September 29th 2019

Market Review

U.S. stocks declined for a second week. The Dow Jones Industrial Average booked a weekly loss of 0.4 percent to finish at 26,820.25. The S&P 500 dropped 1.0 percent to 2,961.79 for the week. The Nasdaq fell 2.1 percent for the week and finished at 7,939.63. Among the key S&P sectors, utilities and staples were the only weekly performers, while all other sectors dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended above 17.2.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that a period of bullish biased consolidation (even with some nasty pullbacks) looked quite likely. Hence, it was not a big surprise at all that stocks ended down for the week. Obviously, the predicted consolidation period caused a slight deterioration in 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 flashed a bearish crossover signal, 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 yet 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. Although its gauge dropped last week, it still remains bullish on quite confirmative levels. This is telling us that – from a pure trend 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 our short-term oriented trend indicators as there is obviously no specific trend when the market is trading 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.

Basically, the same is true if we focus on short-term oriented market breadth. The overall short-term oriented tape momentum looks quite exhausted as the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed a bearish crossover signal last week. This is telling us that the momentum of advancing stocks and advancing volume has turned negative on quite high levels recently. Also the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) decreased last week and even dropped to the bearish territory (20 SMA). This indicates a deterioration of the current upside participation within the ongoing up-trend.  On the other hand, we can see that the market internals still look quite solid at the moment and, therefore, the risk of a significant short-term oriented pullback remains quite limited at the moment. This becomes obvious if we focus on the NYSE New Highs/New Lows Indicator. Here we can see that the latest declines were only driven by profit taking, whereas the broad market was still holding up quite well. This is due to the fact that the number of stocks which are hitting a fresh yearly high only dropped slightly for the week, whereas the number of stocks which have been pushed to a new yearly low also remains quite depressed! Consequently, it is not a big surprise at all that the High-/Low-Index Daily remains quite bullish for the time being. So all in all, the underlying short-term oriented technical condition of the market still looks a bit too supportive to justify a significant pullback at the moment, whereas on the other hand side, the bullish impulses are missing as well. As a matter of fact, further volatile sideways-trading looks quite likely within the next couple of trading sessions.

On the contrarian side, we can see that the current consolidation period has started to have its designated impact on short-term sentiment. This is mainly due to the fact that the z-score from the Daily Put/Call Ratio All CBOE Options Indicator grew back into bullish territory again. This is an outright constructive signal as it indicates that the market has now priced in a lot of bad news already. This can be also seen, if we focus on market sentiment as the amount of bears outpaced the amount of bulls, indicating that the market has still enough room to climb the wall of worry. Another positive signal is coming from the WSC Capitulation Index which is still indicating a risk-on market environment on a very short-time frame. Only the Smart Money Flow Index is flashing a mid-term oriented warning signal, as its gauge keeps trading far below its previous high. So if we try to put these contrarian signals into a bigger picture, the Presidential Cycle might give the best answer. There we can see that the market often hits an intermediate low in early October, after a longer lasting distribution phase in September. This low is then often the basis for a stronger but short-lived rally into mid-October, before further troubles might be due. Given the quite contradicting but still supportive short-term oriented signals together with quite bullish readings on the contrarian side, such a stronger recovery in October looks quite likely.

Mid-Term Technical Condition

Another main reason, why we believe that such a scenario is quite possible is due to the fact that the mid-term oriented uptrend of the market still looks quite healthy at the moment. Although our Global Futures Trend Index slightly decreased for the week and dropped into the upper range of its bullish consolidation area (85 percent), it is far away from being bearish. As always mentioned, as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming weaknesses tend to be limited in price and time (only in combination with confirmative market breadth readings). Moreover, we can see that the most sectors within the S&P 500 remain in a strong mid-term oriented price driven uptrend as the WSC Sector Momentum Indicator is trading at quite encouraging bullish levels. As a matter of fact, the underlying price trend of the S&P 500 looks quite solid at the moment. This can be also observed if we examine our Sector Heat Map, as the momentum score of all sectors (except energy like in the previous weeks and now also health care) remains above the one from riskless money market (currently at 15.8 percent).

Another main fact why we believe that it is still a way too early to panic right now 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. Consequently, we do not think that equities appear to be at risk of facing a high single digit drop at the moment. Especially, the Modified McClellan Oscillator Weekly was holding up quite well and even increased its bullish gap, 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 above their bearish counterparts (although the market was down for two consecutive weeks), signaling that the market internals still look supportive at the moment. On top of that, all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) 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) remains bullish, although it has lost some steam recently. So all in all, our mid-term oriented trend indicator framework remains supportive and, hence, we will stick our strategic bullish outlook at the moment.

Long-Term Technical Condition

The long-term oriented trend of the market remains positive. Although the WSC Global Momentum Indicator decreased last week into the bearish area, it indicates that still 42 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. Also our Global Futures Long Term Trend Index increased once again for the week, signaling that the long-term oriented trend of U.S. equities remains intact. The only weaker signal is coming from our WSC Global Relative Strength Index as the relative strength of all risky markets dropped. If we focus on our long-term market breadth indicators, we can see that the Modified McClellan Volume Oscillator Weekly has not shown any form of weakness, while the High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average decreased last week.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. The allocation of the WSC Sector Rotation Strategy remains unchanged.

Bottom Line

Our key call remains unchanged compared to last week. With quite stretched signals within our short-term oriented indicators, the market is poisoned for further consolidation into early October. However, the current consolidation can be still categorized as non-corrective/bullish biased, as most of our mid- to long-term oriented indicators remain quite bullish/supportive at the moment. Thus, our strategic bullish outlook remains unchanged and, therefore, we think it is still a way too early for our conservative members to take the chips from the table. Moreover, we can see that the current consolidation period has its designated impact on short-term optimism, which could act as another strong catalyst for a short-term relieve rally. However, that does not imply that the market will take off immediately but the chances for an impulsive break-out are definitely increasing (at least form a pure contrarian point of view). Therefore, we would advise our aggressive short-term traders to remain in the bullish camp (although they should not use too much leverage at the moment).

Stay tuned!