahead (whereas the underlying tone should definitely remain bullish).

We basically receive the same picture, if we analyze the current short-term oriented trend participation/-force of the recent rally. Although most of our short-term oriented tape indicators recovered from weak bullish- or even bearish readings, their overall signal remains a bit too weak to fully confirm the latest level of the S&P 500. As a matter of fact, it looks like the market still remains in a bullish biased consolidation period – at least from a pure technical point of view. This becomes quite obvious if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Despite the fact that both indicators increased significantly for the week, none of them managed to close above their bullish 50 percent threshold. This is telling us that the broad market was able to participate in the latest relieve rally, but the overall trend-structure still looks a bit too weak to justify the current levels of the S&P 500. As a consequence, the safety is a bit wide-meshed at the moment. Basically, the same is true if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Although both indicators started to show some stronger signs of stabilization, both indicators are still a bit far away from flashing a bullish crossover signal (at least from a current point of view). As a matter of fact, both indicators have not confirmed the latest relieve rally and, therefore, we would not be surprised to see another period of limited weaknesses ahead. Nevertheless, if we consider the current readings from the NYSE New Highs/New Lows Daily Indicator any upcoming weaknesses should be definitely bullish in their nature, since the number of stocks hitting a fresh yearly high is still outpacing the number of yearly new lows. As a consequence, the High-/Low-Index Daily strengthened its bullish signal significantly. As long as this is the case, the chances for a longer-lasting trend-reversal remains quite limited.

On the contrarian side we can see that the amount of bulls dropped significantly, although the market jumped more than 3% last week. This is a quite positive signal, as most investors are still scared about the latest corona virus headlines (which is needed if the market wants to climb the wall of worry). This can be also seen if we focus on our option based indicators (Daily Put-/Call Ratio All CBOE Options, All CBOE Options Put-/Call Ratio Oscillator and the Equity Options Put-/Call Ratio Oscillator) as apart from the WSC Put-/Volume Ratio all of them remain bullish or at least neutral. On the other hand, we can see that the Smart Money Flow Index did not fully confirm the latest bounce, whereas the WSC Capitulation Index is still indicating a risk-off market environment. Moreover, according to the Presidential Cycle the market could still face some headwinds next week, before further rallying could be expected. A scenario which looks also quite likely if we consider the current readings from our short-term oriented indicator framework.

Mid-Term Technical Condition

Another major reason, why we think that the underlying tone remains quite bullish (although we could see some increased volatility) is due to the fact that the gauge from the Global Futures Trend Index stabilized in the middle of its bullish consolidation area. As you probably know by now, as long as the gauge from this reliable indicator keeps trading above 60% (or does not show stronger signs of negative momentum in combination with negative market breadth), the risk of a stronger correction is extremely limited. In consequence, any upcoming weaknesses should just turn out to be a healthy breather within an ongoing mid-term oriented uptrend. This view is also confirmed by the fact that our WSC Sector Momentum Indicator is still trading at quite solid bullish levels. This indicates that most sectors within the S&P 500 remain in a strong price driven mid-term oriented uptrend at the moment. This can be also seen if we focus on our Sector Heat Map as the momentum score of all sectors (except energy at 0% like in the previous week) remains above the one from riskless money market (currently at 12%).

Examining mid-term oriented market breadth reveals that the current mid-term oriented uptrend of the market is not at risk of fading out right now. First of all, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) increased for the week (although Friday’s drop has left its mark), indicating the current upside participation within the whole market is getting quite broad-based again. Moreover, the Modified McClellan Oscillator Weekly also slightly strengthened last week, telling us that the underlying breadth momentum of the broad market is still strong. In addition, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have not shown any signs of weakness so far or even increased last week, which is another confirmative sign for now. Another important signal is coming from the Advance-/Decline Index Weekly and from the Upside-/Downside Volume Index Weekly. Both indicators have shown some improvements recently and as long as mid-term oriented up-volume and advancing issues are trading above their bearish counterparts, the risk of a stronger correction remains quite low.

Long-Term Technical Condition

The long-term oriented trend of the market remains nearly unchanged compared to the previous weeks. Our WSC Global Momentum Indicator increased last week and indicates that 71% 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. Also our Global Futures Long Term Trend Index continued its bullish ride and reached the highest level for months. This signals that the long-term oriented trend of U.S. equities remains strong. This can be also observed if we focus on the WSC Global Relative Strength Index, which also improved last week. On top of that our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly, SMA 200) also improved compared to the previous 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 Sector Rotation Strategy and the WSC Dynamic Variance Portfolio reached a new all-time high last week.

Bottom Line

Our key call remains unchanged compared to last week. With quite bullish but somehow non-confirmative signals within our short-term oriented indicators, it could be possible that the market might need a few attempts to defend its current levels. However, any upcoming breather/wash-out day/consolidation period can be categorized as non-corrective/bullish biased, as most of our mid- to long-term oriented indicators remain quite bullish/supportive at the moment. Thus, our strategic bullish outlook remains unchanged and, therefore, we think it is still a way too early for our conservative members to take the chips from the table. Aggressive traders could consider a range-bound trading approach (or could just add exposure in weak trading days).

Stay tuned!