December 31st 2017

Market Review

The three U.S. indexes finished the final week of the year with small losses. The Dow Jones Industrial Average slid 0.1 percent for the week to end at 24,732. The blue-chip index is 10.4 percent up for the fourth quarter and recorded a yearly gain of 25.1 percent. The S&P 500 declined 0.3 percent to 2,674 in the holiday-shortened week, after completing the fourth quarter with 6.1 percent and the year with a 19.4 percent gain. The Nasdaq lost 0.8 percent for the week to finish at 6,903. The tech-heavy gained 6.3 percent in the fourth quarter and 28.3 percent in 2017. All three indexes ended in positive territory in December, with the S&P 500 and Dow clinching their 9th straight monthly gain. That marks the longest streak for the Dow since 1959. While, the Nasdaq notched its sixth straight annual gain, its longest streak since the one between 1975 and 1980. Among the key S&P sectors, utilities 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 15.68.

Short-Term Technical Condition

The market was in consolidation mode last week. As a matter of fact the short-term oriented trend of the market remains bullish but has shown some signs of fatigue recently. The Trend Trader Index is still 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 2,658. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher, indicating that the resistance/support levels for the S&P 500 are increasing as well. This is a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend, at least from a pure price point of view. If we focus on the overall trend momentum, in contrast, we can see that the Modified MACD flashed a bearish crossover signal on very high levels last week. This indicates some form of short-term exhaustion and can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. Although this indicator is still trading at quite bullish levels, it has not shown any bullish moves recently and has not confirmed the latest highs of the S&P 500. So basically, those signals are telling us that the pace has started to slow down and, therefore, the chances are quite high that the market is taking a breather.

From the current point of view, any upcoming slow down can be still categorized as healthy breather as nearly all our short-term market breadth indicators are still confirming the current short-term oriented uptrend of the market. The gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are still trending higher, indicating that the underlying breadth momentum of the broad market remains outright constructive at the moment. Additionally, we saw stable readings in the total number of all NYSE-listed stocks which reached a fresh 52 weeks high, in combination with one of the lowest readings of new 52 weeks low! For that reason, the High-/Low-Index Daily remains quite bullish for the time being. Therefore, the overall market internals look pretty healthy at the moment. The only weak breadth signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50). This is not a big surprise at all, as overall trading volume tends to slow down during the last trading week of the year.

If we focus on our contrarian indicators, we can see that the Smart Money Flow Index is also indicating some form of consolidation ahead as it has not confirmed the latest high from the Dow Jones Industrial Average. This picture is widely confirmed by the WSC Capitulation Index as its gauge kept trading within bearish territory. On the other hand, we can see that most of our option based indicators Global Futures Dumb Money Indicator, Uptick-/Downtick Ratio Daily, All CBOE Options Put-/Call Ratio and the Trin Daily) are now showing more neutral signals, which is another indication that any upcoming consolidation period should be limited in price and time. This view is widely confirmed by our more mid-term oriented contrarian indicators, as the amount of NYSE Member Debt in Margin Accounts reached new record levels.

Mid-Term Technical Condition

If we analyze the mid-term oriented technical condition of the market, the threat of any stronger pullback can definitely be ignored at the moment. Mainly because the Global Futures Trend Index is trading at 85 percent and closed below the edge of its bullish 90 percent threshold. Therefore, it is a way too early to issue a strategic sell signal now. We would take a more cautious stance if any upcoming slow-down pushes the gauge below 60 percent (of course only in combination with weakening market breadth). As this is not the case right now, any upcoming short-term weaknesses will definitely be limited in price and time. In addition, we can also see that the WSC Sector Momentum Indicator is trading at a solid level, indicating that most sectors within the S&P 500 remain in a strong mid-term oriented uptrend. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all sectors remains above the momentum score from riskless money market and the one from the S&P 500.

The mid-term oriented market breadth condition shows – again – an intermingled picture. The Modified McClellan Oscillator Weekly remains in its paralyzed status for its 6th week. Also, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) have not shown any significant bullish moves recently. This signals that the underlying trend momentum of the market is a bit flattish at the moment. But on the other hand, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume are still trading quite far above their bearish counterparts. Also our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) continued to strengthen in the last couple of trading sessions or have at least not shown any signs of bearish divergences yet. All in all, the current technical condition of the market still looks quite confirmative and, therefore, it is a way too early to call for a major market top right now.

Long-Term Technical Condition

The long-term uptrend of the market remains intact. Thus, our long-term bullish outlook has not been changed so far. Once again, the Global Futures Long Term Trend Index jumped to its highest level for months, indicating a technical bull market. Our WSC Global Momentum Indicator is telling us that 80 percent of 35 local equity markets all around the world (which are covered from our Global ETF Momentum Heat Map) are still in a long-term oriented up-trend currently. Consequently, the global trend structure still looks extremely supportive for the time being. On top of that we can see that the relative strength of all risky markets keeps trading above the one from U.S. Treasuries. The long-term oriented uptrend of the market is also widely confirmed by long-term market breadth. This is due to the fact that the readings from our entire long-term oriented tape indicators remain bullish (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their long-term oriented simple moving average (200).

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 relative strength score from the MSCI EM dropped out of the top 10 ranked markets within our Global ETF Momentum Heat Map, we received a sell signal for those specific ETFs within our WSC Global Tactical ETF Portfolio. Instead, the SPDR DJ Ind. is added to the portfolio. The allocation advice from the WSC Sector Rotation Strategy remains unchanged.

Bottom Line

Our strategic bullish outlook remains unchanged compared to last week. On a very short time frame, the market looks vulnerable for a bullish biased consolidation period. However, given the quite supportive/bullish readings within our mid- to long-term indicator board, any upcoming weaknesses should be limited in price and time. Therefore, we think it is a way too early to bet on a major trend reversal at the moment and our bullish outlook has not been changed so far. As a consequence, would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips again rather than chasing the market too aggressively on the upside.

Stay tuned!