August 27th 2017

Market Review

U.S. stocks finished the week with small gains. For the week the Dow Jones Industrial Average eked out a small gain of 0.6 percent to finish at 21,813.67. The S&P 500 finished at 2,443.05 and recorded a weekly gain of 0.7 percent. The Nasdaq posted a weekly gain of 0.8 percent to end at 6,265.64. The heavy-tech index booked its first weekly gain in five weeks. Most key S&P sectors ended in positive territory for the week, led by materials. Consumer staples were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded more than 9.5 percent lower, near 11.3.

Short-Term Technical Condition

Despite the fact that the market finished the week on a higher note, the short-term oriented down-trend of the market remains well in force and gained even more bearish ground last week! From a pure price point of view, we can see that the S&P 500 closed 22 points below the bullish threshold from the Trend Trader Index. Not surprisingly, we can also see that both envelope lines of this reliable indicator are also drifting lower indicating an outright underlying bearish short-term oriented trend-structure at the moment. This is because the support and resistance lines for the S&P 500 are decreasing as well. A perfect example for such a strong resistance was on Tuesday, when the S&P 500 just bounced off the lower envelope line from the Trend Trader Index. Another concerning signal is coming from the Modified MACD, as its short-term oriented gauge not only dropped to a new low last week, but also touched its zero line – for the first time in 2017. As a matter of fact, this indicator is definitely not confirming the current levels from the S&P 500. Above all, the Advance-/Decline 20 Day Momentum Indicator remains very bearish, although its gauge recovered slightly compared to the previous week. So from a pure short-term trend perspective, the recent gains can be still categorized as bounce rather than the beginning of a new sustainable up-trend at the moment.

Despite the fact that the recent gains led to some form of stabilization within some of our tape indicators, the current negative trend is still widely confirmed by short-term market breadth. Notwithstanding the above, all of them are still showing an outright bearish divergence if we consider the current levels from the S&P 500. This applies in particular to the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50). Although we have seen a small recovery on quite low levels recently, we can see that both gauges (20/50) closed in deep bearish territory last week. To be more precise, only 39 percent of all NYSE listed stocks managed to close above their 20 days moving average, whereas there were only 36 percent on a 50 day basis. If we consider the fact that the S&P 500 is almost trading near record levels, those ratios remain quite a grim signal as it indicates that only a handful of large-caps are holding up well, whereas the broad basis is already faltering. Another concerning fact is that the that the momentum of advancing stocks (Modified McClellan Oscillator Daily) and advancing volume (Modified McClellan Volume Oscillator Daily) remains outright negative. Despite the fact that we have seen some form of stabilization within their short-term oriented gauges (red ones) recently, this bullish divergence is a way too weak to be taken too seriously at the moment. However, the strongest tape signal is coming from the High-/Low-Index Daily, which managed to flash a small but a bullish crossover signal last week. The main reason for this bullish crossover signal was the fact that we saw a quite strong reduction in the total amount of all NYSE listed stocks which dropped to a new yearly low, in combination with an increase in new yearly highs. In our opinion, this situation was mainly driven by short-covering as we saw a stronger reduction in new lows, whereas a typically stronger spike in new high was still missing. So all in all, our short-term oriented tape indicators are telling us that the latest gains have not really been constructive in their nature.

The situation on the contrarian side remains almost unchanged compared to last week. The Smart Money Flow Index is still showing a quite bearish divergence towards the Dow. This is telling us that the informed crowd remains pretty cautious at the moment. Above all, we can see that the WSC Capitulation Index is still indicating a risk-off market environment and therefore, further increased volatility can be expected on a very short-time frame. Another interesting fact is that the small fry used the recent weaknesses to buy in heavily as the gauge from the Odd-Lot Purchases to NYSE Volume jumped to record levels. This can be interpreted as super red flag on the horizon as those guys tend to be dead wrong in the long run. As per last week’s report, the only positive impulse is coming from the option market as the amount of puts remains on elevated levels (Global Futures Put-/Volume Ratio Oscillator and the Equity Options Call-/Put Ratio Oscillator). So from a pure contrarian point of view, further bearish biased trading into early September looks quite possible.

Mid-Term Technical Condition

On a mid-term time horizon, the technical trend-condition of the market still looks quite damaged and therefore, we remain cautious at the moment. Although the gauge from the Global Futures Trend Index slightly recovered last week, it kept trading well within its bearish consolidation area brackets and is therefore, not confirming the current levels from the S&P 500! As already mentioned several times, as long as the gauge does not close above its 60 percent bullish threshold, the risks of sharp pullbacks remain outright high. In such a situation, even stronger gains tend to be outright corrective in their nature and therefore, we would be quite surprised to see stronger and sustainable gains ahead! Unchanged compared to last week, from a pure price point of view, the market still remains in a mid-term oriented up-trend as the WSC Sector Momentum Indicator has not turned bearish yet. This is telling us that the momentum score of most sectors within the S&P 500 are still outperforming the momentum score of riskless money market within our Sector Heat Map. Nevertheless, we can see that the momentum score of riskless money market keeps trading at higher levels, which is another reason why we remain a bit cautious at the moment.

More importantly, mid-term oriented market breadth remains quite bearish biased, which is another major reason why we think the current risk reward ratio is too small at the moment. Despite the fact the recent gains led to small improvements in Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly, their bullish crossover signals are a bit too weak to be taken too seriously at the moment. Furthermore, their readings are not confirming the current levels from the S&P 500 and therefore, the current tape condition still looks pretty vulnerable. Another threatening tape signal is coming from the Modified McClellan Oscillator Weekly, which showed a widening bearish gap last week. And also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) remain below their bullish threshold. This is an indication that the underlying trend structure of the market remains quite narrow-based/large-cap driven at the moment. Normally such a situation can never be sustainable in its nature. So, either we see another increase in market breadth, or it will be just a question of time until we see a re-valuation of current prices. Therefore, we remain cautious at the moment.

Long-Term Technical Condition

The long-term oriented uptrend of the market remains unchanged and therefore, we do not think that a stronger correction should lead to a new bear market at the moment. The Global Futures Long Term Trend Index is trading at solid levels and thus, indicating a technical bull market. Also the WSC Global Momentum Indicator is trading at the highest levels for months and indicates that 92 percent of all global markets remain within a long-term oriented uptrend. Additionally, we can see that the relative strength of all risky markets keeps trading far above the one from U.S. Treasuries (except commodities). However, we still observe some exhaustion in long-term market breadth. The readings from our entire long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average) have not shown any signs of major improvements. As already pointed several times, this might be another piece of evidence that the market looks vulnerable on a short- to mid-term time horizon.

Model Portfolios

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. The allocation of the Global Tactical ETF Portfolio and the WSC Sector Rotation Strategy remains unchanged.

Bottom Line

The situation remains unchanged compared to last week. Although the market only trades a few percentages below its all-time high, we remain outright cautious at the moment! This is due to the fact that the technical condition of the market looks quite damaged and therefore, the market is still at risk for a stronger pullback at the moment. The main reason, why we have not seen any stronger losses so far is the fact that large-caps are still holding up quite well. So even though we might not see a stronger selling pressure immediately, we would be quite surprised to see sustainable gains ahead with such weak readings all across the board. Consequently, any upcoming (large-cap driven) bounce should be limited in price and time. As a matter of fact, we would advise our conservative members to remain at the sideline as the current risk-/reward ratio is a way too low at the moment. Aggressive traders should remain short as we are expecting a test of the next resistance level at 2,410/2,400 as long as our short-term indicators remain bearish.

Stay tuned!