February 17th 2019

Market Review

U.S. stocks rallied for another week. The Dow Jones Industrial Average surged 3.1 for the week, marking its best weekly winning streak since November 2017. The S&P 500 climbed 2.5 percent, its third straight week of finishing higher. The Nasdaq added 2.4 percent, its longest weekly stretch since August 2016. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.9.

Short-Term Technical Condition

In line with our strategic outlook, the market continued to push higher last week. Consequently, it is not a big surprise at all that the short-term oriented uptrend of the market remains well in force. To be more precise, the S&P 500 is now trading 94 points above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2,681. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher on a quite fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as an outright constructive technical signal as higher highs and higher lows are a typical pattern for a healthy price-driven uptrend. Moreover, the bullish status from the Modified MACD also strengthened during the last week and has, therefore, clearly confirmed the latest rally from the S&P 500. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator also showed some stronger signs of recovery at quite high bullish levels. So all in all, the time-series momentum of the S&P 500 remains outright strong and, therefore, we stick to our call that further gains into deeper February can be expected.

Essentially, we receive the same picture if we analyze short-term market breadth as the current trend participation of all NYSE listed stocks within the current rally looks extremely 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. To be more precise, both indicators (20/50) have reached the highest level since June 2018! This is telling us that the current time-series momentum of the S&P 500 is also driven by a broad basis and not only by a few heavy weighted stocks in the index. As a consequence, the risk of a stronger immediate trend-reversal is outright low at the moment (which indicates that further rallying can be expected on a short-term time perspective). 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 and even continued their bullish ride last week. This shows us that the underlying breadth momentum of the market remains extremely positive at the moment. Additionally, we saw a stable increase in the total number of all NYSE-listed stocks which reached a fresh 52 weeks high (especially on Friday), in combination with quite suppressed readings of stocks hitting a fresh 52 weeks low! As a consequence, the bullish gauge of the High-/Low-Index Daily is trading far above its bearish counterpart. As long as this is the case, the current rally looks quite healthy in its nature. So all in all, with such strong signals all across the board, it is highly unlikely that the recent rally will run out of fuel. As a consequence, we think that the market is heading towards new records into late Q1, which is definitely in line with our strategic bullish outlook.

On the contrarian side, we can see that the market remains overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily), plus some of our option based oscillators (Equity Options Call/Put Ratio Oscillator, Global Futures Put/Volume Oscillator, All CBOE Call/Put Ratio Oscillator) remain bearish. This is telling us that greed within the crowd is increasing, although we are still far away from outright bearish/euphoric levels. This is mainly due to the fact that the current put-/call ratio from the option market still remains quite neutral. As a consequence, we think those bearish readings will only lead to some increased volatility rather than being a major deal-breaker at the moment. More importantly, the WSC Capitulation Index is still indicating that dumb money is still not buying the rally yet, whereas the Smart Money Flow Index has clearly confirmed the latest gains from the Dow Jones Industrial Average. However – from a pure contrarian point of view – the most important driver is still the fact that a lot of market participants have missed out to participate in the current rally. This can be seen in the AII Bulls & Bears survey, as the amount of bulls on Wall Street still remains subdued. As a matter of fact, a lot of money managers are still getting forced to get back into the market. So from a pure contrarian point of view, such fear of missing out (FOMO) will still be one of the most important driver for higher prices in the next couple of weeks.

Mid-Term Technical Condition

This view is also supported by the fact that our mid-term oriented indicators also continued to strengthen last week. First of all, the gauge from our Global Futures Trend Index almost passed the outright bullish 90 percent threshold last week. This can be seen as an extremely positive technical signal, since in such a situation any upcoming short-term oriented weaknesses should be limited in price and time (of course only together with strong readings in mid-term market breadth). So as long as this indicator keeps rising or just trading above 60 percent, the current rally is definitely not at risk of running out of fuel. Secondly, our WSC Sector Momentum Indicator also continued to strengthen significantly last week and was, therefore, almost flashing a bullish crossover signal last week. If this is the case (which we are assuming at the moment), the current rally can be classified as new bull-market instead of being just a bear-market rally. This is an important change, since any upcoming short-term oriented trend-break will not have the power to trigger another significant sell-off/correction. This view is also supported by the fact that the momentum score of riskless money market (from our Sector Heat Map) continued to drop significantly for the week. As a matter of fact, we strongly believe to see further stronger gains down the road.

Another reason for further gains into Q1 is the fact that our entire mid-term oriented tape indicators continued to improve significantly last week. Therefore, the current mid-term oriented positive time-series momentum of the market is well supported by the broad market. Especially, the Modified McClellan Oscillator Weekly continued to show a widening bullish gap last week, indicating that the overall tape momentum remains quite positive for the time being. And once again, all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) increased for the week and, thus, reached their highest readings for months. Therefore, they are clearly confirming the current high of the S&P 500! Another encouraging signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). If we focus on their recent development, we can see that both indicators (100/150) have reached their highest level for weeks (although they could even be higher if we consider the current record level of the broad-index). This indicates that the total upside participation within the market looks quite broad based, which is another indication that it might be a bit too early to take the chips from the table. However, the most important mid-term oriented tape signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. This is mainly due to the fact that both indicators are now trading at outright bullish levels. Normally, as long as both, mid-term oriented advancing issues as well as mid-term oriented up-volume are trading well above their bearish counterparts, any upcoming short-term oriented weaknesses should be limited in price and time. So given the quite bullish signals all across the board, we strongly believe that the current rally is definitely not at risk of running out of fuel at the moment.

Long-Term Technical Condition

The long-term oriented trend of the market also continued to show major signs of improvements last week. First, our WSC Global Momentum Indicator increased by another 10 percentage points last week, indicating that 40 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are now trading above their long-term oriented trend. This is a quite supportive technical signal, as it shows that the current recovery is global in scope. This is another indication for our case, that the current rally could be the beginning of a new bull-market instead of just being a huge bear-market rally. Furthermore, our Global Futures Long Term Trend Index has shown some signs of bottoming out recently, which can be seen as another quite supportive signal at the moment. Only the WSC Global Relative Strength Index is still indicating a long-term risk-off market scenario, as the relative strength of nearly all risky markets is trading below the one from U.S. Treasuries. If we focus on our long-term market breadth indicators, we can see that all of them continued to strengthen or even turned bullish last week. This is especially true for the Modified McClellan Volume Oscillator Weekly, as it flashed a quite strong bullish crossover signal last week. This is telling us that the long-term market internals are gearing up. This can be also seen if we focus on the High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average, as both showed also a very positive development last week.

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 Sector Rotation Strategy, the WSC Inflation Proof Retirement PortfolioWSC All Weather Model Portfolio and the WSC Global Tactical ETF Portfolio.

Bottom Line

The market is heading down our expected path and with still quite broadening strength all across the board, the current rally is definitely not in danger of fading out at the moment. As a matter of fact, we strongly believe to see further gains into late Q1. Consequently, our strategic bullish outlook remains unchanged. Therefore, we would advise our conservative members to hold/increase their equity position, while aggressive short-term traders should remain bullish/keep buying the dips as long as our short-term oriented indicator framework remains constructive.

Stay tuned!!!