March 18th 2018

Market Review

U.S. stocks finished the week with losses. The Dow Jones Industrial Average declined 1.5 percent over the week to 24,946.51. The S&P 500 recorded a weekly drop of 1.2 percent to finish at 2,752.01. The Nasdaq lost 1.0 percent for the week to end at 7,481.99. Most key S&P sectors ended in negative territory for the week, led by materials. Utilities were the only gainers. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 15.8.

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 32 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. 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 quite bullish, although it strongly lost momentum last week. Given the fact that this indicator tends to lead price movements, such a larger non-confirmation could indicate that a stronger trend reversal might be at hand soon.

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 can be seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges are trading above their 50 percent threshold, they decreased last week or have not shown any signs of gains so far. Another bearish signal is coming from the High-/Low-Index Daily, which also flashed a bearish crossover signal last week. The main reason for this bearish crossover signal is the fact that we have recently seen a reduction in the number of new highs, in combination with a quite encouraging spikes of new lows. This indicates that the latest decline was driven by the whole market and not only by a handful of heavy-weighted stocks in the S&P 500. This is a quite bearish signal, as such a stronger spike in new lows is often the vanguard for a stronger trend-reversals on a short-term time horizon. On the other hand side both, the Modified McClellan Volume Oscillator Daily and the Modified McClellan Oscillator Daily were holding up quite well, although they lost some momentum at the end of the week. As a matter of fact, the underling short-term oriented tape condition of the market can be described as quite non-confirmative at the moment. This is telling us that the current rally is running slightly out of steam. Even if we do not see a stronger pullback immediately, with such weak readings the upside potential of the market is quite limited at the moment.

From a pure contrarian point of view, we can see that the latest rally started to have its designated impact on short-term optimism as most of our option based indicators remain quite neutral for the time being (Global Futures Put-/Volume Ratio, Equity Options Call-/Put Ratio Oscillator Weekly and the All CBOE Options Call-/Put Ratio Oscillator Weekly). We mentioned already last time, that approximately 90 percent of all uncovered options are an also-ran and, therefore, we expected the rally to last at least until March 16th, as the option expiring date was due on that day. If we consider the fact that short-term market breadth is deteriorating all across the board, we received further evidences that the market is highly at risk for another down-leg. Therefore, it is not a big surprise at all that the WSC Capitulation Index grew back into its risk-off market environment area, whereas the big guys used the latest rally to cut exposure (as the Smart Money Flow Index dropped almost to a new low last week). Also the Presidential Cycle is suggesting another stronger down-leg into early April, before a V-shaped recovery should bring some relief.

Mid-Term Technical Condition

The situation on a mid-term time horizon looks pretty mixed at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index still remains within its bearish consolidation range. Normally, as long as the gauge does not close substantially above its 60 percent bullish threshold (in combination with weak mid-term oriented market breadth), the risks of a stronger pullback/correction is still given! Moreover, we believe that its gauge will lose momentum soon if we consider the weak short-term oriented tape condition of the market. Therefore, we are quite cautious at the moment. However, from a pure price point of view, most underlying sectors within the S&P 500 remain in a mid-term oriented uptrend and, as a consequence, the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far. This can be also seen if we focus on our Sector Heat Map, as the momentum score of all sectors (except utilities and consumer staples like in the previous week) keeps trading above the one from riskless money market. As already pointed out last week, we can also see that the current momentum score of riskless money market (currently 15.6 percent) is trading above 10 percent, which can be also seen as a red flag on the horizon (at least for now).

The current mid-term oriented tape condition of the market looks also quite non-confirmative at the moment. The Modified McClellan Oscillator Weekly has not shown any gains so far. This is an indication that the tape momentum has not improved at all, although we saw a stronger rally over the past weeks. This can be also seen if we focus on the Advance-/Decline Index Weekly, which strengthened its bearish signal. On top of that we can also see that the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) also dropped or have not shown any signs of gains so far. In other words, the latest rally was not able to bring our mid-term oriented tape indicators back to confirmative levels. The only encouraging fact is that the Upside-/Downside Volume Index Weekly is still trading at quite supportive levels. However, given the outright weak mid-term oriented tape structure, we strongly believe that the upside potential of the market looks extremely capped at the moment. So even if we do not see a stronger pullback immediately, the opportunity costs of not being invested should be quite low at the moment.

Long-Term Technical Condition

The long-term uptrend of the market remains intact, and therefore, the risk for a stronger bear-market is limited at the moment. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and trading at the highest level for years. As we can see from the WSC Global Momentum Indicator, 82 percent of all local equity markets around the world remain within a long-term oriented uptrend. This can be also monitored if we focus on the WSC Global Relative Strength Index, as the relative strength of all risky markets keeps trading far above the one from U.S. Treasuries. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stocks which are trading above their 200 day simple moving average is trading at solid bullish levels. In addition, our Modified McClellan Volume Oscillator Weekly continued to increase its bullish gap. The only weak signal is coming from the High-/Low Index Weekly.

Model Portfolios

If we have a closer look at our Model Portfolios (WSC Inflation Proof Retirement Portfolio, the Global Tactical ETF Portfolio, the WSC Sector Rotation Strategy and the WSC All Weather Portfolio) we can see that there were no changes in the allocation last week.

Bottom Line

After we had called the early February low right on time, we expected to see a stronger counter-trend rally lasting at least until mid-March. Although the S&P 500 has not reached our preferred target level of 2,850, it rallied 171 points since then. More importantly, the current rally is running out of steam as it has shown some major signs of fatigue recently (as our tape indicators deteriorated significantly last week). This is another piece of evidence for our long-term view, that the current rally is just part of a complex top-building process and will be, therefore, corrective in its nature. Consequently, we think the market is highly at risk for stronger disappointments at the moment. On the other hand side, even if we do not see a stronger pullback immediately, we think the upside potential of the market should also remain quite capped 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!!!