September 30th 2018
U.S. averages closed the week mostly with a negative performance. The Dow Jones Industrial Average dropped 1.1 percent from the week-ago close to 26,458.31. The S&P 500 recorded a 0.5 percent loss over the week and finished at 2,913.98. The Nasdaq Composite booked a weekly gain of 0.7 percent to end at 8,046.35. On the month, the Dow Jones Industrial Average gained 1.9 percent, while the S&P 500 posted a monthly gain of 0.4 percent, while the Nasdaq edged down 0.8 percent. Over the quarter, the S&P 500 has risen more than 7 percent, which would be its biggest quarterly advance since the fourth quarter of 2013. The Dow Jones Industrial Average is up about 9 percent; both the Dow Jones Industrial Average and the S S&P 500 P have risen in 11 of the past 12 quarters. The Nasdaq is up more than 7 percent over the quarter, and it is set for its ninth straight quarterly gain. Among the key S&P sectors, technology was the best weekly performer, while materials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.1.
Short-Term Technical Condition
From a pure price point of view, the short-term trend of the market remains intact as the S&P 500 managed to close 19 points above the bearish threshold from the Trend Trader Index and both envelope lines of this indicator are still rising. Nevertheless, we can see that the underlying trend-momentum of the market remains outright weak at the moment. This is mainly due to the fact that the Advance-/Decline 20 Days Momentum Indicator dropped deeply into bearish territory last week. Another concerning fact is that the Modified MACD has not shown any strengths so far and even flashed again a bearish crossover signal last week. Consequently, most of our trend indicators are definitely not confirming the current levels from the S&P 500 (as the index is trading near its all-time high)! In such a situation short- to mid-term market breadth is key area of focus, as it will help us to evaluate if the current trend slow-down is just part of a healthy consolidation period or more corrective in its nature.
Unfortunately, short-term market breadth deteriorated all across the board last week (although the market is hovering shy below its all-time high). Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed major signs of exhaustion – the latter one also flashed a bearish crossover signal last week. This is telling us that the underlying momentum and volume of advancing stocks on NYSE is outright weak at the moment (although the S&P 500 is trading near record highs). Consequently, it was also not a big surprise that the percentage of stocks which are trading above their short-term oriented moving averages (20/50) finished the week in deeper bearish territory. To be more precise, right now there are only 31/42 percent of all NYSE listed stocks which are trading above their 20/50 days moving average and these readings are far away confirming the current levels of the S&P 500! In addition, there was also a strong reduction in the number of new highs with a stronger increase of new lows. As a matter of fact, the High-/Low-Index Daily strengthened its bearish signal last week. So all in all, given the outright weak short-term oriented market breadth structure of the market, we do not believe that the market has enough power to push higher! In other words, we strongly believe the market is outright vulnerable for stronger disappointments at the moment (as the current rally is only driven by a few mega caps at the moment, whereas the broad market is already strongly lagging behind)! As a matter of fact, we would not be surprised to see a stronger momentum break soon.
On the contrarian side, we can see that the NYSE short interest dropped last week, which is another bearish indication on a short-term time frame. Unchanged compared to last week, we can see that the Smart Money Flow Index is far away from confirming the current levels from the Dow Jones Industrial Average. Given the deteriorating tape structure all across the board, this is another red flag on the horizon which is definitely getting closer right now.
Mid-Term Technical Condition
Another concerning fact is that the mid-term oriented trend of the market also continued to deteriorate last week. This is due to the fact that the gauge from the Global Futures Trend Index plummeted to 39 percent – the lowest level for months. As a matter of fact, this indicator is far away from confirming the current levels from the S&P 500 and, therefore, we would be outright surprised if the market will continue to grow higher. On the contrary, as long as its gauge remains far below its outright bearish 60 percent threshold, the market will remain highly at risk for stronger disappointments. Not surprisingly, from a pure price point of view, the mid-term oriented uptrend of the market still remains intact as we have not seen any stronger decline so far. As a result, the WSC Sector Momentum Indicator still keeps trading at the highest level for months. This indicates that most sectors within the S&P 500 are still outperforming riskless money market on a relative basis. This can be also observed by looking at our Sector Heat Map as the momentum score of all sectors keeps trading above the one from riskless money market (currently at 0.0 percent).
Another toppish signal is coming from mid-term market breadth, which also continued to deteriorate all across the board last week. Especially, the Modified McClellan Oscillator Weekly widened its bearish gap last week, which is another indication for an outright weak tape momentum at the moment. This can be also observed if we focus on the Advance-/Decline Index Weekly, which flashed a bearish crossover signal. This is another indication that the current rally is running out of steam at the moment. On top of that we can also see that the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped to the lowest level for months, indicating an outright damaged tape condition at the moment (as the broad market started to decline all across the board). The only encouraging fact is that the Upside-/Downside Volume Index Weekly is still trading at quite confirmative levels. As both, Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly tend to turn bearish mostly before a stronger correction, we keep a very close eye on the development of these indicators within the next 2-3 weeks! Anyhow, even if we do not see a stronger correction immediately – with such weak tape signals al across the board – we think the upside potential of the market remains extremely capped. Consequently, the risk-/reward ratio of being invested deteriorated significantly last week.
Long-Term Technical Condition
Once again unchanged compared to the previous weeks remains the long-term oriented trend of the market. The WSC Global Momentum Indicator stays paralyzed (for nine weeks now) at quite bearish levels, 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. 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 10 weeks, signaling that the long-term oriented trend of U.S. equities remains intact (compared to the rest of the world). Our WSC Global Relative Strength Index shows that the relative strength of all risky markets was holding up quite well last week, but all markets (except one) are trading below the one from U.S. Treasuries. This is a sign for a slow growth period. Looking at our long-term oriented tape indicators reveals that the High-/Low Index Weekly, the Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average weakened last week.
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.
Our base call remains unchanged compared to last week. Although the S&P 500 was trading close to a new all-time high last week, we still remain outright cautious at the moment. This is mainly due to the fact that our indicator framework shows that the current bullish price driven trend is mainly caused by a few mega-caps (whereas the broad market is strongly lagging behind). In general, such a large-cap driven rally is quite dangerous to play (hardly sustainable in its nature). Because if we see a trend-reversal in these mega-caps, there is literally no safety-net around to cushion such a move. In such a situation, the risk of a strong and sharp trend-reversal remains high. Given the outright bearish tape structure at the moment, we think there are two scenarios possible. Either, we see a longer-lasting consolidation period (where we see a healthy rotation back into small caps) or the market is heading into a stronger correction within the next weeks. Consequently, it might be a bit too early to pull the trigger immediately (as we would like to see some negative price action first). As a matter of fact, we would advise our conservative members to keep/place their stop-loss limit around 2,850. This stop loss limit should be in place until our mid-term indicator framework turns positive again! Aggressive traders should go short, if the S&P 500 drops below 2,850 and should increase their exposure if we see further down testing below 2,790/2,750.