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September 10th 2017

Market Review

U.S. stocks closed the week with losses. The Dow Jones Industrial Average closed at 21,789 and declined 0.9 percent over the week. The S&P 500 shed 0.6 percent for the week to finish at 2,462. The Nasdaq slid 1.2 percent for the week to end at 6,357. Among the key S&P sectors, health care and energy were the best weekly performer, while financials and technology dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.1.

Short-Term Technical Condition

Despite the fact that the market ended down for the week, the readings from our entire short-term oriented trend-indicators remain bullish and some of them even continued to strengthen last week. The S&P 500 is still trading 17 points above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.445. In addition, we can see that both envelope lines of this reliable indicator have slightly started to show some positive signs of bottoming out. This can be seen as a quite constructive technical signal as it indicates that the latest price move is getting more sustainable in its nature, which is in line with our recent outlook. Moreover, the bullish status from the Modified MACD also improved compared to last week and is additionally showing some form of bullish divergence right now. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator jumped to the highest level for months and is therefore, confirming our view that we have seen the worst already – at least on a short-term time frame.

This picture is widely confirmed by short-term market breadth as it was good to see that our entire tape indicators showed stronger signs of improvements – although the market closed with losses for the week. This is a quite positive technical signal, as it indicates that the broad based market is getting back on track. This becomes pretty obvious if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators clearly strengthened their bullish signals, indicating that the momentum of advancing stocks as well as advancing volume is gearing up. Also the total number of stocks which are hitting a fresh yearly high remains at quite solid levels, whereas the number of stocks which were pushed to a new yearly low has not shown further negative spikes so far. Consequently, it was not a big surprise at all that the High-/Low-Index Daily was holding up quite well last week. Also the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) showed major signs of recovery since last week. With such positive short-term readings, we believe that the risk of a stronger and sustainable negative trend-reversal tends to be extremely limited for the time being.

As per last week’s report, on the contrarian side is it quite calm. The Smart Money Flow Index lost some ground compared to the Dow, but its long-term movement still looks like a bigger trading range. As a matter of fact it could be possible to see some further range bound trading ahead. Another supportive reading is coming from the WSC Capitulation Index, which continued to level off from quite bearish readings. Nevertheless, its gauge still remains in bearish territory and therefore, we think the overall volatility level might remain elevated on a very short-time frame. However, given the quite supportive short-term readings, this should not be a big threat at all.

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, we get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market strengthened last week. Mainly because our reliable Global Futures Trend Index continued to recover significantly and was therefore, able to close in the middle of its bullish consolidation range last week. This can be seen as a very constructive signal, as it confirms our latest view that the recent correction risk has clearly diminished (as its gauge closed above the important 60 percent together with a stronger recovery in market breadth). In addition, the WSC Sector Momentum Indicator is still trading at a very solid level (although it came down a bit in the last week). This is telling us that most sectors within the S&P 500 are per definition in a mid-term oriented uptrend – although this trend-force cooled down a bit. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all industries (apart from energy) is still above the one from riskless money market. Nevertheless, we can see that riskless money market also added some strength recently. Right now this is not a deal-breaker at all (given the quite supportive readings all across the board) but it might also indicate that the pace of the recent uptrend is slowing down a bit. Consequently, this signal might be another indication for a range-bound scenario.

The same is true if we focus on our mid-term oriented market breadth indicators, as they also show a quite ambiguous picture at the moment. On the one hand, there are a lot of positive signals. For example, all of our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) continued to strengthen in the last couple of trading sessions (or have at least not shown any signs of bearish divergences yet).  On the other hand, there are also a lot of neutral as well as negative signals around. First of all the Modified McClellan Oscillator Weekly finished the week literally unchanged, indicating that the underlying breadth momentum is still somehow lagging behind on a mid-term time horizon. On top of that we can see that also the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly showed a quite weak performance last week although both of them still remain supportive at the moment. Another weak but supportive signal is coming from the stocks which are trading above their mid-term oriented simple moving average (100/150). Despite the fact that we saw a stronger recovery in their readings, both of them have not succeeded to pass their bullish threshold yet. In summary, the overall mid-term oriented condition of the market is too supportive to be at risk for a stronger pullback, but it also remains a bit too weak for a major and sustainable break-out at the moment.

Long-Term Technical Condition

Our long-term bullish outlook remains unchanged as the Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. Also the WSC Global Momentum Indicator is trading at the highest levels for months and indicates that 92 percent of all global markets remain within a long-term oriented uptrend. Additionally, we can see that the relative strength of all risky markets keeps trading far above the one from U.S. Treasuries (except commodities). We also received some small improvements from long-term market breadth. Both, the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly eked out some small gains. Only the percentage of stocks which are trading above their 200 day moving average have not succeeded to turn positive and to pass the bullish threshold.

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, the Global Tactical ETF Portfolio and the WSC All Weather Portfolio. As the momentum score of financials dropped below average and below the one from the S&P 500 within our Sector Heat Map, we received a sell signal for that ETF within our WSC Sector Rotation Strategy. Moreover, we are proud to announce that the WSC All Weather Portfolio reached another all-time high last week.

Bottom Line

As already mentioned last week, the technical environment of the market confirmed our view that the recent corrective top building process transformed back into a healthier market environment. Given the quite supportive readings all across the board, the risk of a stronger correction is definitely off the table right now. However, that does not imply that the market will take off immediately. On the contrary, in our opinion the overall tape structure is still a bit too weak to push the market strongly above its latest all-time high. This means that as long as we do not see some stronger readings within our indicator framework, it is highly likely to see some sort of bullish biased range bound trading ahead. In our preferred scenario, this range bound trading is accompanied with further improvements within our indicator framework which would then of course lead to further gains. On the other hand, it is also possible that this range bound leads to a renewed deterioration, which would then of course force the market back into a more corrective top building process again. However, given the quite fast changing market environment, we would not be afraid of issuing a strategic sell signal immediately if that is the case as capital appreciation is the most important driver for success.

Stay tuned!