July 2nd 2017

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average declined 0.2 percent over the week to 21,349.63. The S&P 500 recorded a weekly drop of 0.6 percent to finish at 2,423.41. The Nasdaq lost 2.0 percent for the week to end at 6,140.42. Among the key S&P sectors, the financial sector was the best weekly performer, while technology dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 11.1.

Strategy Review

As our strategic bullish outlook remained unchanged during this year, the first six month of the year have been quite profitable for our members so far. The Dow Jones Industrial Average is up 1.6 percent over the month, 3.3 percent over the quarter and 8 percent over the first half of the year. The S&P 500 gained 0.5 percent over the month and advanced by 2.6 percent over the past quarter. The index is up 8.2 percent year to date, its best half-year performance since 2013. The heavy-tech Nasdaq dropped 0.9 percent over the month. Still, it is up 3.9 percent over the past quarter and up 14.1 percent since the start of the year, its best half-year performance since 2009. Even our WSC Model Portfolio Composite (Charts of Interest) is just trading less than 2 percent below its all-time high!

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that the market looked vulnerable for further (sentiment driven) consolidation and therefore, it was not a big surprise at all that stocks ended down for the week. Obviously, the predicted consolidation period caused a deterioration of the short-term uptrend of the market. From a pure price point of view, this short-term trend clearly turned bearish last week as the S&P 500 closed a few points below the bearish threshold from the Trend Trader Index. Moreover, our reliable Modified MACD continued to gain more bearish ground last week, indicating that further down-testing is likely. Nevertheless, from a pure structural point of view, the short-term oriented trend of the market has not completely turned bearish as both envelope lines of the Trend Trader Index are still holding up quite well. The same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator as its gauge dropped last week, but still remains bullish on quite moderate levels. This is telling us that – from a pure price point of view – the current sentiment driven consolidation period has still a bullish tilt. Anyhow during a consolidation period it is not quite unusual to see a lot of bearish or even fast changing signals within short-term oriented trend indicators as there is obviously no specific trend when the market is sideways. As a matter of fact, short- to mid-term market breadth is a key area of focus to evaluate if a given consolidation period is just part of a healthy breather or the beginning of a more significant trend reversal.

In normal circumstances, a consolidation period is considered to be a healthy as long as short-term to mid-term market breadth remains supportive or is at least showing some form of bullish divergences. In such a case, any short-term oriented trend break can be ignored as the market is just taking a (healthy) breather within an ongoing uptrend. Otherwise, if short-term market breadth is collapsing, the consolidation is getting a more corrective tilt and is therefore, just a vanguard of a more significant/longer-lasting pullback. Right now, short-term market breadth looks quite constructive and even showed some bullish divergences compared to last week. This becomes pretty obvious if we focus on the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily. Both indicators improved last week, showing that the underlying market breadth momentum has gained some strength recently. If we focus on the NYSE New Highs minus New Lows Indicator, we can see that the latest declines have only been driven by profit taking, whereas the broad market was still holding up quite well. This is due to the fact that only the number of stocks which are hitting a fresh yearly high dropped significantly for the week, whereas the number of stocks which have been pushed to a new yearly low also remains outright depressed! Consequently, it is not a big surprise at all that the High-/Low-Index Daily remains quite bullish for the time being. Another piece of evidence for this case is the fact that the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) also gained some bullish ground last week. So all in all, we think it is a bit too early for any counter trend activities (profit taking or even short-selling) as the current consolidation period still looks constructive by its nature.

From a pure contrarian point of view, the recent down-testing has started to have its designated impact on short-term sentiment, which is a typical pattern during a (healthy) consolidation process. The long positions from the small-fry/dumb money dropped significantly, as the gauge from the Odd Lot Purchases/Nyse Volume reached a new low on Friday. Nevertheless, we are not completely there yet as the market has still to work off this predominant bullish sentiment within the option market. As a consequence, we do not think that the recent consolidation period has come to an end right now. This is in-line with the fact that the Smart Money Flow Index has shown some weaknesses recently, whereas the fisher transformation of the WSC Capitulation Index rose into cautious territory. So consequently – on a very short-time frame – we are expecting to further days of consolidation ahead/down-testing ahead!

Mid-Term Technical Condition

The mid-term uptrend of the market improved a bit and is therefore, it is a way too early to get cautious at the moment. This is mainly due to the fact that our reliable Global Futures Trend Index increased to 73 percent last week! For that reason, the actual reading of this reliable indicator is confirming the current levels from the S&P 500 as it tells us that the market is technically speaking in a consolidation mode with a quite bullish tilt.  The same is true if we analyze the current trend participation of all major key sectors within the S&P 500. There we can see that most industries continued to show a strong form of positive momentum last week. This is mainly due to the fact that the gauge from our WSC Sector Momentum Indicator is trading in solid bullish territory. This can be also observed if we take a look at our Sector Heat Map as the momentum score of all sectors (except energy) remains above the one from riskless money market (currently at 11 percent). In our view, this is another indication that the underlying trend force remains outright strong and therefore, we stick to our new record highs scenario into summer.

More importantly, this case is also widely confirmed by our mid-term oriented market breadth indicators. The percentage of stocks which are trading above their mid-term oriented moving averages (100/150) gained slightly more bullish ground last week. This indicates a rising up-trend participation within the broad market, which is definitely a good technical sign. In contrast, our Modified McClellan Oscillator Weekly remains unchanged and has not shown any significant movements yet, indicating that the overall momentum is a bit subdued. Apart from that fact we can see that the underlying demand remains healthy as mid-term oriented advancing issues as well as mid-term oriented up-volume are trading well above their bearish counterparts. As long as this is the case, we definitely stick to our new highs scenario as we have never seen a stronger correction in the past which was not accompanied with quite bearish readings within those two indicators. For that reason, it looks like that there is now still a bit room left before major troubles might be due (at least for now).

Long-Term Technical Condition

The long-term uptrend of the market remains intact. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and trading at very high levels. Also the WSC Global Momentum Indicator indicates that 85 percent of all global markets 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 (except commodities). Also, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stocks which are trading above their 200 day simple moving average gained more bullish ground last week. Also, the amounts of stocks which are hitting a fresh long-term new high are trading far above their bearish counterparts (although they decreased last week), pushing our High-/Low Index Weekly to supportive levels. And also our Modified McClellan Volume Oscillator Weekly gained some bullish ground and narrowed its gap.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. As the momentum score of consumer discretionary dropped below average and below the one from the S&P 500 within our Sector Heat Map, we received a sell signal for that ETF within our WSC Sector Rotation Strategy. The allocation of the WSC Global Tactical ETF Portfolio remains unchanged.

Bottom Line

The technical picture of the market remains pretty unchanged compared to last week. With quite bullish indicators all across the board we have not seen any typical signs for a major top-building process yet and therefore, we expect to see further record highs into deeper summer. However, with quite stretched sentiment signals on the contrarian side, the current consolidation period might continue for a very short-time frame and therefore, further down-testing looks possible. However, our bullish outlook remains unchanged and therefore, we would advise conservative members to hold their equity position, while aggressive short-term traders should definitely stay in the bullish camp.

Stay tuned!