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October 15th 2017

Market Review

U.S. stocks finished the week with further gains. The Dow Jones Industrial Average added 0.4 percent for the week to end at 22,871.72. The S&P 500 advanced 0.2 percent from last Friday’s close to finish at 2,553.17. The Nasdaq climbed 0.2 percent over the week to 6,605.80. The technology-laden index booked its 57th record close in 2017. Most key S&P sectors finished higher, led by consumer staples, while health care and financials ended in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 9.6.

Short-Term Technical Condition

According to our short-term oriented indicators, the bullish trend-status from the S&P 500 remains unchanged. To be more precise, the S&P 500 closed 34 points above the bearish threshold from the Trend Trader Index. Above all, both envelope lines of this reliable indicator are still drifting higher on a very fast pace. This is another indication for a stronger short-term oriented uptrend. This can be also seen if we focus on the Modified MACD which has not shown any signs of a threatening bearish crossover signal yet. Also, the gauge from the Advance-/Decline 20 Day Momentum Indicator remains outright bullish, although it lost momentum last week. As this indicator tends to be a leading one, a start of a healthy consolidation period could be possible and therefore, the pace is likely to slow down a bit next week.

If we focus on our short-term oriented breadth indicators, we can see that their readings slightly weakened for the week and are therefore, quite intermingled at the moment. The Modified McClellan Oscillator Daily decreased for the week (albeit on very high levels) and the Modified McClellan Volume Oscillator Daily even flashed a small bearish crossover. As a matter of fact, the underlying tape momentum of the broad market started to slow down a bit. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges are trading far above their 50 percent threshold, they decreased last week and are therefore, showing some small signs of fatigue. This is not a big surprise at all, if we consider the fact that the market scored on record high after another. Consequently, it could be possible that the market is about to enter a small but healthy consolidation period, which should be therefore, limited in price and time. This is mainly due to the fact that the High-/Low-Index Daily is still trading at outright solid level and is therefore, far away from being bearish. The main reason for such a strong bullish signal is caused by the fact that we have not seen any stronger spike/decline in the amount of stocks hitting a fresh yearly low/high. This is telling us that it is still a way too early to bet on a major trend reversal (at least for the time being). So all in all, the market looks a bit vulnerable for a bullish biased consolidation/sideways trading at the moment.

This view is widely confirmed if we focus on our contrarian indicators. After the quite encouraging new-highs headlines, we still can see a lot of complacent within the option market. This becomes pretty obvious if we focus on the z-score of the Daily Put/Call Ratio All CBOE Options Indicator and the All CBOE Options Call-/Put Ratio Oscillator. On the other hand, we can see that the smart guys (Smart Money Flow Index) have not used the rally to sell into strength so far, whereas the WSC Capitulation Index is still indicating an extremely risk-on environment for risky assets. So also from a pure contrarian point of view, it could be possible that the pace is likely to slow down a bit (to dampen short-term optimism), before further strength can be expected.

Mid-Term Technical Condition

The mid-term uptrend of the market remains absolutely intact so far, as the Global Futures Trend Index is still trading above the outright 90 percent bullish threshold and has confirmed the latest high from the S&P 500. Also from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator increased for the week. This is telling us that most 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 all sectors (except consumer staples which is 0 percent) remains equal or above the one from riskless money market (which dropped to 0 percent).

This current mid-term oriented up-trend of the market is widely confirmed by mid-term oriented market breadth. Like in the previous weeks, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to strengthen in the last couple of trading sessions and are therefore, confirming the recent level of the S&P 500! In other words, the recent high was widely supported by a broad basis, which is an absolutely healthy breadth signal. Moreover, mid-term oriented advancing issues and mid-term oriented up-volume continued to gain more bullish ground and are therefore, trading far above their bearish counterpart. Also our Modified McClellan Oscillator Weekly increased its bullish gap, indicating that the mid-term oriented tape momentum remains constructive. Only the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) lost some steam, although both are still trading far above their bearish 50 percent threshold. This indicates that the majority of all NYSE listed stocks are still per definition in a robust mid-term oriented up-trend. These facts signal that the total upside participation within the market is still positive, which is another indication that it a bit too early to take the chips from the table.

Long-Term Technical Condition

The long-term uptrend of the market remains intact and therefore, the risk for another bear-market is virtually nonexistent. 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 months. As we can see from the WSC Global Momentum Indicator, 90 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 above the one from U.S. Treasuries. More importantly, 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 trading at solid bullish levels. Also the amounts of stocks which are hitting a fresh 52 weeks high are trading far above their bearish counterparts, positive impacting our High-/Low Index Weekly. In addition, our Modified McClellan Volume Oscillator Weekly continued to increase its bullish gap.

Model Portfolios

If we have a closer look at our Model Portfolios (WSC Inflation Proof Retirement Portfolio, the Global Tactical ETF Portfolio, the WSC Sector Rotation Strategy and the WSC All Weather Portfolio) we can see that there have been no changes in the allocation last week. However, we are proud to announce that the WSC All Weather Portfolio and the WSC Sector Rotation Strategy reached another all-time high last week.

Bottom Line

With quite stretched signals within some of our short-term oriented tape indicators – together with some elevated greed on the contrarian side – the chances for a healthy consolidation period (or even a few rocky sessions) are definitely increasing at the moment. Nevertheless, with quite solid readings all across the board, our strategic bullish outlook remains definitely unchanged. Therefore, we do not think that any upcoming consolidation period could cause a major trend reversal at the moment. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips rather than to chase the market too aggressively on the upside.

Stay tuned!