June 3rd 2018

Market Review

U.S. averages finished the week mostly with a positive performance. The Dow Jones Industrial Average lost 0.5 percent over the week, to end at 24,635.21. The S&P 500 gained 0.5 percent for the week to finish at 2,734.62. The Nasdaq closed at 7,554.33, ending the week 1.6 percent higher. Among the key S&P sectors, energy was the best weekly performer, while financials dragged. The CBOE Volatility Index, the gauge of S&P 500 options known as the VIX, ended at 13.5.

Short-Term Technical Condition

From a pure trend point of view the bullish short-term status of the market remains unchanged. This is due to the fact that the S&P 500 closed 36 points above the bearish threshold from the Trend Trader Index. Also both envelope lines of this reliable indicator are still drifting higher, indicating that the resistance/support levels for the S&P 500 are increasing as well. In addition the Advance-/Decline 20 Day Momentum Indicator jumped to the highest level for weeks. Normally, this indicator tends to be a leading one and, therefore, it signals that the bullish trend is highly likely to continue – at least on a short-term time frame. Nevertheless, we can see that the underlying trend-momentum slightly deteriorated last week. This is mainly due to the fact that the Modified MACD flashed a small bearish crossover signal last week, indicating some form of short-term exhaustion. Right now, it is definitely a bit too early to get concerned about this bearish signal as the overall tone from our remaining short-term oriented trend indicators remains quite supportive at the moment. Consequently, this bearish signal is just telling us that the pace is likely to slow down a bit in the next couple of trading sessions.

This picture is widely confirmed by short-term market breadth as some of our indicators slightly weakened for the week. Especially, the Modified McClellan Oscillator Daily did not show any significant positive growth for the week, while the Modified McClellan Volume Oscillator Daily continued to show a widening bearish gap. This is telling us that the overall tape momentum remains positive but the underlying momentum of advancing volume started to slow down a bit. Consequently, we would not be surprised to see further bullish biased consolidation ahead (at least on a short-term time perspective). The main reason, why we believe that the current consolidation is quite healthy in its nature is due to the fact that the overall tone still remains quite supportive at the moment. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges are still trading far above their 50 percent threshold and, therefore, the market has still some room left to push higher. This view is also supported by the fact that the High-/Low-Index Daily is still trading at an solid level and is, therefore, far away from being bearish. The main reason for such a bullish signal is caused by the fact that we have not seen any stronger spike in the amount of stocks hitting a fresh yearly low (although it was a quite volatile week). This is telling us that it is still a bit too early to bet on a major trend reversal (at least for the time being).

On the contrarian side, the situation also looks quite unchanged compared to last week. The Smart Money Flow Index is still not confirming the recovery which started in early April. As a matter of fact it is still showing a huge bearish divergence to the current readings from the Dow Jones Industrial Average. This is an outright bearish signal on a mid-term time perspective and, therefore, we would not be surprised if the market is facing major headwinds in deeper summer (which would be in line with the readings from our Presidential Cycle). On a short-term time perspective we can see that some of our option based indicators (Global Futures Put Volume Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator and the All CBOE Options Call-/Put Ratio Oscillator) are still signaling increased greed among dumb money. As a matter of fact, it could be possible that the current short-term oriented uptrend will be accompanied by increased volatility.

Mid-Term Technical Condition

The mid-term uptrend of the market remains more or less unchanged. Our reliable Global Futures Trend Index succeeded to stay in its bullish consolidation range which is a quite constructive signal (especially together with a recovery in market breadth). This view is also confirmed by the WSC Sector Momentum Indicator, which is trading as solid bullish levels, signaling that most sectors within the S&P 500 remain in a mid-term uptrend. This can be also seen if we focus on our Sector Heat Map: although the momentum score from riskless money market keeps trading slightly above 20 percent, there are only 2 out of 9 sectors within the S&P 500 which are having a lower score than that. In our view, this is another indication that the risk appetite among investors is still persistent (at least for now).

More importantly, this current mid-term oriented up-trend of the market is widely confirmed by mid-term oriented market breadth. Beside the Advance-/Decline Volume Line, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) continued to strengthen in the last couple of trading sessions. In other words, the recent situation is widely supported by a broad basis, which is a quite healthy breadth signal. Moreover, mid-term oriented advancing issues and mid-term oriented up-volume continued to gain more bullish ground and are, as a consequence, trading far above their bearish counterparts. Also our Modified McClellan Oscillator Weekly finally succeeded to flash a bullish crossover signal last week, indicating that the mid-term oriented tape momentum is getting back on track. This can be also seen if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). So all in all, the current upside participation within the market is still quite supportive and, therefore, we think it is still a bit too early to take the chips from the table.

Long-Term Technical Condition

The long-term oriented trend of the market shows again the same picture as in the previous week. The WSC Global Momentum Indicator decreased again and dropped to lowest levels for months. This signals that a lot of local equity markets around the world are still falling below their long-term trend-lines and that the current bull-run is slightly fading out. Additionally, the Global Futures Long Term Trend Index continued its bearish ride and also reached the lowest level for months. But again, a positive sign is coming from our WSC Global Relative Strength Index as the relative strength of all risky markets increased last week. In addition, all markets (except one) are trading above the one from U.S. Treasuries. Also the readings from our 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) were holding up quite well.

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 Chile and from MSCI Italy dropped out of the top 10 ranked markets within our Global ETF Momentum Heat Map, we received a sell signal for these specific ETFs within our WSC Global Tactical ETF Portfolio. Instead, the MSCI France and Russell 2000 are being added within the portfolio.

Bottom Line

The technical picture of the market improved compared to last week and, therefore, our bullish outlook remains unchanged at the moment. To be more precise, with quite supportive/bullish readings within our indicator framework (especially on a mid-term time horizon), we think that the current consolidation still looks quite healthy in its nature. As a matter of fact, we think it is a bit too early to bet on a major trend reversal at the moment. Therefore, we strongly believe to see further gains into deeper June (although we would not be surprised if such gains were accompanied by increased volatility). So in the end, we would advise our conservative members to remain invested, whereas aggressive traders should focus on buying into weaknesses, as long as our short-term oriented indicator framework remains constructive.

Stay tuned!!!