August 2nd 2020

Market Review

Apart from the Dow Jones Industrial Average, major U.S. averages finished the week with strong gains. The Dow Jones Industrial Average dropped 0.2% from the week-ago close to 26,428.32, whereas the S&P 500, in contrast, recorded a 0.8% gain over the week and finished at 3,271.12. The Nasdaq Composite jumped 3.7% for the week to end at 10,745.27. The major equity averages also wrapped up the month of July with solid gains and posted their fourth straight positive month. The Dow Jones Industrial Average gained 2.3% in July, while the S&P 500 and the Nasdaq Composite rose 5.5% and 6.8%, respectively. Among the key S&P sectors, technology was the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 24.5.

Short-Term Technical Condition

From a pure trend point of view the bullish short-term status of the market remains unchanged.  This is because the S&P 500 closed 82 points above the bearish threshold from the Trend Trader Index. Although this signal looks quite positive on the first place, we can also see that the underlying trend-momentum of this price driven uptrend has started to deteriorate as the Modified MACD flashed a small bearish crossover signal last week. This potential slow-down is also supported by the fact that the Advance-/Decline 20 Day Momentum Indicator did not confirm the weekly gains of the S&P 500. Right now, it is still a bit too early to get concerned about these facts since the S&P 500 is still trading far above the bearish threshold from the Trend Trader Index and the Advance-/Decline 20 Day Momentum Indicator still remains bullish from a pure signal point of view. Nevertheless, we would not be surprised to see some form of consolidation since the market is getting increasingly vulnerable on a very short-time frame with such weak but somehow supportive readings.

This picture is also confirmed by short-term oriented market breadth since our entire tape indicators have shown stronger signs of non-confirmation recently (albeit they remain bullish from a pure signal point of view). Particularly, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed stronger signs of exhaustions last week, although the S&P 500 finished the week on a higher note. This is telling us that the underlying breadth momentum is slowing down, which is another indication that the market might face some headwinds soon. This view is also confirmed by the percentage of stocks which are trading above their short-term oriented moving average (20/50). Even though both indicators managed to close above their bearish 50 percent threshold, both have clearly lost some bullish ground during the week, indicating that the market looks ready to take a healthy breather. The main reason why we mentioned “healthy” here is because the NYSE New HighsNew Lows Indicator has not shown any spike in new lows so far. A fact, which can be also observed by the High-/Low-Index Daily, which is still far away from flashing a bearish crossover signal. As long as this is the case, it is too early to bet on a sustainable trend-reversal – although we would not be surprised to see some volatile sessions ahead.

On the contrarian side, we can also see that the market could also face some stronger headwinds as the put-/call ratio (z-score of the All CBOE Put-/Call Ratio Daily and the WSC Put-/Volume Ratio) indicates some form of short-term complacent. A fact which is also confirmed by the WSC Dumb Money Indicator. This is often a vanguard of minor top and, therefore, we would be surprised if the market trades significantly higher on the 21st of August, when the option expiration date is due. On the other hand, we still can see that the number of bears on Wall Street remains outright high, indicating that there is still enough dry powder around to drive prices higher on a mid-term time perspective. Moreover, we can see that the WSC Capitulation Index dropped significantly showing that the market got back into a risk-on market environment. Given the quite mixed signals on the contrarian side, increased volatility looks quite likely.

Mid-Term Technical Condition

However, given the fact that the mid-term oriented technical condition of the market remains quite bullish any upcoming pullback/consolidation period should turn out to be limited in price and time. Our reliable Global Futures Trend Index is still trading above its outright bullish 90 percent threshold and, therefore, it is a way too early to get bearish from a pure strategic point of view. As a matter of fact, we do not believe that a short-term trend-reversal leads to a stronger correction for the time being. On top of that we can see that most sectors within the S&P 500 remain in a mid-term-oriented uptrend as the gauge of the WSC Sector Momentum Indicator stabilized at high bullish levels. Consequently, the underlying price trend of the S&P 500 looks quite solid right now. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all sectors (except energy) remains above the one from riskless money market!

Another main reason why the downside potential of the market should be capped is because the current mid-term oriented up-trend is still strongly confirmed by mid-term-oriented market breadth. Especially, the Modified McClellan Oscillator Weekly has not shown any signs of weaknesses yet, indicating that the overall tape momentum remains quite constructive for the time being. Another positive signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both bullish gauges slightly increased for the week, signaling that the market internals look quite healthy right now. Given the fact that – in the past – all corrections were accompanied by bearish or outright weak readings within both indicators (together with a Global Futures Trend Index score below 60 percent), the risk of a blow-off top looks quite limited at the moment. This view is also confirmed by the fact that our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to strengthen in the last couple of trading sessions. This indicates that the broad market is still participating within the on-going mid-term-oriented uptrend. Above all, we can see that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) finished the week nearly unchanged. In the end, our mid-term-oriented trend indicator framework is telling us that it is still a way too early to get bearish from a strategic point of view.

Long-Term Technical Condition

The long-term oriented trend of the market also showed further signs of improvements last week. Our Global Futures Long Term Trend Index continued its bullish ride, indicating that the long-term oriented trend of U.S. equities is gaining momentum. In addition, our WSC Global Momentum indicates that currently 45% 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. Although this gauge has lost some momentum recently, the overall score remains quite encouraging for now. Moreover, also our WSC Global Relative Strength Index increased significantly compared to the previous week (although it also reveals that the relative strength of all risky markets is trading far below the one from U.S. Treasuries). 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 unchanged.

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. Moreover, we are proud to announce that the WSC All Weather Portfolio reached a new all-time high last week.

Bottom Line

Given the increased greed on the contrarian side in combination with quite supportive but not really confirmative short-term oriented tape signals, we would not be surprised to see some form of short-lived consolidation ahead. Nevertheless, we strongly believe that any upcoming consolidation period / weaknesses / washout-day should be limited in price and time since the mid-term oriented technical condition of the market is giving no major reason to worry right now. If we consider the quite elevated number of bears on Wall Street, any upcoming weaknesses will most likely lead to a “buy the dip mentality” rather than being the start of second sell-off wave. As a matter of fact, our strategic bullish outlook remains unchanged compared to last week as the underlying tone remains outright positive. 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 it is a way too early to bet on a major trend reversal. Therefore, we believe that conservative investors should remain invested, whereas aggressive traders should continue to buy the dips (instead of chasing the market too aggressively on the upside).

Stay tuned!