April 22nd 2018

Market Review

All three major U.S. averages finished the week with gains. For the week, the Dow Jones Industrial Average eked out a small gain of 0.4 percent to end at 24,463. The S&P 500 added 0.5 percent for the week to finish at 2,670. The Nasdaq advanced 0.6 percent from the week-ago close to 7,146. All major averages logged their second straight week of gains. Energy and industrials led gainers among the S&P’s 10 major sectors; consumer staples and technology were the only negative sectors for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.9.

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend-status turned bullish as the S&P 500 managed to close slightly above the bullish threshold from the Trend Trader Index. So from a pure price point of view, the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not close below 2.626. 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. Moreover, the gauge from the Advance-/Decline 20 Day Momentum Indicator jumped back into bullish territory and is, therefore, confirming the recent gains from the S&P 500. Another quite encouraging signal is coming from the Modified MACD. Given the fact that we saw a strong surge in both trend lines of this reliable indicator, we strongly believe that any upcoming weakness would most likely just produce a bullish divergence in its readings, as extremely heavy losses would be necessary to bring this short-term oriented gauge back to its former low! Consequently, we received further confirmation for our latest call that the bounce might continue for a while.

This picture is widely confirmed by short-term market breadth as it was good to see that our entire tape indicators showed stronger signs of improvements – although the market closed the week only with small gains. This is a quite positive technical signal, as it indicates that the broad based market is getting back on track. This becomes pretty obvious if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators clearly strengthened their bullish signals, indicating that the momentum of advancing stocks as well as advancing volume is gearing up. Also the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) showed major signs of recovery and got back into bullish territory. Moreover, they formed a quite bullish divergence, if we compare their current readings to the ones in mid-February, where the S&P 500 traded at similar levels. As a matter of fact, the current level from the S&P 500 is definitely supported by a broader basis and, therefore, further bouncing into early May looks likely. The only weak signal is coming from the High-/Low-Index Daily which nearly flashed a bearish crossover signal. This was mainly due to the fact that the new lows outpaced the new highs at the end of the week. At the moment, the small increase in new lows is not a big game changer at all, but if this trend continues it will be just a question of time until the bounce is running out of fuel. However, given the quite positive short-term readings, we believe that the bounce will not be at risk of fading out – at least for now.

On the contrarian side, we can see that the Smart Money Flow Index dropped to a new low, indicating major troubles ahead on a mid-term time horizon. This view is also confirmed by our cyclical roadmap (Presidential Cycle). According to these reliable past patterns, the current bounce could even lift the market towards or even above the latest bull-market high, before a blow-off top could herald a longer lasting down-turn (cyclical bear market) into deeper summer/early fall. If we compare the current levels from the Smart Money Flow Index with similar levels in the past, a cyclical bear market could have the potential to push the S&P 500 towards 2,000-2200. As already mentioned a couple of times, if the current bounce does not lead to stronger improvements within our indicator framework (especially on a mid-term time horizon), this scenario looks quite likely and, therefore, our strategic bearish mid-term view remains unchanged at the moment.

Mid-Term Technical Condition

The mid-term oriented trend of the market remains unchanged compared to the previous week and still looks quite vulnerable at the moment. Although our Global Futures Trend Index increased significantly last week, the gauge has still not passed its important 60 percent bullish threshold yet! And – from a formal point of view – the current correction cycle will be not be over as long as this gauge keeps trading below that important threshold! Therefore, the recovery we saw in the previous weeks, can be still classified as (corrective) bounce rather than a new sustainable uptrend. And also our WSC Sector Momentum Indicator continued its bearish ride and reached the lowest level for years! As already pointed out last week, this is a sign that the momentum score of more and more sectors within the S&P 500 are starting to underperform the momentum score of riskless money market. In this context, our Sector Heat Map indicates that currently 4 sectors are underperforming the momentum score of riskless money market. So all in all, the overall tone remains supportive, but if we consider the overall direction/development of these signals, it is just a question of time until we see a bearish signal in that indicator as well. This is a strong piece of evidence (for our mid-term view) that the market could face major troubles in deeper summer.

If we analyze our mid-term oriented market breadth indicators, they show some encouraging signs of recovery at the moment (albeit on quite low levels). This might be another indication that the current bounce could continue for a while. Both, the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, turned slightly bullish or strengthened their bullish signal on quite low levels recently. This is a quite positive signal as it indicates that the current bounce might continue for a while. Basically, the same is true if we focus on our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly). Moreover, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) increased and got slightly back into bullish territory. This is a quite supportive signal, as it indicates that the latest bounce was widely supported by a broader basis.

And our Modified McClellan Oscillator Weekly showed a decreasing bearish gap, although the indicator still remains quite bearish at the moment. So all in all, the mid-term oriented tape condition of the market remains supportive on quite low levels. As a result, we think the risk of a stronger immediate correction towards the latest low has reduced significantly. However, right now these signals are a way too weak to change our mid-term oriented cyclical bear market scenario. Nevertheless, we keep a close eye on the development of these indicators within the next couple of weeks.

Long-Term Technical Condition

The long-term oriented uptrend of the market shows the same picture as in the previous week. Although the WSC Global Momentum Indicator slightly increased last week, it is trading at the lowest levels for months. This is an indication that a lot of local equity markets around the world have dropped below their long-term trend-lines recently and that the current bull-run is slightly fading out. Also the Global Futures Long Term Trend Index continued to drop (although it is still trading at quite bullish levels). Moreover, our WSC Global Relative Strength Index reveals that the relative strength of all risky markets continued to decrease – although they keep trading far above the one from U.S. Treasuries. In contrast, long-term market breadth showed some forms of recovery, as the readings from our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average) improved slightly.

Model Portfolios

If we focus on our Model Portfolios, we can see that the WSC Sector Rotation Strategy is adding industrials again as its relative strength scores rose above average and above the one from the S&P 500 within our Sector Heat Map. There have been no changes in the allocation advice from the WSC Inflation Proof Retirement Portfolio, the WSC All Weather Portfolio or the WSC Global Tactical ETF Portfolio.

Bottom Line

Our base call remains unchanged compared to last week. On a short-term perspective, we think that the current bounce will continue into deeper April/early May. Consequently, our tactical call that we see a stronger move towards 2,750/2,800 remains unchanged. If we are correct, then this bounce will be just part of a larger and complex top-building process into deeper Q2 (which could then finally lead to another significant correction into summer). The main rationale behind that call is the fact that the overall technical condition of the market looks quite bearish biased and, therefore, the current bounce still looks quite unsustainable in its nature. However, we advise our aggressive traders as well as conservative members to hold their tactical long-position as long as short-term market breadth continues to improve. Nevertheless, a stop-loss limit at 2,588 is quite important – just in case we see an unexpected sharp decline.

Stay tuned!!!