February 12th 2017

Market Review

U.S. stocks finished the week with gains with all three major averages hitting new records. The Dow Jones Industrial Average gained 1.0 percent for the week to close at 20,269.37. The S&P 500 booked a weekly gain of 0.8 percent and closed at 2,316.10. The Nasdaq advanced 1.2 percent to end at 5,734.13. Most 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 10.82.

Strategy Review

In our last week’s comment we highlighted the fact that the market looked vulnerable for a consolidation period as the readings from of our short-term oriented trend indicators had been quite stretched recently. Moreover we said that such a consolidation period would be extremely limited in price and time as we had not seen any evidences for a stronger correction within our mid- to long-term oriented indicator framework. As a matter of fact, neither the volatile sideways trading from Monday till Wednesday, nor the recent rally towards new record highs at the end of the week have been a big surprise at all.

Short-Term Technical Condition

Anyhow, the short-term oriented up-trend of the market regained its bullish momentum last week. If we focus on our short-term oriented trend indicators we can see that the S&P 500 managed to close 39 points above the bearish threshold from the Trend Trader Index. Consequently, from a pure price point of view, the market remains in a short-term oriented uptrend as long as the S&P 500 does not drop below 2,277. In addition, both envelope lines of the Trend Trader Index are still drifting higher, indicating that – from a pure structural point of view – the underlying trend structure of the market continued to strengthen! Additionally, we saw a small bullish crossover signal from the Modified MACD last week, whereas the gauge from the Advance-/Decline 20 Day Momentum Indicator managed to close in quite supportive territory! So despite the fact that some trend signals could be definitely a bit stronger (if we consider the current levels from the S&P 500), we can see that the short-term oriented uptrend of the market regained some strength last week. As a matter of fact, it looks like that the market will continue its path of crawling higher on very slow pace.

This setting is also confirmed by short-term market breadth as the current trend participation of all NYSE listed stocks within the current rally looks pretty stable at the moment. The Modified McClellan Oscillator Daily regained its footing as it managed to flash a bullish but weak crossover signal last week, whereas the Modified McClellan Volume Oscillator Daily looks like it is about to follow soon. Despite the fact that both readings should be a bit stronger if we consider the current level of the S&P 500, they indicate that the underlying breath momentum of the market remains somehow supportive. However, the most encouraging fact is that the total amount of all NYSE-listed stocks which reached a new yearly high spiked significantly (at the end of the week) and they have therefore, clearly confirmed the recent break-out from the S&P 500. Consequently, the High-/Low-Index Daily also strengthened its bullish signal for the week and is therefore, trading at quite solid levels right now. Also the percentage of stocks which are trading above their short-term oriented moving averages (20/50) managed to get back (slightly) into bullish territory, although their readings could be definitely higher, if we consider the current levels from the S&P 500. So in the end, most of our short-term oriented tape indicators got back on track and therefore, it looks pretty unlikely that the recent rally will run out of fuel soon. Albeit, we think that advance is more likely to take place on a slower pace (given the fact that most of those signals could be definitely stronger in the nature).

As per last week, the situation on the contrarian side looks quite unspectacular at the moment as we have not received any threatening signals so far. The Smart Money Flow Index is still indicating some bullish biased consolidation ahead, whereas the WSC Capitulation Index is indicating a risk-on scenario at the moment. Above all, we can see that the NYSE Member Margin Debt has clearly confirmed the latest record high from the S&P 500. Only market sentiment, measured by Market Vane is indicating too much optimism around, whereas the AII Bulls-/Bears survey is telling us that the recent consolidation period on very high levels has clearly damped optimism among the crowd (which can be seen as quite supportive – at least for the time being).

Mid-Term Technical Condition

Unchanged compared to last week, the mid-term oriented up-trend of the market remains well intact. This is mainly due to the fact that the gauge from the Global Futures Trend Index kept trading within the upper range of its bullish consolidation area and therefore, it is definitely a way too early to issue a strategic sell signal at the moment. Moreover, it is worth to mention that as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming weaknesses/consolidation should be limited in price and time (if additionally mid-term market breadth remains supportive). But on the other hand, as long as the gauge does not manage to close above its extremely bullish 90 percent threshold, the rally can be still categorized as a bullish consolidation period, at least from a pure technical point of view. As a matter of fact, it is still possible to see a slow pace rally environment ahead (especially if we also consider the short-term oriented technical condition of the market). Nevertheless, the overall price driven mid-term oriented trend looks pretty solid at the moment. This is due to the fact that the WSC Sector Momentum Indicator increased significantly last week and is trading at extremely bullish levels. This indicates that all sectors within the S&P 500 remain in a mid-term oriented uptrend. This view is also supported by our Sector Heat Map, as the momentum score of all sectors remains above the one from riskless money market.

The mid-term oriented trend of the market is also strongly confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly continued to gain more bullish ground last week, indicating that the underlying mid-term oriented market breadth momentum remains pretty supportive. Additionally, all of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to strengthen in the last couple of trading sessions and are therefore, clearly confirming the current level of the S&P 500! Basically, the same is true if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) as they also increased in the last week. This fact can be also seen as a confirming tape signal as the current rally/picture looks quite broad based. Such a broader tape confirmation can also be seen if we focus on mid-term oriented advancing issues as well as mid-term oriented up-volume as both indicators are trading well above their bearish counterparts. As a matter of fact, it is a bit too early to change our strategic bullish outlook at the moment.

Long-Term Technical Condition

The long-term oriented technical picture of the market also continued to brighten up on quite bullish levels. The long-term oriented technical picture of the market remains almost unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. In addition, we can see that the current bull market still remains quite broad based and global in scope as the WSC Global Momentum Indicator increased to 75 percent (plus 7 percentage points compared to last week). This can be also monitored if we focus on the Global Relative Strength Index, as the relative strength of all risky markets keeps trading above the one from U.S. Treasuries. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stocks which are trading above their 200 day simple moving average continued to strengthen last week and are therefore, definitely confirming the current levels from the S&P 500. Also the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts. Above all, the Modified McClellan Volume Oscillator Weekly did not show any signs of weaknesses last week, indicating that the tape structure of the market remains pretty healthy at the moment.

Model Portfolios

Last week, there have been no changes in the allocation advice of our model portfolios (WSC All Weather Portfolio, WSC Inflation Proof Retirement Portfolio and the Global Tactical ETF Model Portfolio). As the momentum score of energy fell below average and below the one from the S&P 500, we received a sell signal for that ETF within our WSC Sector Rotation Strategy last week.

Bottom Line

Our strategic bullish outlook remains unchanged compared to last week. Given the quite supportive/bullish indicators all across the board (and especially on a mid- to long-term time horizon) it is a way too early to get concerned about the technical condition of the market. As a consequence, our strategic bullish outlook has not been changed so far as we are expecting a continuation of the recent rally (albeit on a very slow pace). Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips rather than chasing the market too aggressively on the upside!

Stay tuned!