August 5th 2018
U.S. stocks finished the week with small gains. The Dow Jones Industrial Average rose just 0.04 percent this week and finished at 25,462.58. The S&P 500 ended at 2,840.35 and booked a weekly gain of 0.8 percent, whereas most of the gains were made on Thursday. The S&P 500 and Dow also posted their fifth straight weekly gain. The Nasdaq gained 1.0 percent over the week to finish at 7,812.01. Most key S&P sectors finished higher, led by health care and consumer staples. Energy was the worst performer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 11.6.
Short-Term Technical Condition
Not surprisingly – 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 41 points above the bearish threshold from the Trend Trader Index. Nevertheless, we can see that the underlying trend-momentum deteriorated significantly last week. This is mainly due to the fact that the Modified MACD flashed a small bearish crossover signal last week on very high levels, indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator as its gauge plummeted to the lowest level for weeks. Right now it is a bit too early to get concerned about these bearish divergences as the S&P 500 is still trading 41 points above the bearish threshold from the Trend Trader Index. Nevertheless, with such weak readings, the market is getting increasingly vulnerable on a very short time frame.
This picture is widely confirmed by short-term market breadth. The Modified McClellan Oscillator Daily turned bearish last week, whereas the Modified McClellan Volume Oscillator Daily is far away from confirming the current levels from the S&P 500. This indicates that the overall tape momentum of the market is quite weak-kneed at the moment. Another negative tape signal is the fact that the current trend is mainly driven by large-caps rather than by the broad market. This becomes pretty obvious if analyze the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50). Both gauges strongly decreased last week and even dropped deep into bearish territory, indicating a diminishing trend participation within the latest break-out attempt. This can be also seen if we focus on the NYSE New Highs – New Lows Indicator, which measures the total number of stocks which are hitting a fresh yearly high or low. There we can see that the total number of new highs should be much higher if we consider the fact that the S&P 500 is trading almost at record levels. As a consequence, the readings from the High-/Low-Index Daily remain somehow supportive but not really confirmative at the moment. Consequently, the current technical condition of the market looks quite weak-kneed at the moment. As a matter of fact, we stick to our call that the current slow growth period is losing some steam. As a matter of fact, the market is getting increasingly vulnerable for a breather/further bullish biased sideways trading.
The situation on the contrarian side is quite unspectacular at the moment. This is mainly due to the fact that our entire option based indicators are trading in neutral territory at the moment. The only interesting fact is that the gauge from the Smart Money Flow Index has stabilized on quite low levels recently. Despite the fact that this can be interpreted as somehow supportive signal, we should not forget its gauge is still far away from confirming the current levels from the Dow Jones Industrial Average. As a matter of fact, we would not be surprised, if the market is running into major headwinds later this year.
Mid-Term Technical Condition
Right now, it is still a bit too early to get concerned about that fact, since the mid-term oriented technical condition of the market still looks supportive at the moment. This is mainly due to the fact that gauge from our reliable Global Futures Trend Index is still trading in the middle part of its bullish consolidation area. As already mentioned a couple of times, as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming consolidation/weakness tends to be limited in price and time (only in combination with confirmative mid-term oriented market breadth readings). As a matter of fact, we do not believe that the market is at risk for a stronger correction right now. Moreover, most sectors within the S&P 500 remain in a mid-term oriented uptrend as the WSC Sector Momentum Indicator jumped to the highest levels for months. Consequently, the underlying price trend of the S&P 500 looks outright solid at the moment. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all sectors remains above the one from riskless money market, which finally dropped to 0 percent!
Another main reason why we believe that the downside potential of the market remains capped is due to the fact that the current mid-term oriented up-trend of the market is widely confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly was holding up quite well, indicating that the overall tape momentum remains quite constructive for the time being. Another positive signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both bullish gauges from these indicators are still trading well above their bearish counterparts, signaling that the market internals look quite healthy at the moment. On top of that, all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to strengthen or have not shown any weak signals in the last couple of trading sessions. This indicates that the broad market is participating within the ongoing mid-term oriented uptrend. Above all, we can see that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) remain quite bullish, although they have lost some steam recently. So all in all, our mid-term oriented trend indicator framework is telling us that 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 showed some positive signals – although on a very weak level. The WSC Global Momentum Indicator gained (small) momentum and indicates that 22 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend lines. Although this indicator has shown some positive momentum recently, this still is an indication that the current global bull-market is quite fragile at the moment. Also our Global Futures Long Term Trend Index continued its recent recovery, but still signals that the current long-term oriented trend of U.S. equities remains intact but is also showing major signs of exhaustion. Again, a positive signal is coming from our shorter-term oriented WSC Global Relative Strength Index as the relative strength of all risky markets was holding up quite well last week. But now all markets (except one) are trading below the one from U.S. Treasuries, which is another sign for a slow growth period. Our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly, percentage of stocks which are trading above their 200 day moving average) remained unchanged compared to the previous week.
Last week, there were 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).
Our view remains pretty unchanged compared to last week. With quite stretched signals within our short-term oriented tape indicators, the market is getting increasingly vulnerable for a healthy breather/slow growth period into mid-August. However, given the fact that the mid-term oriented condition of the market still looks quite supportive in its nature, we think that any upcoming consolidation period should be limited in price and time. As a matter of fact, aggressive traders should focus on buying the dips (focus on steady profit taking) instead of chasing the market too aggressively on the upside, whereas conservative members should hold their equity position as there is still some potential left, before major troubles might be due.