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January 8th 2017

Market Review

All three U.S. indexes finished the first week of the year with solid gains. For the week, the Dow Jones Industrial Average rose 1.0 percent to 19,963.80. The blue-chip index set an intraday high of 19,999.63. The S&P 500 increased 1.7 percent in the holiday-shortened week to end at an all-time high of 2,276.98. The Nasdaq rocketed 2.6 percent during the week to finish at an record level of 5,521.06. All key S&P sectors finished in positive territory for the week, led by health care. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 11.3.

Short-Term Technical Condition

The short-term oriented uptrend of the market got back on track as the readings from our entire short-term oriented trend-indicators strengthened significantly last week. As the latest advance took place on a fast pace, we can see that the S&P 500 is now trading almost 22 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 2,254. Additionally, both envelope lines of this reliable indicator continued to increase on a fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. Above all, we can see that the underlying trend momentum got back on track, as the Modified MACD is about to flash a bullish crossover signal soon. Also the gauge from the Advance-/Decline 20 Day Momentum Indicator finished the week at quite solid levels, indicating further gains ahead (or that the recent consolidation period has come to an end).

This view is also confirmed by short-term market breadth. Both the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed a weak but bullish crossover signal last week. This indicates that the underlying breadth momentum of the market got slightly back on track. Another encouraging fact is that the total amount of all NYSE-listed stocks which reached a new yearly high remains pretty confirmative. But more importantly, there were hardly any stocks around which dropped to a new yearly low, indicating a quite healthy tape structure.  As a consequence, the High-/Low-Index Daily strengthened its bullish signal for the week. Only the percentage of stocks which are trading above their 20 days simple moving average should be much higher, given the fact that the S&P 500 is trading at record highs. But in contrast, the percentage of stocks which are trading above their 50 days simple moving average are trading at quite solid bullish levels, indicating a quite supportive trend-structure at the moment. In our opinion, with such strong signals all across the board, it is highly likely to see further gains ahead. As a consequence, we think that the market is heading towards new records into mid-January, which is definitely in line with our strategic bullish outlook.

The situation looks slightly different if we focus only on our contrarian indicators. There we can see that the Smart Money Flow Index has not confirmed the latest high from the Dow, the WSC Capitulation Index is still indicating a risk-off market scenario plus the gauges from the WallStreetCourier Index Oscillator and the Uptick-/Downtick Ratio Daily closed in bearish territory. In addition we can see that market sentiment is also a bit stretched. In such a situation it is not unusual to a see a washout day or at least further consolidation ahead. But given the quite strong short-term trend- as well as breadth indicators, we think that upcoming sideways trading/down testing should be limited in price and time.

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, we basically get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market continued to strengthen significantly and is therefore, giving no reason to worry right now. This is mainly due to the fact that our reliable Global Futures Trend Index increased last week to the upper part of its bullish consolidation range (85 percent). This is telling us that the mid-term oriented up-trend of the market remains well in force. Additionally, we can see that the WSC Sector Momentum Indicator also increased and is trading at quite solid levels, indicating that most sectors of the S&P 500 remain in a mid-term oriented uptrend. Looking at our Sector Heat Map reveals that the momentum score of nearly all sectors remains above the one from riskless money market. Like in the previous weeks, only health care and consumer staples have a lower scoring and therefore, it is too early to bet on a sustainable trend-change in that sector.

Mid-term oriented market breadth is absolutely confirming the current mid-term oriented uptrend of the market. The Modified McClellan Oscillator Weekly continued to increase last week, narrowing its bearish gap; it might flash a bullish crossover signal soon. This indicates that the overall tape momentum of the market is getting back on track. Additionally, all of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) increased last week to new record levels! This picture is also confirmed if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both gauges are trading at quite encouraging bullish levels, which is another sign that the underlying tape structure of the market remains pretty broad-based at the moment. Such a broader tape confirmation can also be seen if we examine mid-term oriented advancing issues as well as mid-term oriented up-volume. Both indicators improved significantly last week and are trading well above their bearish counterparts. As a matter of fact we think it might be a way too early to call for a major market top at the moment.

Long-Term Technical Condition

The long-term uptrend of the market remains well intact and therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating a technical bull market, whereas the WSC Global Momentum Indicator shows that currently only 45 percent of all local equity markets around the world remain in a long-term oriented uptrend. Moreover, the relative strength of most risky markets keeps trading above the one from U.S. Treasuries, which is another indication for a risk-on market environment. Also long-term market breadth is currently giving no reason to worry and therefore, we think that the current long-term uptrend of the market is not in danger at all (at least for the time being). Especially our long-term oriented High-/Low Index Weekly is still trading at supportive levels, indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the Modified McClellan Volume Oscillator Weekly as well as looking at the number of stocks which are trading above their longer-term oriented moving averages (200)!

Model Portfolios

Last week, there have been no changes within our model portfolios (WSC All Weather Model Portfolio, the WSC Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio and the WSC Global Tactical ETF Portfolio. Worth mentioning: as the underlying risk management indicator (WSC Global Momentum Indicator) of the WSC Global Tactical ETF Portfolio has not turned bullish yet, the portfolio remains invested in cash to protect capital.

Bottom Line

Our bullish outlook remains unchanged compared to last week. However, given the quite stretched readings within our contrarian indicators, increased volatility on a very short time frame cannot be ruled out. Nevertheless, given the quite supportive/bullish indicators all across the board (and especially on a mid- to long-term time horizon) it is a way too early to get concerned about the technical condition of the market. As a consequence, our bullish outlook has not been changed so far. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips rather than chasing the market too aggressively on the upside!

Stay tuned!