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June 4th 2017

Market Review

U.S. stocks rallied for the week, lifting all three major indices to new records. For the week, the Dow Jones Industrial Average added 0.6 percent, to 21,206.29. The S&P 500 advanced 1.0 percent during the week to 2,440.23. The Nasdaq gained 1.5 percent from last week’s close to end at 6,305.80. Most key S&P sectors ended in positive territory for the week, led by health care. Energy and financials were the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 9.8.

Strategy Review

From the late February until late May, it looked like that the market got caught in a quite strong trading range between 2,328 and 2,410. This was due to the fact that during that time frame, the whole bull-run during was based on an extreme narrow leadership. In other words, our indicator framework showed that only due to the strong performance of a mere mega-caps (mainly within the tech-sector), the market was trading more or less sideways, although the underlying tape structure was already faltering. We told our members that in such a situation the upside potential of the market was capped as long as we did not see any improvements within our tape indicators. Not surprisingly, the market was struggling for direction as such a mega-cap only driven rally can never be sustainable in the long run.

Consequently, the market was several times highly at risk for an outright strong correction (especially if we consider the outstanding leverage) as the tilt between corrective and supportive sideways-trading was extremely narrow. The situation was sometimes so tense, that we advised our members to place a stop-loss order at critical support levels serval times. However, no stop-limits were triggered back then but we said those limits should remain in place until we see further improvements within our indicator framework. In fact over the past weeks, our indicator framework showed us a small but healthy rotation back into small caps.  Consequently, we expected to see a sustainable break-out above the upper-limit from that trading range in combination with further gains into summer.  Moreover, the quality of this rally will give us then further guidance when it is time to pull the trigger.

Short-Term Technical Condition

In line with our recent outlook, the short-term oriented up-trend of the market continued to gain more bullish ground last week, pushing the major key indices to new records. Not surprisingly, the short-term oriented trend of the market strengthened, as the readings from our entire short-term oriented trend indicators became or remain extremely bullish at the moment. To be more precise, the S&P 500 closed 46 points above the bearish threshold from the Trend Trader Index. Above all, both envelope lines of this reliable indicator are still drifting higher on a steady pace. So from a pure structural point of view, this is another indication for a strong short-term oriented price-driven uptrend. The same is true if we focus on the readings from the bullish readings from Modified MACD, as it showed an increased bullish gap last week. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator rocketed last week and has therefore, clearly confirmed the recent break-out from the S&P 500. Given the fact that this indicator tends to lead price movements, such a strong confirmation also indicates further rallying ahead. As a consequence, it looks like that the current short-term oriented up-trend is definitely gaining more steam (from a pure trend point of view).

More importantly, this view is now also widely confirmed by short-term market breadth as the current trend participation of all NYSE listed stocks within the latest rally still looks quite broad-based and therefore, healthy at the moment. Especially, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) continued to grow further into bullish territory, indicating further upside participation within the current trend-structure at the moment. On top of that, we can see that the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not shown any signs of weaknesses yet, indicating that the underlying breadth momentum of the market remains positive. However, the most encouraging fact is that the latest break-out from the S&P 500 was supported by an extremely broad basis (which is absolutely a healthy technical signal). This becomes pretty obvious if we focus on the New High minus New Low Indicator as we saw a major spike in the total amount of all NYSE-listed stocks which reached a new yearly high (in combination with an outright low number of stocks which dropped to a new yearly low last week)! As a consequence, the High-/Low-Index Daily jumped to the highest level for months. In our opinion, with such strong signals all across the board, it is highly unlikely that the recent rally will run out of fuel on a very short time frame. As a consequence, we think that the market is heading towards new record into mid-June, which is more or less in line with our summer rally scenario.

According to our contrarian indicators, we can see that a lot of purchasing was done by the Smart Money, whereas the crowd remains skeptical (sentiment survey from Market Vane). These are basically quite good ingredients for the start of another rally attempt. Above all, we can see that the market still remains in a risk-on mode (according to our WSC Capitulation Index). The only negative fact is that the Uptick-/Downtick Ratio remains a bit bearish, plus we saw another Hindenburg Omen last week. Despite the fact that this signal tends to be quite reliable in most of the cases, we should not forget that the technical situation is a bit too bullish at the moment and therefore, we do not pay too much attention to this signal at the moment.

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, we basically get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market continued to strengthen and is therefore, giving no reason to worry right now. This is mainly due to the fact that our reliable Global Futures Trend Index increased by 12 percentage points to 79 percent last week! For that reason, the actual reading of this reliable indicator is confirming the current levels from the S&P 500. The same is true if we analyze the current trend participation of all major key sectors within the S&P 500. There we can see that most industries continued to show a strong form of positive momentum last week. This is mainly due to the fact that the gauge from our WSC Sector Momentum Indicator is trading in solid bullish territory. This can be also observed if we take a look at our Sector Heat Map as the momentum score of all sectors (except energy) remains above the one from riskless money market (currently at 12 percent). In our view, this is another indication that the risk appetite among investors remains pretty high and therefore, we stick to our new record highs scenario into summer.

More importantly, this mid-term oriented up-trend is also widely confirmed by our mid-term oriented market breadth indicators and therefore, we do not think to see a major trend break ahead. The percentage of stocks which are trading above their mid-term oriented moving averages (100/150) gained slightly more bullish ground last week and got therefore, back above their 50 percent bullish threshold. This indicates a rising up-trend participation, which is definitely a good sign. In addition, the Modified McClellan Oscillator Weekly finally escaped from its paralyzed status (which has been lasting for several weeks) and strengthened its bullish gap. This signals that the underlying breadth momentum of the market started to grow. Another encouraging mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and from the Upside-/Downside Volume Index Weekly. The first one clearly increased its bullish gap and the latter one flashed a bullish crossover signal. Normally, as long as both, mid-term oriented advancing issues as well as mid-term oriented up-volume are trading above their bearish counterparts, the underlying tape structure of the market remains healthy. For that reason, it looks like that there is now still a bit room left before major troubles might be due.

Long-Term Technical Condition

The long-term uptrend of the market remains intact. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and trading at the highest levels for months. Also the WSC Global Momentum Indicator jumped to the highest levels for months and indicates that 90 percent of all global markets remain within a long-term oriented uptrend. This can be also monitored if we focus on the WSC Global Relative Strength Index, as the relative strength of all risky markets keeps trading above the one from U.S. Treasuries (except commodities). Also, 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 gained more bullish ground last week. Also the amounts of stocks which are hitting a fresh 52 weeks high are trading far above their bearish counterparts, pushing our High-/Low Index Weekly to supportive levels. And also our Modified McClellan Volume Oscillator Weekly has not shown any bearish moves this time.

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, WSC Sector Rotation Strategy and the Global Tactical ETF Model Portfolio). Moreover, we are proud to announce that the WSC All Weather Portfolio and the WSC Sector Rotation Strategy reached again a new all-time high again last week!

Bottom Line

With broadening strengths all across the board, we expect that the market is about to follow our summer rally scenario and therefore, we think to see further gains into June. Consequently, our strategic bullish outlook remains unchanged. Given the quite encouraging readings within our indicator framework, we think aggressive traders should buy into any upcoming weaknesses as long as our short-term trend- as well as breadth indicators remain strong. Conservative members should remain invested and if you have taken profits before, it would be now a good point in time to build up exposure again (as the risk of a stronger pullback has diminished significantly). From a pure trading point of view, 2,450/2,455 represents important key resistance levels. A break above that numbers would indicate that further rallying towards 2,480 and 2,500 can be expected.

Stay tuned!