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July 16th 2017

Market Review

U.S. stocks rallied for the week, pushing the Dow and the S&P 500 to new record highs. The Dow Jones Industrial Average rose 1.0 percent for the week to a record of 21,637.74. The S&P 500 climbed 1.4 percent for week to a record of 2,459.27. The Nasdaq rocketed 2.4 percent from last Friday close to 6,312.47. The heavy-tech index booked its sixth-straight positive close and finished just shy of its closing record of 6,321.76 set on June 8. All key S&P sectors, except financials ended in positive territory for the week, led by technology. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 9.5.

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend of the market turned pretty bullish as we have seen some decent gains last week. This is mainly due to the fact that the S&P 500 closed 33 points above the bearish envelope line from the Trend Trader Index. So from a pure price point of view, the short-term uptrend of the market remains intact as long as the S&P 500 does not drop below 2.426 (bearish threshold from the Trend Trader Index). This bullish short-term oriented price trend is also supported by the Modified MACD, which flashed a small but bullish crossover signal on Friday. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator also grew into solid bullish territory. Despite the fact that our entire short-term trend indicators are back on track, we can still see some bearish divergences in their readings, as the Advance-/Decline 20 Day Momentum Indicator has not clearly confirmed the recent breakout by the S&P 500, whereas the bullish signal from the Modified MACD is still a way too weak to be taken too seriously at the moment. So from a pure short-term oriented trend perspective, the recent consolidation period is not completely over yet. As a matter of fact, short-term market breadth will give us further guidance whether the latest move was just a kind of bull-trap within the ongoing consolidation process or the stepping stone of our expected summer rally (into August).

If we analyze the latest move from the S&P 500, we can see that it was accompanied by a stronger recovery within our short-term oriented breadth indicators. As a matter of fact, it looks like that the latest consolidation period turned out to be just a healthy breather and therefore, the latest break-out looks quite sustainable in its nature. This becomes pretty obvious if we focus on the percentage of stocks which trading above their short-term oriented moving averages (20/50) as they are now quite far away from being bearish. This indicates that the underlying trend participation within the latest break-out was quite broad based. Additionally, we saw stable readings in the total amount of all NYSE-listed stocks which reached a fresh yearly high, in combination with very depressed readings of new lows! As a matter of fact, the bullish signal from the High-/Low-Index Daily jumped to quite bullish levels. On top of that, we can see that both, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily, flashed a bullish crossover signal last week. This signals that the market internals are getting back on track. So all in all, we think the current short-term oriented technical condition of the market looks quite healthy again and therefore, we do not think that any upcoming noise of the market will lead to a major trend reversal at this point in time.

The situation on the contrarian side looks almost unchanged compared to last week. Despite the fact that the Smart Money Flow Index has shown some signs of strength recently, its gauge keeps trading at moderate bullish levels. As a matter of fact, this indicator is not really confirming the latest rally from the Dow. Moreover, we can see that the Uptick-/Downtick Ratio Daily remains in bearish territory plus the market is quite overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Ratio Daily) on a very short-time frame.  As a matter of fact, it is possible to see a washout day or a slow pace market environment on a very short-time frame. On the other hand, we can see that the WSC Capitulation Index is about to form a rounding top, indicating that we might have seen the worst already. This might also coincide with the fact that short-term and long-term optimism has diminished recently (Daily CBOE Put-/Call Options Ratio and Market Vane) which is an absolutely important ingredient if the market wants to climb a wall of worry.

Mid-Term Technical Condition

Another reason why we remain bullish at the moment is the fact that the mid-term oriented uptrend of the market stays unchanged at quite solid bullish levels. This becomes pretty obvious if we focus on readings from the Global Futures Trend Index.  Like in the last week, the indicator keeps trading exactly in the middle part of its bullish consolidation area (75 percent). As long as this is the case, any pullback should only turn out to be a temporary weaknesses/consolidation within an ongoing bull market. We would get quite cautious if the gauge dropped below 60 percent (in combination with weakening/bearish mid-term oriented market breadth), as it would be an indication that a stronger correction lies ahead. This is not the case right now and therefore, it is a way too early to issue a strategic sell signal at the moment. Above all, from a pure price point of view, the mid-term oriented up-trend of the market remains also intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far and is trading at solid levels. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market keeps trading at low levels (currently 15.7 percent) and below all other sectors (except energy).

On top of that, mid-term oriented market breadth (also regained strength and) is therefore, still confirming the current mid-term oriented uptrend of the market. Especially, the Modified McClellan Oscillator Weekly succeeded to widen its bullish gap (albeit on low levels). This is telling us that the momentum of advancing stocks improved on a mid-term time horizon and that the underlying market breadth momentum remains pretty supportive. More importantly, all of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) jumped to new record highs and have therefore, definitely confirmed the latest break-out from the S&P 500! Above all, it is another piece of evidence for our summer rally scenario. Basically, the same is true if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both gauges kept trading at solid bullish levels – although they could be definitely a bit stronger if we consider the current level of the S&P 500. However, all in all, this is another sign that the underlying tape structure of the market looks pretty solid at the moment. Such a broader tape improvements can also be seen if we focus on mid-term oriented advancing issues as well as mid-term oriented up-volume. Recapping the overall tape situation, we stick to our summer rally scenario and therefore, we think to see further record highs into summer before major troubles might be due!

Long-Term Technical Condition

The long-term uptrend of the market remains unchanged to our previous comments. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 as it keeps trading at very high levels – although it has been declining for the last weeks. Also the WSC Global Momentum Indicator indicates that 78 percent of all global markets remain within a long-term oriented uptrend. This can be also monitored if we focus on the WSC Global Relative Strength Index, as the relative strength of all risky markets keeps trading above the one from U.S. Treasuries (except commodities). Like in the previous weeks, also long-term oriented market breadth still looks quite constructive as the percentage of stocks which are trading above their 200 day simple moving average are showing no reason to worry. Also, the amounts of stocks which are hitting a fresh long-term new high are trading far above their bearish counterparts, leaving our High-/Low Index Weekly on supportive levels. And also our Modified McClellan Volume Oscillator Weekly regained strength and might flash a bullish crossover signal soon.

Model Portfolios

If we have a closer look at our Model Portfolios, we can see that there have been no changes in the allocation advice from the WSC Global Tactical ETF Portfolio, WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. As the momentum score of financials dropped below average and below the one from the S&P 500 within our Sector Heat Map, we received again a sell signal for that ETF within our WSC Sector Rotation Strategy. Right now, the relative strengths score of financials is just shy trading below the one from the S&P 500 and therefore, big price swings – either up or down – can trigger signals that last only for one week. Despite the fact that such signals can be painful it is part of every momentum driven investment strategy, since the main idea is to exploit trends on very systematic way.

Bottom Line

In our last week’s comment we highlighted the fact that our strategic bullish outlook remained unchanged as we had received a growing number of evidences that the consolidation period should turn out to be healthy and therefore, pretty limited in price and time. Although we expected that the consolidation period will be in force a bit longer, the overall direction of the recent (bullish) break-out was not a big surprise at all. As a matter of fact, the market was moving a bit ahead in terms of time but not in terms of price. However, given the quite bullish readings all across the board, our strategic bullish outlook remains unchanged. Moreover, we received even further confirmation for our summer rally scenario, which is also supported from a pure cyclical point of view. As a consequence, we would advise our conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips.

Stay tuned!