April 15th 2018

Market Review

As expected in our latest call, U.S. stocks finished the week with solid gains. For the week, the Dow Jones Industrial Average rose 1.8 percent to 24,360.14. The S&P 500 gained 2.0 percent during the week to end at 2,643. The Nasdaq jumped 2.8 percent from the week ago close to finish at 7,106.65. Most key S&P sectors ended in positive territory for the week, led by materials. Utilities were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 17.4.

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend condition of the market improved significantly compared to last week. From a pure price point of view, the short-term oriented trend of the market turned quite neutral, as the S&P 500 managed to close in the middle of both envelope lines of the Trend Trader Index. This was the first positive pure price driven trend signal since we saw the latest correction leg in mid-March, indicating that a stronger bounce is in place. Nevertheless, we should not forget that both lines of the Trend Trader Index are still decreasing and, therefore, the current recovery is still a bit fragile in its nature. But apart from this fact, we can see many positive developments within our remaining short-term oriented trend indicators. The gauge from the Advance-/Decline 20 Day Momentum Indicator clearly confirmed the latest rally as it showed a strong recovery last week and nearly reached the bullish territory. Another quite encouraging signal is coming from the Modified MACD, as we saw a solid surge in the short-term oriented trend line of this reliable indicator and finally a bullish crossover signal. Consequently, any upcoming weakness would most likely just produce a bullish divergence in its readings, as extremely heavy losses would be necessary to bring this short-term oriented gauge back to its former low! As a matter of fact, we can be pretty sure that that the bounce will continue for a while.

This picture is also confirmed by our short-term oriented breadth indicators as they showed some stronger signs of recovery last week. The most encouraging signal is coming from the High-/Low-Index Daily, which almost flashed a bullish crossover signal last week. The main reason for this quite supportive signal is the fact that we have recently seen a quite strong reduction in the number of new lows, in combination with a small increase of new highs. This is a quite encouraging tape signal as it is telling us that the market internals strengthened on a broader basis as the latest recovery was not mainly driven by short-covering. As long as this pattern continues, the overall tone should be supportive. This can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges recovered significantly last week and finished the week on quite supportive levels. Basically, the same is true if we focus on the Modified McClellan Oscillator Daily and on the Modified McClellan Volume Oscillator Daily as both indicators succeeded to flash a bullish crossover signal last week. This is telling us that the short-term oriented momentum of advancing issues and advancing volume finally turned positive. This is another indication that the bounce might continue for a while. The main reason why the current recovery is still categorized as bounce (and not as new sustainable uptrend) is due to the fact that the absolute readings of our short-term oriented tape indicators are still a bit too weak-kneed at the moment. Consequently, as long as we do not see a stronger spike in new lows (or other typical short-term oriented tape deterioration signals), the bounce will not be at risk of fading out – at least for now.

From a pure contrarian point of view, we can see that the latest recovery started to have its designated impact on short-term pessimism as the gauge from the Daily Put/Call Ratio All CBOE Options Indicator dropped back into neutral territory. If we have a closer look at the current level from the S&P 500 and the CBOE Volatility Index (VIX), we can be pretty sure that all of those put options must have been wiped out so far. This is not a big surprise at all. Three weeks ago, we already mentioned the fact that approximately 90 percent of all uncovered options are an also-ran. Therefore, we expected the rally to last at least until April 20th, as the option expiring date is due on that day. If we consider the fact that short-term market breadth is slightly improving all across the board, we received further confirmation for our short-term bounce scenario. This view is also confirmed by our cyclical roadmap. According to those reliable past patterns, the current bounce could even lift the market towards a new record high before a blow-off top could herald a longer lasting down-turn (cyclical bear market or a drop towards 2,500) into deeper summer (which is in-line with our strategic outlook so far). This would explain the fact that the gauge from our Smart Money Flow Index has dropped almost to the lowest level since early 2016 recently, indicating that the big guys have started to cut exposure significantly.

Mid-Term Technical Condition

On a mid-term time horizon, the technical condition of the market still looks quite vulnerable at the moment. Although our Global Futures Trend Index increased by nearly 20 percentage points last week and has, therefore, confirmed the latest gains of the S&P 500, the gauge is still far away from passing its important 60 percent bullish threshold! As already mentioned a couple of times – from a formal point of view – the current correction cycle will be not be over as long as its gauge keeps trading below that important threshold! As a matter of fact, the latest recovery can be still classified as (corrective) bounce rather than a new sustainable uptrend.  Also the WSC Sector Momentum Indicator has not succeeded to improve recently and is still trading at the lowest level for years! This fact reveals that the momentum score of more and more sectors within the S&P 500 are starting to underperform the momentum score of riskless money market. This circumstance is also proofed by our Sector Heat Map as currently already 5 sectors are underperforming the momentum score of riskless money market (six weeks ago, only one sector was underperforming). As already pointed out last week, this is a strong piece of evidence (for our mid-term view) that the market will face a major troubles soon.

Mid-term market breadth showed some small signs of recovery (on quite low levels) and, therefore, we received further confirmation for our short-term bounce (mid-term bust) scenario. Our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) increased last week, indicating that the bounce might continue for a while. Moreover, mid-term oriented advancing issues and mid-term oriented up-volume continued to gain more bullish ground, although both indicators remain far away from being healthy. Also the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) showed some improvements (although on a very low levels) and are oscillating around their thresholds. This indicates that the market remains supportive on a short-term time perspective (as the readings are quite confirmative for the current level of the S&P 500), but remain too weak on an absolute basis. However, we can see that the Modified McClellan Oscillator Weekly continued to decrease, indicating that overall tape momentum remains quite poorly at the moment.

Long-Term Technical Condition

The long-term oriented uptrend of the market shows the same picture as in the last weeks, revealing that it started to run out of steam. The WSC Global Momentum Indicator is trading at the lowest level for months, indicating that a lot of local equity markets around the world have dropped below their long-term trend-lines recently and that the current bull-run is slightly fading out. Although the Global Futures Long Term Trend Index is still trading at quite bullish levels, it also continued to decrease. The same is true with our WSC Global Relative Strength Index – although the relative strength of all risky markets keeps trading far above the one from U.S. Treasuries, it also weakened last week. And the exhaustion in long-term market breadth is still persistent, as the readings from our entire long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average) have not shown any significant positive moves recently. This is another confirmation for our mid-term oriented cyclical bear-market scenario.

Model Portfolios

If we focus on our Model Portfolios, we can see that the WSC Sector Rotation Strategy is selling industrials as its relative strength scores dropped below average and below the one from the S&P 500 within our Sector Heat Map. Consequently, the portfolio is only holding 3 out of 9 sectors, which is another indication for a narrowing leadership within the S&P 500. There have been no changes in the allocation advice from the WSC Inflation Proof Retirement Portfolio, the WSC All Weather Portfolio or the WSC Global Tactical ETF Portfolio.

Bottom Line

Our base call remains unchanged compared to last week. On a short-term perspective, we think that the current bounce will continue into deeper April/early May. Consequently, our tactical call that we see a stronger move towards 2,700/2,750 or even 2,800 (if we see further strong improvements within short-term market breadth) remains unchanged. If we are correct, then this bounce will be just part of a larger and complex top-building process into deeper Q2 (which could then finally lead to another significant correction into summer). The main rationale behind that call is the fact that the overall technical condition of the market looks quite bearish biased and, therefore, the current bounce still looks quite corrective in its nature. However, we advise our aggressive traders as well as conservative members to hold their tactical long-position as long as short-term market breadth continues to improve (or we do not see a stronger spike of new lows (more than 125). Members with the primary goal of capital appreciation and for those where transaction costs matters could also get back into the market, as we think the bounce could lift the market almost 5 percent from current levels. Nevertheless, a stop-loss limit at 2,588 is quite important – just in case we see an unexpected sharp decline.

Stay tuned!!!