March 11th 2018
U.S. stocks finished the week with solid gains. The Dow Jones Industrial Average gained 3.3 percent over the week to close at 25,335.74. The S&P 500 jumped 3.5 percent for the week to finish at 2,786.57. The Nasdaq ended at 7,560.81 and jumped 4.2 percent over the past five days. The tech-heavy index notched its first closing record since Jan. 26. All three benchmark indexes posted their best weekly performance in three weeks. All key S&P sectors ended in positive territory for the week, led by financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 14.6.
Short-Term Technical Condition
In line with our latest call, the short-term uptrend of the market strengthened significantly last week after most of our short-term oriented indicators had turned bullish. To be more precise, the S&P 500 closed 99 points above the bearish threshold from the Trend Trader Index, indicating that the market is now per definition in a bull-mode as long as the broad equity benchmark does not close below 2.687. Furthermore, we can see that both envelope lines of this reliable indicator have also started to bottom out as well, which can be seen as another encouraging trend-signal. The same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, which literally rocketed to the highest level for months. Consequently, it was not a big surprise at all that the market finished the week with solid gains. Another important short-term trend signal is coming from the Modified MACD, which flashed a bullish crossover signal last week. Given the fact that we have seen a quite strong surge in our short-term oriented gauges, we believe that the market is now trading in a powerful uptrend, as quite heavy losses would be necessary to bring our indicators back into their bearish modes on a short-term time horizon.
Moreover, it was good to see that short-term oriented market breadth showed some strong signs of improvements compared to last week. The most encouraging tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators turned outright bullish or even flashed a bullish crossover signal. This indicates that the current short-term oriented uptrend is driven by the whole market and not only by a few heavy weighted stocks in the index (which is a quite healthy tape signal). This can be also seen if we examine the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both indicators passed their bullish thresholds and clearly confirmed the recent gains of the S&P 500. Basically, the same is true if we take a look at the NYSE New Highs – New Lows Indicator. There we can see that there was a reduction in the total number of new lows, indicating that the market internals are strengthening. As a matter of fact, the bearish gauge from the High-/Low-Index Daily also decreased and is, therefore, also confirming the recent gains from last week. Nevertheless, we can also see that the total number of new highs remains relatively depressed, and therefore, the indicator has not turned completely bullish so far. So all in all, the recent rally is widely confirmed by quite positive readings within our short-term market breadth indicators. As a matter of fact, we think that the recent gains will definitely turn out to be more sustainable in their nature. Thus, we received further confirmation for our view that we will see a retest of the latest bull-market highs very soon.
From a pure contrarian point of view, we can see that the latest rally started to have its designated impact on short-term optimism as most of our option based indicators turned pretty neutral last week (Global Futures Put-/Volume Ratio, Equity Options Call-/Put Ratio Oscillator Weekly and the All CBOE Options Call-/Put Ratio Oscillator Weekly). We mentioned already last time, that approximately 90 percent of all uncovered options are an also-ran and, therefore, we expected to see a higher markets at least until March 16th, as the option expiring date is due on that day. If we have a closer look at the latest price action, we can be pretty sure that a lot of put options will be wiped out on that day. Anyhow, the WSC Capitulation Index is still indicating a risk-on market on a very short-time frame. On a mid-term time perspective, a quite red flag is coming from the Smart Money Flow Index as its gauge has not confirmed the latest rally from the Dow. In our point of view, this might be another piece of evidence that the current rally is just part of a larger top-building process.
Mid-Term Technical Condition
Despite the fact that the conditions on a short-term time frame are brightening, the technical mid-term condition of the market still remains weak/vulnerable for the time being. This is mainly due to the fact that the gauge from the Global Futures Trend Index has not managed to pass its very important bullish 60 percent threshold yet. As already mentioned a couple of times, from a pure formal point of view, this indicates that the recent correction cycle is definitely not over yet. Therefore, this indicator is still confirming the case that the current rally is just part of a larger top building process. In other words, if the current rally will not bring our mid-term oriented tape indicators back to confirmative levels, the risk of another significant down-leg in Q2 remains quite high. From a pure price trend point of view, the mid-term oriented uptrend of the market remains intact. This is due to the fact that the WSC Sector Momentum Indicator is still trading at quite solid levels. This signals that most sectors within the S&P 500 are still outperforming riskless money market on a relative basis. This view is also supported by examining our Sector Heat Map; the momentum score of all sectors (except utilities and consumer staples like in the previous week) keeps trading above the one from riskless money market. Nevertheless, we can also see that the current momentum score of riskless money market is trading above 10 percent, which can be also seen as a red flag on the horizon (at least for now)
Analyzing mid-term oriented market breadth shows a quite encouraging recovery. This becomes obvious if we take a look at our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly). All of them recorded solid gains last week and are, therefore, confirming the latest move from the S&P 500. Also the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) increased for the week, although the gauge on a 100 days frame is only trading slightly above the bullish threshold. On top of that, we can see that also the readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly improved compared to the previous week. The only weak signal is coming from our Modified McClellan Oscillator Weekly. But this is not a big surprise if we consider the current circumstances. So all in all, these signals are indicating that we have seen the worst already (at least on a short-term basis), and therefore, we stick to our call that we will see a retest of the latest bull-market high soon. However, if this retest does not push the bullish gauges from our mid-term oriented tape indicators back or near to their latest highs we saw in late January, we will have further confirmation that the current recovery is just part of a larger top building process.
Long-Term Technical Condition
As per last week’s report, the long-term uptrend of the market remains well intact. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and trading at the highest levels for years. As we can see from the WSC Global Momentum Indicator, 82 percent of all local equity markets around the world remain within a long-term oriented uptrend. This can be also monitored if we focus on the WSC Global Relative Strength Index, as the relative strength of all risky markets keeps trading very far above the one from U.S. Treasuries. Also, 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 gained bullish ground last week. Also the number of stocks which are hitting a fresh 52 weeks high are trading (slightly) above their bearish counterparts (although our High-/Low Index Weekly has not been affected yet by this fact). In addition, the signal from the Modified McClellan Volume Oscillator Weekly also improved.
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 Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Sector Rotation Strategy. As the relative strength score from the MSCI Peru 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 MSCI Brazil being added within the portfolio.
The market is moving exactly in line with our forecast. Consequently, our key call remains unchanged as we received further confirmation that the latest correction is just part of a larger and complex top building process. Therefore, it could be possible to see further negative surprises on a mid-term time horizon. However, on a short-time frame we think the current rally will push the S&P 500 towards/near the latest bull market high at the 2,850/2,870. Our approach right now is to watch the quality of the current rally quite carefully: Whether the current rally/retest will be of high quality in its nature or if it will be accompanied by an increasing amount of bearish divergences which will then just represent the typical ingredients for a major market top. However, aggressive traders should remain bullish as long as our short-term oriented indicator framework remains bullish, whereas conservative members should also remain long.