December 10th 2017
In line with our recent call, most U.S. averages finished the week in positive territory with the Dow and S&P 500 logging record closes. The Dow Jones Industrial Average recorded a 0.4 percent weekly gain to end at a record of 24,329.16. The S&P 500 also booked also a weekly climb of 0.4 percent, closing at a record of 2,651.50. The Nasdaq finished the week nearly unchanged (minus 0.1 percent) at 6,840.08. Among the key S&P sectors, financials was the best weekly performer, while utilities dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended at 9.58.
Short-Term Technical Condition
The short-term oriented trend of the market continued to strengthen last week. This is mainly due to the fact that the S&P 500 managed to close 50 points above the bearish envelope line from the Trend Trader Index. So from a pure price point of view, the short-term uptrend of the market remains intact as long as the S&P 500 does not drop below 2.600 (bearish threshold from the Trend Trader Index). Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher, which is another constructive trend signal at the moment. Above all, the overall trend momentum also increased as the readings from the Modified MACD and the Advance-/Decline 20 Day Momentum Indicator also closed in solid bullish territory. Consequently, our entire short-term oriented trend indicators are confirming the latest gains from the S&P 500.
If we focus on our short-term oriented breadth indicators, we can see that their readings slightly weakened for the week and are, therefore, a bit intermingled at the moment. Although the Modified McClellan Volume Oscillator Daily showed some solid bullish readings last week, the Modified McClellan Oscillator Daily flashed a small bearish crossover signal. As a matter of fact, the underlying tape momentum of the broad market started to slow down a bit. 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 decreased for the week, dropping below their 50 percent threshold, and are showing some small signs of fatigue. In contrast, the High-/Low-Index Daily is still trading at a solid level (although it also decreased last week). This is mostly due to the fact that the total number of stocks which is hitting a fresh yearly low has not shown any negative spikes so far. So all in all, the market looks a bit vulnerable for a bullish biased consolidation/sideways trading at the moment and we would not be surprised to see some rocky sessions (at a very short time-frame) ahead.
The situation on the contrarian side remains unchanged compared to last week. On a very short time frame, the market is getting increasingly complacent (Global Futures Dumb Money Indicator, Uptick-/Downtick Ratio Daily and the All CBOE Options Put-/Call Ratio). Normally it takes either a sharp wash-out day or at least some increased volatility to work off such a high optimism. In our opinion, it is highly likely to see such events within the next couple of days. The main reason for such a call is the quite intermingled short-term tape structure in combination with seasonal headwinds. From a pure seasonal point of view (December chart within our cycles section), it is not unusual to see a limited period of weaknesses in mid-December before the typical year-end rally continues. Consequently, such a period of increased volatility would be quite healthy for the market. If we focus on our more mid-term oriented contrarian indicators, we can see that they remain quite confirmative at the moment (Smart Money Flow Index, NYSE Member Margin Debt and the WSC Capitulation Index).
Mid-Term Technical Condition
If we analyze the mid-term oriented technical condition of the market, the thread of a stronger pullback can be definitely ignored at the moment. Mainly because the Global Futures Trend Index is trading at a healthy level (in the middle of its bullish consolidation area). Therefore, it is a way too early to issue a strategic sell signal at the moment. We would take a more cautious stance if any upcoming slow-down pushes the gauge below 60 percent (of course only in combination with weakening market breadth). As this is not the case right now, any upcoming short-term weaknesses will definitely be limited in price and time. In addition, we can also see that the WSC Sector Momentum Indicator is trading at the highest level for months, indicating that all sectors within the S&P 500 remain in a strong mid-term oriented uptrend. 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 momentum score from riskless money market.
Another reason why we believe to see some rocky sessions ahead is due to the fact that nearly all of our mid-term oriented tape indicators weakened last week. Especially, our Modified McClellan Oscillator Weekly finished its third week again nearly unchanged; indicating that the underlying breadth momentum is still somehow lagging behind on a mid-term time horizon. Additionally, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) decreased last week (although still trading at solid bullish levels). The same is true if we have a look at the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly, as their readings also weakened for the week. Normally, such a deterioration within mid-term market breadth would signal that the rally is slightly running out of fuel. However, in such a situation we should not forget that some of our tape indicators are leveling off at the end of the year (as liquidity is getting extremely thin). Nevertheless, we will monitor our indicator framework quite closely within the next couple of weeks.
Long-Term Technical Condition
The long-term uptrend of the market remains intact and, therefore, the risk of a new bear market is extremely limited at the moment. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and trading at the highest level for months. As we can see from the WSC Global Momentum Indicator, 82 percent of all local equity markets around the world 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. Also, long-term oriented market breadth still looks quite constructive at the moment. Although the percentage of stocks which are trading above their 200 day simple moving average decreased last week, it is still trading at solid bullish levels. Also the number of stocks which are hitting a fresh 52 weeks high is trading far above its bearish counterpart. And also the Modified McClellan Volume Oscillator Weekly increased last week.
If we have a closer look at our Model Portfolios (WSC Inflation Proof Retirement Portfolio, the Global Tactical ETF Portfolio, the WSC Sector Rotation Strategy and the WSC All Weather Portfolio) we can see that there were no changes in the allocation last week.
Our strategic bullish outlook remains unchanged compared to last week. On a very short time frame, the market looks vulnerable for a washout-day and/or a short-term consolidation. However given the quite supportive/bullish readings within our mid- to long-term indicator board, we think it is a way too early to bet on a major trend reversal at the moment. As a consequence, our bullish outlook has not been changed so far. Therefore, would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips again rather than chasing the market too aggressively on the upside.