January 13th 2019
All three major U.S. averages posted solid weekly gains. The Dow Jones Industrial Average booked a weekly gain of 2.4 percent to close the week at 23,995.95. The S&P 500 increased 2.5 percent for the week to end at 2,596.26. The Nasdaq produced a weekly return of 3.5 percent to finish at 6,971.48. All key S&P sectors finished higher, led by industrials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 18.2.
Short-Term Technical Condition
In line with our recent call, the short-term oriented trend-status turned bullish as the S&P 500 managed to close slightly above the bullish threshold from the Trend Trader Index. So from a pure price point of view, the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not close below 2.492. Moreover, the gauge from the Advance-/Decline 20 Day Momentum Indicator jumped back into bullish territory and is, therefore, confirming the recent gains from the S&P 500. Another quite encouraging and supporting signal is coming from the Modified MACD, as we saw a strong surge in both trend lines of this reliable indicator. The only weak signal is coming from the envelope lines of the Trend Trader Index, as they are still decreasing and have not started to bottom-out yet. Despite the fact that this can be seen as a quite bearish signal for now, we should not forget that our remaining trend indicators remain quite bullish at the moment. As a matter of fact, any upcoming weakness (or even a potential retest of the previous low) would just produce several bullish divergences in their readings, as extremely heavy losses would be necessary to bring them back to their former lows! As a matter of fact, we strongly believe that the latest gains got the potential to transform back into a more sustainable recovery, instead of being a short-lived bounce.
This picture is confirmed by short-term market breadth as it was good to see that our entire tape indicators showed stronger signs of improvements. This is a very positive technical signal, as it indicates that the broad based market is getting back on track and was, therefore, strongly involved in the rally we saw last week. This becomes pretty obvious if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators clearly strengthened their bullish signals, indicating that the momentum of advancing stocks as well as advancing volume is gearing up. Also the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) showed major signs of recovery – but still they have not passed the bullish threshold yet. Another strong signal is coming from the High-/Low-Index Daily which nearly flashed a bullish crossover signal. This was mainly due to the fact that we still saw a strong reduction in new lows, in combination with a small increase in new highs during the latest bounce. So given the quite positive short-term oriented tape readings, we strongly believe that the latest low from the S&P 500 is not at risk to be taken out again. Consequently, the latest move from the S&P 500 looks more like the start of a sustainable uptrend, rather than being a short-term oriented bounce. Nevertheless, we can also see that the total amount of new highs as well as the absolute readings from the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) are a bit too weak-kneed to justify another significant up-leg/rally at the moment. In such a situation, it is not unusual to see a period of a longer-lasting/volatile consolidation period or even some increased down-testing ahead (2-4 percent), before another rally attempt looks quite likely. On the other hand, even if we see some stronger selling pressure ahead, the readings within our short-term oriented indicator framework are just too strong to justify another new low from the S&P 500!
This picture is also widely confirmed by our contrarian indicators. On a very short-time frame, the market is heavily overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and, therefore, the latest rally is highly likely to take a pause in the next couple of trading sessions. Apart from that fact, most of our contrarian indicators remain supportive. This is mainly due to the fact that the latest bounce was clearly confirmed by our Smart Money Flow Index and the WSC Capitulation Index. Another confirmative signal is coming from the option market, as the total amount of puts strongly declined over the past weeks. Consequently, a lot of put options have been wiped out recently – a fact which we expected to happen! Another positive signal is coming from market sentiment. Despite the fact that the total amount of bears dropped significantly for the week, there is still enough money on the sideline which could fuel act as additional catalyst on a mid-term time horizon.
Mid-Term Technical Condition
The mid-term oriented trend of the market improved compared to the previous week but still looks quite vulnerable. First of all our Global Futures Trend Index increased significantly last week and jumped to the middle part of the bearish consolidation area. This is a very good signal, but still the gauge has not passed its important 60 percent bullish threshold yet! Thus, from a formal point of view, the current correction cycle will be not be over as long as this gauge keeps trading below that important threshold! Consequently, the recovery we saw in the previous weeks can be still classified as bounce rather than a new sustainable uptrend. Nevertheless, as long as the momentum of the gauge remains positive, the current bounce is not at risk of fading out. Moreover, we strongly believe that any renewed technical driven selling pressure would just produce a bullish divergences in its readings, as extremely heavy losses would be necessary to bring its gauge back to its former low! As a matter of fact, it could be possible that any upcoming weaknesses would just act as basis for another rally attempt into late Q1. However, as long as we do not see a stronger recovery within our WSC Sector Momentum Indicator, such a rally will be nothing more than a huge bear market rally. Therefore, it was good to see some kind of stabilization within that indicator. This can be also seen if we focus on our Sector Heat Map, as the momentum score of riskless money market decreased to 88.2 percent. Nevertheless, for now these readings are still too weak and, thus, this is just another indication for our preferred scenario that the current recovery will just turn out to be a huge bear-market rally into Q1 instead of being the start of a new bull-market!
If we analyze our mid-term oriented market breadth indicators, they show some encouraging signs of recovery at the moment. Both, the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, strengthened their bullish signal significantly and, therefore, we think the down-side potential of the S&P 500 looks quite capped at the moment. Consequently, we do not believe that any upcoming weaknesses will have the power to push the S&P 500 below its former low at 2,346 (at least for the next couple of weeks). This view is also confirmed by our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as they showed strong gains for the week. Moreover, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) increased – although they still have not gotten back into bullish territory yet. But still this is a quite supportive signal, as it indicates that the latest bounce was widely supported by a broader basis. And finally, also our Modified McClellan Oscillator Weekly showed a decreasing bearish gap, although the indicator still remains quite bearish at the moment. So all in all, the mid-term oriented tape condition of the market remains supportive. As a result, we think the risk of a stronger immediate correction towards the latest low has reduced significantly. However, right now those signals are a way too weak to change our mid-term oriented cyclical bear market scenario. Nevertheless, we keep a close eye on the development of these indicators within the next couple of weeks.
Long-Term Technical Condition
The long-term oriented trend of the market weakened again last week. Our WSC Global Momentum Indicator remains unchanged compared to the previous week and is trading at a very low level. This indicates that only 20 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend. This picture is also confirmed by our Global Futures Long Term Trend Index, which continued its bearish ride last week. Also our WSC Global Relative Strength Index showed some weaknesses last week and in addition, the relative strength of all risky markets is trading below the one from U.S. Treasuries. These facts are another indication for our long-term oriented risk-off market scenario. Our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly, the percentage of stocks which are trading above their 200 day moving average) in contrast, showed a very positive development last week. Still the long-term condition of the market looks outright grim which underlines our bear-market case.
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 Model Portfolio and theWSC Global Tactical ETF Portfolio.
After we have successfully side-stepped the latest correction, it was one of our key calls that 2,346 from the S&P 500 represents an outright strong but intermediate low within the current bear-market cycle. After we had received the final confirmation two weeks ago, we advised our members to get back into the market again (as the expected bear-market rally looked quite attractive to play). Since then we have seen a stronger rally which was accompanied with brightening readings within our short-term oriented indicator framework. Consequently, our short-term bullish outlook remains unchanged (as we think we have seen the worst already – at least on an intermediate time-frame). Nevertheless, if we consider the pace of the recent recovery, we think there is a good chance to see at least some more wash-out days/increased down-testing or just a longer-lasting period of consolidation ahead. Such a behaviour is quite common, as the market has to digest the latest bounce we saw. In the best case, we see a limited pullback (2-4 percent), which would then act as basis for another rally attempt into Q1. From the current point of view, such a move would be nothing more than a huge bear-market rally (instead of being the start of a new bull-market) as the latest correction cycle has definitely left its mark on our mid- to long-term oriented indicator framework. So in other words, if the current counter trend rally is not accompanied by strong improvements within our mid-term oriented market breadth indicators (within the next couple of weeks), another correction leg in late Q1 can be expected (preferred scenario for now). Thus, we would advise our aggressive traders to take profits and/or to reduce their leverage, as we expect to see some rocky sessions ahead. Conservative members should remain invested as we think any upcoming weaknesses should be limited in price and time. Members who stayed on the side-line so far, should use any kind of weaknesses to get back into the market