July 5th 2020

Market Review

In line with our latest expectations, all three major U.S. averages finished the holiday-shortened week with solid gains. The Dow Jones Industrial Average added 3.3% during the week to end at 25,827.36. The S&P 500 jumped 4.0% in the same time period to finish at 3,130.01. The Nasdaq rocketed 4.6% from the week ago close to finish at a record of 10,207.63. It was the S&P 500 and the Dow’s and biggest weekly gains since June 5. The Nasdaq posited its best weekly performance since May 8. Nearly all key S&P sectors ended in positive territory for the week, led by the materials sector. Financials and energy were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 27.7.

Short-Term Technical Condition

Although the S&P 500 ended the week with solid gains, the short-term trend structure of the market only improved moderately compared to last week. From a pure price point of view the short-term oriented trend turned from bearish to neutral as the S&P 500 closed within the two envelope lines of the Trend Trader Index. But apart from this fact, our remaining short-term oriented trend signals remain bearish – at least from a pure signal point of view. The Modified MACD has not turned bullish so far, although its short-term oriented gauge showed some signs of recovery last week. This is telling us that the short-term oriented trend momentum remains quite weak-kneed for now. In addition, both envelope lines of the Trend Trader Index started to flatten out, indicating that – from a pure structural point of view – the market remains in a consolidation mode. Above all, the Advance-/Decline 20 Day Momentum continued its bearish ride and has not shown any signs of stabilization yet (although the market finished with solid gains).  Hence, it formed a negative divergence compared to the current level of the S&P 500. Consequently, we would not be surprised to see some rocky sessions ahead. However, as already mentioned last week, during a volatile consolidation period it is not unusual to see a lot of fast changing signals within our short-term oriented trend indicators. As a matter of fact, the developments within our short- and mid-term-oriented breadth indicators are definitely key area of focus right now as they will give us further guidance in such circumstances!

According to our short-term oriented breadth indicators, the current level of the S&P 500 is still supported by a broader basis. The most encouraging signal is coming from our NYSE New Highs/New Lows Indicator. There we can observe that the number of stocks which are hitting a fresh yearly high increased to a quite healthy level (91), whereas the ones which have been pushed to a new yearly low remains outright depressed (3). Consequently, the High-/Low-Index Daily succeeded to widen its bullish gap. This positive tilt can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Even though the SMA 20 remains bearish from a pure signal point of view, both gauges showed some form of bullish recovery last week. On top of that, we can see that the Upside-/Downside Volume Index Daily also turned bullish last week, which is another supportive fact for now. The only negative tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily, as both indicators remain bearish from a pure signal point of view. This is telling us that the underlying momentum of advancing issues and advancing volume remains quite weak-kneed. However, these bearish signals can be ignored as our remaining short-term oriented breadth indicators are showing that the latest rally was strongly backed by a broad basis.

On the contrarian side, we received further confirmation that the ongoing volatile sideways consolidation is transforming back into a more bullish environment. The main rationale fact behind that view is that the number of bears on Wall Street keeps trading at extremely high levels, indicating that a lot of bad news is already priced in, leaving the market better positioned to rally on (minor) positive surprises. Another positive fact is that the WSC Capitulation Index has started to drop recently, indicating that the market is getting back into a risk-on market environment. This rally scenario is also supported from a pure seasonal point of view (Decennial Cycle), as the market often showed stronger signs of strength into deeper summer. The only negative signal is coming from the Smart Money Flow Index, which did not fully confirm the rally from last week. From a pure contrarian point of view, it could be possible to see at least another washout day before further gains can be expected.

Mid-Term Technical Condition

Another reason why we stick to our bullish strategic outlook is because the mid-term-oriented uptrend remains intact. Hence, we strongly believe that any upcoming short-term oriented weaknesses should be limited in price and time. To be more precise, the Global Futures Trend Index remains nearly unchanged compared to the previous week and is trading in the upper range of its bullish consolidation area (85%). As this indicator is far away from being bearish, any upcoming pullback tends to be limited in price and time (since it has not the power to trigger a longer lasting trend reversal). This view is also confirmed from a pure price point of view, as the WSC Sector Momentum Indicator increased once again for the week (although it slightly dropped on Friday in contrast to the broad index). This is indicating that most sectors within the S&P 500 remain in a mid-term-oriented uptrend. This can be also seen if we examine our Sector Heat Map as the momentum score of riskless money market is trading at very low levels (currently at 5.6%). In addition, most sectors within the S&P 500 are trading above the momentum score from riskless money market. All these facts are another indication that the underlying trend-force remains quite strong (and, therefore, our strategic bullish view remains unchanged).

Another outright encouraging fact is that the positive mid-term oriented time series momentum is still widely backed by a broad basis. Consequently, the probability for a significant and longer-lasting trend-reversal remains outright low for the time being. The Modified McClellan Oscillator Weekly continued to gain further bullish ground, showing that the underlying tape momentum still looks quite healthy for the time being. However, the most important signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as both indicators strengthened their bullish signals last week. These are quite confirmative facts since bullish readings in both indicators together with readings of the Global Futures Trend Index above 60% never led to a significant sell-off in the past. Another supportive tape signal is coming from the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) as both indicators improved during the week (although the SMA 150 still remains bearish from a pure signal point of view). The only weaker signal is coming from our Advance-/Decline Line Weekly. But in contrast, the Advance-/Decline Line Daily and the Advance-/Decline Volume Line strongly increased last week. All in all, we can see that mid-term-oriented market breadth is getting back on track and, therefore, it is definitely a way too early to take the chips from the table.

Long-Term Technical Condition

The long-term oriented trend of the market shows – once again – nearly the same picture as in the previous week. Our Global Futures Long Term Trend Index, which has been decreasing for weeks, continued its bearish ride and reached the lowest levels for years. This is indicating that the long-term oriented trend of U.S. equities still looks quite damaged for now. Also the gauge from our WSC Global Momentum Indicator dropped last week and indicates that currently only 16% 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. If we focus on the WSC Global Relative Strength Index, we can see that they remained nearly unchanged compared the previous weeks. Our long-term oriented tape indicators show a quite positive picture, as all of them improved (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the SMA 200).

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

After the market successfully hit rock bottom two weeks ago, the ingredients for further strong gains are accumulating. The main rationale behind that call is that the supportive/bullish readings are increasing across the board. In addition, the number of bears on Wall Street are telling us that there is still enough dry power left to push prices higher. That does not necessarily mean that the market will take off tomorrow but on the other hand side, our indicator framework is telling us that it is too early to act contrarian. A fact that can also be observed if we focus on our Big Picture Indicator which is still moving around its 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 our strategic bullish outlook remains unchanged. Therefore, we believe that conservative investors should remain invested, whereas aggressive traders should continue to buy the dips.

Stay tuned!