September 6th 2020

Market Review

U.S. stocks wrapped a turbulent week. After closing at new record levels during the week, all three major U.S. averages finally finished the week with losses. For the week, the Dow Jones Industrial Average lost 1.8% to end at 28,133.31. The S&P 500 fell 2.3% during the week and finished at 3,426.96. The Nasdaq saw a 3.3% weekly decline, its largest since March and finished at 11,313.13. Nearly all key S&P sectors ended in negative territory for the week, led by energy. Materials and utilities were to only gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded advanced to 30.8.

Strategy Review

Over the past two weeks, we warned our members that the chances for a stronger sentiment driven washout-event were increasing on a fast pace. Consequently, we advised our members not to take too much leverage (or any kind of high-beta or short-volatility bets), although our strategic bullish outlook remained unchanged back then. In fact, after the S&P 500 had rallied 2.5% until Wednesday, the broad index tumbled by almost 7 percent before it recouped some losses to close 2.3% lower for the week. Although the recent sentiment driven sell-off was in line within our expectation, the big question is if it paves the way for further rallying into September of if it will be the start of a stronger trend-reversal?

Short-Term Technical Condition

Although the washout day was quite strong in terms of price, the overall impact on the readings of our short-term oriented trend indicators could have been by far worse. From a pure price point of view, this short-term trend clearly turned neutral as the S&P 500 closed between the envelop lines from the Trend Trader Index. Consequently, the recent sell-off was within statistical expectations if we consider the parabolic advance from the weeks before. Thus – from a pure price point of view – the short-term oriented price trend of the market should remain supportive as long as the S&P 500 does not drop below 3,406. This also explains the fact that both envelope lines of the Trend Trader Index have not shown any signs of weaknesses yet, which is still a quite constructive price driven signal for now. Moreover, the underlying momentum of this short-term oriented price driven trend was also holding up relatively well if we consider the magnitude of the latest decline. Especially, the weak negative signal from the Modified MACD should not be taken too seriously for the time being since any stronger up-day could easily change its status here. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator since it only dropped slightly below its bullish threshold. All these facts are telling us that the short-term oriented uptrend has not fully broken yet – at least from the current trend point of view. Therefore, the latest sentiment driven sell-off has still a supportive tilt.

Moreover, we should not forget that the short-term oriented trend of the market is only a limited picture about the current condition of the market as it includes a lot of noise. Therefore, it is not unusual that some or even all short-term oriented trend indicators tend to deteriorate, when the market faces stronger selloffs. In such a situation short- to mid-term market breadth will help us to answer the question if such a sell-off is a major inflection point or it will just turn out to be a healthy breather on the way higher.

From a current point of view, short-term market breadth was holding up quite well if we consider the magnitude of the recent sell-off. This is telling us that the latest decline was mainly driven by profit taking from a few heavy weighted stocks in the index rather than being the result of broad-based selling across the board. Consequently, the underlying tape structure of the market remains weak-kneed but still somehow supportive – at least from the current point of view. Especially, the still bullish signal of the Upside-/Downside Volume Index Daily shows that on average up-volume dominated down-volume last week. As a matter of fact, the broad market did not fully participate in the latest sell-off we saw. Basically, the same is true if we focus on the NYSE New Highs minus New Lows Indicator. Here we can see that the declines were mainly driven by profit taking, whereas the broad market was still holding up quite well since the number of new yearly highs (31) outpaced the ones dropping to a new yearly low (20). In addition, the latter ones have also not shown any negative spikes so far. Consequently, the High-/Low-Index Daily is far away from flashing any bearish crossover signal. Basically, we receive the same picture if we focus on the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Even though the first one (SMA 20) dropped slightly below its bullish threshold, the second one (SMA 50) was holding up extremely well. If we consider the magnitude of the latest decline in combination with the quite bullish signal on a 50 days’ time period, we can be quite sure that the latest sell-off has not enough power to transform into a stronger correction immediately. However, on the other side the bullish tape momentum impulses are missing also since the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not shown any signs of positive divergences so far. In the end, the underlying short-term oriented technical condition of the market still looks quite supportive and, therefore it might be a bit too early to get concerned about the latest declines. On the other hand, we can also not ignore the fact that the bullish impulses are also missing as well. Thus, we would not be surprised to see some form of volatile but bullish biased consolidation ahead – at least from the current point of view.

On the contrarian side, we can see that the latest sell-off has started to have its designated impact on short-term optimism. As always mentioned in our previous market comments, when sentiment is getting too extreme in combination with strong bullish readings across the board, nasty washout-days are quite common. Although these days are hard to time, they relieve overbought conditions and dampen short-term optimism, which is then often the basis for further growth. Indeed, the latest washout-day relieved small overbought conditions (Upside-/Downside Volume Ratio Daily) and triggered a strong spike in put-options and, therefore, some of our option based indicators softened their bearish signals (All CBOE Options Put-/Call Ratio and the WSC Put-/Volume Ratio), whereas the WSC Dumb Money Indicator turned neutral again. Although this can be interpreted as quite positive development, most of our option based indicators still remain quite bearish from a pure signal point of view (All CBOE Options Put-/Call Ratio, WSC Put-/Volume Ratio, Equity Options Put-/Call Ratio Oscillator, All CBOE Put-/Call Ratio Oscillator). As a matter of fact, we think there is a good chance to see further (volatile) down-testing or even a longer-lasting consolidation period ahead. This picture might fit into the seasonal context (President Cycle and Decennial Cycle), where the market often faces stronger headwinds until early November. On the other hand, the down-side potential should also remain capped since there are still enough bears on the sideline waiting for a good entry point, whereas the WSC Capitulation Index still remains quite bullish from a pure signal point of view.

Mid-Term Technical Condition

Another major reason why we believe that the underlying tone remains bullish is because the mid-term-oriented trend-condition of the market remains well intact. As a result, it is still a way too early to get bearish from a pure strategic point of view (although a period of increased volatility is likely). Our Global Futures Trend Index has not shown any weakness recently and is, therefore, still trading in the upper range of its bullish consolidation area (85%). As long as this indicator is trading above 60% (in combination with confirmative market breadth), any upcoming weaknesses should turn out to be a healthy breather rather than the beginning of a sustainable down-trend. Moreover, we can see that most sectors within the S&P 500 remain in a strong mid-term-oriented price driven uptrend as the WSC Sector Momentum Indicator is trading at quite encouraging bullish levels. As a matter of fact, the underlying price trend of the S&P 500 looks quite solid for the time being. This can be also observed if we examine our Sector Heat Map, as the momentum score of all sectors (except energy like in the previous weeks) remains above the one from riskless money market (currently at 10%).

Another main fact why we believe that it is still a way too early to panic right now is due to the fact that the current mid-term oriented up-trend of the market is still strongly confirmed by mid-term oriented market breadth. Thus, we do not think that equities appear to be at risk of facing another major bear-leg drop soon. Especially, the Modified McClellan Oscillator Weekly was holding up quite well, indicating that the overall tape momentum remains quite constructive for the time being. However, the most important bullish signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. There we can see that both indicators strengthened their strong bullish signal, although the market was down for the week. This shows us that the market internals still look quite too robust to throw in the towel. On top of that, all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have not shown any serious weak signals in the last couple of trading sessions. This indicates that the broad market is holding up quite well and remains, therefore, in a strong mid-term-oriented uptrend. A fact, which can be also observed if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). In the end, given the quite supportive mid-term-oriented signals across the board, we think it is too early to turn bearish from a pure strategic point of view.

Long-Term Technical Condition

The long-term technical condition of the market also still shows a robust picture as the gauge from the WSC Global Momentum Indicator increased to the highest level for weeks. This shows that most local equity markets around the world (in detail 74%) remain in a long-term oriented uptrend so far. Also, the Global Futures Long Term Trend Index increased last week and is trading in solid bullish territories. In addition, the relative strength of all risky markets literally rocketed to their highest levels for weeks. If we examine our long-term oriented tape indicators, we can see that the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly improved, while the SMA 200 remained nearly unchanged.

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

Even though further sentiment driven consolidation/down-testing cannot be ruled on a short-term time perspective, there is no major reason to change our strategic bullish view for now. To be more precise, with quite supportive/bullish readings (especially on a mid-term time perspective), any upcoming weaknesses should turn out to be limited in price and time (at least for the time being). Thus, it is a way too early to get concerned about the latest price action we saw. A fact that can be also observed if we focus on our Big Picture Indicator, which is still moving around it 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, any upcoming pullback should turn out to be limited in price and time. Hence, we would advise our conservative members to hold their equity exposure, whereas aggressive short-term traders should focus on trading selective extreme moves in both directions.

Stay tuned!