admin No Comments

May 27th 2018

Market Review

U.S. stocks finished the week in positive territory. The Dow Jones Industrial Average gained 0.2 percent for the week to close at 24,753.09. The S&P 500 booked a weekly gain of 0.3 percent and closed at 2,721.33. The Nasdaq ended the week 1.1 percent higher and closed at 7,433.85. Among the key S&P sectors, the utilities sector was the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.2.

Short-Term Technical Condition

Not surprisingly, the short-term oriented uptrend of the market remains quite unchanged compared to last week. The S&P 500 is still trading 38 points above the bearish threshold from the Trend Trader Index. This is telling us that – from a pure price point of view – the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.6835. Furthermore, 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. This short-term oriented bullish price driven trend is widely confirmed by positive momentum, as the Modified MACD has not shown any signs of major weaknesses so far.  On top of that the gauge from the Advance-/Decline 20 Day Momentum Indicator is trading at the highest bullish levels for weeks and, thus, clearly confirming the recent levels from the S&P 500.

espite the fact that the market finished the week with gains, the readings within our short-term breadth indicators were developing moderately last week. Consequently, the signals from most of our short-term oriented tape indicators remain supportive, but we can see some non-confirmation within their readings. This applies in particular to the Modified McClellan Volume Oscillator Daily, which flashed a bearish crossover signal. The Modified McClellan Oscillator Daily, in contrast, was holding up quite well. These signals are telling us that the short-term oriented breadth momentum of the market is currently slowing down a bit.  The case is similar if we focus on the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). From a pure signal point of view, both indicators are quite confirmative at the moment. Nevertheless, both indicators did not improve last week and were trading rather sideways, although the main averages ended the week with gains.  Another weak but bullish tape signal is coming from the NYSE New HighsNew Lows Indicator, as the number of stocks hitting a fresh yearly high and low has not shown any significant bullish moves compared to last week. As a consequence, also the bullish status from the High-/Low-Index Daily remains unchanged (although its bullish gauge decreased for the week). So in the end, there was hardly any real recovery within the short-term oriented tape structure visible, although the market finished slightly higher for the week. As a consequence, the current underlying short-term oriented tape condition of the market is signaling that further bullish biased sideways-trading on a very short time frame looks pretty likely.

On the contrarian side, the situation also looks quite mixed at the moment. The Smart Money Flow Index is still not confirming the recovery which started in early April. As a matter of fact it is still showing a huge bearish divergence to the current readings from the Dow Jones Industrial Average. This is an outright bearish signal on a mid-term time perspective and, therefore, we would not be surprised if the market is facing major headwinds in deeper summer (which would be in line with the readings from our Presidential Cycle). On a short-term time perspective we can see that some of our option based indicators (Global Futures Put Volume Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator and the All CBOE Options Call-/Put Ratio Oscillator) are signaling increased greed among dumb money. This is definitely another short-term oriented burden for the market right now.

Mid-Term Technical Condition

However, if we analyze the mid-term oriented technical condition of the market, the thread of a stronger correction can be definitely ignored at the moment. This is mainly due to the fact that the gauge from our reliable Global Futures Trend Index is still trading within its bullish consolidation range. As a matter of fact, the current consolidation period can be still classified as healthy rather than as corrective in its nature. So as long as we do not see readings below 60 percent (in combination with bearish readings within mid-term oriented market breadth), the risk of another stronger correction remains limited. This view is also confirmed by the WSC Sector Momentum Indicator, which increased last week and is signaling that most sectors within the S&P 500 remain in a mid-term uptrend. Our Sector Heat Map reveals that the momentum score from riskless money market dropped again (by 5 percentage points) last week and that currently only 2 out of 9 sectors within the S&P 500 are trading below the momentum score from riskless money market. As already pointed out last week, this is another indication that it might be a bit too early to take the chips from the table (at least for now).

The current mid-term oriented tape condition of the market remains somehow supportive but has not shown a clear direction recently. This is another sign that the current consolidation period might continue for a while. The most positive sign is coming from the Modified McClellan Oscillator Weekly, which narrowed its bearish gap last week. This is an indication that the tape momentum has improved. Also the Advance-/Decline Index Weekly was holding up quite well. The Upside-/Downside Volume Index Weekly, in contrast, showed a weak performance and decreased for the week (although it still remains bullish from a pure signal point of view). Also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) did not show any positive moves last week and were rather trading sideways. In other words, the overall mid-term oriented tape condition of the market remains supportive but is a bit too weak to justify stronger moves in both directions (from a current point of view moment).

Long-Term Technical Condition

Unchanged compared to the previous weeks remains our long-term oriented uptrend of the market. The WSC Global Momentum Indicator keeps on falling and trades at the lowest level for months. This is a signal that a lot of local equity markets around the world have dropped below their long-term trend-lines recently and that the current bull-run is slightly fading out (which would be in with the current Presidential Cycle). Also our Global Futures Long Term Trend Index continued its bearish ride, which has been lasting for weeks. But again we could see some bullish signals last week. First of all, our WSC Global Relative Strength Index showed once again strong signs of improvements and the relative strength of all risky markets keeps trading far above the one from U.S. Treasuries (except one). And also the readings from our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average) were holding up quite well.

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. The allocation of the WSC Global Tactical ETF Portfolio and the WSC Sector Rotation Strategy remains unchanged.

Bottom Line

The technical situation remains almost unchanged compared to last week. Given the still supportive/bullish readings within our mid-term oriented indicator framework, we think it is still a bit too early to take the chips from the table. As a matter of fact our long-term strategic bullish outlook remains unchanged at the moment. On a short-term time perspective, it looks like the market is quite capped in both directions. As a consequence, a period of consolidation into early June looks quite likely at the moment. Normally, such a range-bound trading period tends to be healthy if market breadth is getting back on track within that time period. On the other hand, if we see a deterioration all across the board, such a consolidation period could easily transform back into a more corrective top-building process. Right now, it is still a bit too early to get concerned about that fact as the overall tone still remains quite supportive at the moment. Therefore, we think the market has still some room left to grow, before such bearish divergences are becoming a real threat for the market. Nevertheless, if we consider the fact that the market is running into major headwinds into deeper summer (according to our Presidential Cycle), we would not be surprised if these divergences start piling up within the next couple of weeks.

Stay tuned!!!