April 7th 2019

Market Review

U.S. stocks rallied for the week. The Dow Jones Industrial Average surged 2.0 percent for the week to close at 26,424.99. The S&P 500climbed also 2.0 percent from last Friday’s close to end at 2,892.74. The Nasdaq booked a weekly gain of 2.7 percent and finished at 7,938.69. Most key S&P sectors ended in positive territory for the week, led by materials. Consumer staples and utilities were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.8.

Strategy Review

In our last week’s comment we highlighted the fact that we remained strategically bullish as the underlying tape condition was still somehow supportive but not really overwhelmingly confirmative. Consequently – from a pure technical point of view – the market remained in a bullish biased consolidation mode (as large caps were the main performance contributors, whereas the momentum from small caps was still a bit subdued). Moreover we mentioned that – from a pure cyclical point of view – we would not be surprised to see a stronger recovery within our tape momentum indicators soon, as the second quarter in a pre-election year tends to be a quite profitable one. As a matter of fact, we expected to see a stronger recovery within our indicator framework soon. Such a recovery would then transform the bullish biases slow-growth period (which started in early March) back into a stable risk-on market environment, which would then act as basis for another stronger rally in Q2. In fact, last week we saw a strong recovery all across the board, indicating that the market is getting ready for further rallying into Q2. Consequently, the market is heading down our projected path.

Short-Term Technical Condition

If we focus on our short-term oriented momentum indicators, we can see that the bullish status from the S&P 500 clearly strengthened last week. Compared to last week, the S&P 500 managed to close significantly above the bearish envelope line from the Trend Trader Index. So from a pure price point of view, the short-term oriented (price driven) uptrend of the market remains intact as long as the S&P 500 does not drop below 2.817 (bearish threshold from the Trend Trader Index). Unchanged compared to last week, we can see that both envelope lines of this reliable indicator are drifting higher, which is another constructive trend signal at the moment. Above all, the overall trend momentum also slightly increased as the Modified MACD flashed a weak but bullish crossover signal last week. Normally, we would not take such a weak bullish signal too serious, as any stronger down-day could easily produce a bearish crossover signal within that indicator again. Therefore, it was good to see that the Advance-/Decline 20 Day Momentum Indicator jumped to its highest level for weeks. As this indicator often reacts before prices do, the recent jump was clearly a quite confirmative signal (indicating further gains ahead). Even tough, the latest trend strengthening can be seen as a green flag on the horizon, it should be always counterchecked with our breadth indicators (to make sure it is broad-based and, therefore, sustainable in its nature).

According to our tape indicators, the latest price action was definitely healthy in its nature as most of them got back on track or even strengthened their bullish signal last week. However, the most encouraging fact is that both, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily, managed to flash a bullish crossover signal last week. This indicates that the underlying breadth momentum of the market accelerated last week. This is a quite important fact, as it tells us that a lot of stocks participated in the latest price action we saw last week. This can be also observed if we look at the percentage of stocks which are trading above their short-term oriented moving averages (20/50) as both gauges succeeded to get back to bullish levels. Another encouraging signal that we saw a solid numbers in stocks which are hitting a fresh high (especially at the beginning of the week), without any offsetting spikes in new lows. As a matter of fact, the bullish gauge from the NYSE New HighsNew Lows reached higher levels than we saw in the latest bull-market high in mid-September 2018. With such solid numbers, any upcoming pullback should be limited in price and time. So in the end, the demand was quite broad based and, therefore, we think the market has enough power to hit new all-time highs soon!

From a pure contrarian point of view, the picture looks quite mixed at the moment. Given the fact that the market is quite overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily), in combination with quite elevated greed within the option market, the risk of some stronger and painful wash-out days (to dampen short-term optimism) cannot be ruled out at the moment. This might be also the reason, why the Smart Money Flow Index has not fully confirmed the rally from the Dow Jones Industrial Average. On the other hand, we can see that the gauge from the WSC Capitulation Index keeps trading well above its bearish threshold, indicating a quite strong risk-on market environment. Another important driver could be the fact that total amount of bulls on Wall Street remains subdued and, therefore, there is still enough firepower around to push prices higher.

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, we get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market strengthened last week and, therefore, we stick to our new all-times-high scenario in Q2. First of all, our reliable Global Futures Trend Index managed to gain further bullish ground as it grew to 85 percent last week. This is a quite confirmative signal, since it was just trading sideways the weeks before. However, this strong positive number is telling us that the mid-term oriented trend of the market is gearing up and remains, therefore, well in force. As always stated in our market comment, as long as this indicator is showing positive signs of momentum and keeps trading above 60 percent (in combination with supportive mid-term market breadth), the risk of a stronger trend-reversal is literally not given. This view is also confirmed by the WSC Sector MomentumIndicator, which continued to grow strongly into deeper bullish territory last week, signaling that most sectors within the S&P 500 (59 percent) remain in a solid mid-term uptrend. This can be also seen if we focus on our Sector Heat Map, where the momentum scorefrom riskless money market dropped to 9.6 percent. And currently there are only 2 out of 9 sectors within the S&P 500 which are having a lower score than that. In our view, this is another indication that the risk appetite among investors is still persistent and, therefore, the risk of a stronger correction remains quite subdued at the moment.

Another main reason why we believe to see new all-time highs soon is due to the fact that we saw a stronger recovery within our mid-term oriented tape momentum indicators last week. Especially, the Modified McClellan Oscillator Weekly gained even more bullish ground, indicating that the overall tape momentum continued to accelerate on very high levels last week. Another reason is that we saw a stronger recovery in the bullish gauge from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Consequently, this pick-up is a quite confirmative signal as it indicates that the market internals are gearing up again. Moreover, as long as mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading (far) above their bearish counterparts, it is a bit too early to get concerned about the current technical condition of the market. Another encouraging signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). If we focus on their recent development, we can see that both indicators managed to get back into bullish territory last week. This indicates that the total upside participation within the market is getting back on track, which is another indication for our new-highs scenario in Q2.

Long-Term Technical Condition

The long-term oriented trend of the market also continued to show signs of improvements last week, supporting our long-term bullish view. Our WSC Global Momentum Indicator grew by 5 percent compared to last week, indicating that currently 70 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat) are trading above their long-term oriented trend. This is another supportive long-term technical signal, as it shows that the current rally still remains global in scope. Also, our Global Futures Long Term Trend Index gained some bullish ground, which can be seen as another quite supportive momentum signal at the moment. Once again, all markets in our WSC Global Relative Strength Index increased last week. Examining our long-term market breadth indicators (Modified McClellan Volume Oscillator WeeklyHigh-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average), reveals that all of them continued to strengthen last week. This is a clear signal that the long-term market internals are also gearing up.

Model Portfolios

Last week, there have been no changes in the allocation advice of the WSC All Weather Model PortfolioWSC Inflation Proof Retirement Portfolio and the WSC Global Tactical ETF Portfolio. As the momentum score from health care dropped below average and below the one from the S&P 500, we received a sell signal for that sector within our WSC Sector Rotation Strategy. Moreover, we are proud to announce that our WSC All Weather Model Portfolio reached a new all-time high last week.

Bottom Line

The technical picture of the market improved compared to last week and, therefore, our bullish outlook remains unchanged at the moment. To be more precise, with quite increasingly bullish readings within our indicator framework (especially on a mid-term time horizon), we think that the current rally has the potential to push the S&P 500 towards multiple record highs in Q2. As a matter of fact, we think it is a way too early to take the chips from the table. However, on a very short-time period some nasty washout days to dampen short-term optimism cannot be ruled out at the moment. However, given the quite bullish set-up, we would advise our aggressive traders to buy into any upcoming weaknesses, whereas conservative investors should remain invested.

Stay tuned!!!