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May 19th 2019

Market Review

U.S. stocks wrapped a volatile week and all three major U.S. averages finished the week finally in negative territory. The Dow Jones Industrial Average declined 0.7 percent over the week to 25,764. The S&P 500 recorded a weekly loss of 0.8 percent to finish at 2,859.53. The Nasdaq lost 1.3 percent for the week to end at 7,816.28. Most key S&P sectors ended in negative territory for the week, led by financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.

Strategy Review

In our last week’s comment, we highlighted the fact that we still expected to see some down-testing (final washout) at the beginning of the following week, before the market should hit an important low. Moreover, we mentioned that such a low could then act as the basis for another stronger (and maybe final) rally into deeper summer. In fact, after the bears had taken the S&P 500 down to 2,801 on Monday, stocks strongly rebounded towards 2,892 until Thursday before dropping slightly into negative territory for the week on Friday. Anyhow, after our members have successfully participated in the strong year-start rally, the big question is if last week’s stabilization was mainly driven by short-covering (and, therefore, renewed weaknesses can be expected) or if the market has now entered a bottom building process (which could be the basis for a strong counter-trend rally into late summer)?

Short-Term Technical Condition

Not surprisingly, the short-term oriented price driven trend of the market remains well in force. This is mainly due to the fact that the S&P 500 closed 22 points below the bearish threshold from the Trend Trader Index. Furthermore, we can see that both envelope lines of this reliable indicator are drifting lower. This signals that within the past 20 days we saw lower highs and lower lows, which is another typical technical pattern for a short-term oriented price driven down-trend. Basically, the same is true if we focus on the overall trend momentum, as the Modified MACD continued to gain more negative ground last week. The situation looks quite different, if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator as its gauge managed to get back into bullish territory last week. This indicator often begins to turn before prices do, thereby making it a leading indicator. As a matter of fact, it was good to see that this indicator has clearly confirmed the recovery from last week. In such a situation short-term to mid-term market breadth is key area of focus as it tells us if the current bearish-biased trend is losing stream or if it is driven by a strong majority and will, therefore, highly likely continue.

If we focus on the readings from short-term oriented market indicators, we can see major improvements last week. This applies in particular to the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50). Although we have seen a recovery since Monday, both gauges have not managed to pass their bullish threshold yet. Nevertheless, both gauges were holding up relatively well, given the fact that the S&P 500 lost 3 percent within the past three weeks. Basically, the same is true if we focus on the momentum of advancing stocks (Modified McClellan Oscillator Daily) and advancing volume (Modified McClellan Volume Oscillator Daily). Despite the fact that both indicators remain quite bearish from a pure signal point of view, we can see some form of stabilization in their short-term gauges. However, the most important signal is coming from the NYSE New Highs – New LowsIndicator, as we have not seen a significant spike in new lows or a strong reduction in new highs yet (not even on Monday). This indicates that most of the selling pressure was caused by profit taking rather than by heavy short-selling activities. Moreover, it was good to see a stronger bullish spike of new highs at the end of the week, indicating that we might have seen the worst already. As a matter of fact, the High-/Low-Index Daily strengthened its bullish signal and remains, therefore, supportive. This supports our view, that the market might have entered a volatile bottom building process.

On the contrarian side, we can see that the fear among investors remains persistent. This is due to the fact that the put-/call ratio within the Daily Put/Call Ratio All CBOE Options grew deeper into outright bullish territory. As approximately 90 percent of all uncovered options are an also-ran, we would be surprised if the market is trading much lower in late June, when the option expiring date is due. This picture is also confirmed if we focus on the AII bulls & bears survey. Right now, there are more bears than bulls (a fact we have not seen since early January). From a pure contrarian point of view, this is a quite bullish ingredient as it indicates a quite significant washout. On the other hand, we can see that the big guys have started to build up exposure quite significantly during the latest period of weakness, as the Smart Money Flow Index has formed an outright bullish divergence recently. Moreover, we can see that the WSC Capitulation Index is still indicating a risk-on market environment, although we saw some increased selling pressure within the past 3 weeks. Another quite bullish signal is coming from the Presidential Cycle. There we can see that the market has often hit an important low in mid-May, which was then the basis for another stronger rally into deeper summer (before the market will hit its final high in Q3 2019)!

Mid-Term Technical Condition

The mid-term oriented condition of the market continued to deteriorate last week. This is mainly due to the fact that the gauge from the Global Futures Trend Index dropped significantly last week and touched the important 60 percent threshold. Normally, this would be a quite bearish signal as readings below 60 percent are indicating that the market is outright vulnerable for further disappointments. However, this is mainly the case if we see additional weak readings within our mid-term oriented tape indicators (which is not the case right now). This might also explain, why the mid-term oriented uptrend of the market still remains intact as the WSC Sector MomentumIndicator keeps trading at solid bullish levels (although it also dropped for the week). This indicates that most sectors within the S&P 500are still in a mid-term oriented up-trend at the moment (as we have not seen a stronger pullback so far). This can be also observed if we focus on our Sector Heat Map as the momentum score from riskless money market keeps trading below most sectors (although it has shown some strength recently).

The main reason, why we think that the current pullback should be limited in price and time is due to the fact that mid-term market breadth still remains outright strong at the moment. Apart from the Advance-/Decline Line in Percent, our entire advance-decline indicators (Advance-/Decline Line DailyAdvance-/Decline Line Weekly and the Advance-/Decline Volume Line) are trading near record highs and have, therefore, formed a quite bullish divergence recently. Moreover, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume strengthened their bullish signals last week (although the market finished the week slightly lower). This is another supportive signal, indicating that we might be not too far away from an important low. Moreover, as long as we do not see a bearish crossover signal within these two indicators, we think it is still a bit too early to pull the trigger (from a strategic point of view). Another encouraging signal is coming from the Modified McClellan Oscillator Weekly which defeated its bullish gap last week. This indicates that the underlying momentum of advancing stocks on a mid-term time horizon still remains quite positive. This can be also seen if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Despite the fact that we saw some stronger selling pressure last week, both gauges did not fell significantly below their bullish threshold last week. All these facts are telling us that it might be a bit too early to pull the trigger yet as the current weaknesses still looks limited in price and time (at least from the current point of view).

Long-Term Technical Condition

The long-term oriented trend of the market remains in place and has not shown any major signs of weaknesses so far. Our WSC Global Momentum Indicator keeps trading at outright bullish levels, although it has lost some steam recently. To be more precise, it tells us that 65 percent 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. This is a very supportive technical signal, as it shows that the current rally still remains global in scope. And once again our Global Futures Long Term Trend Index succeeded to gain more bullish ground, which is also a very supportive momentum signal at the moment. Also all markets in our WSC Global Relative Strength Index increased last week. If we focus on our long-term market breadth indicators, we can see that the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weeklyremain quite supportive, while the percentage of stocks which are trading above their 200 day moving average slightly weakened last week.

Model Portfolios

Last week, there have been no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Sector Rotation Strategy. As the relative strength score from the FTSE China 25 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 France is added to the portfolio.

Bottom Line

Despite the fact that our most of our short-term trend indicators remain bearish from a pure signal point of view, most of our short- to mid-term oriented tape indicators have not confirmed the latest negative price action from the S&P 500. Moreover, from a pure contrarian and a seasonal point of view, the overall technical picture is getting increasingly bullish, which is another indication that we might have seen the worst already. Therefore, it looks like that the market appears to be ready to enter a volatile bottom building process, which might be the basis for another significant rally into summer. However, that does not necessarily mean that the market will take off immediately, since the overall short-term tape condition is still a bit too weak-kneed at the moment to justify a V-shaped recovery. On the other hand, we can see that mid-term market breadth is telling us that it is still too early to pull the trigger (at least for now). Consequently, further volatile sideways trading looks quite likely. Our approach right now is to watch the quality of the bottom building process quite carefully. Whether the sideways-trading will be of high quality in its nature (our preferred view) or if it will be accompanied by a further deterioration within our indicator framework, which will then be definitely a deal-breaker for our base case scenario. Consequently, we would advise our conservative members to remain invested, whereas our aggressive traders should also remain in the bullish camp as long as we do not see a significant break-down within our remaining short-term oriented breadth indicators (massive spike of new lows and a bearish High-/Low-Index Daily). Nevertheless, we would also think it would make sense to place a stop-loss limit (closing price) at 2,780 (just in case things change quite fast within the next couple of days).

Stay tuned!!!