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September 2nd 2018

Market Review

In line with our latest call, U.S. stocks rallied for the week. The Dow Jones Industrial Average added 0.7 percent from last Friday’s close to 25,964.82. Over the past month, the Dow is up 2.2. The S&P 500 rallied 0.9 percent during the week to 2,901.52. The benchmark index gained 3.0 percent over the month. The Nasdaq closed at 8,109.54. The tech-heavy index rose 2.1 percent over the week and is up 5.7 percent over the month, its best August return since 2000. Both the Dow Jones Industrial Average and the S&P 500 notched their third straight weekly advances, while the Nasdaq booked its second straight positive week. Most key S&P sectors ended in positive territory for the week, led by technology. Consumer staples led decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 12.9.

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend of the market clearly continued to strengthen last week as the S&P 500 succeeded to closed 47 points above the bearish envelope line from the Trend Trader Index. So from a pure price point of view, the short-term uptrend of the market remains intact as long as the S&P 500 does not drop below 2.854 (bearish threshold from the Trend Trader Index). Furthermore, we can see that both envelope lines of this reliable indicator are literally rocketing, which is another outright constructive trend signal at the moment. Above all, the overall trend momentum also strongly strengthened as the both trend lines from the Modified MACD increased. With such strong readings it is highly unlikely to see any major trend-reversal ahead. This view is also widely confirmed by the Advance-/Decline 20 Day Momentum Indicator, which is also trading at the highest level for weeks. Consequently, our entire short-term oriented trend indicators are confirming the latest gains from the S&P 500.

This picture is also widely confirmed by our short-term oriented market breadth indicators as all of them further increased last week or have not shown any signs of weakness. First of all, we saw healthy readings in the number of stocks which are hitting a fresh yearly high (especially at the beginning of the week), together with an outright low number of stocks which were pushed to a new yearly low. Consequently, it pushed the bullish gauge from the High-/Low-Index Daily to quite comfortable bullish levels. This is another positive signal that the latest gains were not caused by a few mega caps but they were a result from a strong demand all across the board. Basically, the same is true if we focus on our short-term oriented breadth momentum indicators, as the gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily also strengthened last week. This is indicating that the underlying breadth momentum of the broad market is gearing up. The only weak signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges were holding up quite well, they could be a bit stronger, given the solid readings of the broad index. However, this is not a big deal-breaker at the moment, if we consider the quite healthy remaining market breadth signals around.

According to our contrarian indicators, the amount of bulls on Wall Street continued to increase last week. As already mentioned last week, the increased demand is another supportive signal on a mid-term time horizon. However, on a very short-time frame, this increased greed has also started to have a quite negative impact on the option market as the amount of call options jumped significantly last week. As a matter of fact, the z-score from the Daily Put/Call Ratio All CBOE Options Indicator almost fell into bearish territory. If this trend continues, it could be possible to see quite volatile/choppy markets until the 21st of September (option expiration date). Above all, from a pure cyclical point of view, September tends to be a though month for risky assets. However, right now it is still a bit too early to get concerned about that fact, as the WSC Capitulation Index is still indicating a risk-on market environment on a very short-time frame. Unchanged compared to last week, the only negative signal is coming from the Smart Money Flow Index. However, as long as we do not see a significant break-down in short- to mid-term market breadth, we keep ignoring this signal for the time being. Nevertheless, we will be pretty sure that it will be just a question of time until this negative divergence will be wiped out.

Mid-Term Technical Condition

The main reason, why we believe it is still a way too early to bet on a major trend-reversal is due to the fact that our entire mid-term oriented indicators remain bullish and also strengthened significantly last week. This becomes pretty obvious if we focus on the gauge from the Global Futures Trend Index, which jumped into the middle part of its bullish consolidation area last week. As a matter of fact, this reliable indicator is now definitely confirming the current levels from the S&P 500! This can be seen as quite strong trend signal, as readings near (or even above) 60 percent never led to any stronger short-term oriented trend-reversal! As per last week’s report, the WSC Sector Momentum Indicator also jumped to the highest level for months, indicating that many sectors of the S&P 500 remain in a mid-term oriented uptrend. These bullish facts are also supported by our Sector Heat Map. The momentum score of all sectors keeps trading above the one from riskless money market (currently at 0.0 percent).

On top of that, we can see that this current mid-term oriented up-trend of the market is also widely confirmed by mid-term oriented market breadth. Our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) increased in the last couple of trading sessions or were holding up quite well. Thus, they are clearly confirming the recent level of the S&P 500! Moreover, mid-term oriented advancing issues and mid-term oriented up-volume were also holding up quite well and are trading well above their bearish counterpart. This is probably the most important signal, as it indicates a solid underlying demand. Also our Modified McClellan Oscillator Weekly slightly increased its bullish gap last week. In addition, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) have also not shown any bearish signs recently. All these facts signal that the total upside participation within the market is gaining momentum, which is another indication that there is still some room left before major troubles might be due.

Long-Term Technical Condition

The long-term oriented uptrend of the market shows exactly the same picture as in the previous week. The WSC Global Momentum Indicator has been trading for 5 weeks at the same level, indicating that just 22 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are still trading above their long-term oriented trend lines. As already pointed out several times, this is a clear signal that the current global bull-market is quite fragile at the moment. On the other hand side, our Global Futures Long Term Trend Index has been increasing for 6 weeks, signaling that the long-term oriented trend of U.S. equities is regaining momentum. Our WSC Global Relative Strength Index shows that the relative strength of all risky markets increased last week, but all markets (except one) are trading below the one from U.S. Treasuries. This is sign for a slow growth period. Our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly, percentage of stocks which are trading above their 200 day moving average) remained unchanged compared to the previous week.

Model Portfolios

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. The allocation of the WSC Global Tactical ETF Portfolio and the WSC Sector Rotation Strategy remains unchanged. Moreover, we are proud to announce that the WSC Sector Rotation Strategy reached a new all-time high again last week.

Bottom Line

The technical picture of the market continued to improve compared to last week and, therefore, our bullish outlook remains unchanged at the moment. To be more precise, with quite supportive/bullish readings within our indicator framework (especially on a mid-term time horizon), we think that the current rally still looks quite healthy in its nature. Therefore, we strongly believe to see further gains into deeper September (although we would not be surprised if such gains were accompanied by increased volatility). So in the end, we would advise our conservative members to remain invested, whereas aggressive traders should remain in the bullish camp.

Stay tuned!