May 13th 2018

Market Review

U.S. stocks ended the week with gains. The Dow Jones Industrial Average booked a 2.3 percent weekly gain to end at 24,831.17. The S&P 500 recorded a weekly climb of 2.4 percent and closed at 2,727.72. The Nasdaq increased 2.7 percent for the week to close at 7,402.88. Nearly all key S&P sectors ended in positive territory for the week led by energy. Utilities and consumer staples were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held just above 12.7.

Strategy Review

Over the past two weeks, we received a growing number of evidences that the market was highly at risk for another significant correction. 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 was holding up quite well, 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 is 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 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 – in such a situation – we would scarify 2-3 percent upside potential, just in case if the corrective technical condition of the market transforms back into a more healthier environment. Worth mentioning is the fact that the S&P 500 gained 2.17 percent since then. Despite the fact that we saw several painful down-days since then it was also interesting to see that the 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 (at least for now) or if the latest bounce was just part of a bigger suckers rally?

Short-Term Technical Condition

The short-term oriented trend of the market turned clearly bullish last week, as the readings from our entire short-term oriented trend indicators strengthened. In particular, the S&P 500 closed 71 points above the bearish threshold from the Trend Trader Index. This indicates that the underlying bullish trend of the market remains intact as long as the broad equity benchmark does not drop below 2,656. In addition, both envelope lines of this reliable indicator started to rise again, which can be seen as another constructive trend signal. This bullish short-term uptrend is now also supported by the readings of the Modified MACD (which also flashed a bullish crossover signal) and the Advance-/Decline 20 Day Momentum Indicator. Both indicators have clearly confirmed the latest move from the S&P 500 and, therefore, further gains on a short-term time perspective are quite likely.

This view is also widely confirmed by short-term market breadth as all of our short-term tape indicators strengthened significantly last week. Both, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed a quite sound bullish crossover signal. This is telling us that the underlying breadth momentum of the broad market recovered significantly and remains, consequently, pretty supportive/healthy at the moment. This bullish tape signal is also confirmed by the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Both gauges are definitely confirming the latest rise of the S&P 500, as the current participation of all NYSE listed stocks within the recent rally looks quite broad based. This can be also seen if we focus on the S&P 500 vs the Russell 2000 Ratio. Additionally, the total number of stocks which are hitting a fresh yearly high reached the best level since the correction cycle started in late January! This is an outright strong bullish signal, as it indicates that the recent rally was driven by the broad market and not just by a few heavy-weighted stocks within the index. Consequently, the High-/Low-Index Daily flashed a strong bullish signal and reached the highest level for weeks. So given the outright supportive/bullish readings within our short-term oriented indicator framework, further rallying looks extremely likely.

From a pure contrarian point of view, the situation remains unchanged compared to last week. Despite the fact that the gauge from the Smart Money Flow Index showed major signs of recovery during the last couple of trading days, the outright long-term bearish divergence remains persistent. This is a quite bearish mid- to long-term technical signal. As already pointed out last week, the last time we saw such strong divergences between this reliable indicator and the Dow was a couple of months before the “Trump Rally” started. Compared to back then, the Smart Money Flow Index is now still showing a huge bearish divergence. Therefore, this reliable indicator is confirming our cyclical roadmap (Presidential Cycle), where a cyclical bear market in summer looks quite likely. However, we should not forget that these historical patterns should just be seen as a rough guideline instead of a precise trading plan. As a matter of fact, our framework is key area of focus, as it will give us further guidance where the market is heading.

Mid-Term Technical Condition

Considering the mid-term oriented technical condition of the market, we get nearly the same picture as we have on a short-term time frame. The mid-term uptrend of the market strengthened significantly last week. To be more precise, our reliable Global Futures Trend Index increased last week to the upper end of its bearish consolidation area. For that reason, the current reading of this reliable indicator is confirming the recent rally from the S&P 500. But we must not forget that this indicator is still trading below its important 60 percent threshold (even if it is only 2 percentage points), a warning that the market remains vulnerable for negative news-flow. Anyhow, another positive mid-term oriented trend signal is coming from the WSC Sector Momentum Indicator, as it jumped to quite solid bullish levels last week. This indicator measures how many key sectors remain in a mid-term oriented up-trend. So from a pure price point of view, many key sectors started drifting higher and, hence, the underlying trend-condition of the S&P 500 improved substantially. Nevertheless, we should not forget that the momentum score of riskless money market within our Sector Heat Map remains at elevated levels, although it dropped significantly for the week.

More importantly, the improvement within the mid-term oriented trend-structure is now also widely confirmed by our mid-term oriented tape indicators. All our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) strengthened in the last couple of trading sessions. Even the Modified McClellan Oscillator Weekly finally succeeded to narrow its bearish gap, indicating that the momentum of advancing stocks improved on a mid-term time horizon. 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 reached the highest level for weeks, which is another sign that the underlying tape structure of the market remains pretty broad-based at the moment. Such a broader tape confirmation can also be seen if we focus on mid-term oriented advancing issues as well as mid-term oriented up-volume as both indicators turned bullish or strengthened their bullish signal significantly. In the past, nearly all corrections were accompanied by bearish or outright weak readings within both indicators. Given the fact that we saw a strong surge in both bullish gauges, the corrective bounce/consolidation scenario is definitely off the table right now.

Long-Term Technical Condition

Unchanged compared to the previous weeks remains our long-term oriented uptrend of the market. The WSC Global Momentum Indicator keeps trading at the lowest level for months, signaling that a lot of local equity markets around the world have dropped below their long-term trend-lines recently and that the current bull-run is slightly fading out. Also our Global Futures Long Term Trend Index continued its bearish ride, which has been lasting for weeks. But we could also see some bullish signals last week. First of all, our WSC Global Relative Strength Index showed strong signs of improvements and the relative strength of all risky markets keeps trading far above the one from U.S. Treasuries. And also the readings from our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average) have shown some positive moves recently.

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, WSC All Weather Portfolio and the WSC Global Tactical ETF Model. As the momentum score of financials fell below average and above the one from the S&P 500 within our Sector Heat Map, we see a sell signal for that ETF within our WSC Sector Rotation Strategy.

Bottom Line

Despite the fact the market bounced 2.4 percent for the week, the improvements within our indicator framework have been quite surprisingly. Given the strong improvements all across the board, it looks like that the recent corrective consolidation period 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!!!