September 3rd 2017

Market Review

U.S. stocks finished the week with small gains. For the week the Dow Jones Industrial Average eked out a small gain of 0.6 percent to finish at 21,813.67. The S&P 500 finished at 2,443.05 and recorded a weekly gain of 0.7 percent. The Nasdaq posted a weekly gain of 0.8 percent to end at 6,265.64. The heavy-tech index booked its first weekly gain in five weeks. Most key S&P sectors ended in positive territory for the week, led by materials. Consumer staples were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded more than 9.5 percent lower, near 11.3.

Strategy Review

Over the past couple of weeks, we received a growing number of evidences that the market was in the middle of a corrective top-building process. To be more precise, our indicator framework showed that only due to the strong performance of a handful of large- and mega-caps, the S&P 500 had reached a new all-time high, although the remaining stocks were already faltering. We warned our members that such a situation was extremely dangerous as just a trend-reversal within those few stocks could trigger a fast paced pullback as there was literally no safety net around which would be able to cushion such a move (as the broad market was already in a weak technical condition). Moreover we said that even if we did not see a stronger pullback immediately, the upside potential of the market should also remained capped in such a situation (as the market would have enough breadth/power to rally substantially above its previous all-time high). As a matter of fact, we advised our conservative members to step onto the sideline as the opportunity cost (risk-/reward ratio) of not being invested was extremely low. Above all, we mentioned that any upcoming rebounds should turn out to be corrective as long as we did not see any significant improvements within our indicator framework. Despite the fact that we saw several painful down-days since then it was also interesting to see that the small bounce from last week led to significant improvements within our indicator framework. Consequently, the big question is if the current correction cycle has already come to an end or if the latest bounce was just part of a bigger suckers rally?

Short-Term Technical Condition

If we have a closer look at our short-term oriented indicators, we can see that the bounce from last week pushed the S&P 500 15 points above the upper envelope line from the Trend Trader Index. As a matter of fact, the pure price driven short-term oriented uptrend remains intact as long as the S&P 500 does not close below 2,446. This pure price driven uptrend is now also supported by the Modified MACD, which flashed a bullish but weak crossover signal on Wednesday. This indicates that the underlying trend momentum of the market turned positive again (at least on low levels). Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, which also turned bullish last week, signaling that the overall trend-internals are also slightly getting back on track. Nevertheless, both signals are a bit too weak to take them too seriously at the moment, since any stronger down-day could easily produce a sell signal again. Moreover, we should not forget that both envelope lines from the Trend Trader Index are still decreasing and therefore, the latest gains from the S&P 500 can be still categorized as bounce – at least from a pure signal point of view.

However, if we analyze the underlying quality of the latest move we get a completely different picture as our entire short-term tape indicators improved significantly last week! Despite the fact that the S&P 500 only gained 1.4 percent for the week, the overall trend participation rose towards solid levels last week.  Especially, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) recovered from outright bearish levels, indicating an intensifying trend-structure at the moment. Consequently, the latest bounce was driven by a quite broad basis rather than by a few heavy weighted stocks within the S&P 500. This is a quite healthy technical signal, although the gauge on a 50 days frame did not turn completely bullish yet. This can be also observed if we focus on the High-/Low Index Daily as it continued to strengthen its bullish signal last week. This is due to the fact that there was a healthy expansion of the total amount of all NYSE-listed stocks which reached a new yearly high, whereas the total amount of new lows literally collapsed (after the stronger spike three weeks ago). This is telling us that the selectivity within the broad market has fallen sharply which is another positive signal that the latest gains were supported by a broad basis.  Another encouraging fact is the momentum of short-term market breadth (advancing issues and advancing volume) is also getting back on track as the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily also turned bullish last week. So if we consider the magnitude of recent recovery within our indicators together with the fact that the S&P 500 only advanced 1.4 percent for the week, it looks that we have seen the worst already (at least on a short-term time period).

On the contrarian side, there are hardly any signals around. The Smart Money Flow Index has shown some strength recently, neglecting the case for further losses. Above all, we can see that the fisher transformation from the WSC Capitulation Index has formed a rounding top indicating that we might have seen the worst already.

Mid-Term Technical Condition

However, the most important mid-term oriented trend signal is coming from the Global Futures Trend Index. As already mentioned a couple of time, from a formal point of view, any ongoing correction cycle will not be over as long as its gauge keeps trading below its 60 percent threshold (in combination with a weak mid-term market breadth). Therefore, it was good to see that its gauge managed to pass that important hurdle on Thursday, indicating that the recent gains are definitely part of a larger recovery rather than a corrective rebound. Therefore, the chances are quite high that the market will start another rally attempt towards its latest all-time high soon. Unchanged compared to last week, from a pure price point of view, the market remains in a mid-term oriented up-trend as the gauge from the WSC Sector Momentum Indicator kept trading at solid levels. This is telling us that the momentum score of most sectors within the S&P 500 are still outperforming the momentum score of riskless money market within our Sector Heat Map. Therefore, it was also good to see that the momentum score of riskless money market dropped for the week, which is another green flag on the horizon.

Another important fact is that, apart from the Modified McClellan Oscillator Weekly, most of our mid-term oriented tap indicators showed also major signs of recovery last week. This is mainly due to the fact that we saw a small bullish crossover signal within the Upside-/Downside Volume Index in combination with a quite encouraging spike in mid-term oriented advancing issues! As a result, the threat of a stronger pullback has reduced significantly. Moreover, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) slightly turned bullish during the week, indicating the growing number of upside participation within the market. So all in all, the recent correction risk has diminished significantly under the prevailing circumstances. Nevertheless we should not forget that most signals are still a bit weak-kneed. For that reason, we keep a close eye on the development of those indicators within the next couple of weeks.

Long-Term Technical Condition

The long-term oriented uptrend of the market remains unchanged. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. Also our WSC Global Momentum Indicator indicates that 92 percent of all global markets are currently within a long-term oriented uptrend at the moment. Also our WSC Global Relative Strength Index reveals that the relative strength of all risky markets keeps trading above the one from U.S. Treasuries (except commodities). Another positive signal is coming from long-term market breadth. Apart from the Modified McClellan Volume Oscillator Weekly our entire long-term oriented breadth indicators showed also stronger signs of recovery (High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average) underlining the case that we might have seen the worst already.

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 and the WSC All Weather Portfolio. As the momentum score of materials rose above average and above the one from the S&P 500 within our Sector Heat Map, we received a buy sell signal for that ETF within our WSC Sector Rotation Strategy. Above all, we can see that the Global Tactical ETF Portfolio is closing two trades with a decent profit. The main reason for that is that the MSCI South Korea and the MSCI Spain dropped out among the top 10 markets within our Global ETF Momentum Heat Map. On the other hand, the MSCI Italy and the MSCI EM are now ranked within the top 5 markets within our Global ETF Momentum Heat Map, and are therefore, being added to the portfolio. Moreover, we are proud to announce that the WSC All Weather Portfolio reached an all-time high last week.

Bottom Line

Despite the fact the market bounced 1.4 percent for the week, the improvements within our indicator framework have been quite surprising. Given the strong improvements all across the board, it looks like that the recent corrective top building process transformed back into a healthier market environment. Consequently, the risk of a stronger correction clearly diminished last week and therefore, our strategic outlook now turned slightly bullish again. For that reason, we would advise our conservative members to raise exposure again (by buying into weaknesses rather to chase the market too aggressively on the upside) as the current risk-/reward ratio looks attractive again (at least for the time being). However, given the quite fast changing market environment, we would not be afraid of issuing a strategic sell signal immediately, if the current mid-term trend-/breadth condition of the market turns negative again as capital appreciation is the most important driver for success.

Stay tuned!