January 26th 2019
U.S. stocks finished the week nearly unchanged. The Dow Jones Industrial Average eked out a small weekly gain of 0.1 percent to finish at 24,737.20. The blue-chip index recorded its fifth week of gains. The S&P 500 declined 0.2 percent from the week ago close to end at 2,664.76. The Nasdaq gained 0.1 percent over the week and ended at 7,164.86. Among key S&P sectors, technology and utilities led the gainers, while energy and staples dragged. The CBOE Volatility Index, a gauge for U.S. stock volatility known as the VIX, traded near 17.4.
Short-Term Technical Condition
Apparently, the short-term oriented price trend of the market remains almost unchanged compared to last week as the S&P 500 finished nearly flat for the week. To be more precise, the S&P 500 is now trading 92 points above the bearish threshold from the Trend Trader Index. This signals that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,552. Furthermore, both envelope lines of this reliable indicator are drifting higher on a quite fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This is quite a constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. Another encouraging trend signal is coming from the Modified MACD. Despite the fact that the market finished nearly flat for the week, both gauges continued to strengthen in the last couple of trading sessions and have, therefore, reached the highest level for weeks. As a result, this indicator has not only clearly confirmed the latest high from the S&P 500, but it has also formed a strong bullish divergence (as it has not shown any signs of weaknesses so far). Consequently, we expect that the current bear-market is highly likely to continue. This picture is widely confirmed by the Advance-/Decline 20 Day Momentum Indicator, which also rocketed to the highest levels for months. As this indicator tends to be a leading one, further gains into early February can be expected (at least from a pure price point of view).
Fundamentally, we receive the same picture if we analyze short-term market breadth as the current trend participation of all NYSE listed stocks within the current rally looks very broad-based/healthy. The percentage of stocks which are trading above their short-term oriented moving averages (20/50) got back into solid bullish territory. This indicates that the underlying trend-structure of the market continued to strengthen, although most averages finished nearly flat for the week. This is a quite bullish signal, as it tells us that the recent sideways trading was only caused by a few heavy-weighted stocks in the index rather than being driven by the whole market. Consequently, the recent price action of the market has not fully reflected the true underlying trend of the market. This can be also seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators continued their bullish rides and reached the highest level for weeks. This is telling us that the underlying breadth momentum of the market remains outright positive, as the total amount of advancing issues as well as advancing volume remains outright strong. As a matter of fact, both indicators have also not confirmed the recent sideways-trading from the S&P 500. Additionally, the total number of all NYSE-listed stocks which reached a fresh 52 weeks high was also higher than the one which reached a fresh 52 weeks low. Consequently, the High-/Low-Index Daily finally flashed a bullish crossover signal last week. So all in all, with such strong signals all across the board, it is highly unlikely that the current rally will run out of fuel. As a consequence, we expect that the market will continue to push higher into late January/early February.
The situation on the contrarian side also looks quite supportive at the moment. This is mainly due to the fact that the option marketremains in neutral territory, although we saw a quite strong rally over the past couple of weeks. Moreover, we can see that there is still enough fire power sitting at the sideline, as the amount of bulls on Wall Street still remains subdued. Another confirmative signal is coming from the WSC Capitulation Index, which is still indicating an outright risk-on market environment at the moment. However, the only small negative signal is coming from the Smart Money Flow Index, as it slightly dropped for the week. However, given the quite bullish readings all across the board, we do not think that this signal will lead to just more than increased volatility within the next couple of trading sessions.
Mid-Term Technical Condition
Another quite bullish fact is that our entire mid-term oriented trend indicators also slightly continued to improve compared to the previous week (although the market finished almost flat for the week). First of all, the gauge from our Global Futures Trend Index finally passed the important 60 percent threshold and is now trading in the bullish consolidation area. This can be seen as a constructive technical signal, since in such a situation any upcoming short-term oriented weaknesses should be limited in price and time (of course only together with strong readings in mid-term market breadth). So as long as this indicator keeps rising or just trading above 60 percent, the current rally is not at risk of running out of fuel. Secondly, our WSC Sector Momentum Indicator also recorded a small gain, which is another quite positive technical signal for the time being. But, as long as the gauge of this indicator is not showing stronger gains over the next couple of weeks, the current rally is still likely to be a huge bear-market rally instead of being the start of a new bull-market. This view is well supported by the fact that the momentum score of riskless money market (from our Sector Heat Map) still remains quite high at the moment. And still eight sectors are trading below the one from riskless money market! Therefore, we still stick to our preferred scenario that the current rally will just turn out to be a huge bear-market rally into Q1 instead of being the start of a new bull-market.
Anyhow, the current quite bullish setting of the mid-term oriented trend indicators is also confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly succeeded to decrease its bearish gap last week, indicating that the overall tape momentum is improving. And once again, all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) gained further bullish ground and even reached their highest readings for weeks. Therefore, they are clearly confirming the current level of the S&P 500! Also, mid-term oriented advancing issues as well as mid-term oriented up-volume strengthened significantly, as they finally managed to flash a small bullish crossover signal last week. Only the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) could be a bit stronger. So given the quite bullish divergences/signals all across the board, we strongly believe that the current rally is highly likely to continue into end Q1.
Long-Term Technical Condition
The long-term oriented trend of the market weakened again last week. Although our WSC Global Momentum Indicator slightly increased compared to the previous week, it is still trading at a very low level. It signals that only 25 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend. This picture is also confirmed by our Global Futures Long Term Trend Index, which continued its bearish ride last week. Also our WSC Global Relative Strength Index showed weaknesses last week and in addition, the relative strength of all risky markets is trading below the one from U.S. Treasuries. These facts are another indication for our long-term oriented risk-off or short-term oriented bear-market rally scenario. Our long-term oriented tape indicators in contrast (High-/Low Index Weekly, the percentage of stocks which are trading above their 200day moving average) showed a positive development last week (especially our Modified McClellan Volume Oscillator Weekly). Still the long-term condition of the market looks outright grim which underlines our bear-market rally case.
As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Model Portfolio and the WSC Inflation Proof Retirement Portfolio. The allocation of the WSC Global Tactical ETF Portfolio and the WSC Sector Rotation Strategyremains unchanged.
The technical picture of the market continued to strengthen last week and, therefore, our strategic bullish outlook remains unchanged at the moment. To be more precise, with quite supportive/bullish readings within our indicator framework (especially on a short- to mid-term time horizon), we think that the current (bear-market) rally still looks quite constructive in its nature. The main reason, why we mentioned bear-market rally is due to the fact that the latest correction cycle has definitely left its mark on our mid- to long-term oriented indicator framework. So as long as we do not see a significant recovery within their readings (especially on a mid-term time horizon), another stronger correction leg in late Q1 is quite likely (preferred scenario for now). Anyhow – from a current point of view – the short-term oriented technical picture still looks quite too strong to bet on a major trend reversal at the moment. Therefore, we strongly believe to see further gains into mid Q1. So in the end, we would advise our conservative members to remain invested, whereas aggressive traders should focus on buying into weaknesses, as long as our short-term oriented indicator framework remains constructive.