January 20th 2019

Market Review

After a short-lived consolidation at the beginning of the week, U.S. stocks ended the week with solid gains. The Dow Jones Industrial Average gained 3.0 percent over the week to close at 24,706.35. The S&P 500 jumped 2.9 percent for the week to finish at 2,670.71. The Nasdaq advanced 2.7 percent over the past five days to end at 7,157.23. Most key S&P sectors ended in positive territory for the week, led by financials. Utilities were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 18.

Short-Term Technical Condition

Right in line with our recent call, the short-term oriented trend of the market continued to strengthen last week, as the S&P 500 closed 66 points above the bearish envelope line from the Trend Trader Index. As a consequence, the pure price driven short-term oriented trend turned bullish and remains intact as long as the S&P 500 does not close below 2,504. Another encouraging short-term oriented trend signal is the fact that both envelope lines from the Trend Trader Index started to bottom out. This is telling us that – from a pure structural point of view – the underlying short-term oriented trend-structure of the market has now finally a bullish tilt. Consequently, the latest recovery can be now classified as a stronger short-term oriented uptrend rather than a short-lived bounce. This pure price driven view is also widely confirmed by the Modified MACD as both trend-lines continued to grow on a fast pace. This indicates that the underlying trend momentum of the market remains outright strong at the moment. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator, which rocketed into bullish territory and, thus, is strongly confirming the latest gains from the S&P 500. Given the fact that we saw a strong surge in both indicators, we strongly believe that the current rally is highly likely to continue and is, therefore, not at risk of running out of steam at the moment. Consequently, we received further confirmation for our latest call that we see a stronger rally into Q1.

This picture is also widely confirmed by short-term market breadth as we also saw major 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. Both indicators continued to rise significantly and are, therefore, confirming the latest gains we saw. In addition, they are also telling us that the underlying tape momentum of the market is outright confirmative at the moment. Consequently, any upcoming weaknesses should just turn out to be a short-lived consolidation period instead of being the start of a major trend-reversal. 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) as both gauges recovered significantly last week and also finally passed their bullish thresholds. Another encouraging signal is again coming from the High-/Low-Index Daily, which almost flashed a bullish crossover signal. The main reason for this bullish crossover signal is the fact that we have recently seen a quite strong reduction in the number of new lows, in combination with a minor increase of new highs. This indicates that the market internals are strengthening as the latest recovery was driven by a strong demand rather than by short-covering. This is another piece of evidence that the latest rally will continue for a while. And, as long as we do not see a stronger spike in new lows (or other typical short-term oriented tape deterioration signals), the current rally will not be at risk of fading out – at least for now.

On the contrarian side, we can see that the market is quite overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) at the moment. Therefore, it could be possible that the pace is likely to slow down a bit within the next couple of trading sessions. However, the most important contrarian signal is coming from the Smart Money Flow Index as it has clearly confirmed the latest gains we saw. Moreover, we can see that the WSC Capitulation Index dropped significantly, indicating an outright risk-on market environment at the moment. Not surprisingly, we can see that the amount of bears on Wall Street dropped significantly last week. This is a fact, which we expected to happen already last week. In our opinion, the total amount of bulls still remains a bit subdued and, therefore, there is still enough money around to push the market higher. Moreover, we can see that the option market still remains quite neutral, although we saw a stronger recovery over the past couple of weeks.

Mid-Term Technical Condition

On a mid-term time horizon, the technical condition of the market continued to improve compared to the previous week. This is mainly due to the fact that the gauge from the Global Futures Trend Index recorded a double-digit percentage growth and jumped back to the upper range of its bearish consolidation area. It nearly passed its 60 percent bullish threshold! As already mentioned a couple of times – 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! Consequently, this indicator is confirming our view that the latest bounce will turn out to be a stronger rally into Q1 instead of just a short-lived bounce. Moreover, we can see that our WSC Sector Momentum Indicator continued to stabilize on low levels, which is another quite positive technical signal for the time being. Nevertheless, as long as we do not see a stronger recovery within this indicator over the next couple of weeks, the current rally is still likely to be a huge bear-market rally instead of being the start of a new bull-market. This can be also seen if we focus on our Sector Heat Map, as the momentum score of riskless money market still remains quite high at the moment. As a matter of fact, we still stick to our preferred scenario that the current rally will just turn out to be a huge bear-market rally into Q1 instead of being the start of a new bull-market.

Examining mid-term oriented market breadth reveals that it recorded solid gains last week. This becomes obvious if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line), as all of them strongly increased last week and are confirming the latest move from the S&P 500. Also the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) increased for the week, although both gauges are still trading below their bullish threshold. Additional strong and supportive signals are coming from the Advance-/Decline Index Weekly, the Upside-/Downside Volume Index Weekly and from our Modified McClellan Oscillator Weekly. So all in all, these signals have clearly confirmed the current level from the S&P 500 and, therefore, the risk of another significant down-leg remains outright low at the moment. Nevertheless, we should not forget that most of our mid-term oriented indicators still remain bearish from a pure signal point of view. So if we do not see a stronger recovery within the next 2- to 4 weeks, we have further confirmation for our bear-market rally scenario (as such bearish divergences are the first ingredients for a stronger trend-reversal).

Long-Term Technical Condition

This view goes along with the fact that the long-term outlook of the market still has absolutely not improved compared to the previous weeks. Our WSC Global Momentum Indicator shows the same (low) reading as in the previous weeks and 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. Also our Global Futures Long Term Trend Index continued to decrease and dropped to the lowest level for years. In addition, our WSC Global Relative Strength Index did not show any improvements last week and the relative strength of all risky markets is trading below the one from U.S. Treasuries. This is a clear indication that the market still remains in a technical bear-market at the moment. However, focusing on our long-term oriented tape indicators (Modified McClellan Volume Oscillator Weekly, the percentage of stocks which are trading above their 200 day moving average and High-/Low Index Weekly) shows a quite positive picture, as all of them improved last 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 Sector Rotation Strategy, the WSC Inflation Proof Retirement PortfolioWSC All Weather Model Portfolio and theWSC Global Tactical ETF Portfolio.

Bottom Line

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 three 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 there is still enough room left to grow. Nevertheless – from the current point of view – the current rally can be still classified as huge bear-market rally instead of being the start of a new bull-market. This is mainly due to the fact that the latest correction cycle has definitely left its mark on our mid- to long-term oriented indicator framework. So as long as we do not see a significant recovery within their readings (especially on a mid-term time horizon), another stronger correction leg in late Q1 can be expected (preferred scenario for now). Anyhow, for now the overall short-term condition of the market still looks quite supportive. Consequently, we advise our aggressive traders as well as our conservative members to remain long/invested.

Stay tuned!!!