February 23rd 2020

Market Review

Due to Friday’s losses, U.S. stocks closed out the week in negative territory. The Dow Jones Industrial Average slumped 1.4% over the week to 28,992.4. The S&P 500 booked a weekly loss of 1.6% to finish at 3,337.75. The Nasdaq shed 1.3% for the week to end at 9,576.59. All key S&P sectors ended in negative territory for the week, led by technology. The utilities sector led gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped to 17.1.

Strategy Review

In our last week’s market forecast we mentioned the fact that – on a very short-time frame – a short-lived consolidation and/or stronger washout day to dampen short-term optimism could not be ruled out. In fact, on Friday the S&P 500 lost nearly 1.1% and, therefore, the S&P 500 posted its biggest one-day loss since January 31st.

Short-Term Technical Condition

Although the market finished in negative territory for the week, the short-term oriented trend of the market remains intact. This is due to the fact that the S&P 500 is still trading 30 points above the bearish threshold from the Trader Index. Consequently, the pure short-term oriented price trend of the market remains bullish as long as the S&P 500 does not close below 3,307 (lower threshold from the Trend Trader Index). Also from a pure structural point of view, the short-term oriented trend of the market has not turned bearish as both envelope line of the Trend Trader Index are still increasing. The situation looks slightly different, If we focus on the overall short-term trend momentum. There we can see that the Modified MACD flashed a small bearish crossover signal last week, indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. Although the indicator is still trading in bullish territory, its overall level remains quite weak-kneed. Consequently, it could be possible to see further bearish signals within our short-term oriented trend indicators soon, which might be accompanied by further consolidation or even by increased down-testing. If this is the case, 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/all of our short-term oriented trend indicators tend to deteriorate, when the market has to digest sentiment driven washout-days. In such a situation, short- to mid-term market breadth will give guidance if the current short-term oriented bearish trend will lead to further stronger losses or if it was only caused by too much market noise (profit taking or just from a few heavy weighted stocks in the index). In other words, it will determine our degree of confidence within these trend/momentum signals. So if short- to mid-term market breadth remains strong, the impact of a short-term oriented trend-break should be quite limited in price and time. In normal circumstances, a consolidation period/sentiment driven washout-period is considered to be a healthy one as long as short-term to mid-term market breadth remains supportive or is at least forming some bullish divergences. In such a case, any short-term oriented trend break can be ignored as the market is just taking a (healthy) breather within an ongoing uptrend. Otherwise, it is highly likely that such a consolidation period is just a harbinger of a more significant pullback/correction.

From a current point of view, short-term market breadth still looks quite constructive although the recent washout has erased the recovery in the readings of the  Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. This is telling us that the underlying breadth momentum of advancing  issues and advancing volume lost further supportive ground. Basically, the same is true if we focus on the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Both gauges decreased for the week and the second one (SMA 50) additionally dropped below its bullish threshold. On the other hand, we still can see that the remaining market internals remain quite robust (given the recent circumstances). This becomes quite obvious if we examine the NYSE New HighsNew Lows Indicator. There we can see that the number of stocks hitting a fresh yearly high kept trading at extremely confirmative levels, whereas the number of stocks which were pushed to a new yearly low have not shown any  stronger negative spike so far.  Especially on Friday, the total number of new lows was absolutely not concerning at all (if we consider the magnitude of the decline on that day). Consequently, it was not a big surprise at all that the High-/Low-Index Daily was holding up quite well and remains, therefore, quite bullish. On top of that, we can see that the Upside-/Downside Volume Index Daily was also holding up quite well (if we consider the recent circumstances), which is another piece of evidence that the latest decline was mainly driven by profit taking (and not the result from a stronger selling pressure all across the board).  A fact, which can be also observed by our reliable WSC Short-Term Composite, which is still trading at quite comfortable bullish levels.

Probably the most important signal this week is coming from the contrarian side. There we can see that the latest washout-day on Friday caused a lot of fear in the option market as the daily put-/call ratio spiked on that day. Therefore, the recent washout-day started to have its expected impact on short-term optimism, which is even reinforced by mainstream media headlines. As a consequence, most of our option based indicators (Daily Put-/Call Ratio All CBOE Options, All CBOE Options Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator and the WSC Put-/Volume Ratio) softened their outright bearish signals. Nevertheless, we can see that most of them still remain quite bearish and, therefore, further (limited) selling pressure/volatility cannot be ruled out. A fact, which is also confirmed by the WSC Capitulation Index and the Smart Money Flow Index. If we focus on seasonal tendencies (Presidential Cycle and the Decennial Cycle), the recent weakness should act as basis for another bull-run into late March.

Mid-Term Technical Condition

This would be in-line with the fact that the mid-term oriented technical condition of the market still reveals a quite robust picture. This becomes obvious if we focus on the gauge from the Global Futures Trend Index, which is solidly trading in the bullish consolidation area (although we saw a stronger selling pressure last week). This can be seen as a quite bullish trend signal, as the market never faced a stronger correction with readings above 60 percent. Also our WSC Sector Momentum Indicator advanced last week and is trading at outright robust levels. This signals that the majority of sectors of the S&P 500 remain in a mid-term oriented uptrend. These bullish facts are also supported by our Sector Heat Map as the momentum score from riskless money market (currently at 10%) still keeps trading below most sectors. In our view, this is another indication that the underlying mid-term oriented time-series momentum of market still remains persistent. Given the fact that our entire mid-term oriented indicators remain bullish or have not shown any serious signs of weakness so far, we think that any upcoming short-term oriented pullback should be limited in price and time. As a matter of fact, we strongly believe that it is definitely a way too early to bet on a major trend-reversal at the moment.

On top of that, we can see that this current mid-term oriented time-series momentum of the market is also widely confirmed by mid-term oriented market. Our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) were holding up quite well compared to the broad market. Moreover, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading well above their bearish counterparts (although they have lost a bit bullish ground recently). As long as both indicators remain bullish in combination with readings above 60% within our Global Futures Trend Index, it is definitely a bit too early to pull the trigger. Another encouraging signal is coming from the Modified McClellan Oscillator Weekly which has not turned bearish yet. This indicates that the underlying momentum of advancing stocks on a mid-term time horizon still remains positive. The only weaker mid-term breadth signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150), although both indicators are still bullish from a pure signal point of view. All in all these facts are telling us that it might be a bit too early to pull the trigger yet as the current weakness can be still described as healthy in its nature (at least for now).

Long-Term Technical Condition

The long-term oriented trend of the market remains unchanged and clearly supports our view that the current consolidation still looks quite supportive in its nature. Although our WSC Global Momentum Indicator slightly decreased on very high bullish levels on Friday, it is far away from being bearish. Currently it shows us that 67% 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. In consequence, the current bulls-run can be still described as global in scope. Above all, our reliable Global Futures Long Term Trend Index succeeded once again to gain more bullish ground last week, which is also a very supportive momentum signal at the moment. Another quite supportive fact is that our WSC Global Relative Strength Index was holding up quite well, indicating that it might be a bit too early to panic right now. Basically, the same is true if we focus on our long-term market breadth indicators. There we can see that the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly strengthened considerably, while the SMA 200 slightly weakened last week.

Model Portfolios

Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. As the momentum score of utilities rose above average and above the one from the S&P 500 in our Sector Heat Map, we received a buy signal for that ETF in our WSC Sector Rotation Strategy.

Bottom Line

Our key call remains unchanged compared to last week. With quite stretched signals within our short-term trend indicators, further sentiment driven consolidation/volatility into late February cannot be ruled out. However – from the current point of view – any further upcoming washout-days/selling pressure/consolidation period can be still categorized as non-corrective/bullish biased as the mid- to long-term condition of the market still remains outright robust. A fact, which can be also seen if we focus on our Big Picture Indicator, which is still moving around within its bullish quadrant. Thus, our strategic bullish outlook remains unchanged.

Stay tuned!