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July 9th 2017

Market Review

U.S. stocks finished the week with small gains. The Dow Jones Industrial Average added 0.3 percent for the week to end at 21,414.34. The S&P 500 advanced 0.1 percent from last Friday’s close to finish at 2,425.18. The Nasdaq eked out 0.2 percent over the week to 6,153.08. Among the key S&P sectors, the financial sector was the best weekly performer, while energy dragged.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 11.

Short-Term Technical Condition

Despite the fact that the market finished the week with decent gains, the improvements in the readings of our short-term oriented trend indicators have been developing moderately. From a pure price point of view, the short-term oriented trend of the market turned neutral, as the S&P 500 closed at the bearish threshold from the Trend Trader Index. However, the most concerning trend signal is the fact that the Trend Trader Index started to form a bearish rounding top, although the market finished with small positive gains for the week. This is a piece of evidence that the recent consolidation period will continue into deeper July and therefore, it could be possible to see increased down-testing ahead. Basically, the same is true if we focus on the readings from the Modified MACD as both trend lines picked up even more bearish ground last week and are therefore, showing a widening negative gap. The only positive short-term trend signal is coming from the Advance-/Decline 20 Day Momentum Indicator. Despite the fact that its gauge declined for the week, it still remains bullish from a pure signal point of view. As a matter of fact, the current consolidation still looks somehow supportive but we should not forget that its gauge is not really confirming the current levels from the S&P 500. As a matter of fact, we think further sideways trading or even increased down-testing looks quite possible from a pure trend point of view.

The readings from our short-term oriented breadth indicators also started to weaken and are therefore, quite intermingled at the moment. Especially, both the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily strengthened their bearish signals last week. The first one also flashed a bearish crossover signal and the latter one looks like it will follow soon. This indicates that the overall tape momentum turned quite bearish, plus the overall trend condition of the market also looks a bit weak-kneed right now. This becomes pretty obvious if analyze the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50) as both gauges decreased last week, although they are still trading in their bullish range. This can be also seen if focus on the NYSE New HighsNew Lows Indicator as the total amount of stocks hitting a fresh 52 weeks high decreased, whereas the amount of stocks hitting a fresh 52 weeks low has started to increase recently. Consequently, the High-/Low-Index Daily also came down substantially last week. So in the end, there was absolutely no recovery/momentum within the short-term oriented tape structure visible, although the market finished the week with decent gains! As a matter of fact, those short-term oriented bearish divergences are a way too heavy to be ignored at the moment. So all in all, the market looks extremely vulnerable for a period of weakness into deeper July.

The situation on the contrarian side looks pretty similar at the moment. The gauge from the Smart Money Flow Index stabilized on moderate levels and is therefore, definitely not predicting any major break-out in both directions.  Despite the fact that this indicates some form of broader based trading range, the situation on a short-term time frame has definitely a bearish tilt. This is due to the fact that the WSC Capitulation Index is showing a strong risk-off scenario at the moment (although we have not seen any stronger losses yet), whereas the gauge from the Uptick-/Downtick Ratio Daily has also grown into bearish territory recently. Consequently, we are definitely expecting to see more rocky/volatile sessions ahead. In our opinion, this will definitely have a stronger impact on short-term optimism, which is needed to trigger another stronger rally attempt. Despite the fact that the recent sideways trading has soften short-term complement, short-term optimism still remains a bit elevated as the fear is not high enough (Daily CBOE Put-/Call Options Ratio and Market Vane) at least at the moment.

Mid-Term Technical Condition

The mid-term oriented trend of the market remains unchanged compared to the week before and all of our mid-term oriented trend indicators remain supportive. The gauge from our reliable Global Futures Trend Index increased slightly by 2 percentage points and is trading exactly in the middle part of its bullish consolidation area (75 percent). So consequently as long as the Global Futures Trend Index trades above 60 percent – in combination with supportive mid-term oriented breadth indicators – any short-term oriented swings (even stronger ones) are just normal weaknesses within an ongoing bull market. Anyhow, also from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator remains quite bullish and therefore, most underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also observed if we analyze our Sector Heat Map: the momentum score of all sectors (except energy) remains above the one from riskless money market – although it increased nearly by 5 percentage points in to 16.1 percent (which might be another piece of evidence for our deeper July weaknesses case).

The mid-term market breadth, in contrast, has shown some signs of exhaustion recently. Especially, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) lost some steam (although they closed far above their 50 percent threshold). The same is true if we have a look at the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly. Both indicators still remain bullish from a pure signal point of view, but dropped significantly for the week. Right now, their readings still remain supportive but if this trend continues with that pace it is just a question of time until we receive a bearish crossover signal within those indicators. As a consequence, we will monitor their development quite closely within the next couple of weeks. Basically, the same set up is true if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as they all decreased or have not shown any bullish moves recently. And in addition, the Modified McClellan Oscillator Weekly narrowed its (small) bullish gap.

Long-Term Technical Condition

The long-term uptrend of the market remains intact. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and trading at high levels. Also the WSC Global Momentum Indicator is trading at high levels and indicates that now 82 percent of all global markets remain within a long-term oriented uptrend. If we analyze the WSC Global Relative Strength Index we can see that the relative strength of all risky markets keeps trading above the one from U.S. Treasuries (except commodities). Also, apart from the Modified McClellan Volume Oscillator Weekly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stocks which are trading above their 200 day simple moving average are also trading at solid levels. Only the amounts of stocks which are hitting a fresh 52 weeks high dropped last week, although they are still trading far above their bearish counterparts – especially if we take a look at our High-/Low Index Weekly.

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 and materials rose above average and above the one from the S&P 500 within our Sector Heat Map, we received a buy signal for that ETF within our WSC Sector Rotation Strategy.

Bottom Line

If we consider the quite weak readings and the bearish divergences within our short-term oriented indicator framework, we think that the current consolidation period is about to get a bearish tilt. As a matter of fact, a period of weakness into deeper July looks quite likely. However, given the still quite supportive readings within our mid-term oriented trend-indicators, we think that any upcoming weaknesses will not be a major game changer at the moment. In our preferred scenario, any upcoming weaknesses will deaden short-term optimism and will act as basis for another stronger rally attempt in later summer (preferred early August). Consequently it is still a bit too early to change our strategic bullish outlook for now! On the other hand, we also received some early signals of an ageing rally as there was a stronger deterioration within mid-term market breadth. Right now it is a bit too early to say if this was driven by seasonal effects or through a weakening underlying demand. If the second one holds, any upcoming short-term weaknesses or even August rally will cause further deteriorations within our mid-term market tape structure which will then of course forces the market into an important top at the end of summer.

Stay tuned!