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May 10th 2020

Market Review

U.S. stocks finished the week with solid gains and all three averages posted their first weekly advance in three. For the week, the Dow Jones Industrial Average rose 2.5% to 24,331.32. The S&P 500 jumped 3.5% during the week to end at 2,929.8. The broad index has bounced more than 30% from its virus low and is just 13.6% away from its record high. The Nasdaq jumped 6.0% from the week ago close to finish at 9,121.32. The heavy-tech index is more than 35% off its lows and is now up 1.6% for 2020. All key S&P sectors ended in positive territory for the week, led by the energy sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 28.

Strategy Review

In our last week’s comment, we said that we remained strategically bullish as the underlying tape condition (market breadth) was a way too strong to justify a stronger and sudden sell-off. Additionally, saw a lot of fear within our contrarian indicator, indicating that the market had enough room to surprise on the upside. Consequently, we expected to see stronger rallying (up-days) ahead. In fact, the S&P 500 jumped 3.5% for the week, whereas the tech-heavy Nasdaq soared even 6% and was, therefore, able to close in positive territory for the year. After the strong rally from past week, the S&P 500 closed slightly below the upper threshold from the quite strong trading range (between 2,797 and 2,954) which is in place since early May. Thus, the big question is if the market has enough power to break above this nearly unbreakable trading range or if the recent rally will be faded again?

Short-Term Technical Condition

As mentioned above, the market was in an outright bull-mode last week. Therefore, it is not a big surprise at all that the short-term oriented uptrend of the market remains in force at the moment. To be more precise, the S&P 500 closed 108 points above the bearish threshold from the Trend Trader Index on Friday. This is telling us that the pure price driven short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,821. In addition, both envelope lines of this reliable indicator are still drifting higher on a fast pace, indicating that the resistance/support levels for the S&P 500 are still increasing as well. This can be seen as an outright constructive technical signal as higher highs and higher lows are a typical pattern for a healthy price-driven uptrend. If we focus on the underlying trend momentum, we can see that the bullish status from the Modified MACD also slightly strengthened during the last week and did, therefore, confirm the latest rally of the S&P 500. The only weaker signal is coming from the Advance-/Decline 20 Day Momentum Indicator. Although its gauge remains bullish, it (again) lost some momentum last week and, hence, did not confirm the weekly performance of the S&P 500. As this indicator tends to be a leading one, it could be possible that the pace is likely to slow down a bit (at least for a few trading sessions).

However, this small bearish divergence can be definitely ignored at the moment, since our entire short-term oriented market breadth indicators continued to strengthen last week. This can be especially observed if we examine the NYSE New Highs/New Lows Indicator, as the number of stocks hitting a fresh 52-weeks high reached the highest level since the bear-market cycle started in February. On the other hand, we can see that there are absolutely hardly any of stocks around, which are hitting a fresh yearly low. As long as we do not see a significant spike in that number, the overall market environment should remain supportive. Given that positive development, the High-/Low-Index Daily slightly strengthened its bullish signal. This is a quite confirmative signal so far, as it indicates that the recent rally is getting more broad-based and is, therefore, not only driven by mega-cap tech stocks. Basically, the same is true if we focus on the Modified McClellan Oscillator Daily and on the Modified McClellan Volume Oscillator Daily. Both indicators have not shown any signs of major weaknesses so far, indicating that the short-term momentum of advancing volume and advancing issues remains quite strong. As a matter of fact, it looks like the current rally is still supported by a broad and strong basis. This can also be seen if we focus on the percentage of stocks which are trading above their short-term moving averages (20/50) as both gauged jumped to quite confirmative levels last week. So all in all, the underlying tape quality of the market strengthened and looks, hence, quite healthy at the moment. Thus, we strongly believe that the market will have enough power to break above its current trading range.

On the contrarian side, the market has still enough potential to surprise on the upside as the majority of market participants (AII Bulls & Bears survey) remains extremely cautious at the moment. This is a quite interesting situation, if we consider the fact that the S&P 500 rallied almost 34% since its low in late March. On top of that, we can see that our entire option based indicators (Daily Put-/Call Ratio All CBOE Options Indicator, AII CBOE Put-/Call Ratio Oscillator and the Equity Options Put-/Call Ratio Oscillator) turned or remain more or less neutral. In such a situation, volatility tends to slow down on a fast pace, supporting the ongoing trend. A fact, which is illustrated by the CBOE Volatility Index, which dropped considerably last week. The only negative signal is coming from the WSC Capitulation Index, which has shown some strength on low levels recently, whereas the Smart Money Flow Index consolidated at quite high levels. So all in all, the overall situation on the contrarian side still looks supportive and, therefore, we think it is still a way too early to bet on a major trend reversal.

Mid-Term Technical Condition

This view is also supported by the fact that our entire mid-term oriented indicators are giving no reason to worry right now, as all of them remain improved last week. Probably, the most important mid-term oriented trend signal is coming from the Global Futures Trend Index. Its gauge showed stronger signs of positive momentum and has, therefore, finally closed significantly above its 60% threshold. This can be interpreted as a quite strong positive technical trend signal, as such strong readings (in combination with bullish short- to mid-term oriented tape signals) never led to stronger and sustainable correction/trend-reversal in the past! So from a strict technical point of view, the ongoing rally cannot be classified as bear-market rally anymore as upcoming losses tend be limited in price and time (in such a set-up). This view is also confirmed by the WSC Sector Momentum, which showed stronger signs of improvements last week (although it is still slightly bearish from a pure signal point of view). This is showing that more and more sectors of the S&P 500 are getting back into a mid-term oriented price driven uptrend. These bullish facts are also supported by our Sector Heat Map as the momentum score of riskless money market dropped by 7 percentage points (54.8%).

If we analyze our mid-term oriented market breadth indicators, they also show some encouraging signs of improvements (although some their signals of them still remain a bit weak-kneed). The most important mid-term oriented signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as both indicators increased for the week (whereas the first one even succeeded to turn bullish). This is another strong confirmation, that the current rally is transforming from being a huge bear market rally into a more sustainable uptrend.  Consequently, we strongly believe that the current rally is not at risk of fading out at the moment. Another confirmative signal is coming from the Advance-/Decline Line Daily and the Advance-/Decline Line Weekly. Only the Advance-/Decline Volume Line showed a small bearish divergence compared to the broad index. Another positive mid-term oriented tape signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) as both of them (slightly) increased for the week, whereas our Modified McClellan Oscillator Weekly continued to bottom out last week.

Long-Term Technical Condition

The long-term oriented trend of the market has not shown any significant signs of recovery so far. The WSC Global Momentum Indicator has been trading for weeks at the lowest level possible (0%) and absolutely not shown any bullish moves so far. This signals that there are absolutely no local equity markets around the world (covered by our Global ETF Momentum Heat Map) which are trading above their long-term oriented trend lines. Also our Global Futures Long Term Trend Index has not succeeded to stop its bearish ride. This signals that the long-term oriented trend of U.S. equities is quite damaged at the moment. And although our WSC Global Relative Strength Index slightly improved last week, it reveals that the relative strength of all risky markets is trading below the one from U.S. Treasuries (which is another indication that we are still quite early in the current up-cycle). But some positive signals are coming from our long-term oriented tape indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and SMA 200) as all of them showed some bullish developments 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

In line with our latest view, the technical picture of the market continued to improve significantly compared to last week and, therefore, our strategic bullish outlook remains unchanged at the moment. To be more precise, with broadening strengths all across the board, we think that the current recovery rally is not in danger of fading out at all (at least for the moment). Consequently, we strongly believe that the S&P 500 will have enough power to break above its current trading range, which will then be accompanied by further gains into deeper May. Even if the S&P 500 needs a few attempts to do so (with such positive readings all across the board), any upcoming consolidation/down-days should turn out to be limited in price and time. This is mainly due to the fact that there are absolutely no major deal-breaker visible at the moment. In other words, as long as the gauge from our Big Picture Indicator keeps improving, we think it is a way too early to take the chips from the table. For that reason, we think it would make sense for advise our conservative members to remain invested, whereas aggressive traders should stick in the bullish camp. Nevertheless, we also think it would make sense to keep the stop-loss limit at 2,727 (intraday price), just in case a black swan shows up during the week.

Stay tuned!