February 10th 2019
U.S. stocks wrapped a volatile week and all three major U.S. averages finished the week with small gains. The Dow Jones Industrial Average eked out a small weekly gain of 0.2 percent to finish at 25,106.33. The S&P 500 finished at 2,707.88 and ended the week roughly where it had started (plus 0.1 percent). The Nasdaq recorded a weekly gain of 0.5 percent to end at 7,298.20. Among the key S&P sectors, the utilities 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 15.7.
Short-Term Technical Condition
Despite the fact that the market ended nearly flat for the week, the short-term oriented uptrend of the market remains well intact. This is mainly due to the fact that the readings from nearly all of our short-term oriented trend-indicators continued to strengthen last week. First of all, we can see that the S&P 500 is now trading almost 62 points above the bearish threshold from the Trend Trader Index! This indicates that from a pure price point of view, the market remains in a short-term oriented uptrend as long as the S&P 500 does not close below 2.645. Moreover, we can see that both envelope lines of that reliable indicator are still literally rocketing. This is a typical pattern for a healthy short-term oriented price driven up-trend. The same is true if we focus on the Modified MACD, which also increased to solid bullish levels. The only weak signal is coming from our Advance-/Decline 20 Day Momentum Indicator as its gauge started to lose some ground in outright bullish territory. This indicates that the overall pace is likely to slow down a bit, although the overall trend direction remains bullish.
However, this small bearish divergence is definitely no deal-breaker at the moment, as our entire short-term oriented market breadth indicators have not shown any signs of weaknesses so far. Consequently, all of them are confirming the current short-term oriented trend of the market. Especially, the strong surge in the short-term gauge from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily is telling us that the underlying tape momentum remains outright strong (although the market finished almost flat for the week). This is a quite positive signal, indicating that the current rally is highly likely to continue. Above all, we can see that the High-/Low-Index Daily still remains quite bullish from a pure signal point of view. This is mainly due to the fact that we have recently seen some stronger moves in new highs, without any offsetting spikes in new lows. So as long as we do not see a stronger spike in new lows, the current rally is not at risk of fading out at the moment. Nevertheless, the total amount of new highs could be a bit higher, if we consider the current level from the S&P 500. Basically, the same is true if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges weakened for the week, but are still trading in solid bullish area. So all in all, this is telling us that the underlying trend-momentum remains intact, although it could be possible that the overall pace of the rally is slowing down a bit.
On the contrarian side, we can see that some of our option based oscillators (Equity Options Call/Put Ratio Oscillator, Global Futures Put/Volume Oscillator, All CBOE Call/Put Ratio Oscillator) flashed a sell signal last week. This is indicating that the greed within the crowd is increasing on a very fast pace although we are still far away from outright bearish levels if we consider the current put-/call ratio from the option market. As a matter of fact, we would not be surprised to see increased volatility ahead. Nevertheless, we still think that the overall set-up looks quite supportive, as the WSC Capitulation Index is still indicating a risk-on market scenario, plus we have not seen any major bearish divergence within the Smart Money Flow Index yet.
Mid-Term Technical Condition
This view is also supported by the fact that our mid-term oriented indicators also strengthened last week. This becomes pretty obvious if we focus on the gauge from the Global Futures Trend Index, which jumped to the upper part of its bullish consolidation area last week and also to the highest level for months (83 percent). 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! Moreover, our WSC Sector Momentum Indicator also stabilized on low levels, which is another quite positive technical signal for the time being. But as already pointed out in recent times, as long as we do not see a stronger recovery within this indicator over the next couple of weeks, the current rally could be still categorized as bear-market rally instead of being the start of a new bull-market. This perspective is once again supported by the fact that the momentum score of riskless money market (from our Sector Heat Map) still remains quite high. Although it increased by 8 percentage points for the week, still seven sectors are trading below the one from riskless money market! Therefore, we still stick to our scenario that the current rally is still part of a bear market rally instead of being the start of a new bull-market (at least from the current point of view).
Analyzing mid-term oriented market breadth shows a quite supportive picture. Especially, the Modified McClellan Oscillator Weeklysucceeded once again to increase its bullish gap last week, indicating that the overall tape momentum is improving. And although all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) dropped in the last two days of the week in synch with the S&P 500, they are still trading at their highest levels for months. This is a quite confirmative picture, as all of them are definitely confirming the current level from the S&P 500 at the moment. Also, mid-term oriented advancing issues as well as mid-term oriented up-volume were holding up quite well, although they could be a bit stronger in our point of view. This also true if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). So given the quite supportive readings all across the board, the risk of a sharp trend reversal remains extremely low at the moment. On the other hand side, we can also see that some of our mid-term oriented breadth indicators should be a bit stronger, if we consider the current level from the S&P 500. So all in all, the underlying tone of the market remains quite bullish, although we would not be surprised if the pace is likely to slow down a bit.
Long-Term Technical Condition
The long-term oriented trend of the market showed some improvements last week. First, our WSC Global Momentum Indicator continued its increase which had started a few weeks ago. The gauge from this indicator signals that 30 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. And although our Global Futures Long Term Trend Index continued its bearish ride last week, it looks like it has finally reached its bottom. Also our WSC Global Relative Strength Index showed some small improvements last week. Still, the relative strength of nearly all risky markets is trading below the one from U.S. Treasuries. Consequently, the long-term oriented trend of the market still looks quite damaged although we saw a stronger recovery in long-term oriented market tape. This is mainly due to the fact that the High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average showed a very positive development last week, whereas our Modified McClellan Volume Oscillator Weekly even nearly flashed a bullish crossover signal. So all in all, the long-term oriented picture of the market is improving but it is still far away from indicating a strong technical market environment. As a matter of fact, we strongly believe that the current rally is still just part of a larger bear-market rally instead of being the start of a new bull-market. This is a very important fact, since in such a situation a short-term oriented trend break could trigger a stronger sell-off (if we additionally see a deteriorating market tape structure).
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 Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio, WSC All Weather Model Portfolio and the WSC Global Tactical ETF Portfolio.
The technical picture of the market remains pretty unchanged compared to last week. With quite confirmative signals all across the board, we think the risk of a sharp trend reversal remains quite low. Nevertheless, on a short-term time perspective it could be possible to see some increased volatility and/or a period of bullish biased sideways trading ahead, before further gains can be expected. Consequently, we would advise our conservative members to hold their equity position, while aggressive short-term traders should remain bullish as long as our short-term oriented indicator framework remains constructive.