February 19th 2017

Market Review

U.S. stocks finished another week of gains with the major averages at record highs. For the week, the Dow Jones Industrial Average gained 1.8 percent to end at 20,624.05. The S&P 500 recorded a weekly climb of 1.5 percent over the five days to 2,351.16. The Nasdaq rose 1.8 percent from last Friday’s close to end at 5,838.58. Most key S&P sectors ended in positive territory for the week, led by financials. Energy was the only decliner. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 11.5.

Short-Term Technical Condition

Right in line with our recent outlook, the market continued to push higher last week. As a matter of fact, it is not a big surprise at all that the short-term oriented uptrend of the market remains pretty unchanged compared to last week and even strengthened respectively. To be more precise, the S&P 500 is now trading 57 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 2.294. 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 a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. Moreover, the bullish status from the Modified MACD also strengthened during the last week and has therefore, clearly confirmed the recent break-out from the S&P 500. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator is also trading at quite bullish levels and thus, further gains into late 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. This indicates that the recent rally was not only driven by large-caps as the underlying trend-structure of the market is gearing up positive momentum. 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 increased their bullish ride. This is telling us that the underlying breadth momentum of the market remains outright positive. Additionally, we saw stable readings in the total amount of all NYSE-listed stocks which reached a fresh 52 weeks high (although they could have been slightly higher on Friday, if we consider latest record readings of the S&P 500), in combination with outright suppressed readings of stocks hitting a fresh 52 weeks low! As a consequence, the bullish gauge of the High-/Low-Index is trading far above its bearish counterpart. As long as this is the case, the current rally looks pretty 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 February, which is definitely in line with our strategic bullish outlook.

Unchanged compared to last week, the situation on the contrarian side remains pretty supportive at the moment. This is mainly due to the fact that the Smart Money Flow Index has clearly confirmed the recent break-out from the Dow Jones Industrial Average, whereas the WSC Capitulation Index is still indicating a risk-on scenario at the moment. Above all, the NYSE Member Margin Debt Indicator has not formed any major bearish divergence yet. Only market sentiment, measured by Market Vane is indicating too much optimism around, whereas the AII Bulls-/Bears survey is telling us that a lot of investors are getting increasingly scared about the continuation of the latest rally (which can be seen as quite positive fact).

Mid-Term Technical Condition

As per last week’s report, also our mid-term oriented trend indicators remain extremely bullish. This is mainly due to the fact that the reading from the Global Futures Trend Index passed the 90 percent threshold last week and is now trading within its extremely bullish area. As long as this is the case, any weaknesses should be used to buy into the market as any pullback should only turn out to be a temporary weaknesses/consolidation within an ongoing bull market. Additionally, the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market keeps trading at zero percent, indicating that all underlying sectors within the S&P 500 should perform absolutely positive on a mid-term oriented time horizon.

The current mid-term oriented up-trend of the market is also strongly confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly continued to show a widening bullish gap last week, indicating that the overall tape momentum remains pretty 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. Only mid-term oriented advancing issues as well as mid-term oriented up-volume lost some momentum last week. But as their bullish gauges are still trading far above their bearish counterparts, we can see that the underlying demand is not yet giving any reason to worry right now. But we will monitor their development quite closely within the next couple of weeks, as quite bearish divergences/signals within those indicators have mostly led to corrections trend-chances in the past.

Long-Term Technical Condition

The long-term technical condition of the market continued to improve in the last couple of trading sessions. Mainly due to the fact that the Global Futures Long Term Trend Index increased again last week. Above all, we can see that the gauge from the WSC Global Momentum is trading at its highest level for weeks. This indicates that most local equity markets around the world (in detail 75 percent) are also participating within the current rally, supporting our strategic bullish outlook. In addition, the relative strength of most risky markets keeps trading again far above the one from U.S. Treasuries, another indication for the current risk-on market environment. However, the most important fact is that long-term market breadth in the U.S. still remains constructive and is therefore, confirming the current long-term oriented trend of the market. This is mainly due to the fact that the Modified McClellan Volume Oscillator Weekly as well as the percentage of stocks which are trading above their long-term oriented moving averages (200) continued to strengthen their bullish signals. Additionally, also the High-/Low Index Weekly keeps trading at very solid bullish levels.

Model Portfolios

Last week, there have been no changes in the allocation advice of our model portfolios (WSC All Weather Portfolio, WSC Inflation Proof Retirement Portfolio, WSC Sector Rotation Strategy and the Global Tactical ETF Model Portfolio).

Bottom Line

Our strategic bullish outlook remains unchanged compared to last week. 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 strategic bullish outlook has not been changed so far as we are expecting a continuation of the recent rally (albeit on a very slow pace). Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should buy into any upcoming weaknesses!

Stay tuned!