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January 15th 2017

Market Review

The three major U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average lost 0.4 percent during the week to finish at 19,885.73. The S&P 500 declined 0.1 percent from the week ago close to end at 2,274.64. The Nasdaq gained 1.0 percent over the week and ended at 2,274.64. The heavy-tech index set a new record high. Among key S&P sectors, technology and materials led the gainers, while energy and consumer staples were the decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 11.3.

Short-Term Technical Condition

In our last week’s comment we had already seen some exhaustion within our contrarian indicators and therefore, it was not a big surprise that the market took a breather last week. The recent sideways trading of the S&P 500 caused the Modified MACD to turn bearish, indicating that the underlying trend momentum of the market has started to slow down lately. However, from a pure price point of view, the short-term oriented uptrend has not been broken yet as the S&P 500 is still trading 17 points above the bearish threshold from the Trend Trader Index (2,257). In addition, it was quite encouraging to see that the Advance-/Decline 20 Day Momentum Indicator finished another week at quite solid levels. As this indicator tends to be a leading one, its confirmative but not outright bullish readings are telling us that the recent consolidation period still looks constructive in its nature.

This picture is widely confirmed by our short-term oriented market breadth indicators as most of them remain outright bullish or at least quite supportive for the time being. As long as this is the case, it might be a bit too early to bet on a major trend reversal for the time being. This is mainly due to the fact that we still saw a quite stable number in the number of stocks which are hitting a fresh yearly high, together with almost no stocks which were pushed to a new yearly low.  As a matter of fact, the bullish signal from the High-/Low-Index Daily remained pretty stable/confirmative, although its gauge could be a bit higher in our point of view. Thus, the recent slow-down still looks pretty healthy in its nature. In addition, we can see that the gauge from the Modified McClellan Oscillator Daily is still trending higher, indicating that the underlying breadth momentum of the broad market remains constructive at the moment. This can be also observed if we focus on the percentage of stocks which are trading above their 50 days simple moving average, as they are still trading at quite solid levels. Only the Modified McClellan Volume Oscillator Daily showed some signs of exhaustion recently, plus the percentage of stocks which are trading above their 20 days simple moving average could also be a bit higher, if we consider the current levels from the S&P 500. So all in all, the readings from our short-term oriented tape indicators are indicating that the underlying trend condition of the market remains pretty solid at the moment. Consequently, we do not think that the recent consolidation period would lead to a major trend reversal at this point in time.

In last week’s comment we highlighted that (from a pure contrarian point of view) we would not be surprised to see a healthy consolidation period/pullback that should relieve overbought conditions and dampen short-term optimism. In fact, the recent sideway trading 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 Weekly and the Equity Options Call-/Put Ratio Oscillator Weekly) have started to gradually move into bullish territory, indicating that the fear among the crowd is rising. Nevertheless, we think that the recent (but healthy) consolidation period might continue into next week, as the Smart Money Flow Index has continued to trade sideways recently. Above all we can see that the WSC Capitulation Index is still indicating a risk-off environment for the time being.

Mid-Term Technical Condition

Anyhow, another main reason why we think that the current consolidation period should be limited in price and time is based on the fact that the mid-term oriented uptrend of the market remains outright bullish at the moment. This becomes pretty obvious if we focus on the gauge from the Global Futures Trend Index, which managed to touch the extremely bullish 90 percent threshold last week. As a matter of fact, this reliable indicator is definitely confirming the current levels from the S&P 500! Moreover, it is worth mentioning the fact that as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming consolidation period/pullback should be limited in price and time (of course only in combination with quite solid readings in mid-term market breadth). In addition, the WSC Sector Momentum Indicator gained more bullish ground last week, indicating that most sectors of the S&P 500 remain in a strong mid-term oriented uptrend. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of nearly all sectors remain above the one from riskless money market. Like in the previous weeks, only health care and consumer staples have a lower scoring.

More importantly, this mid-term oriented up-trend is also widely confirmed by our mid-term oriented market breadth indicators and therefore, we do not think that any short-term oriented consolidation period could trigger a stronger sell-off at the moment. The percentage of stocks which are trading above their mid-term oriented moving averages (100/150) remain very strong, indicating an absolutely broad based uptrend participation at the moment. In addition, we can see that the Modified McClellan Oscillator Weekly narrowed its bearish gap and is about to flash a bullish crossover signal soon, indicating that the underlying breadth momentum of the market keeps on growing. Another encouraging mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and from the Upside-/Downside Volume Index Weekly. Both indicators are telling us that it is a way too early to get bearish from a strategic point of view as both indicators are far away from flashing any bearish crossover signal. Normally, as long as both, mid-term oriented advancing issues as well as mid-term oriented up-volume are trading above their bearish counterparts, the underlying tape structure of the market remains outright bullish. As a matter of fact we think it might be a way too early to call for an important major market top at the moment.

Long-Term Technical Condition

From a pure technical point of view, the long-term oriented up-trend of the market remains intact as the Global Futures Long Term Trend Index has not turned bearish yet and its gauge even increased last week. Also the WSC Global Momentum Indicator strengthened its bullish signal within the last weeks and indicates that 55 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being. In addition, the relative strength of most risky markets keeps trading above the one from U.S. Treasuries. This is another indication for the current risk-on market environment. Moreover, we saw again improvements within our long-term oriented breadth indicators. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly continued to improve. And also the percentage of stocks which are trading above their 200 days simple moving average are trading at very high bullish levels. The same is true if we focus on the High-/Low Index Weekly, as its readings also slightly improved last week.

Model Portfolios

As the underlying risk management indicator (WSC Global Momentum Indicator) of the WSC Global Tactical ETF Portfolio turned bullish last week, the portfolio is getting back into risky assets. However, the have been no changes the WSC All Weather Model Portfolio, the WSC Sector Rotation Strategy and the WSC Inflation Proof Retirement Portfolio.

Bottom Line

Our bullish outlook remains unchanged compared to last week. However, given the quite stretched readings within our contrarian indicators, increased volatility on a very short time frame cannot be ruled out. Nevertheless, given the quite supportive/bullish indicators all across the board (and especially on a mid- to long-term time horizon) it is a way too early to get concerned about the technical condition of the market. As a consequence, our bullish outlook has not been changed so far. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips rather than chasing the market too aggressively on the upside!

Stay tuned!