May 5th 2019
After a quite volatile week, U.S. stocks finished the week nearly unchanged. The Dow Jones Industrial Average posted a small weekly loss of 0.1 percent to close at 26,504.95. Due to a quite strong Friday, the S&P 500 closed the week slightly higher at 2,945.64. The Nasdaq also eked out a small gain for the week to finish at a new all-time high of 8,164.0. Among the key S&P sectors, financials and health care were the top gainers and energy the worst performer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 12.9 on Friday after spiking towards 15.9 on Wednesday.
Short-Term Technical Condition
The market was in consolidation mode last week. As a matter of fact the short-term oriented trend of the market remains bullish, but has shown some signs of fatigue recently. The Trend Trader Index is still telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,902. Furthermore, we can see that both envelope lines of this reliable indicator are still increasing, indicating that the resistance/support levels for the S&P 500 are increasing as well. This is a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend, at least from a pure price point of view. If we focus on the overall trend momentum, in contrast, we can see that the Modified MACD flashed a bearish crossover signal last week (as expected in our last week’s outlook). This indicates some form of short-term exhaustion and can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. Although this indicator is still trading at quite bullish levels, it has not shown any bullish moves recently and has, therefore, not confirmed the latest highs of the S&P 500. So basically, these signals are telling us that the market remains in a technical consolidation mode and, therefore, is highly likely to see further bullish biased trading ahead (at least on a very short-time frame).
The main reason why we believe that the current consolidation period will turn out to be bullish is due to the fact that we saw some encouraging improvements within our short-term oriented breadth indicators last week. To be more precise, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) showed a quite bullish spike at the end of the week. This indicates a quite strengthening tape structure all across the board. This improving tape momentum can be also observed if we focus on the number of stocks which have reached a new 52 weeks high or low, respectively. During the whole week we saw a strong and quite confirmative surge in the number of stocks which are hitting a fresh yearly new high, whereas the total number of new lows kept trading at quite low levels. This is a quite bullish signal, as it indicates that the current short-term oriented uptrend is now driven by a much broader basis (and not by a few of heavy-weighted stocks in the index like last week). Consequently, the bullish gauge from our High-/Low-Index Daily was pushed to the highest level this year and has reached, therefore, quite confirmative levels. The only negative signals are coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both continued their bearish rides last week. This is telling us that the momentum of advancing stocks and advancing volume remains negative and that the current consolidation period is not completely over yet. Therefore, further volatile sideways trading could be possible, before further strengths can be expected!
On the contrarian side, we can see that the latest increase in volatility has started to have its designated impact on short-term sentiment. This is mainly due to the fact that the z-score from the Daily Put/Call Ratio All CBOE Options Indicator grew back into neutral territory again (albeit on quite low levels). This is a quite constructive signal as it indicates that the market has now still a bit more room left for positive surprises. Another positive signal is coming from the WSC Capitulation Index which is still indicating a risk-on market environment on a very short-time frame, whereas the Smart Money Flow Index is telling us that the big guys have not pushed the sell-button so far. The only negative signal on the contrarian side remains the Presidential Cycle. Historically, U.S. equities faced their first stronger pull-back in the time span between May and June which was then the basis for further rallying into mid-July. However, given the quite supportive readings within our short-term oriented tape indicators, we keep ignoring these seasonal headwinds – at least for now.
Mid-Term Technical Condition
Another reason, why we believe that the thread of a stronger pullback remains quite low at the moment is due to the fact that the mid-term oriented uptrend of the market remains quite supportive at the moment. First of all, the Global Futures Trend Index is trading in the middle of its bullish consolidation range and, therefore, it is still a way too early to issue a strategic sell signal now. 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 can also see that the WSC Sector Momentum Indicator is trading at the highest levels for months, indicating that most sectors within the S&P 500 remain in a strong mid-term oriented (price-driven) uptrend. This can be also observed if we have a closer look at our Sector Heat Map, as the momentum score of all sectors (except energy) remains above the momentum score from riskless money market and the one from the S&P 500.
The mid-term oriented market breadth condition shows nearly the same intermingled picture as in the previous week. The only difference is, that the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) grew to quite confirmative levels last week. This is telling us that the market internals are gearing up and, therefore, it is still a bit too early to get concerned at the moment. This picture is also confirmed by our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as all of them reached a new-all time high last week (indicating further strength ahead on a mid-term time horizon). Moreover, we can see that the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly remain bullish from a pure signal point of view, although their bullish gauges continued to decrease last week. However, given the quite healthy recovery in short-term oriented market breadth in combination with their current bullish levels, this is not a big deal-breaker at the moment. Nevertheless, we will have a close eye on their development within the next couple of weeks as bearish readings within both indicators mostly led to stronger pull-backs in the past.
Long-Term Technical Condition
Once again the long-term oriented trend of the market improved and, thus, clearly supports our view that the current consolidation still looks quite supportive in its nature. Our WSC Global Momentum Indicator grew to its highest level for months and signals that currently 80 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. Also our Global Futures Long Term Trend Index, which has been increasing for weeks now, grew to solid bullish levels. This is also a very supportive momentum signal at the moment. And once again all markets in our WSC Global Relative Strength Index increased last week. Further bullish signals are coming from our long-term market breadth indicators, as all of them strengthened (Modified McClellan Volume Oscillator Weekly, the High-/Low Index Weekly, percentage of stocks which are trading above their 200 day moving average).
Last week, there have been no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Rotation Strategy and the WSC Global Tactical ETF Portfolio. Moreover, we are proud to announce that theWSC All Weather Model Portfolio reached a new all-time high last week.
Two weeks ago, the short-term oriented time series momentum of the market was mainly driven by a few heavy-weighted stocks in the index. As a matter of fact, we advised our members to remain bullish but cautious as such a large-cap driven rally is always a fork in the road. Because during such a time period, we either see an increasing demand all across the board (which would lead to significant improvements within our short- to mid-term tape indicators) or existing divergences are piling up, which would then be the basis for a momentum-crash/sell-off (e.g. early/mid 2018, early 2016, mid 2015 or 2011). Therefore, we said we would remain bullish as long as we do not see a short-term oriented trend-break in combination with a spike in new lows since (as long as this is the case) a recovery within the broad market still looked quite likely. In fact, although the market was in consolidation mode last week, we saw a stronger demand all across the board. This is telling us that the recent consolidation period could act as basis for further rallying towards multiple record highs into summer. Consequently, our strategic bullish outlook strengthened last week. However, on a very short-time period further consolidation to dampen short-term optimism cannot be ruled out at the moment. Nevertheless, given the quite bullish set-up, we would advise our aggressive traders to buy into any upcoming weaknesses/remain bullish, whereas conservative investors should remain invested.