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November 19th 2017

Market Review

U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average lost 0.3 percent over the week, to end at 23,358.24. The S&P 500 dropped 0.1 percent for the week to finish at 2,578.85. Both, the S&P 500 and the Dow logged a second straight week of losses. The Nasdaq added 0.5 percent for the week to 6,782.79. Among the key S&P sectors, consumer staples was the best weekly performer, while energy dragged. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, ended at 11.43.

Strategy Review

In our last week’s comment we highlighted the fact that the up- as well as the down-side potential of the market looked pretty capped as the underlying tape condition was still somehow supportive but not overwhelming. As a matter of fact, we said that further consolidation into deeper November could be expected. From a technical point of view, such a distribution phase is always a fork in the road. Because during that time period, we either see a healthy rotation back into small caps (which would lead to significant improvements within our short- to mid-term tape indicators) or that those divergences are piling up, which would lead to a significant trend-reversal/sell-off (e.g. in early 2016, mid 2015 or 2011). Consequently, the quality of the underlying market tape structure during that time period will give us further guidance which scenario is going to happen. Such a process could normally take a couple of days/weeks, whereas the tilt between corrective and supportive consolidation is sometimes also pretty narrow.

Short-Term Technical Condition

In line with our recent outlook, major indexes were struggling for direction last week. Not surprisingly, the recent price action of the S&P 500 continued to deteriorate the short-term trend structure of the market. Apart from the fact that the S&P 500 managed to close within the neutral territory of the Trend Trader Index on Friday, the remaining short-term oriented trend signal remains pretty bearish. Especially, the Modified MACD continued its bearish ride and has not shown any signs of stabilization yet. This indicates that the short-term oriented price momentum of the market is pretty damaged at the moment. Moreover, we can see that the Advance-/Decline 20 Days Momentum Indicator remained well below its bullish threshold last week. So from a pure signal point of view, the short-term oriented trend status of the market has clearly a bearish tilt. Nevertheless, if we have a closer look at the Advance-/Decline 20 Days Momentum Indicator, we can see that its gauge looks like as it has hit rock bottom recently. Often this indicator begins to turn before price does, thereby making it a leading indicator. Even though this fact can be seen as a green flag on the horizon, it should be counterchecked with our breadth indicators. This is due to the fact that it is not quite unusual, that some of our short-term trend indicators turn bearish during a longer-lasting consolidation period.

If we focus on our short-term oriented breadth indicators, we saw two developments last week. The first one was a deterioration until Wednesday but then most of them showed some stronger signs of improvements by the end of the week. The most encouraging fact is definitely that we saw a strong reduction in the total number of stocks which are hitting a fresh yearly low by the end of the week, whereas the total amount of new highs kept trading at quite supportive levels. Consequently, the negative spike on Wednesday could indicate some form of short-term capitulation as bargain hunters started to chase those stocks. Consequently, the High-/Low-Index Daily got back, after it had flashed an outright weak bearish signal on Wednesday. Worth mentioning is the fact, that this bearish signal was mainly caused by a stronger increase in new lows, rather than by a simultaneously decrease in new highs. This positive tilt can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Despite the fact that both remain bearish from a pure signal point of view, they have shown some form of bullish recovery recently (whereas we even saw a bullish signal on a 50 days basis). But on the other hand, we can see that the overall tape momentum remains quite weak-kneed. This is mainly due to the fact that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily remain outright bearish at the moment. So all in all, the readings from our short-term oriented tape indicators are telling us that the underlying technical condition of the market has slightly strengthened during the last couple of trading days, indicating some form of capitulation (which often marks the end of a consolidation period). Despite the fact that this can be seen as silver lining on the horizon, we cannot ignore the fact that the readings of our short-term oriented indicators are still somehow supportive but far away from confirming. Consequently, we would not be surprised to see further consolidation ahead (albeit it got a more positive tilt).

On the contrarian side, it also looks quite possible that Wednesday indicated some form of washout day. This is due to the fact that we saw a stronger spike in the VIX on that day, whereas the gauge of fear dropped significantly since then. Another interesting fact is that the amount of bulls on Wall Street dropped significantly and therefore, this washout-day dampened short-term optimism according to the AII Bulls & Bears survey. This is a quite bullish ingredient since complacent is often the starting point of major trend reversals.  Moreover, we can see that the WSC Capitulation Index dropped back into its all-clear territory and is therefore, showing that the risk appetite among the investors is getting back on track. Above all, we can see that the Smart Money Flow Index grew to a new high, indicating further strengths ahead on a mid-term time horizon.

Mid-Term Technical Condition

On a mid-term trend perspective, we got basically the same set up like on a short-term time frame. This is due to the fact that the Global Futures Trend Index dropped into the bearish consolidation area during the week and finally managed to close exactly at 60 percent. This is exactly at the edge of the bearish consolidation area. As already mentioned a couple of times, readings below 60 percent – in combination with outright weak/bearish readings in mid-term oriented market breadth – are a quite toxic for the market as the ongoing consolidation period would have a clear bearish character. Right now, we are not there yet as mid-term market breadth remains quite strong at the moment. Consequently, this weak reading is just an expression that the ongoing consolidation will be here for a while (albeit it has still a positive tilt if we consider all other circumstances). This can be also seen if we focus on the WSC Sector Momentum Indicator, which keeps trading at solid bullish levels and even increased for the week. This is telling us that from a pure price point of view, the mid-term oriented uptrend of the market remains well intact. This can be also seen if we examine our Sector Heat Map as the momentum score of all sectors (except consumer staples like in the previous weeks) keeps trading above the one from riskless money market (currently at 5.3 percent).

Moreover, the current mid-term oriented trend condition is still confirmed by mid-term market breadth, as most of our tape indicators still remain bullish (biased) or have not shown any weak signals. First of all, it was quite encouraging to see that the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly were holding up quite well or even increased, although most major averages faced declines for the week. Furthermore, we can see that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) also recovered and are trading on quite solid bullish levels. This indicates that most NYSE listed stocks are still per definition in a mid-term oriented up-trend. Also, all our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) have not shown any significant bearish moves recently or even increased. Nevertheless, the recent consolidation has clearly lefts its mark on the Modified McClellan Oscillator Weekly, as this indicator has not managed to post a bullish crossover signal. All in all, the current mid-term oriented technical picture of the market looks quite supportive/constructive and therefore, it is too early to take the chips from the table.

Long-Term Technical Condition

Basically, the same applies for the long-term. The long-term uptrend of the market remains well intact and therefore, our long-term bullish outlook has not been changed so far. Our WSC Global Momentum keeps trading at solid levels and indicates that 82 percent of all local equity markets around the world remain within a long-term oriented uptrend. Moreover, the Global Futures Long Term Trend Index is also trading at solid levels. This can be also seen if we take a look at the Global Relative Strength Index. The relative strength of all risky markets keeps trading far above the one from U.S. Treasuries. As in the previous weeks, we can also observe some exhaustion in long-term market breadth, as the readings from our entire long-term oriented tape indicators (High-/Low Index Weekly, the Modified McClellan Volume Oscillator Weekly) weakened last week. The only exception are the percentage of stocks which are trading above their 200 day moving average, as they increased last week.

Model Portfolios

If we focus on our Model Portfolios, we can see that the WSC Sector Rotation Strategy is selling industrials as its relative strength scores dropped below average and below the one from the S&P 500 within our Sector Heat Map. As the relative strength score from the MSCI Brazil dropped out of the top 10 ranked markets within our Global ETF Momentum Heat Map, we received a sell signal for those specific ETFs within our WSC Global Tactical ETF Portfolio. Instead, the FTSE China 25 is being added within the portfolio. There have been no changes in the allocation advice from the WSC Inflation Proof Retirement Portfolio and the WSC All Weather Portfolio.

Bottom Line

Our outlook remains unchanged compared to last week. On a very short time frame, the market looks vulnerable for further bullish biased consolidation into deeper November. As a matter of fact, a couple of rocky sessions cannot be ruled out. However given the quite supportive/bullish readings within our mid- to long-term indicator board, we think it is a way too early to bet on a major trend reversal at the moment (at least for now). As a consequence, our bullish outlook has not been changed so far. Therefore, would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips again rather than chasing the market too aggressively on the upside.

Stay tuned!