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April 29th 2018

Market Review

U.S. stocks finished the week with small losses. The Dow Jones Industrial Average dropped 0.6 percent over the week to 24,311.19. The S&P 500 booked a very small weekly loss of 0.01 percent to finish at 2.669,91. The Nasdaq shed 0.4 percent for the week to end at 7,119.80. All three benchmarks posted their first weekly decline of the past three. Of the S&P sectors, utilities led advancers, while industrials led decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 15.4.

Strategy Review

After our members had successfully side-stepped the February correction, it was one of our key calls that 2,532 represented an important (intermediate) low. As a consequence, we advised our members to get back into the market quite quickly afterwards as we expected another significant rally into March. In fact, the market had rallied almost 9 percent from the correction low in early February, after our indicator framework was telling us right on time that the market was due for another stronger correction into late March/early April. Back then, we warned our members that any rally without a broader based tape confirmation would definitely not be sustainable in its nature. Moreover, from a pure cyclical point of view (Presidential Cycle) we also expected another significant pullback into April, before a V-shaped but also corrective rally could bring some temporary relief. After we had advised our members to cut exposure again on March 18th, the second correction started just a couple of days afterwards as the S&P 500 dropped almost 7 percent into late March/early April. After the magnitude of this decline was not fully confirmed by our indicator framework in combination with seasonal tailwinds (Presidential Cycle), we expected to see another stronger but corrective bounce into late April/early May. As a matter of fact, we advised our members to get back into the market as the bounce could have the potential to bring the S&P 500 back to its former bull-market high before major troubles into summer might be due. Indeed, since then the market was holding up quite well but failed to rally towards its old bull market high. After we are approaching a quite critical time period within our cyclical roadmap (Presidential Cycle), the big question is if the current bounce will have the power to push the market towards its old bull-market high of if it is time to cut exposure again?

Short-Term Technical Condition

Despite the fact that the U.S. equities finished lower for the week, the bullish trend-status from the S&P 500 remains unchanged. To be more precise, the S&P 500 closed slightly below the bullish threshold of the Trend Trader Index but is still trading 33 points above its bearish threshold. Above all, both envelope lines of this reliable indicator are still drifting higher, indicating that the underlying short-term oriented trend-structure of the market remains bullish biased, as we have seen slightly higher highs and higher lows within the past 20 days. Moreover, the gauge of the Advance-/Decline 20 Day Momentum Indicator has also not shown any signs of major weaknesses, which is not a big surprise at all given the fact that the broad equity benchmark finished the week nearly unchanged. Also the Modified MACD was holding up quite well, although its short-term oriented trend line lost some stream recently. Therefore, it could be possible to see a bearish crossover signal soon, if we do not see a week of strong gains ahead. Such a situation often occurs, when the price action of the market has slowed down for a couple of trading days. Normally, as long as our other short-term oriented market breadth remains bullish, would not even take a bearish Modified MACD too seriously as it would only indicate some signs of short-term exhaustion. Consequently, short-term market breadth is key area of focus as it will tell us if current slowdown will be just part of a healthy consolidation period or if it will be more corrective in its nature.

If we focus on our short-term oriented breadth indicators, we can see that their readings weakened for the week and are, thus, not confirming the current levels from the S&P 500 at the moment! This is due to the fact that short-term market breadth weakened all across the board last week. The Modified McClellan Oscillator Daily flashed a bearish crossover signal and the Modified McClellan Volume Oscillator Daily might follow soon. This is telling us that the underlying momentum of advancing stocks and advancing volume stocks on NYSE weakened significantly last week. Also the percentage of stocks which are trading above their short-term oriented moving averages (20/50) dropped. To be more precise, right now there are only 47/55 percent of all NYSE listed stocks which are trading above their 20/50 days moving average! Another bearish signal is coming from the High-/Low-Index Daily, which slightly strengthened its bearish signal last week (although the market finished nearly flat for the week).The main reason for this bearish signal is the fact that we have recently seen some stronger spikes in new lows, without any encouraging spikes in new highs. As a matter of fact, the underling short-term oriented tape condition of the market can be described as extremely weak/non-confirmative at the moment. This is telling us that the current bounce is definitely running out of steam at the moment! So even if we do not see a stronger pullback immediately, with such weak readings all across the board, we do not believe that the market has enough power to rally towards its previous bull-market high. In other words, the upside potential of the market should be quite capped at the moment and, therefore, the risk for stronger disappointments is increasing on a fast pace.

This point of view, is also confirmed on the contrarian side. The Smart Money Flow Index dropped to a new low, indicating major troubles ahead. Moreover, from a pure cyclical point of view (Presidential Cycle), we are also expecting that the S&P 500 is highly at risk to run into a cyclical bear market this summer (which could have the potential to push the S&P 500 towards 2,000-2200). To be more precise, according to these reliable patterns, the market will run into major tailwinds in early May. Given the fact that our entire indicator framework deteriorated significantly, we think this scenario looks quite likely and, therefore, our strategic bearish mid-term view remains unchanged at the moment.

Mid-Term Technical Condition

Another reason why we believe that the market is at risk for further disappointments is due to the fact that the mid-term oriented condition of the market also deteriorated significantly last week. This is mainly because the gauge from the Global Futures Trend Index decreased significantly for the week (and has, therefore, lost its bullish momentum recently).  As always stated in our market comment, from a formal point of view the current correction cycle will not be over as long as its gauge keeps trading below that important threshold. And as long as the gauge remains within its bearish biased consolidation brackets and does not simultaneously show some positive momentum, the risk of another stronger pullback remains quite high. As this is already the case, it is definitely time to get a cautious stance. So even if we do not see a stronger pullback immediately, as long as the gauge of this indicator remains near or below 60 percent (in combination with weak mid-term market breadth), the upside potential of the market should be limited as well! Consequently, the risk-/reward ratio is deteriorating significantly at the moment. Also our WSC Sector Momentum Indicator decreased significantly over the past weeks, although it did not turn bullish so far. An indication that the momentum score of several sectors within the S&P 500 are underperforming the momentum score of riskless money market. This can be observed by looking at our Sector Heat Map, as currently 4 sectors are underperforming the momentum score of riskless money market. This is another indication that the overall leadership within the S&P 500 is getting quite narrow at the moment.  So all in all, the situation is the same as last week. If we consider the overall direction/development of these signals, it is just a question of time until we see a bearish signal in that indicator as well. This is a strong piece of evidence (for our mid-term view) that the market could face major troubles in deeper summer.

Another reason why we believe that the current bounce is running out of steam is due to the fact that also our entire mid-term oriented breadth indicators deteriorated last week (although the market finished nearly flat for the week). Especially, our Modified McClellan Oscillator Weekly showed an increasing bearish gap and also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped and just closed slightly above their bullish thresholds. This indicates that the underlying trend momentum of the market is fading out and, therefore, most of all NYSE listed stocks are struggling to get back into a strong mid-term oriented uptrend at the moment. Moreover, the current gauges from these indicators are far away from confirming the current levels from the S&P 500 at the moment. However, the most concerning signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both indicators deteriorated significantly for the week. Especially, the Advance-/Decline Index Weekly almost turned bearish last week, indicating that a lot of purchasing power was pulled out of the market and, therefore, the market internals have now a more bearish tilt. If this trend continues, it will be just a question of time until we see a stronger repricing of the S&P 500.

Long-Term Technical Condition

The long-term oriented uptrend of the market shows the same picture as in the previous weeks, indicating that it started to run out of steam. The WSC Global Momentum Indicator is trading at the lowest level for months, signaling 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. Also our Global Futures Long Term Trend Index has been falling for weeks now. Our WSC Global Relative Strength Index, in contrast, showed some signs of improvements last week and the relative strength of all risky markets keeps trading far above the one from U.S. Treasuries. But the exhaustion in long-term market breadth is still persistent, as the readings from our entire 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) have not shown any significant positive moves recently. This is another confirmation for our mid-term oriented cyclical bear-market scenario at the moment.

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 momentum score of energy/industrials rose/fell above/below average and above the one from the S&P 500 within our Sector Heat Map, we buy/sell a sell signal for that ETF within our WSC Sector Rotation Strategy. There have been no changes in the allocation advice of the WSC Global Tactical ETF Model Portfolio.

Bottom Line

Although the market remains in a short-term oriented bullish-biased trend, we think it is time to get a more cautious stance at the moment. As mentioned above, the current technical condition of the market looks extremely non-confirmative/damaged at the moment, and therefore, the risk for another stronger disappointments into summer remains quite high at the moment. Moreover, this scenario is also widely confirmed from a pure cyclical point of view and, therefore, the market is moving right in line with our general strategic view (although we expected to see a stronger bounce into late April). However, even if we do not see a stronger pullback immediately, we think the upside potential of the market looks extremely limited at the moment. So all in all, the risk-/reward ratio of being invested is extremely depressed at the moment (if we consider the current downside potential in in combination with our preferred view). So even if we see a longer-lasting consolidation period instead of another down-leg, we would just sacrifice 2-3 percent upside potential until our indicator framework would flash an all clear signal again.  So in the end, we think it is time for our conservative members to step on the sideline again (until our indicator framework is getting back on track/or until we see a great buying opportunity). Aggressive traders should close any outstanding long positions and should focus on selling into strengths if we see a short-term oriented trend break within our indicator framework.

Stay tuned!!!