January 29th 2017

Market Review

U.S. stocks finished the week in positive territory, with the Dow and S&P 500 posting their first positive week of the past three. After exceeding the 20,000 level for the first time on Thursday, the Dow Jones Industrial Average gained 1.3 percent for the week to close at 20,093.78. The S&P 500 booked a weekly gain of 1.0 percent and closed at 2,294.69. The Nasdaq advanced 1.9 percent during the week to end at 5,660.78. Among key S&P sectors, financials and materials led the gainers, while energy and utilities were the decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 10.5.

Short-Term Technical Condition

In our last week’s comment, we highlighted the fact that the risk of a quite minor/shallow pullback was increasing if we saw a break below 2,230 (or even further trend breaks within our short-term oriented trend indicators). Moreover, we said that such a move should be pretty limited in price and time and therefore, it was just a question of time until further gains can be expected. As the S&P 500 refused to drop below 2,230 on Monday (in combination with confirmative tape signals), it was not a big surprise at all that the short-term oriented up-trend of the market regained its bullish ground last week. If we focus on our short-term oriented trend indicators we can see that the S&P 500 managed to close 31 points above the bearish threshold from the Trend Trader Index. Therefore, from a pure price point of view, the market remains in a short-term oriented uptrend as long as the S&P 500 does not drop below 2,263. In addition, both envelope lines of the Trend Trader Index have started to show new signs of positive momentum recently, indicating that – from a pure structural point of view – the underlying trend structure of the market strengthened! Above all, we saw a quite encouraging bullish crossover signal from the Modified MACD last week, whereas the gauge from the Advance-/Decline 20 Day Momentum Indicator managed to close in quite confirmative bullish territory! So all in all, the underlying short-term oriented uptrend of the market continued to strengthen.

This view is also confirmed by short-term market breadth as the current trend participation of all NYSE listed stocks within the current rally looks very healthy at the moment. The Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily regained their footing as they managed to flash a bullish crossover signal last week. This indicates that the underlying breadth momentum of the market turned positive again. Another encouraging fact is that the total amount of all NYSE-listed stocks which reached a new yearly high spiked significantly at the beginning of the week and they have therefore, clearly confirmed the recent break-out from the S&P 500. Moreover, the spike took place on Tuesday, which was more or less a clear sign that further gains within the next couple of trading sessions could be expected. As a consequence, the High-/Low-Index Daily strengthened its bullish signal for the week and is trading at quite solid levels right now. Only the percentage of stocks which are trading above their short-term oriented moving averages (20/50) could be a higher, if we consider the current levels from the S&P 500. Anyhow, in the end most of our short-term oriented tape indicators got back on track and therefore, it looks pretty unlikely that the recent rally will run out of fuel soon. As a consequence, we think that the market is heading towards new records into February, which is definitely in line with our strategic bullish outlook.

Most of our option based contrarian indicators got back to normal levels (Global Futures Put/Volume Ratio Oscillator Weekly, All CBOE Options Call-/Put Ratio Oscillator Weekly, Equity Options Call-/Put Ratio Oscillator Weekly and market sentiment), whereas even the WSC Capitulation Index is now indicating a risk-on scenario on a very short-time frame. Only the Smart Money Flow Index is signaling some form of side-ways trading as it has not completely confirmed the recent break-out from the Dow Jones Industrial Average. Anyhow, if we consider the quite confirmative readings from our remaining short-term oriented indicators, we think we could ignore this little bearish fact.

Mid-Term Technical Condition

Our mid-term oriented trend indicators remain outright supportive/confirmative. The gauge from our reliable Global Futures Trend Index increased slightly and remains on the upper end of its bullish consolidation period and therefore, it definitely a way too early to issue to strategic sell signal at the moment. Moreover, it is worth to mention that as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming weaknesses should be limited in price and time (if additionally mid-term market breadth remains supportive). 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, the majority of all underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of nearly all sectors remain above the one from riskless money market. Like in the previous weeks, the only sectors below are health care and consumer staples.

Another encouraging fact is that the current mid-term oriented trend of the market is also confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly continued to gain more bullish ground last week, indicating that the underlying mid-term oriented market breadth momentum remains pretty supportive. Additionally, all of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) strengthen in the last couple of trading sessions and are therefore, clearly confirming the current level of the S&P 500! Another positive 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 were holding up pretty well and therefore, they remain outright bullish. This indicates that the total upside participation within the market still looks pretty broad based, which is another indication that it might be a bit too early to take the chips from the table. This can be seen as an outright strong confirming tape signal as the current rally looks quite broad based. Such a broader tape confirmation can also be seen if we focus on mid-term oriented advancing issues as well as mid-term oriented up-volume as both indicators are trading well above their bearish counterparts. As a matter of fact, we think that further gains can be expected on a mid-term time horizon (and therefore, it is a way too early to take the chips from the table).

Long-Term Technical Condition

Right now, the long-term uptrend of the market has not been broken yet and therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating a technical bull market, whereas the WSC Global Momentum Indicator shows that 65 percent of all global markets have not broken below their long-term uptrend yet. Also the relative strength of most risky markets keeps trading above the one from U.S. Treasuries, another indication for the current risk-on market environment. Especially our long-term oriented High-/Low Index Weekly is still trading at supportive levels, indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the Modified McClellan Volume Oscillator Weekly as well as looking at the number of stocks which are trading above their longer-term oriented moving averages (200)!

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 and the WSC Sector Rotation Strategy. As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio.

Bottom Line

Our strategic bullish outlook remains unchanged compared to last week. Given the quite supportive/bullish indicators all across the board (and especially on a mid- to long-term time horizon) it is a way too early to get concerned about the technical condition of the market. As a consequence, our strategic bullish outlook has not been changed so far as we are expecting a continuation of the recent rally. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips rather than chasing the market too aggressively on the upside!

Stay tuned!