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May 20th 2018

Market Review

All three major U.S. averages finished the week with losses. The Dow Jones Industrial Average closed nearly at 24,715.09, leaving it with a 0.5 percent weekly loss. The S&P 500 lost 0.5 percent for the week as well to finish at 2,712.98. The Nasdaq slid 0.7 percent for the week to end at 7,354.34. Among the key S&P sectors, energy was the best weekly performer, while utilities dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.4.

Short-Term Technical Condition

Despite the fact that the market finished with a small loss for the week, the bullish trend-status from the S&P 500 remains unchanged. To be more precise, the S&P 500 closed 48 points above the bearish threshold from the Trend Trader Index. Above all, both envelope lines of this reliable indicator are still drifting higher, a typical indication for a stronger short-term oriented uptrend. The same is true if we focus on the readings from the Modified MACD, as they have not shown any signs of weaknesses so far. Also, the gauge from the Advance-/Decline 20 Day Momentum Indicator remains pretty bullish. As a matter of fact, the latest price action from the S&P 500 can be still described as a healthy consolidation period rather than the start of a new sustainable down-trend at the moment.

Basically, we receive the same picture if we analyze short-term market breadth. Especially, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) continued to increase, indicating an outright healthy trend-structure at the moment (although the market finished in negative territory for the week). 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 remain quite supportive at the moment. To be more precise, both short-term oriented trend-lines have reached the highest level since the first correction leg in late January/early February and have, therefore, formed an outright bullish divergence recently. This is telling us that the underlying breadth momentum of the market remains outright strong, which indicates that further rallying can be expected on a short-term time perspective. This picture is widely confirmed by the NYSE New Highs minus New Lows. There we saw a stable increase in the total number all NYSE-listed stocks which reached a fresh 52 weeks high, in combination with depressed readings of new 52 weeks low! As a matter of fact, the High-/Low-Index Daily did not show any signs of weaknesses last week, although the market finished lower for the week. This is telling us that the latest price action of the S&P 500 was only driven by a handful of heavy weighted stocks in the S&P 500 rather than by the whole market. So all in all, given the outright positive short-term oriented tape structure, we think the current short-term oriented uptrend of the market is not at risk of fading out at the moment.

On the contrarian side, the situation looks quite heterogeneous. The Smart Money Flow Index 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. However, on a very short-time frame, we can see that the Fisher Transformation from the WSC Capitulation Index managed to get back into outright bullish territory, indicating that the market got back into a risk-on mode last week.

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 strengthened last week (although the market finished with losses for the week). This is mainly due to the fact that our reliable Global Futures Trend Index gained further momentum and finally succeeded to get back into its bullish consolidation range last week. This is a quite constructive signal, as it indicates that the latest correction cycle has come to an end (as its gauge closed above the 60 percent threshold together with a recovery in market breadth). Basically, the same is true if we analyze the current momentum score of all major key sectors within the S&P 500. There we can see that most industries showed an outright positive momentum versus riskless money market last week. As a result, the gauge from the WSC Sector Momentum increased significantly last week and reached a solid bullish level. This can be also seen if we focus on our Sector Heat Map, as the momentum score from riskless money market dropped significantly last week. And currently only 2 out of 9 sectors within the S&P 500 are trading below the momentum score from riskless money market. In our view, this is another indication that the risk appetite among investors has returned and, therefore, we think that further rallying can be expected.

Also mid-term market breadth looks quite supportive at the moment. Especially, the Modified McClellan Oscillator Weekly continued to increase last week and narrowed its bearish gap, indicating 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 or have not shown any signs of bearish divergences yet! Only, the bullish signals from mid-term oriented up-volume and mid-term oriented advancing issues could definitely be a bit stronger in our point of view. But given the fact that our entire short-term tape indicators have gained quite bullish ground recently, this issue is not a big deal-breaker at the moment. Moreover, we can see that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) also increased to outright supportive levels during the last couple of trading sessions. This indicates that the total upside participation on a mid-term time horizon grew significantly last week, which is another indication that further rallying can be expected.

Long-Term Technical Condition

The long-term oriented trend of the market shows again the same picture as in the previous week. The WSC Global Momentum Indicator decreased again and trades at lowest levels for months. This signals 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. Additionally, the Global Futures Long Term Trend Index continued its bearish ride and also reached the lowest level for months. But again, a positive sign is coming from our WSC Global Relative Strength Index as the relative strength of all risky markets increased last week. In addition, all markets (except one) are trading above the one from U.S. Treasuries. But the exhaustion in long-term market breadth is still persistent, as the readings from both, the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly, have again not shown any significant positive moves recently. The only exception is the percentage of stocks which are trading above their 200 day moving average. This can be seen as another confirmation for our mid-term oriented view, that the market will face major headwinds in deeper summer.

Model Portfolios

If we have a closer look at our Model Portfolios, we can see that there have been no changes in the allocation advice from the WSC Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Sector Rotation Strategy. As the relative strength score from the S&P Latam 40 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 MSCI Singapore is being added within the portfolio.

Bottom Line

The technical picture of the market continued to improve significantly compared to last week and, therefore, our bullish outlook remains unchanged at the moment. To be more precise, with broadening strengths all across the board, we think that the current short-term oriented uptrend is not in danger of fading out at the moment. Consequently, we strongly believe to see further gains into deeper May. For that reason, we would advise our conservative members to remain invested (or to get back into the market if they did not raise their exposure last week), whereas aggressive traders should focus on buying into weaknesses, as long as our short-term oriented indicator framework remains constructive.

Stay tuned!!!