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April 9th 2017

Market Review

U.S. stocks closed the week with modest losses. The Dow Jones Industrial Average closed at 20,656.10 and declined less than 0.1 percent over the week. The S&P 500 shed 0.3 percent for the week to finish at 2,355.54. The Nasdaq slid 0.6 percent for the week to end at 5,877.81. Among the key S&P sectors, energy was the best weekly performer, while financials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.75.

Short-Term Technical Condition

On a short-term time frame, the trend of the market remains almost unchanged compared to last week. From a pure price point of view, the current short-term oriented trend remains pretty neutral as the S&P 500 managed to close within both envelope lines of the Trend Trader Index. Nevertheless, we can see that both envelope lines of this reliable indicator have slightly started to drift lower, indicating that – from a pure structural point of view – the underlying trend structure of the market slightly turned bearish. The same is true if we focus on the Modified MACD, which showed a widening bearish gap last week, indicating that further down-testing is likely. In contrast to that, we can see that the gauge from the Advance-/Decline 20 Day Momentum closed at quite bullish levels and is therefore, somehow confirming the recent level from the S&P 500. Consequently, we are expecting to see further consolidation on a very short-time frame. As already mentioned several times, during a consolidation period it is not quite unusual to see a lot of bearish or even fast changing signals within short-term oriented trend indicators as there is no specific trend within a broad based trading range. In general, a consolidation period is considered to be a healthy one if it is being accompanied by an improvement in short-term market breadth, indicating that the market internals are strengthening. In such a case, the market tends to trade sideways for a couple of weeks, before renewed strengths can be expected. Therefore, short- to mid-term market breadth is a key area of focus to evaluate if a given consolidation period should be considered as healthy or if it will turn out to be more corrective in its nature.

Right now, short-term market breadth still looks – somehow – constructive. This becomes pretty obvious if we focus on the Modified McClellan Oscillator Daily as it clearly strengthened its bullish signals, indicating that the momentum of advancing stocks is gearing up. Also the total number of stocks which are hitting a fresh yearly high remains at quite encouraging levels, whereas the number of stocks which have been pushed to a new yearly low have not shown any negative spikes so far. Consequently, it was not a big surprise at all that the High-/Low-Index Daily was holding up quite well last week. On the other hand, we still can see some serious bearish divergences. This is due to the fact that the Modified McClellan Volume Oscillator Daily closed in the bearish area, although it has shown some signs of improvements recently – but they were a way too weak to be taken too seriously at the moment. More importantly, this signal is somehow contradicting the bullish readings from the Modified McClellan Oscillator Daily, as it is telling us that there is hardly volume momentum gearing up in those advancing stocks. Also the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) have not shown any positive movements in the last week. So all in all, the current short-term oriented tape condition is outright mixed at the moment and therefore, the consolidation period is likely to continue next week.

From a pure contrarian point of view, the situation also stays pretty mixed at the moment. Despite the fact that the gauge from the Smart Money Flow Index stabilized last week, it has not sorted out its quite bearish divergence to the Dow yet. As a matter of fact, this indicates that big institutional investors have used the latest strength to reduce their equity exposure. Above all, the WSC Capitulation Index is still indicating a tense market environment. On the other hand we can see that the NYSE Member Debt in Margin Accounts Indicator reached a new all-time high and has therefore, not formed any threatening bearish divergence yet (as bets on further gains based on heavy debt should still act supportive at least for now).

Mid-Term Technical Condition

If we analyze the mid-term oriented technical condition of the market, the thread of a stronger correction (fast pullback succeeding 5-7 percent) has diminished significantly over the past two weeks. Mainly, because the Global Futures Trend Index strengthened last week and is now trading in the upper area of its bullish consolidation range. As a consequence, it might be a bit too early to take the chips from the table (at least for now) as there is still a good chance that the current consolidation period will turn out to be healthy in its nature. We would get quite cautious if the recent consolidation period pushes the gauge below 60 percent (in combination with weakening/bearish short- to mid-term market breadth), as it would be an indication that a stronger correction lies ahead. Therefore, the current short-term oriented deterioration still looks somehow supportive for the time being. In addition, we can see that the WSC Sector Momentum Indicator is still trading at a very solid level, indicating that many sectors of the S&P 500 remain in a 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 all sectors remains above the momentum score from riskless money market and the S&P 500. But, as already pointed out in our previous comments, we can also see that most sectors have a lower momentum score than the S&P 500, which indicates a growing selectivity among the market. In more details this means, that only some large caps are holding up quite well, whereas the broad market is already lagging behind and therefore, the pure price driven trend information from the index might be a bit misleading at the moment.

The mid-term oriented market breadth shows also an ambiguous picture at the moment. On the one hand, there are a lot of positive signals. For example, the Advance-/Decline Index Weekly and all of our advance-decline indicators (with exception of the Advance-/Decline Volume Line) continued to strengthen in the last couple of trading sessions or have not shown any signs of bearish divergences yet (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly). And on the other hand, there are also a lot of neutral as well as negative signals in our tape indicator framework. Once again the bearish readings from Modified McClellan Oscillator Weekly finished the week literally unchanged, indicating that the underlying breadth momentum is still somehow lagging behind on a mid-term time horizon. And the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) gained more bearish ground last week. This is an indication that the underlying trend structure of the market remains extremely narrow-based/weak at the moment. And in addition, the Upside-/Downside Volume Index Weekly flashed a small bearish crossover signal, indicating a weak tape momentum on a mid-term oriented time frame. Despite the fact that the correction risk has diminished under the prevailing circumstances, we should not forget that readings within our mid-term oriented tape indicators still quite weak-kneed. For that reason, we keep a close eye on the development within those two indicators within the next 2-3 weeks as further bearish readings would be definitely a sign that the consolidation period will turn back to be more corrective in its nature!

Long-Term Technical Condition

On a very long-time frame, the technical setting of the market remains very bullish at the moment. As a consequence, we do not think that any upcoming correction should lead to a new bear market at the moment. The bullish Global Futures Long Term Trend Index showed further signs of improvements last week and has reached the highest level for years. In addition, the gauge from the WSC Global Momentum is also trading at very high encouraging levels. This indicates that most local equity markets around the world (namely 80 percent) remain in a long-term oriented uptrend. And the relative strength of all risky markets did not only increase last week, but also keeps trading again far above the one from U.S. Treasuries. This is another indication that the current bull-market might have not come to an, even if we see a stronger correction. Moreover, long-term market breadth is giving no reason to worry and therefore, we think that the current long-term uptrend of the market is not in danger at all (for the time being). The percentage of stocks which are trading above their 200 day simple moving average remain at solid bullish levels. Only the Modified McClellan Volume Oscillator Weekly showed some signs of weakness, as it also did in the previous weeks. In contrast, long-term new highs are still strong, whereas long-term new lows kept trading at not really threatening levels.

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 Global Tactical ETF Portfolio, WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. As the momentum score of financials rose above average and above the one from the S&P 500 within our Sector Heat Map, we received again a buy signal for that ETF within our WSC Sector Rotation Strategy.

Bottom Line

Given the quite intermingled readings all across the board, we think the market is caught in a longer-lasting tug-of-war at the moment. As a matter of fact, further consolidation work into deeper April looks extremely likely. However, this consolidation period still looks supportive at the moment but given the quite fragile readings all across the board, this situation could change literally within days. As a matter of fact we stay a bit alerted at the moment, although it is a bit too early to issue a strategic sell signal at the moment. Consequently, we still stick into the bullish camp for now, but we will monitor the developments within our indicators quite carefully over the next couple of days/weeks. As a matter of fact, the next 2-4 weeks will become quite critical as they will give further guidance.

Stay tuned!