admin No Comments

January 28th 2018

Market Review

U.S. equities finished the week by breaking another set of records. The Dow Jones Industrial Average rose 2.1 percent for the week to a record high of 26,616.71. The S&P 500 rocketed 2.2 percent for week to a record of 2,872.87. The Nasdaq jumped 2.3 percent from last Friday close to an all-time high of 7,505.77. All key S&P sectors ended in positive territory for the week, led by health care.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 11.1.

Short-Term Technical Condition

Not surprisingly, short-term oriented price trend of the market remains well in force. The S&P 500 is currently trading 122 points above the bearish threshold from the Trend Trader Index. This means that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.760. Furthermore, we can see that both envelope lines of this reliable indicator are drifting higher on a very fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite strong technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. The same is true if we focus on the trend lines from the Modified MACD, as they increased very sharply and are trading at very high bullish levels as well. And the gauge from the Advance-/Decline 20 Day Momentum Indicator shows the same setting as last week – it remains outright bullish, although it lost momentum. As this indicator tends to be a leading one, the (healthy) consolidation period (from last week) scenario remains still in place.

If we focus on our short-term oriented breadth indicators, we can see that their readings show the same intermingled picture as last week. First of all the Modified McClellan Volume Oscillator Daily decreased its bullish gap and it is only a question of time until it flashes a bearish crossover signal. And secondly, the Modified McClellan Oscillator Daily which had flashed a small bearish crossover signal two weeks ago, has not shown any signs of recovery yet. This is a signal that the underlying tape momentum of the broad market started to slow down a bit. This fact is also supported by the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges decreased for the week and are showing some signs of fatigue. In contrast, the High-/Low-Index Daily is still trading at a solid level. This is mostly due to the fact that the total number of stocks which is hitting a fresh yearly high has not shown any negative momentum so far. So all in all, the market looks a bit vulnerable for a bullish biased consolidation period at the moment. However, given the quite supportive readings all across the board, any upcoming consolidation period should be limited in price and time.

If we focus on our contrarian indicators, we can see that the big guys have not started to take any profits so far, as the Smart Money Flow Index has clearly confirmed the latest high from the Dow Jones Industrial Average. Moreover, the WSC Capitulation Index is still signaling a risk-on market environment. The only red flag is coming from the option market as the put-/call ratio is indicating a lot of complacent among investors. But given the overall healthy trend and tape setup, we think this fact can be definitely ignored, at least for the moment.

Mid-Term Technical Condition

If we analyze the mid-term oriented technical condition of the market, the thread of a stronger pullback can also be definitely ignored at the moment. The main reason is that the Global Futures Trend Index is trading at a healthy level, namely in the upper range of its bullish consolidation area. But it should be a bit stronger given the all-time high of the S&P 500. Nevertheless, it is a way too early to issue a strategic sell signal at the moment. We would take a more cautious stance if any upcoming slow-down pushes the gauge below 60 percent (of course only in combination with weakening market breadth). As this is not the case right now, any upcoming short-term weaknesses will definitely be limited in price and time. In addition, we also can see that the WSC Sector Momentum Indicator is trading at a solid level, indicating that all sectors within the S&P 500 remain in a mid-term oriented uptrend. This can also be seen if we have a closer look at our Sector Heat Map, as the momentum score of all sectors (except from interest-rate sensitivity utilities at 0 percent) remains above the momentum score from riskless money market (0 percent).

The mid-term oriented market breadth condition shows also an intermingled picture. This becomes obvious as the Modified McClellan Oscillator Weekly remains in its paralyzed status. Also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) has not shown any significant bullish moves recently. This indicates that the underlying trend momentum of the market is a bit flattish at the moment. On the other hand, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume are still trading far above their bearish counterparts. Basically, the same set up is true if we analyze our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) as they continued to strengthen in the last couple of trading sessions or have at least not shown any signs of bearish divergences yet. So all in all, the current technical condition of the market still looks quite confirmative, and therefore, it is a way too early to call for a major market top right now. Nevertheless, as conditions could change quickly, we will monitor the developments of them quite closely within the next couple of weeks.

Long-Term Technical Condition

The long-term uptrend of the market remains well intact. Therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index jumped to its highest level for years and is indicating a technical bull market. Additionally, the WSC Global Momentum Indicator shows that currently 85 percent of all local equity markets around the world remain in a long-term oriented uptrend. Moreover, the relative strength of most risky markets keeps trading above the one from U.S. Treasuries, which is another indication for a risk-on market environment. Also long-term market breadth is currently giving no reason to worry, and therefore, we think that the current long-term uptrend of the market is not in danger at all (at least for the time being). Especially our long-term oriented High-/Low Index Weekly is trading at very supportive levels, indicating that the long-term tape of the market remains well intact. And the Modified McClellan Volume Oscillator Weekly succeeded to increase its bullish gap. Also the percentage of stocks which are trading above their longer-term oriented moving average (200) is holding up quite well.

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 relative strength score from the MSCI South Korea dropped out of the top 10 ranked markets within our Global ETF Momentum Heat Map, we received a sell signal for those specific ETFs within our WSC Global Tactical ETF Portfolio. Instead, the MSCI South Africa is added to the portfolio. The allocation advice from the WSC Sector Rotation Strategy remains unchanged. Moreover, we are proud to announce that the WSC All Weather Portfolio, the WSC Sector Rotation Strategy and the WSC Global Tactical ETF Portfolio reached a new all-time high last week. Especially, the cross-sectional momentum approach within our WSC Global Tactical ETF Portfolio is working very well in that kind of market environment.

Bottom Line

Our call remains unchanged compared to last week. Given the small non-confirmative signals within our short-term tape indicators, in combination with increased greed within the option market, the market still looks a bit vulnerable for a healthy but very short-lived consolidation period. Apart from that fact, the technical picture of the market remains quite healthy at the moment. To be more precise, with quite bullish signals all across the board (especially within our mid-term oriented indicator framework) the current bull-run is definitely not at risk of fading out at moment. As a matter of fact, any upcoming weaknesses should be limited in price and time. Therefore, we would advise our aggressive traders should not chase the market too aggressively on the upside, whereas our conservative members should hold their equity position as our positive mid- to long-term outlook has not been changed so far.

Stay tuned!!!