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September 23rd 2018

Market Review

U.S. stocks finished the week with a mixed performance, but still with two benchmarks hitting record highs. The Dow Jones Industrial Average rose 2.2 percent in five trading days to end at 26,743.50; the blue chip index booked its biggest weekly percentage gain since July. The S&P 500 gained just 0.9 percent over the week to finish at 2,929.67. Both indexes hit fresh all-time highs earlier on the day. The Nasdaq Composite declined 0.3 percent during the week to 7,986.96. Most key S&P sectors ended in positive territory for the week, led by materials. Utilities and technology were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 11.7.

Short-Term Technical Condition

So far, the short-term oriented up-trend of the market has not been broken yet as the S&P 500 closed 41 points above the bearish threshold from the Trend Trader Index. Therefore, 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 drop below 2,888. In addition, both envelope lines of the Trend Trader Index are rising, indicating that – from a pure structural point of view – the underlying short-term oriented trend structure of the market remains quite bullish. On the other hand side, we can see that the current short-term oriented trend momentum of the market remains quite weak-kneed as the bearish divergence within the Modified MACD and the Advance-/Decline 20 Day Momentum Indicator has not been sorted out yet. Although, the Modified MACD managed to flash a small bullish crossover signal last week, the signal itself is still a way too weak to be taken too seriously at the moment. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, as its gauge should be much (much) higher if we consider the current record levels from the S&P 500.

Despite the fact that the latest gains led to some form of recovery within some of our short-term oriented tape indicators, most of them are still showing an outright bearish divergence (if we consider the current levels from the S&P 500). This applies in particular to the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50). Although we have seen a small recovery on quite low levels recently, we can see that both gauges (20/50) did not manage to get back into bullish territory last week. To be more precise, only 34 percent of all NYSE listed stocks managed to close above their 20 days moving average, whereas there were only 48 percent on a 50 day basis. If we consider the fact that the S&P 500 is trading at record levels, these ratios remain quite a grim signal as it indicates that that latest move was mainly driven by a large-caps, whereas the broad basis is still struggling. Therefore, it is not a big surprise at all that the total number of stocks hitting a fresh yearly high can be best described as supportive, albeit this ratio is far away from being confirmative at the moment. So if we see a stronger spike in new lows, we would not be surprised to see a stronger trend break within our short-term oriented trend indicators. Anyhow, as this has not been the case so far, our High-/Low-Index Daily finished the week nearly unchanged, caused by the fact that we have not seen any stronger spike or decline in the number of stocks hitting a fresh yearly low/high. According to the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily, the underlying tape momentum of the market is a bit intermingled at the moment. While the Modified McClellan Oscillator Daily decreased for the week, the Modified McClellan Volume Oscillator Daily in contrast flashed a solid bullish crossover signal (albeit on quite low levels). This is telling us that the latest break-out was accompanied by a strong volume, although this buying volume was only focused on a few stocks (as the total number of advancing issues did not show any stronger spike last week). So all in all, the signals from of our short-term oriented tape indicators remain almost unchanged compared to last week.

On the contrarian side, we can see that the market is quite overbought at the moment (Trin Daily and the Upside-/Downside Volume Ratio Daily) and, therefore, we would not be surprised if the pace is slowing down next week. Another reason for this slow-down is the fact that we saw a strong spike in NYSE volume, which often marks a short-term top. Another interesting fact is, that we saw two more Hindenburg Omen last week (adding up to 8 within three weeks). This is another expression, for the outright weak-kneed breadth situation at the moment. Moreover, the trend that a lot of bulls started to switch into the bearish camp continued last week, whereas 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 red flag on the horizon is definitely getting closer right now.

Mid-Term Technical Condition

The mid-term oriented condition of the market remains unchanged compared to the previous week. The most important signal is coming from the Global Futures Trend Index as its gauge has not managed to improve and is, thus, still trading below the important 60 percent threshold (and is, therefore, far away from confirming the current level from the S&P 500). As already mentioned a couple of times, as long as the gauge keeps trading below 60 percent, the risk of a stronger pullback remains outright high (of course only in combination with weak or bearish readings in mid-term oriented market breadth). On the other hand side, even if we do not see a stronger trend-reversal immediately, as long as the gauge of this indicator remains near or below 60 percent (in combination with weak mid-term market breadth), the upside potential of the market should be capped as well! However, from a pure price point of view, the mid-term oriented uptrend of the market still remains intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This indicates that most sectors within the S&P 500 are still in a mid-term oriented up-trend at the moment (as we have not seen a stronger pullback so far). This can be also seen if we focus on 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).

Unchanged compared to last week, the mid-term oriented market breadth condition shows a quite intermingled picture at the moment. Despite the fact the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) remain bullish from a pure signal point of view, they are far away from confirming the current level from the S&P 500. This is telling us that a lot of stocks did not participate within the latest rally we saw. On top of that we can see that the bullish gauge from the Advance-/Decline Index Weekly just managed to close slightly above its bearish counterpart, indicating a quite weak-kneed mid-term oriented tape structure at the moment. Only the Upside-/Downside Volume Index Weekly managed to gain some bullish ground last week and closed out the session, therefore, at quite supportive levels. This is a quite supportive fact, as in the past all corrections were accompanied by bearish or outright weak readings within both indicators (together with a Global Futures Trend Index score below 60 percent).  As a matter of fact, the latest pickup in the Upside-/Downside Volume Index can be at least interpreted as some form of recovery. Unfortunately, the overall mid-term oriented tape momentum continued to show stronger signs of exhaustion as the bullish gap from the Modified McClellan Oscillator Weekly continued to narrow. The only positive signal is coming from 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 were still holding up quite well last week. So from a pure mid-term oriented tape perspective, it looks like the market does not have enough power to break substantially above its old record high, whereas the downside potential of the market still remains quite high at the moment! As a matter of fact, it looks like the market is heading into a make or break set-up within the next couple of weeks.

Long-Term Technical Condition

Not surprisingly, the long-term oriented uptrend of the market shows – once again – exactly the same picture as in the previous weeks. The WSC Global Momentum Indicator has been trading for 8 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. 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 9 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 increased 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, 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 were holding up quite well last week.

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 Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Global Tactical ETF Model.

Bottom Line

Our base call remains unchanged compared to last week. Although the S&P 500 reached a new all-time high last week, we still remain quite cautious (cautiously bullish) at the moment. This is mainly due to the fact that our indicator framework shows that the current price action is mainly caused by heavy weighted stocks in the index (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 large-caps (and a further deterioration within our tape indicators), 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. From a technical point of view, such a large-cap rally is always a fork in the road. Because during that time period, we either see a healthy rotation back into small caps (which would lead to significant improvements within our short- to mid-term tape indicators) or that these divergences are piling up, which would lead to a significant trend-reversal/sell-off (e.g. in early 2016, mid 2015 or 2011). Consequently, the quality of the underlying market tape structure during that time period will give us further guidance which scenario is going to happen. Such a process could normally take a couple of days/weeks, whereas the tilt between corrective and supportive consolidation is sometimes also pretty narrow. However, as our mid-term oriented tape condition is still somehow supportive (albeit on quite low levels), further large-cap rallying cannot be ruled out at the moment. 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 adjust 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.

Stay tuned!