July 29th 2018

Market Review

U.S. stocks finished the week mostly with a positive performance. For the week, the Dow Jones Industrial Average added 1.6 percent to 25,451.06. The S&P 500 gained 0.6 percent to end at 2,818.82. Both the Dow and the S&P 500 posted their fourth straight weekly gains, the longest such streak since January. The Nasdaq in contrast lost 1.1 percent during the week to finish at 7,737.42. Most key S&P sectors finished higher, led by energy and industrials, while technology ended in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 13.0.

Short-Term Technical Condition

The market is moving right in line with our recent outlook and, therefore, it is not a big surprise at all that the short-term oriented uptrend of the market remains pretty unchanged compared to the previous week. The S&P 500 is still trading 42 points above the bearish threshold from the Trend Trader Index. This is an indication that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.776. Furthermore, both envelope lines of this reliable indicator are still drifting higher on a very fast pace, signaling that the resistance/support levels for the S&P 500 are increasing as well. This bullish short-term uptrend is also widely supported by the readings of the Modified MACD, which showed a solid bullish surge last week. On top of that the gauge from the Advance-/Decline 20 Day Momentum Indicator is trading at quite bullish levels and, thus, confirming the current status of the broad index.

If we focus on our short-term oriented breadth indicators, we can see that their readings show an intermingled picture. While the Modified McClellan Volume Oscillator Daily slightly increased its bullish gap (on a very low level), the Modified McClellan Oscillator Daily flashed a bearish crossover signal. This is an indication that the underlying tape momentum of the broad market started to slow down a bit. This fact is also supported by the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges dropped significantly last week and are, therefore, not confirming the current levels from the S&P 500! In contrast, the High-/Low-Index Daily is still trading at quite supportive but not really confirmative levels. This is mostly due to the fact that the total number of stocks which is hitting a fresh yearly high (NYSE New HighsNew Lows Indicator) has not shown any serious negative momentum so far. Nevertheless, we should not forget that the total number of new highs should be much higher, if we consider the current level from the S&P 500. So all in all, it looks like the current bullish biased slow growth period is starting to lose some steam.

On the contrarian side, we can see that the gauge from the All CBOE Options Call-/Put Ratio Oscillator moved back into neutral territory. This indicates that the option market is getting quite greedy again. This can be also seen if we focus on the gauge from the Daily Put/Call Ratio All CBOE Options, which almost dropped into bearish territory last week. This indicates that the market might be not too far away from a sentiment driven consolidation period. If we focus on our more mid- to long-term oriented contrarian indicators, we can see that the gauge from the Smart Money Flow Index is far away from confirming the current levels from the Dow Jones Industrial Average. This is another major red flag on the horizon. As a matter of fact, we would not be surprised, if the market is running into major headwinds later this year.

Mid-Term Technical Condition

Analyzing the mid-term oriented technical condition of the market, the thread of a stronger pullback can be definitely ignored at the moment. The main reason is that the Global Futures Trend Index is trading in the middle part of its bullish consolidation area. But the readings could be a bit stronger if we consider the current level of the S&P 500. Nevertheless, for now, it is a bit too early to issue a strategic sell signal. We would take a more cautious stance if any upcoming slow-down pushes the gauge below 60 percent (of course only in combination with weakening market breadth). As this is not the case right now, any upcoming short-term weaknesses should be healthy in their nature. In addition, the WSC Sector Momentum Indicator is trading at the highest level for weeks, indicating that most sectors within the S&P 500 remain in a mid-term oriented uptrend. This can also be seen if we have a closer look at our Sector Heat Map, as the momentum score of all sectors (except materials and consumer staples) remains above the momentum score from riskless money market (7.7 percent).

The mid-term oriented market breadth condition shows the same intermingled picture as on short-term. This becomes obvious as the Modified McClellan Oscillator Weekly narrowed its bullish gap. Also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped last week. This indicates that the underlying trend momentum of the market is a bit flattish at the moment. On the other hand, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume are still trading far above their bearish counterparts. Basically, the same set up is true if we analyze our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) as they were holding up quite well or have at least not shown any serious bearish signs yet. So all in all, the current technical condition of the market still looks supportive and, therefore, it is a bit too early to call for a major market top right now. Nevertheless, as conditions could change quickly (especially with weaker readings within short-term market breadth), we will monitor the developments of them quite closely within the next couple of days/weeks.

Long-Term Technical Condition

Unchanged compared to the previous weeks remains the long-term oriented trend of the market. The WSC Global Momentum Indicator stabilized at quite bearish levels, indicating that just 18 percent of all local equity markets around the world (which are covered by our Global Momentum ETF Heat Map) are still trading above their long-term oriented trend lines. This is a clear indication that the current global bull-market is quite fragile at the moment. Our Global Futures Long Term Trend Index, which recovered a bit last week, signals that the current long-term oriented trend of U.S. equities remains intact but is also showing major signs of exhaustion. Once again, a positive signal is coming from our shorter-term oriented WSC Global Relative Strength Index as the relative strength of all risky markets was holding up quite well last week. But currently, already 5 markets are trading below the one from U.S. Treasuries, which is another sign for a slow growth period. Looking at our long-term oriented tape indicators, the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly were holding up quite well last week, while the percentage of stocks which are trading above their 200 day moving average weakened last week.

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. As the momentum score of health care rose above average and above the one from the S&P 500 within our Sector Heat Map, we received a buy signal for that ETF within our WSC Sector Rotation Strategy. The allocation of the WSC Global Tactical ETF Portfolio remains unchanged.

Bottom Line

If we consider the quite fragile readings within our short-term oriented tape indicators, in combination with increased greed within the option market, the market appears ready for a breather. Right now, any upcoming breather should be limited in price and time, as the mid-term condition of the market still looks quite supportive, albeit not confirmative. As a matter of fact, we think it is still a bit too early to take the chips from the table. Nevertheless, we will monitor the development within our indicator framework quite closely (especially the development of new highs and of the Global Futures Trend Index). Consequently, we would advise our conservative members to hold their equity position, whereas aggressive traders should focus on taking some profits.

Stay tuned!