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November 12th 2017

Market Review

U.S. stocks finished the week on a subdued note. The Dow Jones Industrial Average lost 0.5 percent over the week to close at 23,422.21. The S&P 500 lost 0.2 percent for the week to finish at 2,582.28. The Nasdaq slid 0.2 percent for the week as well to end at 6,750.94. Both the Dow and the S&P 500 had risen for eight straight weeks, while the Nasdaq broke a six-week rally. Still, all three indexes are hovering near record levels. Among the key S&P sectors, consumer staples were the best weekly performer, while financials dragged. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, closed at 11.29.

Short-Term Technical Condition

The consolidation mode of the market is now fully in force, as major U.S. stock indexes snapped a multi-week winning streak last week. However, from a pure price point of view, the short-term trend of the market remains intact as the S&P 500 closed 16 points above the bearish threshold from the Trend Trader Index. Nevertheless, the situation looks completely different if we analyze the underlying momentum of that short-term oriented price trend. This becomes pretty obvious if we focus on the Modified MACD, which continued to gain more bearish ground last week, whereas the Advance-/Decline 20 Day Momentum Indicator dropped deeper into bearish territory last week. Moreover, both indicators are therefore, also showing a huge bearish divergence, if we consider the current levels from the S&P 500. As a matter of fact, we would not be surprised to see further rocky (bearish biased) sessions ahead. As already mentioned a couple of times, the short-term oriented trend of the market is only giving a limited picture about the current condition of the market. This is due to the fact that the price information of an index is often misleading as a few heavy weighted stocks (e.g. Apple of Facebook) within the index could produce a lot of false swings/signals in both directions.  In such a situation, short- to mid-term market breadth will give us further guidance about the current technical condition of the market. In other words, it will determine our degree of confidence within those trend signals. So if short- to mid-term market breadth remains strong, the impact of a short-term oriented trend-break should be pretty limited in price and time as any upcoming weaknesses tend to be heathy in their nature and vice versa.

If we have closer look at our short-term oriented tape indicators, we think the consolidation period is just at its beginning and therefore, further down-testing can be expected. This is due to the fact that short-term market breadth continued to deteriorate all across the board last week (although the market is hovering shy below its all-time high). Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to show major signs of exhaustion. This is telling us that the underlying momentum and volume of advancing stocks on NYSE literally collapsed. As a matter of fact, it was also not a big surprise that the percentage of stocks which are trading above their short-term oriented moving averages (20/50) dropped deeper into bearish territory. To be more precise, right now there are only 32/45 percent of all NYSE listed stocks which are trading above their 20/50 days moving average and these readings are far away confirming the current levels from the S&P 500! Only the High-/Low Index Daily is still somehow supportive, although we saw a stronger reduction in the total amount of new yearly highs. As a matter of fact, the bullish gauge from the High-/Low Index Daily has come down a bit recently. So all in all, given the outright weak short-term oriented market breadth structure of the market, we do not believe that the market has enough power to push higher. Consequently, the market will continue to be in a consolidation mode, whereas further down-testing is highly likely. 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 (losses below minus 7 percent) in its nature (at least from a current point of view).

Even on the contrarian side, we can see that the amount of bulls reached the highest level since January 2017. If we consider the fact that all of those guys are invested already, there is hardly anyone left to push prices higher at the moment. This is just another confirmation for the current consolidation scenario. Moreover, we can see that the gauge from the WSC Capitulation Index grew into its cautious territory, which is another piece of evidence that further rocky sessions can be expected. On the other side, we can see that our more mid-term oriented indicators (the Smart Money Flow Index as well as the NYSE Member Debt Margin) remain pretty supportive and therefore, it might be a bit too early throw in the towel (from a pure contrarian point of view).

Mid-Term Technical Condition

As already mentioned above, the mid-term oriented tape condition is also key area of focus within an ongoing consolidation period. Right now, the mid-term uptrend of the market remains intact as 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 continued to decrease for the week and is therefore, just trading 7 percent above its bearish consolidation area. Consequently, if this trend continues the current consolidation period could easily turn out to 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. 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 (except consumer staples like in the previous weeks) keeps trading above the one from riskless money market (currently at 5.3 percent).

The mid-term oriented market breadth condition still looks quite supportive, although the recent slow-down has definitely left its mark on some of our tape indicators. This becomes pretty obvious as the Modified McClellan Oscillator Weekly flashed a bearish cross over signal. Also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped and closed just shy above their bullish threshold. 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 pretty limited 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 well 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 Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) 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 weak but still somehow too supportive to call for a major market top right now. Nevertheless, as conditions could change quickly, we will monitor the developments of them quite closely within the next couple of weeks.

Long-Term Technical Condition

On a very long-time frame, the technical picture of the market remains bullish at the moment and therefore, we do not think that any upcoming trend-break should lead to a new bear market at the moment. This is mainly due to the fact that the WSC Global Momentum keeps trading at solid levels and indicates that 85 percent of all local equity markets around the world remain within a long-term oriented uptrend. Moreover, it was good to see that the readings from the Global Futures Long Term Trend Index also showed some solid levels 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 far above the one from U.S. Treasuries. Nevertheless, we can also see some exhaustion in long-term market breadth, as the readings from our entire long-term oriented tape indicators (High-/Low Index Weekly the Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average) weakened last week. This might be another piece of evidence that the market looks vulnerable on a short- to mid-term time horizon.

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 Sector Rotation Strategy. As the relative strength score from the MSCI Netherlands dropped out of the top 10 ranked markets within our Global ETF Momentum Heat Map, we received a sell signal for those specific ETFs within our WSC Global Tactical ETF Portfolio. Instead, the MSCI Peru being added within the portfolio.

Bottom Line

Our key call remains unchanged compared to last week. With quite stretched signals within our indicator board, the market is getting increasingly vulnerable for negative surprises/further consolidation into deeper November. So even if we do not see any negative days immediately, we think the upside potential of the market also looks extremely capped at the moment. Anyhow, the technical condition of the market can be still categorized as non-corrective consolidation, as most of our mid-term oriented indicators still remain quite supportive at the moment. As a consequence, we stick to our strategic bullish outlook at the moment, although we will monitor the development within our indicator framework quite closely within the next couple of weeks. As a matter of fact, we would advise our conservative members to hold their equity position (at least for now), while aggressive short-term traders should focus on profit taking and/or start selling stronger spikes with close stops as the upside potential of the market also looks pretty capped at the moment!

Stay tuned!