May 6th 2018
It was a volatile week on Wall Street as U.S. stocks started out the week with small gains, fell by over 1 percent until Thursday but rallied on Friday. In the end, U.S. stocks finished the week with a mixed performance. The Dow Jones Industrial Average lost 0.2 percent in five trading days to end at 24,262.51. The S&P 500 declined 0.3 percent over the week to finish at 2,663.42. The Nasdaq Composite added 1.2 percent during the week to 7,209.62. Among the key S&P sectors, technology was the best weekly performer, while health care dragged the most. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.8.
Short-Term Technical Condition
From a pure price point of view, the current short-term oriented trend remains pretty neutral as the S&P 500 managed to close within both envelope lines of the Trend Trader Index. Nevertheless, we can see that both envelope lines of this reliable indicator started to form a rounding top. This indicates that – from a pure structural point of view – the underlying trend structure of the market slightly turned bearish. The same is true if we focus on the Modified MACD, which flashed a small bearish crossover signal last week and, as a consequence, has not confirmed the stronger bounce on Friday. Only the Advance-/Decline 20 Day Momentum Indicator succeeded to end the week in bullish territory, after it had touched the bearish threshold during the week. Nevertheless, it also formed a small bearish divergence last week, as it has not fully confirmed the rally on Friday. So all in all, the overall short-term oriented trend status from the S&P 500 slightly changed from being supportive towards bearish biased.
Taking a closer look at our short-term oriented tape indicators shows that short-term market breadth also continued to weaken last week. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to show signs of exhaustion and have, therefore, not confirmed the bounce on Friday. More importantly, their readings are telling us that the underlying momentum of advancing volume and advancing stocks on NYSE remains quite negative at the moment. 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) also have not shown any significant bullish moves. As in the previous week, currently only 47/55 percent of all NYSE listed stocks are trading above their 20/50 days moving average! Also the number of stocks hitting a fresh yearly high and low has not shown any significant bullish moves compared to last week. As a consequence, also the bearish status from the High-/Low-Index Daily remains unchanged compared to the previous week. This is a quite interesting fact, as our entire short-term oriented breadth indicators have not confirmed the strong 1.3 percent bounce on Friday. Consequently, this bounce was only driven by a few heavy weighted stocks rather than by the broad market. As a matter of fact, we do not think that the rally on Friday will be the beginning of a new stronger and sustainable uptrend at the moment. In other words, the upside potential of the market looks outright capped at the moment, whereas the risk for stronger disappointments remains quite high at the moment.
The situation on the contrarian side is also almost unchanged compared to last week. The Smart Money Flow Index is still indicating major troubles ahead. The last time we saw such strong divergences between this reliable indicator and the Dow was a couple of months before the “Trump Rally” started. Compared to back then, the Smart Money Flow Index is now showing a huge bearish divergence. Therefore, this reliable indicator is confirming our cyclical roadmap (Presidential Cycle), where we are expecting to see a cyclical bear market this summer. Given the fact that our entire indicator framework continued to deteriorate significantly, we think this scenario looks quite likely and, therefore, our strategic bearish mid-term view remains unchanged at the moment. Moreover, on a very short-time frame, also our WSC Capitulation Index is signaling a risk-off market environment at the moment.
Mid-Term Technical Condition
The mid-term oriented trend of the market also continued to deteriorate significantly last week. The gauge from our Global Futures Trend Index dropped to the middle part of the bearish consolidation area. As this indicator still has not managed to pass its 60 percent threshold yet, the market remains extremely vulnerable for negative news-flow. And as the gauge of this reliable indicator is trading within its bearish consolidation area and, in addition, has not shown any positive momentum recently, the risk of another stronger waterfall-like decline remains quite high at the moment. However, even if we do not see a stronger pullback immediately, with such weak readings within that indicator, any upcoming gains should be definitely limited in price and time. Thus, we remain outright cautious at the moment. Moreover, our WSC Sector Momentum Indicator has also not shown any bullish moves recently, which is a sign that the momentum score of several sectors within the S&P 500 are underperforming the momentum score of riskless money market. When we take a closer look at the Sector Heat Map, we can see that currently 4 sectors are underperforming the momentum score of riskless money market. This means that the overall leadership within the S&P 500 is quite narrow at the moment.
The mid-term oriented market breadth condition reveals that the recent price action has definitely left its mark on some of our tape indicators. This becomes pretty obvious as the Modified McClellan Oscillator Weekly continued to drop. Also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) have not shown any bullish momentum and closed just shy above their bullish threshold. This indicates that the underlying trend momentum of the market is very flattish at the moment (which is another confirmation that the upside potential of the market should be pretty limited at the moment). Also mid-term oriented advancing issues as well as mid-term oriented up-volume gained some small bearish ground last week. Basically, the same set up is true if we focus on our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) as they all have not shown any significant bullish move recently and were just trading more or less sideways. So all in all, the current technical condition of the market looks quite weak at the moment. So even if we do not see a stronger decline immediately, with such non-confirmative readings all across the board, we do not think that the market has enough power to trigger a new and sustainable uptrend at the moment.
Long-Term Technical Condition
The long-term oriented uptrend of the market shows again the same picture as in the previous week. The WSC Global Momentum Indicator remains nearly unchanged and is trading at the lowest levels for months. This is a signal that a lot of local equity markets around the world dropped below their long-term trend-lines in the last weeks and that the current bull-run is fading out. Also the Global Futures Long Term Trend Index continued to drop and also reached the lowest level for months. A positive sign is coming from our WSC Global Relative Strength Index as the relative strength of all risky markets increased last week and are, in addition, trading far above the one from U.S. Treasuries. On the other hand side, the exhaustion in long-term market breadth is still persistent, as 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 again not shown any significant positive moves recently. This can be seen as another confirmation for our mid-term oriented cyclical bear-market scenario.
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 Brazil and from MSCI South Africa 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 Italy and MSCI Peru are being added within the portfolio.
Although the short-term oriented trend of the market has not completely turned bearish so far, our strategic bearish outlook remains unchanged compared to last week. As already mentioned above, the current technical condition of the market looks extremely non-confirmative/damaged at the moment, and therefore, the risk for stronger disappointments into summer remains quite high. Moreover, this scenario is also widely confirmed from a pure cyclical point of view and, therefore, we remain quite cautious since the risk-/reward ratio of being invested is extremely depressed at the moment (if we consider the current downside potential in in combination with our preferred view). So even if we see a longer-lasting consolidation period instead of another stronger down-leg, we would sacrifice 2-3 percent upside potential until our indicator framework would flash an all clear signal again. So in the end, we advise our members to remain at the sideline at the moment (until our indicator framework is getting back on track/or until we see a great buying opportunity). Aggressive traders should focus on selling into strengths if we see a short-term oriented trend break within our indicator framework.