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November 5th 2017

Market Review

Although the market was struggling for direction at the beginning of the week, U.S. equities finished the week by breaking another set of records on Friday. The Dow Jones Industrial Average rose 0.5 percent for the week to a record high of 23,539.19. The S&P 500 climbed 0.3 percent for week to a record of 2,587.84. The week marked the eight straight weekly gain for both the Dow and the S&P 500, the longest such streak for both since November 2013. The Nasdaq advanced 0.9 percent from last Friday close to 6,764.44, an all-time high. The heavy-tech index marked its 63rd record close of 2017 and closed out its sixth positive week in a row, matching a streak that ended in early March. Among the key S&P sectors, energy was the best weekly performer, while industrials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 9.1.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that there was a good chance for short-lived (but healthy) consolidation period/serve pullback as most of our short-term oriented trend- as well as breadth indicators showed some form of short-term exhaustion. In fact, we saw some lackluster trading until Thursday before the market regained strength on Friday, finishing the week on a higher note. Consequently – from a pure price point of view – the short-term oriented uptrend of the market remains intact as the S&P 500 closed 22 points above the bearish threshold from the Trend Trader Index. This is 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 2.558. Nevertheless, from a technical point of view, the market remains in consolidation mode as the underlying trend-momentum remains outright weak at the moment.  This is mainly due to the fact that the Modified MACD has not managed to flash a bullish crossover signal so far. This indicates some form of short-term exhaustion and therefore, stronger fast driven gains are quite unlikely in such a scenario. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. The gauge from this reliable indicator is just trading shy above its bearish threshold, indicating that the market is a bit running out of fuel at the moment. In general, it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate, when the price action of the market is slowing down (after a stronger rally). As a matter of fact, short- to mid-term market breadth is a key area of focus to evaluate if a given consolidation period is just part of a healthy breather or the beginning of a more significant trend reversal.

In normal circumstances, a consolidation period is considered to be healthy as long as short-term to mid-term market breadth remains somehow supportive or is at least showing some form of 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, if short-term market breadth is collapsing, the consolidation is getting a more corrective tilt and is therefore, just a vanguard of a more significant/longer-lasting pullback. Currently, our entire short-term oriented tape indicators remain somehow supportive, but we can also see a lot of non-confirmation within their readings. This can be seen if we look at the percentage of stocks which are trading above their short-term moving averages (20/50). Both indicators decreased last week, although their readings should be much better if we consider the current level from the S&P 500. This is telling us that the upside participation within the latest gains remained extremely weak-kneed. This can be also seen if focus on the NYSE New HighsNew Lows Indicator as the total amount of stocks hitting a fresh 52 weeks high has lost some steam recently. Consequently, the High-/Low-Index Daily weakened last week, but is still trading at quite solid levels. This indicates that the latest break-out was mostly driven by large caps whereas the broad market was already lagging behind a bit. This can be also seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators have not really shown any serious bullish moves last week. So in the end, there was hardly any further strength within the short-term oriented tape structure visible, although the market finished slightly higher for the week. As a consequence we think to see a continuation of the recent consolidation period or at least some bullish biased sideways-trading ahead.

On the contrarian side, we receive almost the same picture. The Smart Money Flow Index has shown some strength recently, but it is still trading slightly below its all-time high, whereas the WSC Capitulation Index has not flashed a bearish signal yet. This signal confirms the view of an ongoing but healthy consolidation period. Basically the same is true if we focus on NYSE Member Margin Debt. Last week, this indicator climbed towards new record highs and has therefore, confirmed the overall level from the S&P 500. Consequently, it might be bit too early to bet on a major trend-reversal yet. The only concerning contrarian signal is the fact that the market flashed a Hindenburg Omen last week. This is a quite rare bearish technical signal and when it occurs, the market should be at risk for a stronger pullback within the next 30 days. According to our research, since 1996, the market faced a stronger loss exceeding the 5 percent range within the following 30 days in less than 25 percent of all cases. In all those cases, the mid-term tape structure of the market was extremely damaged as well (which is not the case right now). In other words, the Hindenburg Omen is just a single number that shows that the tape structure of the market is lagging behind.

Mid-Term Technical Condition

Right now, this fact can be ignored as the mid-term uptrend of the market remains intact so far. Although the Global Futures Trend Index again slightly decreased for the week (to 73 percent), it is still trading well above its bearish 60 percent threshold. Therefore, the mid-term uptrend of the market remains intact so far. As a consequence, it is too early to issue a strategic sell signal at the moment as the indicator remains within its bullish consolidation area. But as long as the gauge keeps trading within its bullish consolidation area and does not simultaneously show some signs of positive momentum, the upside potential of the market should remain limited as well. As a consequence further bullish biased sideways trading with increased volatility looks quite likely. Anyhow, we would get quite cautious if the gauge drops below 60 percent (in combination with weakening market breadth, especially within the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly), as it would be a clear indication that a stronger trend-break lies ahead. But this is absolutely not the case right now! Moreover, from a pure momentum point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator is far away from being bearish. This is telling us that most underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we have a closer look at our Sector Heat Map as the momentum score of all sectors (except consumer staples like in the previous weeks) remains above the one from riskless money market (currently at 5 percent).

Another main reason why we believe that the downside potential of the market remains pretty capped is due to the fact that the current mid-term oriented up-trend of the market is still supported by mid-term oriented market breadth. Despite the fact that the bullish gap from the Modified McClellan Oscillator Weekly started to narrow, its overall signal remains bullish. This is telling us that the momentum of mid-term oriented market breadth remains somehow weak but supportive. Moreover, we can see that the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) kept trading at quite bullish absolute levels. This indicates that the overall mid-term oriented trend participation/support within the market remains broad based. On top of that, we can see that the bullish gauges from the Upside-/Downside Index Weekly and the Advance-/Decline Index Weekly kept trading at quite solid levels, although they slightly decreased for the week. However, as long as this is the case, it is a way too early to take the chips from the table!

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market remains intact (and therefore, any upcoming pullback will not lead to a new bear-market at the moment). The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. As we can see from the WSC Global Momentum Indicator, 85 percent of all local equity markets around the world 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. Also, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stocks which are trading above their 200 day simple moving were holding up quite well. Also the amounts of stocks which are hitting a fresh 52 weeks high are trading far above their bearish counterparts – having a positive impact on our High-/Low Index Weekly. The only bearish signal is coming from the Modified McClellan Volume Oscillator Weekly – as it continued to decrease and is about to flash a bearish crossover signal.

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 Inflation Proof Retirement Portfolio, the Global Tactical ETF Portfolio and the WSC All Weather Portfolio. As the momentum score of health care dropped below average and below the one from the S&P 500 within our Sector Heat Map, we received a sell signal for that ETF within our WSC Sector Rotation Strategy. Moreover, we are proud to announce that the WSC All Weather Portfolio and the WSC Sector Rotation Strategy reached another all-time high last week.

Bottom Line

Our view remains pretty unchanged compared to last week. With quite stretched signals within some of our short-term oriented tape indicators, the market is getting increasingly vulnerable for a consolidation period. However, with quite solid readings all across the board, it is a way too early to bet on a major trend reversal at the moment. Thus, our strategic bullish outlook remains unchanged. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on profit taking.

Stay tuned!