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July 8th 2018

Market Review

U.S. stocks finished the week with gains. For the week, the Dow Jones Industrial Average returned 0.8 percent to close at 24,456.48. The S&P 500 ended at 2,759.82 and booked a weekly gain of 1.5 percent. The Nasdaq gained 2.4 percent over the week to finish at 7,688.39. Among the key S&P sectors, energy was the only negative sector for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 13.4.

Strategy Review

In our last week’s comment, we highlighted the fact that the market followed a typical textbook like consolidation period and, therefore, the quality of the underlying tape structure would give us further guidance where the market is heading. Because under 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, such a consolidation period forces the market into a typical top building process, which is then of course just the harbinger of a more significant pullback/correction. In our last week’s comment we started to get quite cautious as we had received a growing number of evidences within our indicator framework that the consolidation period slightly started to transform into a corrective top-building process. Moreover we said as long as our mid-term oriented tape indicators had not turned bearish and remained, therefore, supportive, it was a bit too early to sell and too late to buy. As a consequence, we advised our members to place a stop-loss limit around 2,687 until we would see some solid improvements within our indicator framework. Moreover, we mentioned that – on a very short-time frame – another rally attempt within the ongoing consolidation period into mid-July (option expiration) looked quite possible.

Short-Term Technical Condition

In fact, the market finished the week with decent gains. But if we focus on our short-term oriented trend indicators, we can see that their readings developed quite moderately last week. From a pure price point of view, the current short-term oriented trend turned pretty neutral as the S&P 500 managed to close within both envelope lines of the Trend Trader Index. Nevertheless, we can see that both envelope lines of this reliable indicator are still drifting lower, indicating that – from a pure structural point of view – the underlying trend structure of the market remains bearish. Basically, the same is true if we focus on the Modified MACD and the Advance-/Decline 20 Day Momentum Indicator. Although both indicators are signaling some form of improvements, their signals are a way too weak to take them too seriously at the moment. This is due to the fact that any stronger down-day could easily lead to a bearish crossover within both indicators and, therefore, they are not really confirming the latest move by the market. So from a pure trend point of view, the latest gains can be still classified as a part of a consolidation period rather than the start of a new sustainable break-out.

Basically, we receive almost the same picture if we analyze short-term market breadth. Despite the fact that the latest move caused some stronger improvements in the readings of our short-term oriented tape indicators, some of them are still not confirming the current levels from the S&P 500. This applies in particular to the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators just flashed an outright weak bullish crossover signal last week. This is telling us that the underlying tape momentum of the market remains pretty weak-kneed and, therefore, the recent bounce still looks quite fragile in its nature. The case is slightly different if we focus on the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Both tape indicators rebounded quite strongly last week, but nevertheless the absolute levels on a 20 days’ time frame should be much higher if we consider the current level from the S&P 500. Another weak and non-confirming bullish crossover signal is coming from the High-/Low Index Daily (as we saw a quite strong spike of new highs on Friday). Although, this spike looked relatively encouraging, it was unfortunately just a single event so far. So all in all, short-term market breadth has shown quite supportive but not really confirmative readings recently. As a matter of fact, further bullish biased trading can be expected on a short-term time frame.

From a pure contrarian point of view, the situation is almost unchanged compared to last week. The option market remains quite bearish and, therefore, further bouncing until 15th of July (the option expiring date) looks quite likely. This picture is also confirmed by market sentiment, as most of the market participants remain quite cautious at the moment. However, apart from that fact our remaining contrarian indicators still look quite grim. Especially, the Smart Money Flow Index is far away from confirming the current levels from the Dow Jones Industrial Average. The last time we saw such strong divergences between this reliable indicator and the Dow was a couple of months before the “Trump Rally” had started. Compared to back then, the Smart Money Flow Index is now showing a huge bearish divergence. Given the outright weak tape structure, we would not be surprised if the market is running into a major market top in deeper summer. Moreover, we can see that the WSC Capitulation Index is still showing a risk-off market environment and has, therefore, not confirmed the latest move by the market. On a very short-time frame, we can see that the market is quite overbought and, therefore, the pace is likely to slow down a bit in the next couple of trading sessions.

Mid-Term Technical Condition

The mid-term oriented condition of the market showed no major signs of improvements compared to the previous week. The gauge from the Global Futures Trend Index still remains within the upper part of its bearish consolidation area, indicating that the market has a corrective tilt at the moment. So even if we do not see a stronger pullback immediately, as long as the gauge of this indicator remains near or below 60 percent (in combination with weak mid-term market breadth), the upside potential of the market should be somehow capped as well. Only, from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator still keeps trading at solid bullish levels so far. This indicates that most sectors within the S&P 500 are still in a mid-term oriented up-trend at the moment. This can be also seen if we focus on our Sector Heat Map, as the majority of sectors within the S&P 500 have still a higher momentum score than riskless money market.

However, the most encouraging signals are coming from mid-term market breadth. This is mainly due to the fact that mid-term oriented advancing issues as well as mid-term oriented up-volume has shown some stronger signs of recovery recently. As a matter of fact, both indicators are now trading well above their bearish counterparts, which is a quite healthy technical signal. Because, 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).  As a matter of fact, the risk of another stronger pullback has slightly diminished, at least for now. Also, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) strengthen significantly in the last couple of trading sessions and are, therefore, showing some bullish divergences right now. Another supportive signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) as they also increased significantly last week. This signals that the majority of all NYSE listed stocks got back on track, which can be also observed if we focus on the Modified McClellan Oscillator Weekly. All in all, these facts indicate that the total upside participation within the market recovered significantly last week. As a matter of fact, we think that it might be still a bit too early to take the chips from the table as the current consolidation period looks like it is transforming back into a more healthy market environment.

Long-Term Technical Condition

The long-term oriented trend of the market shows the same bearish picture as in the previous weeks. The WSC Global Momentum Indicator dropped once again to the lowest level for months. As stated in the last weeks this is a clear sign that a lot of local equity markets around the world are trading below their long-term trend-lines and that the current bull-run is fading out. Also the Global Futures Long Term Trend Index showed the same setting as in the last weeks and dropped again to the lowest level for months. Also like in the previous weeks, a positive signal is coming from our WSC Global Relative Strength Index as the relative strength of all risky markets was holding up quite well last week. But currently, already 5 markets are trading below the one from U.S. Treasuries, which is another signs that the global bull market is slightly losing steam. This can be also observed if we focus on our long-term oriented breadth indicators. The High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly are far away from being confirmative. Only the percentage of stocks which are trading above their 200 day moving average is holding up quite well so far. So all in all, the long-term condition of the market is indicating that the current bull market has already reached a mature stage.

Model Portfolios

Last week, there have been no changes in the allocation advice of our model portfolios (WSC All Weather Portfolio, WSC Inflation Proof Retirement Portfolio, WSC Sector Rotation Strategy and the Global Tactical ETF Model Portfolio).

Bottom Line

The improvements within our indicator framework (especially within mid-term market breadth) are indicating that the current corrective consolidation period slightly transformed back into a healthier market environment. As a matter of fact, the risk of a stronger pullback has clearly decreased (at least for now). On the contrary, in our opinion the overall tape structure is still a bit too weak to push the market strongly towards its latest all-time high. This means that as long as we do not see some stronger/confirmative readings within our indicator framework, it is highly likely to see some sort of bullish biased and volatile trading action into deeper July (instead of a stronger rally towards the latest bull-market high).  Nevertheless, given the weak long-term oriented technical condition of the market, together with quite bearish long-term signals on the contrarian side, we would not be surprised to see a renewed deterioration afterwards. But for now, it still looks a bit too early to take the chips from the table. For that reason, we would advise our conservative members to remain invested and to remove their stop loss limit from last week. Aggressive traders should focus on the long side again, although we would advise them not to take too much leverage at the moment.

Stay tuned!