February 25th 2018

Market Review

U.S. stocks posted modest gains for a second straight week. The Dow Jones Industrial Average gained 0.4 percent from the prior Friday’s close to end at 25,309.99. The blue-chip index has been up for two straight weeks, representing its largest two week climb, up 4.6 percent, since Nov. 18, 2016. The S&P 500 added 0.6 percent over the week to end at 2,747.30. The two straight weeks of gains for the equity index, up 2.9 percent over that period, are its most since Feb. 13, 2015. The Nasdaq advanced 1.4 percent from the week-ago close to 7,337.39 and booked its best two-week stretch, up 6.7 percent, since Oct. 31, 2014. Most key S&P sectors ended in positive territory for the week, led by technology. Consumer Staples and health care were the only decliners on the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.5.

Short-Term Technical Condition

If we have a closer look at our short-term oriented indicators, we can see that the advances from the last two weeks pushed the S&P 500 25 points above the bearish envelope line from the Trend Trader Index. As a consequence, the pure price driven short-term oriented uptrend remains intact as long as the S&P 500 does not close below 2,722. This pure price driven uptrend is now also getting support by the Modified MACD, which has been showing a positive development recently and which might flash a bullish crossover signal soon. This indicates that the underlying trend momentum of the market is getting back on track again (at least on low levels). Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, which has been also showing a positive development recently and which signals that the overall trend-internals are also slightly getting back on track. Nevertheless, both signals are a bit too weak to take them too seriously at the moment, since any stronger down-day could easily produce a sell signal again. Moreover, we should not forget that both envelope lines from the Trend Trader Index are still decreasing and, therefore, the latest gains from the S&P 500 can be still categorized as bounce – at least from a pure signal point of view.

Also short-term oriented market breadth showed signs of improvements last week. The most encouraging tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both recovered significantly last week. This indicates that the tape momentum is slightly getting back on track. This can also be observed if we take a look at the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both indicators are still trading in bearish territory, they have been showing a very healthy development recently – especially when we recall their yearly low three weeks ago. Additionally, we saw a recovery in the total number of all NYSE-listed stocks which reached a fresh yearly high, in combination with less stocks dropping to a new low! As a matter of fact, the High-/Low-Index also started to recover. So all in all, the recent recovery was widely confirmed by positive developments within our short-term market breadth indicators. Thus, we received further confirmation that we have seen the worst already! Nevertheless – on a very short-time frame – the market remains quite vulnerable for nasty but limited pullbacks as most of our short-term oriented tape indicators are still a bit too weak if we consider the current level from the S&P 500.

On the contrarian side, we can see that the fear among investors still remains outright high at the moment (Global Futures Put-/Volume Ratio, the Equity Options Call-/Put Ratio Oscillator Weekly and the All CBOE Options Call-/Put Ratio Oscillator Weekly). This is definitely another piece of evidence that we have seen the worst already – at least on an intermediate basis.

Mid-Term Technical Condition

On a mid-term time horizon, the technical condition of the market remains unchanged compared to last week. This means in more detail that it still looks very vulnerable currently. Mainly, since the gauge from the Global Futures Trend Index is still far away from passing its 60 percent bullish threshold! As always stated in our market comment – from a formal point of view – the current correction cycle will be not be over as long as its gauge keeps trading below that important threshold! Therefore, it was good to see that its gauge has shown again some positive momentum recently! Nevertheless, its gauge has not confirmed the latest momentum from the S&P 500! As a matter of fact, the risk of another stronger down-leg remains quite high (although we strongly believe that we have seen the worst already – at least on an intermediate basis). This view is also supported by the fact that the mid-term oriented price trend of the market remains positive.  This can be observed if we focus on the WSC Sector Momentum Indicator, which is still trading at quite solid levels and has not shown any signs of weakness so far. This signals that most sectors within the S&P 500 are still outperforming riskless money market on a relative basis. This fact is also supported by our Sector Heat Map as the momentum score of all sectors (except utilities like in the previous weeks) keeps trading above the one from riskless money market (currently at 15.2 percent).

Another important fact is that, apart from the Modified McClellan Oscillator Weekly, most of our mid-term oriented tap indicators continued to recover last week. First of all, our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) increased last week. Additionally, also the readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly continued to improve. This is another indication that we have seen the worst already. Another weak but supportive signal is coming from the stocks which are trading above their mid-term oriented simple moving average (100/150). Despite the fact that they were holding up quite well in the last week, they have not succeeded to clearly pass their bullish threshold yet. So all in all, the underlying tape structure is definitely too strong to see another retest of the previous low. On the other hand, we can also see that most signals are a way too weak-kneed to justify levels far above the latest all-time high. This development is just another piece of evidence for our cyclical roadmap which suggests that the current recovery is just part of a complex multi-week top building process. Consequently, we would not be surprised if these bearish divergences will start to mount up or will be at least persistent over the next couple of weeks. Therefore, we are monitoring the quality of the recovery quite closely, as it will give us further guidance if these bearish divergences will be sorted out soon or if they will mount up and lead to a major correction in late Q2 (our preferred scenario).

Long-Term Technical Condition

Our long-term bullish outlook remains unchanged as the Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. Also the WSC Global Momentum Indicator is trading at the highest levels for months and indicates that 88 percent of all global markets remain within a long-term oriented uptrend. Additionally, we can see that the relative strength of all risky markets keeps trading far above the one from U.S. Treasuries. There were also some small improvements in long-term market breadth. Both, the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly eked out some small gains, whereas the percentage of stocks which are trading above their 200 day moving average managed to stay above 50 percent.

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.

Bottom Line

The short-term situation remains almost unchanged compared to last week. With improving indicators all across the board, we received further confirmation for our (intermediate) bottom call. On a very short-time frame, the market is quite overbought and with increasing divergences (especially on a short-term time frame), a limited pullback towards 2,700/2,650 cannot be ruled out at the moment. Consequently, aggressive traders should use any pullback to add exposure. Although we even received further confirmation for our view that the current recovery is just part of a complex top-building process, conservative investors should remain invested. This is mainly due to the fact that we think that the current rebound is an attractive bet as it could push the S&P 500 towards 2,850/2,870 into March, before further major troubles might be due.

Stay tuned!!!