April 16th 2017

Market Review

U.S. stocks finished the week with losses. For the week, the Dow Jones Industrial Average slid 1.0 percent to 20,453.25. The S&P 500 finished at 2,328.95 and posted a weekly drop of 1.1 percent. The Nasdaq declined 1.2 percent from the week-ago close to 5,805.15. Most key S&P sectors finished in the red for the week, led by financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.

Strategy Review

In our last week’s comment we highlighted the fact that the market was caught in a tug-of-war and therefore, the up- as well as the down-side potential looked extremely capped. As a matter of fact, we said that further volatile consolidation could be expected, whereas such a distribution would definitely turn out to be a fork in the road. To be more precise, we expected either to see a healthy rotation back into small caps within the following couple of days/weeks (which would lead to significant improvements within our short- to mid-term tape indicators) or that those negative signals/divergences are piling up, which would lead to a significant sell-off. Consequently, the quality of the underlying market tape during the following couple of days/weeks would give us further guidance which scenario would happen.

Short-Term Technical Condition

From a pure price point of view, the short-term trend of the market clearly turned bearish last week as the S&P 500 closed 19 points below the bearish threshold from the Trend Trader Index. In addition, we can see that both envelope lines of that reliable indicator have also started to decrease. Therefore, we have received even more confirmation that the current weakness is definitely part of a bigger top building process rather than being a short-lived consolidation period. Moreover, both, our reliable Modified MACD and our Advance-/Decline 20 Day Momentum Indicator continued to gain more bearish ground last week and have therefore, additionally formed an outright bearish divergence to the current readings from the S&P 500. It is not quite unusual, that our short-term trend indicators turn bearish during times, when the market is crawling lower on a very slow pace. On the other hand side, strong bearish readings are also very often the vanguard of a major correction. To distinguish between those two scenarios, short- to mid-term market breadth is key area of focus.

Interestingly, short-term market breadth still shows the same picture like last week and stays – somehow – constructive. The Modified McClellan Oscillator Daily continued to strengthen its bullish signals, telling that the momentum of advancing stocks is still improving (albeit on a low level). Also the total number of stocks which are hitting a fresh yearly high remains at quite moderate levels, whereas the number of stocks which have been pushed to a new yearly low have not shown any negative spikes so far. Consequently, the High-/Low-Index Daily was again holding up quite well last week. Above all, the indicator runs somehow sideways, which is somehow another confirmation for the current consolidation period. In contrast, there are still some serious bearish divergences/readings visible. The Modified McClellan Volume Oscillator Daily continued to drop into deeper bearish territory and is – like last week – contradicting the bullish readings from the Modified McClellan Oscillator Daily. That means that there is hardly any volume piling up behind those advancing stocks on NYSE. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges closed below their 50 percent threshold, indicating that the underlying trend force of the market has clearly turned bearish, which is quite a red flag on the horizon.

On the contrarian side, we receive basically a similar picture. The Smart Money Flow Index continued to form an outright bearish divergence to the Dow Jones Industrial Average, indicating that the big guys have reduced their equity exposure significantly over the past couple of weeks. This is another major alert for the next couple of weeks. In addition to that we can see that the WSC Capitulation Index is still indicating a risk-off market environment. On the other hand, we can see that the recent consolidation period had definitely its designated impact on short-term optimism. This is mainly due to the fact that the readings from the Global Futures Put Volume Ratio and the All CBOE Options Call-/Put Ratio grew into supportive/bullish territory, indicating that the crowd is buying protection. As a matter, a short-term oriented bounce into the option expiring date next week looks pretty.

Mid-Term Technical Condition

Moreover, the mid-term uptrend of the market remains intact so far, as the Global Futures Trend Index is still trading on the upper end of its bullish consolidation range. As a consequence further sideways trading with increased volatility is quite possible. Anyhow, we would get quite cautious if the gauge drops below 60 percent (in combination with weakening market breadth, especially within the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly), as it would be a clear indication for a strong pullback! Therefore, those indicators are clearly key area of focus within the next 1-3 weeks! However, from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator remains quite bullish. Nevertheless, we can see that it lost some steam in the past weeks. This can be also seen if we focus on our Sector Heat Map as the momentum score of riskless money market has picked up recently. This is another warning sign that the current consolidation is getting more corrective in its nature, although we are not 100 percent there yet (as there are still some contradicting signals around).

Like in the week before, mid-term oriented market breadth shows an ambiguous picture and contradicting signals at the moment. While nearly all of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) remain supportive at the moment (the Advance-/Decline Volume Line is the only exception), the rest of our tape indicators weakened significantly or even turned bearish last week. This can be seen if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both indicators continued to gain more bearish ground last week. Another important tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both indicators gained more bearish ground last week, indicating that the demand has started to decrease. And also the Modified McClellan Oscillator Weekly has finished its fourth week nearly unchanged, indicating that the underlying breadth momentum is still somehow lagging behind on a mid-term time horizon. In conclusion, mid-term oriented market breadth leans bullish, but not without some major red flags on the horizon.

Long-Term Technical Condition

Right now, the long-term uptrend of the market remains intact and therefore, we do not think that any upcoming correction should lead to a new bear market at the moment. The Global Futures Long Term Trend Index is trading at the highest levels for months and thus, indicating a technical bull market. Also the WSC Global Momentum Indicator increased last week and indicates that 82 percent of all global markets remain within a long-term oriented uptrend. Unchanged compared to last week, we can see that the relative strengths of all risky markets keeps trading far above the one from U.S. Treasuries. Also, long-term market breadth is giving no reason to worry currently and therefore, we think that the current long-term uptrend of the market is not in danger at all. Especially our long-term oriented High-/Low Index Weekly is still trading at solid levels (although it have come down a bit recently), indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the number of stocks which are trading above their longer-term oriented moving averages (200) – they are still trading in a solid bullish area, although they have come down a bit recently! Only the Modified McClellan Volume Oscillator Weekly continued to show some signs of fatigue.

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 Inflation Proof Retirement and the WSC All Weather Portfolio. As the momentum score of financials dropped again 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. As the SPDR DJ Industrial Average dropped out among the top 10 markets within our Global ETF Momentum Heat Map, we received a sell signal for that specific ETF. On the other hand, as the MSCI India is now ranked within the top 5 markets within our Global ETF Momentum Heat Map, it is now being added to the portfolio. Moreover, we are proud to announce that the WSC All Weather Portfolio reached a new all-time high again last week! Right now the year to date performance is 5.3 percent, whereas its volatility is just below 4 percent!

Bottom Line

The technical situation slightly deteriorated all across the board last week. Especially, the weaker readings within our mid-term oriented indicators are indicating that the current sideways-trading is again transforming back into a more corrective set-up. Nevertheless, it is still a bit too early to pull the trigger as there are still some signals around that do not fit in the puzzle right now. In the current situation, the tilt towards corrective and supportive is extremely narrow and that makes it so tough at the moment. If this situation continues, it could be also possible that the market is just slowly drifting lower as there is just too much breadth for a fast and stronger decline around and just too less for holding the market at those levels. And in the end, the S&P 500 could also trade 7-14 percent below its all-time high before anybody is realizing such a devaluation. So all in all, we remain cautiously bullish – at least for now but we also think it is time to place a stop loss limit around 2,295, (just in case things change quite fast within the next couple of days). This stop-loss should remain in place as long as we do not see any improvements within our indictor framework.

Stay tuned!