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November 11th 2018

Market Review

The U.S. stock market finished the week with solid gains. The Dow Jones Industrial Average gained 2.4 percent over the week to close at 25,270.83. The S&P 500 was also 2.4 percent higher on the week and finished at 2,723.06, the best week since May. The Nasdaq rallied 2.6 percent for the week to close at 7,356.99, its best week since August. Most key S&P sectors ended in positive territory for the week, led by materials. Utilities were the only decliners. The Chicago Board Options Exchange Volatility Index (VIX), a measure of investor uncertainty, fell to 19.51.

Short-Term Technical Condition

From a pure price point of view, the short-term oriented trend of the market turned clearly bullish last week. If we have a closer look at our short-term oriented indicators, we can see that the advances from the last week pushed the S&P 500 64 points above the bearish envelope line from the Trend Trader Index. As a consequence, the pure price driven short-term oriented trend turned bullish and remains intact as long as the S&P 500 does not close below 2,717. Moreover, both envelope lines from the Trend Trader Index formed a small rounding bottom and finally started to increase (indicating that we might have seen the worst already – at least from the current point of view). This pure price driven uptrend is now also getting support by the Modified MACD, which flashed a strong bullish crossover signal on Monday and was, therefore, indicating further gains ahead. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, which rocketed into bullish territory on Wednesday, confirming the latest gains we saw. Given the fact that we saw a strong surge in both indicators, we strongly believe that any upcoming weakness would most likely just produce a bullish divergence in their readings, as extremely heavy losses would be necessary to bring their gauges back to their former low! Consequently, we received further confirmation for our latest call that we might have seen the worst already – at least on an intermediate basis.

This view is also widely confirmed by short-term market breadth as we also saw major signs of improvements last week. The most encouraging tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both recovered significantly last week and have, therefore, also confirmed the latest gains we saw. Anyhow, both indicators are telling us that the underlying tape momentum is getting back on track. 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) as both gauges recovered significantly last week. Nevertheless, we should not forget that both gauges still keep trading well below their bullish thresholds so far, indicating that the current recovery is still a bit weak-kneed in its nature. However, the most encouraging signal is coming from the High-/Low-Index Daily, which almost flashed a bullish crossover signal last week. The main reason for this bullish crossover signal is the fact that we have recently seen a quite strong reduction in the number of new lows, in combination with a quite encouraging increase of new highs. This indicates that the market internals are strengthening as the latest recovery was driven by a strong demand rather than by short-covering. This is another piece of evidence that we might have seen the worst already – at least on an intermediate basis. However, that does not mean that we see further strong rallying ahead. Given the quite weak-kneed absolute levels from most of our short-term oriented indicators, we think the market still remains quite vulnerable for nasty pullbacks (although we think that we have seen the worst already).

From a pure contrarian point of view, we received further confirmation that we have seen the worst already. This is mainly due to the fact that the gauges from most of our option based indicators Daily Put-/Call Ratio All CBOE Options, Global Futures Put-/Volume Ratio, All CBOE Options Call-/Put Ratio Daily, All CBOE Options Call-/Put Ratio Oscillator and the Equity Options Call-/Put Ratio Oscillator Weekly) are receding from outright high bullish levels. Above all, we can see that the WSC Capitulation Index continued to drop significantly for the week, indicating that the market is in the middle of a bottom building process at the moment. Only its fisher transformation remains bearish, indicating that further nasty pullbacks cannot be ruled out at the moment.  Moreover, the gauge from the Smart Money Flow Index also started to bottom out, although its gauge is far away from confirming the current level from the Dow Jones Industrial Average. As a matter of fact, it could be possible that the latest correction is just part of a longer-lasting top building process which could unfold within the next couple of months.

Mid-Term Technical Condition

On a mid-term time horizon, the technical condition of the market still looks quite vulnerable at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index is still trading far below its 60 percent bullish threshold! As already mentioned a couple of times – from a formal point of view – the current correction cycle will be not be over as long as its gauge keeps trading below that important threshold! Therefore, it was good to see that its gauge has shown some strong positive momentum recently, as it jumped 23 percentage points last week! Consequently, the risk of another strong pullback remains quite high (although we strongly believe that we have seen the worst already). The main rationale behind this fact is that the mid-term oriented price trend of the market still remains intact and has also shown some small bullish signs recently. This can be seen if we focus on the WSC Sector Momentum Indicator, which is still trading at solid levels and showed signs of strengths last week. This is telling us that most sectors within the S&P 500 are still outperforming riskless money market on a relative basis. And also the momentum score of riskless money market within our Sector Heat Map dropped by almost 7 percentage points last week, which is another indication that the market hit rock bottom (at least on an intermediate basis).

Examining mid-term oriented market breadth reveals a small recovery as the picture generally improved compared to the previous weeks. This becomes obvious if we focus on our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly), as all of them gained bullish ground last week and are 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 both gauges are still trading slightly below the bullish threshold. The only weak signals are coming from the Advance-/Decline Index Weekly, the Upside-/Downside Volume Index Weekly and 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 telling us that we might have seen the worst already (at least on an intermediate basis) and, therefore, any upcoming pullback within the ongoing recovery should be limited in price and time (as long as we see further improvements within our short-term oriented indicator framework)!

Long-Term Technical Condition

The long-term oriented trend of the market has not shown any significant signs of recovery. The WSC Global Momentum Indicator is still trading near the lowest level for years and signals that only 12 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 lines. Also our Global Futures Long Term Trend Index has not shown any bullish signs recently (but is still holding up quite well and trading in solid bullish territory). This signals that the long-term oriented trend of U.S. equities is slightly reversing from quite elevated levels. Our WSC Global Relative Strength Index dropped significantly last week and shows that the relative strength of nearly all risky markets is trading below the one from U.S. Treasuries (which is another indication for a risk-off market environment). Focusing on our long-term oriented tape indicators reveals that the Modified McClellan Volume Oscillator Weekly and especially the High-/Low Index Weekly again weakened last week while the percentage of stocks which are trading above their 200 day moving average showed some bullish gains. The outright weak long-term oriented technical condition of the market might be an indication that the latest correction might be just part of a longer-lasting top-building process, which might unfold next year.

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, WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. As the momentum score of consumer discretionary rose above average and above the one from the S&P 500 within our Sector Heat Map, we received a buy signal for that ETF within our WSC Sector Rotation Strategy. This signal fits quite well to our current outlook, as the portfolio is definitely getting a slightly more aggressive stance.

Bottom Line

In our last week’s comment we highlighted the fact that there was a good chance that the market had hit an important intermediate low as we had seen typical technical patterns for such an event. The main reason why we mentioned intermediate and not final low is due to the fact that the latest correction cycle has definitely left its mark on some of our mid- to long-term oriented indicator framework. In such a situation it is not unusual that the first correction and the subsequent stronger and longer-lasting counter trend rally are just part of a larger and longer-lasting top building process. So in other words, if the current counter trend rally is not accompanied by strong improvements within our market breadth indicators (within the next couple of weeks), another correction leg in early next year cannot be ruled out at the moment.

Anyhow – on a short-term perspective – we think we have seen the worst already. As already mentioned last week, we said that we additionally needed to see at least some bullish indication within our indicator framework (especially within short-term market breadth) to receive further confirmation for our intermediate bottom scenario. So consequently, with brightening readings within our indicator framework, we think that we have seen the worst already – at least on an intermediate basis. That does not mean that the market will take off immediately, but given the quite supportive readings within our short-term oriented indicator framework, we think the chances for another significant down-leg towards the latest low remain quite limited (at least of the time being). As a matter of fact, after our conservative members successfully side-stepped the recent turmoil, we think it is time to get back into the market (by buying into weaknesses rather than chasing the market too aggressively on the upside) as the risk-/reward ratio for such a bet looks quite attractive at the moment. Consequently, aggressive traders should focus on buying into weaknesses rather than selling strength. Nevertheless, given the fact that the Global Futures Trend Index has not turned bullish so far, there is still a small chance that the technical condition of the market is deteriorating again. In such a case, we are not afraid of issuing a strategic sell signal again.

Stay tuned!