June 25th 2017

Market Review

U.S. stocks finished the week in positive territory. The Dow Jones Industrial Average closed at 21,396.33 and ended the week roughly where it started after paring gains from earlier in the week. The S&P 500 added 0.2 percent over the five days to close at 2,438.31. The Nasdaq logged a weekly gain of 1.8 percent to finish at 6,265.25. Among the key S&P sectors, the health care sector was the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 10.

Short-Term Technical Condition

According to our short-term oriented indicators, the bullish trend-status from the S&P 500 remains unchanged compared to last week. The S&P 500 is still trading above the bearish threshold from the Trend Trader Index (but touched its bullish threshold). This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.424. Furthermore, we can see that both envelope lines of this reliable indicator are still steadily drifting higher, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. The situation is slightly different if we analyze the overall short-term oriented trend momentum of the market. Especially, the weak readings from the Modified MACD are still indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. The gauge from this indicator dropped significantly last week (although it remains bullish), indicating that the recent consolidation period is not over yet and will therefore, continue next week.

This view is also strongly confirmed by our short-term oriented breadth indicators as most of them have turned bearish or remain weak, although the market finished almost unchanged for the week. Consequently, our entire short-term oriented breadth indicators have additionally formed a bearish divergence, if we consider the current levels from the S&P 500! Especially, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily gained more bearish ground last week and have not shown any signs of a bullish crossover signal so far. This is signaling that the overall breadth momentum of the market remains outright weak-kneed, although the market has not shown any signs of weaknesses yet! Another concerning fact is that the overall NYSE volume spiked on Friday. Normally, such a breadth-event suggests a buying-panic, which often marks a short-term top. The situation looks pretty similar if we analyze the current market participation. Although the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) managed to close clearly above their 50 percent bearish threshold, their absolute levels should be much higher if we consider the current level from the S&P 500. The same is true if we focus on the NYSE New HighsNew Lows Indicator. There we can see that the total amount of new highs came down a bit recently – having a negative impact on our High-/Low Index Daily.

The situation on the contrarian side remains almost unchanged compared to last week. Three weeks ago, we already said that the market looked ready for a sentiment driven consolidation period that should relieve overbought conditions and dampen short-term optimism. Not surprisingly, the market started to consolidate soon after. But more importantly, we saw an immediately reduction of short-term optimism within our option based indicators (Global Futures Put-/Volume Ratio Oscillator, the Equity Options Call-/Put Ratio Weekly and the All CBOE Options Put-/Call Ratio Weekly). In other words the market started to work off that predominant bullish sentiment, which is often the basement for another break-out. This fact is in line with the readings from the Smart Money Flow Index and the WSC Capitulation Index as both of them remain quite bullish. Moreover, we can see that there is still enough leverage around, which is also another bullish mid-term indication. However, right now, the overall sentiment is not negative enough and therefore, we think to see some further days of consolidation ahead. Another quite interesting fact is that the market has triggered a Hindenburg Omen. This is normally a quite bearish sign as it indicates that the market is at risk for a stronger correction within the next 30 days. But given the overall setup, we think this fact can be ignored at the moment.

Mid-Term Technical Condition

Despite the fact that some down-testing looks quite possible on a very short-time frame, equities do not appear at risk for a stronger correction at the moment. This is mainly due to the fact that our reliable Global Futures Trend Index is still trading in the middle of its bullish consolidation range (70 percent). Although it dropped last week, this is telling us that the mid-term oriented up-trend of the market remains well in force. In addition, we can see that the WSC Sector Momentum Indicator is also trading at quite solid levels, indicating that most sectors of the S&P 500 remain in a mid-term oriented uptrend. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of most sectors remains above the one from riskless money market. Only energy has lower scoring (as in the weeks before) and therefore, it is too early to bet on a sustainable trend-change in that sector.

The mid-term oriented market breadth condition looks pretty supportive at the moment, although the recent momentum slow-down has definitely left its mark on some of our tape indicators. This becomes pretty obvious if we focus on the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150). Both gauges dropped last week and are just shy trading above their bullish thresholds. On the other hand, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume are trading well above their bearish counterparts. Also our the Modified McClellan Oscillator Weekly succeeded in defending its bullish gap, indicating that the underlying mid-term oriented market breadth momentum remains pretty supportive. Basically, the same set up is true if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as they all have not shown any significant bearish move recently. So despite the fact that some of our mid-term oriented market breadth indicators weakened for the week, most of them are still trading at quite bullish/supportive levels and therefore, our strategic bullish outlook remains unchanged.

Long-Term Technical Condition

The long-term uptrend of the market remains intact. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and trading at very high levels. Also the WSC Global Momentum Indicator is trading at a very high level and indicates that now 88 percent of all global markets remain within a long-term oriented uptrend. This positive momentum can also be 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 (except commodities). Also, long-term oriented market breadth looks quite constructive at the moment. The percentage of stocks which are trading above their 200 day simple moving average are also trading at solid levels. Also the amounts of stocks which are hitting a fresh 52 weeks high are trading far above their bearish counterparts – having a positive impact on our High-/Low Index Weekly. The only bearish signal is coming – once again – from the Modified McClellan Volume Oscillator Weekly as it has not stopped its bearish ride yet.

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 utilities dropped below average and below the one from the S&P 500 within our Sector Heat Map, we received a sell signal for that ETF within our WSC Sector Rotation Strategy.

Bottom Line

The technical picture of the market remains pretty unchanged compared to last week. With quite bullish indicators all across the board we have not seen any typical signs for a major top-building process yet and therefore, we expect to see further record highs into deeper summer. However, with quite stretched sentiment signals on the contrarian side, the current consolidation period might continue for a very short-time frame. However, our bullish outlook remains unchanged and therefore, we would advise conservative members to hold their equity position, while aggressive short-term traders should definitely stay in the bullish camp.

Stay tuned!