June 24th 2018
U.S. stocks finished the week with losses. The Dow Jones Industrial Average declined 2.0 percent over the week to 24,580.89, marking its largest weekly decline since March 23. The S&P 500 dropped 0.9 percent to finish at 2,754.88. The Nasdaq slipped 0.3 percent for the week to end at 7,692.82. Among the key S&P sectors, utilities was the best performer on the week and industrials the greatest decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.8.
Short-Term Technical Condition
Right in line with our recent call, the market entered a consolidation period last week. Consequently, it was not a big surprise at all that the gauge from the Trend Trader Index dropped into neutral territory, whereas the Modified MACD flashed a bearish crossover signal on Wednesday. On the other hand, we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator is still trading at quite comfortable bullish levels (although it also dropped for the week), plus both envelope lines from the Trend Trader Index are still drifting higher. This is telling us that the short-term oriented trend of the market has not completely turned bearish yet. However, it is not unusual that the readings from our entire short-term trend indicators are languishing (or are even turning bearish) during a consolidation period. To evaluate if the current consolidation period should be considered as healthy or if it will turn out to be more corrective in its nature, short- to mid-term market breadth are a key area of focus.
Short-term market breadth still looks quite supportive at the moment, although the recent consolidation period has left its mark on some of our tape indicators. This becomes quite obvious if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators flashed a bearish crossover signal last week, indicating that the underlying breadth momentum of short-term advancing issues and advancing volume turned negative. On the other hand, we can see that the market internals still look quite healthy at the moment and, therefore, the risk of a stronger short-term oriented pullback remains limited at the moment. This becomes quite obvious if we focus on the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Especially the gauge on a 50 days frame was holding up quite well and is far away from being bearish. Also the NYSE New Highs – New Lows Indicator remains constructive (although the total amount of new highs could be definitely a bit higher if we consider the current levels from the S&P 500). As a matter of fact, the High-/Low-Index Daily is still indicating a supportive but not really confirmative market environment. So all in all, we think to see further volatile sideways-trading within the next couple of trading sessions.
In last week’s comment we highlighted that we would not be surprised to see a sentiment driven (healthy consolidation) period that should relieve overbought conditions and dampen short-term optimism. In fact, the recent consolidation period has started to have its designated impact on short-term optimism. This is due to the fact that our option based indicators (Global Futures Put Volume Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator and the All CBOE Options Call-/Put Ratio Oscillator) have gradually moved away from their bearish/cautious readings. In our opinion it is still a bit too less but the direction is definitely correct. However, the only outright long-term bearish signal is coming from the Smart Money Flow Index (as this reliable indicator 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. Therefore, we would not be surprised if the market is facing major headwinds in deeper summer. But for now, we think there is still a bit room left for the market to grow.
Mid-Term Technical Condition
The mid-term uptrend of the market remains unchanged compared to the previous weeks. Our Global Futures Trend Index decreased a bit, but is still trading in its bullish consolidation range. As long as this is the case, any consolidation period should be still healthy in its nature and, therefore, limited in price and time (of course only in combination with supportive market breadth indicators). The same is true if we analyze the current momentum score of all major key sectors within the S&P 500. The gauge from the WSC Sector Momentum even increased for the week and is trading at solid bullish levels. Also our Sector Heat Map shows a solid picture, as currently only 2 out of 9 sectors within the S&P 500 (consumer staples and utilities) are trading below the momentum score from riskless money market. In our view, this is another indication that the risk appetite among investors remains supportive and, therefore, we think it is a bit too early to take bet on a major trend reversal (at least for the time being).
More importantly, the current mid-term oriented up-trend of the market is still supported by solid readings within mid-term oriented market breadth. First of all, our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) were holding up quite well or have not shown any serious bearish moves recently. Moreover, mid-term oriented advancing issues and mid-term oriented up-volume are also trading far above their bearish counterparts (although they decreased a bit). And our Modified McClellan Oscillator Weekly finally widened its bullish gap, indicating that the mid-term oriented tape momentum is back on track. This can be also seen if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150), as they were holding up quite well (given the fact that the S&P 500 decreased for the week). So all in all, the current upside participation within the market is still quite supportive and, therefore, we think it is still a bit too early to take the chips from the table.
Long-Term Technical Condition
The long-term oriented trend of the market shows again the same picture as in the previous week. The WSC Global Momentum Indicator decreased again and dropped to lowest levels for months. This signals that a lot of local equity markets around the world are still falling below their long-term trend-lines and that the current bull-run is slightly fading out. Additionally, the Global Futures Long Term Trend Index continued its bearish ride and also reached the lowest level for months. But again, a positive sign is coming from our WSC Global Relative Strength Index as the relative strength of all risky markets increased last week. In addition, all markets (except two) are trading above the one from U.S. Treasuries. The readings from our long-term oriented tape indicators show a mixed picture. While the High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average were holding up quite well, the Modified McClellan Volume Oscillator Weekly slightly widened its bearish gap. So all in all, we can see that the global bull-market is slightly running out of fuel and, therefore, we would not be surprised to see increased headwinds later this year.
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).
Our call remains unchanged compared to last week. Given the small non-confirmative signals within our short-term tape indicators, in combination with still some elevated increased greed within the option market, the consolidation period is likely to continue into next week. Apart from that fact, the technical picture of the market still remains bullish at the moment. To be more precise, with quite bullish signals within our mid-term oriented indicator framework, we think it is a bit too early to bet on a major trend reversal at the moment. So all in all, we would advise our aggressive traders should not chase the market too aggressively on the upside, whereas our conservative members should hold their equity position as our positive mid- to long-term outlook has not been changed so far.