February 26th 2017

Market Review

U.S. stocks finished another week of gains with the Dow and the S&P 500 at record highs. The Dow Jones Industrial Average gained 1.0 percent over the week to close at 20,821.76. Its third week of gains. The S&P 500 increased 0.7 percent for the week to finish at 2,367.34. Its fifth straight week of gains. The Nasdaq eked out a small gain of 0.1 percent to finish at 5,845.31. Its fifth straight week of gains. Among the key S&P sectors, utilities was the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 11.4.

Short-Term Technical Condition

The market is moving right in line with our recent outlook and therefore, it is not a big surprise at all that the short-term oriented uptrend of the market remains well in force. The S&P 500 is currently trading 57 points above the bearish threshold from the Trend Trader Index. This means that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.310. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher on a quite fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite strong technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. The same is true if we focus on the trend lines from the Modified MACD, as they increased very sharply and are trading at very high bullish levels as well. Only the bullish gauge from the Advance-/Decline 20 Day Momentum Indicator could be a bit stronger in our point of view (as it lost momentum last week) and has therefore, not completely confirmed the recent break-out from the S&P 500. However, given the quite solid readings within our short-term oriented trend indicators, this fact can be definitely ignored at the moment. Nevertheless, as this indicator tends to be a leading one, it also could be possible that a period of (bullish biased) consolidation might be ahead soon.

Basically, we receive the same picture if we focus on our short-term oriented market breadth indicators. Currently, our entire short-term oriented tape indicators remain pretty supportive, but we can see some non-confirmation within their readings. This can be seen if we look at the percentage of stocks which are trading above their short-term moving averages (20/50). Both indicators remain bullish from a pure signal point of view, but their readings should be much higher if we consider the current level from the S&P 500. This is telling us that the participation within the latest break-out remained a quite weak-kneed. This can be also seen if focus on the NYSE New HighsNew Lows Indicator as the total amount of stocks hitting a fresh 52 weeks high has lost some steam recently. Consequently, the High-/Low-Index Daily weakened last week, but is still trading at quite solid levels. This indicates, that the latest break-out was mostly driven by large-caps, which can be seen as a red flag on the horizon. This can be also seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators have not really shown an increasing bullish gap last week. So in the end, there was hardly any further strength within the short-term oriented tape structure visible, although the market finished slightly higher for the week. As a consequence, it looks like that the recent rally is slightly running out of steam and therefore, we think to see a period of consolidation or at least some bullish biased sideways-trading.

The situation on the contrarian side is signaling something similar. The longer-term oriented Smart Money Flow Index has clearly confirmed the recent break-out from the Dow, whereas the WSC Capitulation Index is still indicating an extremely risk-on market environment. But on the other hand we can see market sentiment has reached extreme levels, indicating a lot of good news has been priced in already. Another concern for contrarians is the recent drop in the amount of the put/call ratios (Daily Put/Call Ratio All CBOE Options, All CBOE Options Call/Put Ratio Oscillator), indicating extreme greed among the crowd. As a consequence, we think the overall market volatility is definitely increasing on a very short-time frame. This would coincide with the fact, that we are expecting some form of consolidation ahead soon.

Mid-Term Technical Condition

Our mid-term oriented trend indicators remain outright supportive. This is mainly due to the fact that the reading from the Global Futures Trend Index reached an extreme bullish level of 94 percent. As long as we do not see any significant weaknesses within that gauge, any pullback should only turn out to be a temporary weaknesses/consolidation within an ongoing bull market. Also, from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator remains very bullish and even increased last week. This is telling us that all underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market remains at zero percent.

This current mid-term oriented up-trend of the market is also widely confirmed by mid-term oriented market breadth. Particularly, the Modified McClellan Oscillator Weekly increased last week and is showing a solid bullish gap, indicating that the overall tape momentum remains pretty positive for the time being. Also, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) again continued to strengthen in the last couple of trading sessions and are therefore, confirming the recent level of the S&P 500! Moreover, mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading far above their bearish counterparts. Furthermore, we can see that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) are still trading strongly above their bearish 50 percent threshold, indicating that the majority of all NYSE listed stocks are still per definition in a robust mid-term oriented up-trend. These facts indicate that the total upside participation within the market still looks pretty broad based, which is another indication that it might be a bit too early to take the chips from the table (although it could be possible to see increased volatility on a very short-time frame).

Long-Term Technical Condition

The long-term oriented technical picture of the market remains unchanged compared to last week. Our Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. The global bull market is trading at very solid levels and shows that now 75 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being. Focusing on the WSC Global Relative Strength Index, we can see, that the relative strength of all risky markets keeps trading far above the one from U.S. Treasuries. Also, long-term oriented market breadth still looks very constructive at the moment. The percentage of stocks which are trading above their (200) day simple moving average remained nearly unchanged at very high bullish levels. Additionally, the Modified McClellan Volume Oscillator Weekly continued to gain more bullish ground last week. In this context, also long-term new highs are still strong, whereas long-term new lows kept trading at not really threatening levels. This can be seen as another positive long-term tape signal. Therefore, the gauge from our long-term oriented High-/Low Index Weekly keeps trading at very solid bullish levels. This indicates that the long-term tape of the market remains well intact.

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 Global Tactical ETF Portfolio and the WSC Sector Rotation Strategy. As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio.

Bottom Line

Given the bullish but somehow non-confirmative readings within our short-term oriented tape indicators, in combination with quite concerning readings from the contrarian side, a period of consolidation or even increased volatility looks pretty likely. However, if we consider the still quite solid and bullish readings within our mid- to long-term oriented indicators, we think any upcoming weaknesses should be limited in price and time (at least from the current point of view). Therefore, we would advise our conservative members to hold their equity position, while aggressive short-term traders should stay in the bullish camp as long as we do not see a significant drop within short-term market breadth.

Stay tuned!