August 12th 2018

Market Review

U.S. averages finished the week with a mixed performance. For the week, the Dow Jones Industrial Average fell 0.6 percent to close at 25,313.07. The S&P 500 posted a weekly loss of 0.3 percent closed at 2,833.28. The Nasdaq managed to end the week with a 0.4 percent gain at 7,839.11. Most key S&P sectors ended in negative territory for the week, led by consumer staples. The CBOE Volatility Index (VIX), the gauge of S&P 500 options known as the VIX, ended near 13.2.

Short-Term Technical Condition

In line with our recent call, the market consolidated last week. Despite the fact that the market finished lower for the week, we can see that the short-term oriented trend of the market has not been broken yet. This is mainly due to the fact that the signals from our entire short-term oriented trend indicators remain bullish so far. The S&P 500 is still trading 17 points above the lower envelope line from the Trend Trader Index, indicating that – from a pure trend point of view – the bullish short-term status of the market remains unchanged. Moreover, we can see that both envelope lines of this reliable indicator are still drifting higher. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend, at least from a pure price point of view. The situation is different if we analyze the overall trend momentum of the market. Especially, the weak readings from the Modified MACD are still indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator, as its gauge dropped significantly to the lowest (bullish) level for months last week. As this indicator tends to be a leading one, we received further confirmation that the recent consolidation period is highly likely to continue into deeper August.

This picture is widely confirmed by short-term market breadth as our entire tape indicators continued to deteriorate last week. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed further signs of exhaustion (the Modified McClellan Volume Oscillator Daily even flashed a small bearish crossover signal). This is indicating that the underlying momentum and volume of advancing stocks on NYSE is outright weak-kneed at the moment. Another weak tape signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both indicators are showing us that the current upside participation within the whole market is quite narrow-based in its nature. Moreover, we can see that both indicators are still far away from confirming the current levels from the S&P 500 – although both indicators showed some small gains last week. On the other hand, a still quite supportive, albeit not confirmative signal is coming from the High-/Low-Index Daily as the averaged numbers of new highs is still trading far above their bearish counterparts (although we saw a stronger spike of new lows on Friday). So all in all, given the somehow weak to supportive short-term oriented market breadth structure, we do not believe that the market has enough power to substantially higher from its current level. Consequently, the market will continue to be in a consolidation mode, whereas some nasty pullback days cannot be ruled out at the moment. However, as long as we do not see a complete collapse within our short-term indicator framework (a significant spike in new lows in combination with a bearish crossover signal in the High-/Low-Index Daily plus increasing bearish signals within our mid-term oriented indicator framework) we do not think that this consolidation period will turn out to be outright corrective in its nature (at least from a current point of view).

The situation on the contrarian side remains unspectacular at the moment. This is mainly due to the fact that most of our option based indicators are trading in neutral territory at the moment. The only interesting fact is that the gauge from the Smart Money Flow Index continued to stabilize on quite low levels recently. Despite the fact that this can be interpreted as a somehow supportive signal, we should not forget its gauge is still far away from confirming the current levels from the Dow Jones Industrial Average. 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

Right now, this is not a major concern at all as the mid-term oriented uptrend of the market remains well in place at the moment. This is mainly due to the fact that the Global Futures Trend Index closed in the lower part of its bullish consolidation area. Nevertheless, we cannot completely ignore the fact that its gauge has been sideways trading/decreasing for weeks and is, therefore, just trading 5 percentage points above its bearish consolidation area. Consequently, if this trend continues the current consolidation period could easily get a more bearish biased tilt. However, we would get quite cautious (change our strategic bullish outlook) if such a drop below 60 percent is accompanied with outright weak or bearish readings in mid-term oriented market breadth. Moreover – in such a case – we would also like to see some negative developments in the WSC Sector Momentum Indicator as well. But right now, we can see that the WSC Sector Momentum Indicator keeps trading at solid bullish levels so far. This indicates that most sectors within the S&P 500 are still in a mid-term oriented up-trend. 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). So on a mid-term time perspective, the current consolidation period still looks quite constructive in its nature (although some nasty down-days on a very short-time frame cannot be ruled out at the moment).

The mid-term oriented market breadth condition still looks quite healthy, although we received further confirmation for a continuation of the recent consolidation period. This becomes pretty obvious as both, the Modified McClellan Oscillator Weekly and the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) remain at unchanged bullish levels compared to the previous weeks. This indicates that the underlying trend momentum of the market is quite flattish at the moment (which is another confirmation that the upside potential of the market should be quite limited on a very short-time frame). On the other hand, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume are still trading above their bearish counterparts (although they have lost some bullish ground recently). Basically, the same set up is true if we focus on our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) as they all have not shown any significant bearish move recently (as they just traded more or less sideways). So all in all, the current technical condition of the market looks quite supportive/healthy at the moment and, therefore, it is still a bit too early to call for a major market top right now.

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 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. Also our Global Futures Long Term Trend Index gained more bullish ground, but still signals that the current long-term oriented trend of U.S. equities remains intact but is also showing signs of exhaustion. And like in the previous weeks, a positive signal is again coming from our shorter-term oriented WSC Global Relative Strength Index. The relative strength of all risky markets was holding up quite well, but all markets (except one) are already trading below the one from U.S. Treasuries, which is another sign for a slow growth period. Our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly, percentage of stocks which are trading above their 200 day moving average) remained unchanged compared to the previous 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 Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Global Tactical ETF Model. As the momentum score of energy fell below average and below the one from the S&P 500 within our Sector Heat Map, we see a sell signal for that ETF within our WSC Sector Rotation Strategy.

Bottom Line

Our view remains pretty unchanged compared to last week. With quite non-confirmative signals on a short-term time perspective, the upside potential of the market looks quite capped on a short-term time perspective. As a matter of fact, we think the market still looks quite vulnerable for further consolidation into deeper August. However, given the fact that the mid-term oriented condition of the market still looks quite supportive in its nature, we think that the current consolidation period will turn out to be healthy in its nature (although nasty pull-back days cannot be ruled out at the moment). As a matter of fact, aggressive traders should not take too much leverage at the moment, whereas conservative members should hold their equity position as there is still some potential left, before major troubles might be due.

Stay tuned!