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January 1st 2017

Market Review

All three U.S. indexes finished the last week of the year in negative territory. The Dow Jones Industrial Average lost 0.9 percent for the week to end at 19,762.60. The blue-chip index is 3.3 percent up for December and recorded a yearly gain of 13.4 percent. The S&P 500 declined 1.1 percent to 2,238.38 in the holiday-shortened week, after completing the month with 1.8 percent and the year with a 9.5 percent gain. The Nasdaq lost 1.5 percent for the week to finish at 5,383.12. The tech-heavy gained 1.1 percent in December and 7.5 percent in 2016. All main S&P 500 groups retreated for the week, led by financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that on a very short-time frame the market looked vulnerable for further consolidation. Therefore it was not a big surprise at all that stocks ended down for the week. Obviously, the predicted consolidation period caused some small deteriorations of the short-term uptrend of the market, as the Modified MACD flashed a bearish crossover signal last week. In addition, the S&P 500 closed slightly below the bearish threshold from the Trend Trader Index. Nevertheless, both envelope lines of the Trend Trader Index are still rising, which indicates that the short-term uptrend of the market still remains intact from a structural point of view. This can be also seen, if we focus on our Advance-/Decline 20 Day Momentum Indicator, which has not turned bearish so far, although its gauge came down recently. In general, it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate, when the market is entering a consolidation period or if the market is taking a breather. In such a situation, short- to mid-term market breadth will give guidance if further losses or if renewed strengths can be expected.

In normal circumstances, a consolidation 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. Right now, short-term market breadth still looks quite constructive, although the impact of the recent consolidation has definitely left its mark on the readings of our tape indicators. This becomes pretty obvious if we focus on the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily. Both indicators are signaling that the underlying market breadth momentum has lost some steam recently. Additionally most NYSE listed stocks closed below their 20 day simple moving average, indicating a weakening upside participation on a very short time frame. On the other hand, we still can see that the remaining market internals remain pretty robust. This is mostly due to the fact that the number of stocks which are hitting a fresh yearly high remains at supportive levels, whereas the number of stocks which have been pushed to a new yearly low still remains quite depressed. Especially, the fact that we saw only a decrease in the total amount of new highs during last week is telling us that the recent pullback was mainly driven by profit taking so far. Consequently, it was not a big surprise at all that the High-/Low Index Daily remains bullish! So all in all, as long as we do not see further trend breaks on a 50 day basis, in combination with a strong increase in the amount of new lows or a bearish crossover signal within our High-/Low Index Daily, it might be a bit too early for any counter trend activities (short-selling) as the current consolidation period still looks constructive by its nature.

The situation from a pure contrarian point of view remains almost unchanged. In our last week’s comment, we highlighted the fact that further volatile sideways-trading could be expected as we had received a growing number of evidence within our contrarian indicators that short-term optimism among the crowd had been too extreme. Such a move normally relieves overbought conditions and dampens short-term optimism before further gains can be expected. In fact, the recent consolidation period has slightly started to have its designated impact on short-term optimism, which is a typical pattern after a stronger rally. Especially our option based oscillators (All Options Call-/Put Ratio Oscillator Weekly, Equity Options Call-/Put Ratio Oscillator Weekly, All CBOE Options Put-/Call Ratio, Global Futures Put-/Volume Ratio Oscillator and the Uptick-/Downtick Ratio) have started to get back towards normal levels. Nevertheless, some of them remain in bearish territory, plus the Smart Money Flow Index as well as the WSC Capitulation Index are telling us that further consolidation into January can be expected. As a matter of fact, we do not think to see another strong/impulsive and sustainable break-out from the S&P 500 on a very short time frame ahead.

Mid-Term Technical Condition

Despite the fact that further back and fill environment is likely on a very short-time frame, equities do not appear at risk for a stronger correction at the moment! This is mainly due to the fact that the Global Futures Trend Index is still trading far above its bearish 60 percent threshold. To be more precise, its gauge increased last week to 82 percent (upper range of its bullish consolidation area) and is therefore somehow confirming the current levels from the S&P 500. As already mentioned a couple of times, we would get quite cautious if its gauge drops below 60 percent (in combination with weakening market breadth), as such a situation was always a clear indication for a major trend reversal in the past. As a matter of fact, it is a bit too early to get concerned about any potential short-term oriented consolidation period right now. In addition, the WSC Sector Momentum Indicator is also trading at solid bullish levels, indicating that most sectors of the S&P 500 continued to strengthen their underlying mid-term oriented up-trend last week. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of most sectors remains above the one from riskless money market (unchanged to last week, only health care and consumer staples have a lower scoring).

The mid-term oriented up-trend is mostly confirmed by mid-term oriented market breadth and therefore the mid-term oriented up-trend of the market should not be in danger at the moment. Once again our Modified McClellan Oscillator Weekly continued to narrow its bearish gap, signaling that the momentum of advancing stocks improved on a mid-term time horizon. This view is also underlined by the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both gauges remained nearly unchanged compared to last week and are still trading on very strong bullish levels. As already pointed out in our previous comment, this is another indication that the underlying tape structure of the market remains pretty broad-based at the moment. Also all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) nearly remained unchanged. In addition the mid-term oriented up-volume is trading at quite outright bullish levels at the moment. Only mid-term oriented advancing issues dropped slightly below their bearish counterparts. However, given those solid readings, our strategic bullish outlook remains unchanged so far.

Long-Term Technical Condition

From a pure technical point of view, the long-term oriented up-trend of the market remains intact as the Global Futures Long Term Trend Index has not turned bearish yet. Nevertheless, we can see that the global bull market remains quite selective as only 42 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being. In contrast, the relative strength of most risky markets keeps trading above the one from U.S. Treasuries. This is another indication for the current risk-on market environment. Moreover, we saw again improvements within our long-term oriented breadth indicators. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly continued to improve, whereas the percentage of stocks which are trading above their 200 day simple moving average are also trading at very high bullish levels. The same is true if we focus on the High-/Low Index Weekly, as its readings also slightly improved last week.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. As the momentum score of financials rose above average and above the one from the S&P 500 within our Sector Heat Map, we received a buy signal for that ETF within our WSC Sector Rotation Strategy. As the underlying risk management indicator (WSC Global Momentum Indicator) of the WSC Global Tactical ETF Portfolio has not turned bullish yet, the portfolio remains invested in cash to protect capital. Worth mentioning is the fact that our entire model portfolios finished the year in positive territory. To be more precise, 3 out of 4 portfolios strongly outperformed the benchmark, whereas 3 of them delivered double digit return in 2016! Only the WSC Sector Rotation Strategy underperformed its benchmark, as there were no clear sector trends last year. However, no investment strategy can be completely effective under all economic conditions and therefore we are absolutely devoted to the concept of diversification. As a matter of fact, we are providing different kind of uncorrelated model portfolios that can be combined to a highly diversified and strong performing portfolio!
In 2016, our WSC Model Portfolio Composite (all 4 Model Portfolios equal weighted – Charts of Interest) gained 10.5 percent, with an average volatility of only 9.1 percent (equals a Sharpe Ratio above 1). More impressive is the fact that its maximum loss was only 5.5 percent, which is another proof of concept for our overall investment strategy: diversify among our uncorrelated investment strategies which are focused to exploit measurable market inefficiencies.

Bottom Line

Our bullish outlook remains unchanged compared to last week. However, on a very short-time frame we expect to see further consolidation at work. However, given the quite supportive/bullish indicators all across the board (and especially on a mid- to long-term time horizon) it is a bit too early to get concerned about the technical condition of the market. As a consequence, our bullish outlook has not been changed so far. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips rather than chasing the market too aggressively on the upside!

Stay tuned!