February 3rd 2019

Market Review

U.S. stocks rallied for the week. The Dow Jones Industrial Average added 1.3 percent from last Friday’s close to 25,063.89. The blue-chip index rose to extend its winning streak for a sixth week, the longest since November 2017. The S&P 500 advanced 1.6 percent during the week to 2,706.53. The Nasdaq closed at 7,263.87 and added 1.4 percent for the week. All key S&P sectors ended in positive territory for the week, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 16.1.

Short-Term Technical Condition

Not surprisingly, the short-term oriented trend of the market clearly continued to strengthen last week as the S&P 500 succeeded to close 103 points above the bearish envelope line from the Trend Trader Index. So from a pure price point of view, the short-term uptrend of the market remains intact as long as the S&P 500 does not drop below 2.603 (bearish threshold from the Trend Trader Index). Furthermore, we can see that both envelope lines of this reliable indicator are literally rocketing, which is another outright constructive trend signal at the moment. Above all, the overall time-series momentum also strongly strengthened as both trend lines from the Modified MACD increased. With such strong readings it is highly unlikely to see any major trend-reversal ahead. This view is also widely confirmed by the Advance-/Decline 20 Day Momentum Indicator, which is also trading at the highest level for months. Consequently, our entire short-term oriented trend indicators are confirming the latest gains from the S&P 500.

This picture also is widely confirmed by our short-term oriented market breadth indicators; all of them further increased last week or have not shown any signs of weakness so far. First of all we saw a healthy increase in the number of stocks which are hitting a fresh yearly high (especially at the beginning of the week), together with an outright low number of stocks which were pushed to a new yearly low. Consequently, it was not a big surprise at all that stocks continued to rally for the week. Above all, it pushed the bullish gauge from the High-/Low-Index Daily to quite supportive levels. This is another encouraging signal that the latest gains were not caused by a few mega caps but they were a result of a strong demand all across the board. Basically, the same is true if we focus on our short-term oriented breadth momentum indicators as the gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily also increased strongly. This is indicating that the underlying tape momentum of the broad market remains very constructive at the moment. This can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges succeeded to get back to solid bullish levels. So in the end, the sound readings within our short-term oriented tape indicators are telling us that that further gains into February can be expected.

Unchanged compared to last week, the situation on the contrarian side still looks quite supportive at the moment. This is mainly due to the fact that the option market remains in neutral territory, although we saw another week of strong gains. This is telling us that the crowd is still quite scared at the moment (due these quite negative driven fundamental news-flow). As a matter of fact, the market has enough room left, to climb that huge wall of worry. This can be also seen if we focus on market sentiment, as the amount of bulls even dropped last week. Consequently, there is still enough purchasing power around to drive prices higher. Another confirmative signal is coming from the WSC Capitulation Index, which is still indicating an outright risk-on market environment at the moment. A fact, which is now also confirmed by our Smart Money Flow Index.

Mid-Term Technical Condition

Another reason for further gains into February is the fact that our entire mid-term oriented indicators improved last week. This becomes pretty obvious if we focus on the gauge from the Global Futures Trend Index, as it succeeded to jump into the middle part of the bullish consolidation area (a few weeks ago this gauge was trading at zero percent!). As a matter of fact, this reliable indicator is now definitely confirming the current levels from the S&P 500! And also our WSC Sector Momentum Indicator continued its bullish ride, which is another quite positive technical signal for the time being. But still this indicator has to show stronger gains over the next couple of weeks in order to classify the current rally as a start of a new bull-market instead of just being a huge bear-market rally. This view is well supported by the fact that the momentum score of riskless money market (from our Sector Heat Map) still remains quite high at the moment. But still it improved by 17 percentage points for the week and seven sectors are trading below the one from riskless money market! Therefore, we still stick to our scenario that the current rally will just turn out to be a huge bear-market rally into Q1 instead of being the start of a new bull-market (at least from the current point of view).

On top of that, we can see that this current mid-term oriented up-trend of the market is also widely confirmed by mid-term oriented market breadth. Our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) strongly increased in the last couple of trading sessions and are, therefore, clearly confirming the recent level of the S&P 500! Moreover, mid-term oriented advancing issues and mid-term oriented up-volume continued to gain more bullish ground and are trading well above their bearish counterpart. This is probably the most important signal, as it indicates a strong underlying demand. Also our Modified McClellan Oscillator Weekly finally succeeded to flash a bullish crossover signal. In addition, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) also increased, but they still have not succeeded to pass their bullish threshold. So given the quite bullish signals all across the board, we strongly believe that the current rally is highly likely to continue into mid/late Q1.

Long-Term Technical Condition

Analyzing the long-term oriented trend of the market shows the same setting as in the previous weeks. Although our WSC Global Momentum Indicator slightly increased again compared to the previous week, it is still trading at a very low level. It indicates that only 28 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend. And our Global Futures Long Term Trend Index has been decreasing for months now and dropped again to the lowest level for years. In addition, also our WSC Global Relative Strength Index showed again weaknesses last week and the relative strength of all risky markets is trading below the one from U.S. Treasuries. These circumstances are still confirming our long-term oriented risk-off and bear-market rally scenario, respectively. But some very positive signals are coming from our long-term oriented tape indicators (High-/Low Index Weekly, the percentage of stocks which are trading above their 200 day moving average, Modified McClellan Volume Oscillator Weekly). All of them showed once again a very positive development last week. But as already pointed out last week, the long-term condition of the market still looks outright grim which underlines our bear-market rally case (at least for now).

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 Sector Rotation Strategy, the WSC Inflation Proof Retirement PortfolioWSC All Weather Model Portfolio and the WSC Global Tactical ETF Portfolio.

Bottom Line

The technical picture of the market continued to strengthen last week and, therefore, our strategic bullish outlook remains unchanged at the moment. To be more precise, with quite supportive/bullish readings within our indicator framework (especially on a short- to mid-term time horizon), we think that the current rally still looks quite constructive in its nature. The main reason, why we mentioned bear-market rally is due to the fact that the latest correction cycle has definitely left its mark on our mid- to long-term oriented indicator framework. So as long as we do not see a significant recovery within their readings (especially on a mid-term time horizon), the risk of another stronger pullback in late Q1/early Q2 still looks possible (at least for now). Anyhow – from a current point of view – the short-term oriented technical picture still looks quite too strong to bet on a major trend reversal at the moment. Therefore, we strongly believe to see further gains into mid Q1. So in the end, we would advise our conservative members to remain invested, whereas aggressive traders continue to buy into any upcoming weaknesses, as long as our short-term oriented indicator framework remains constructive.

Stay tuned!!!