February 24h 2019

Market Review

U.S. stocks finished the week with decent gains. The Dow Jones Industrial Average added 0.6 percent for the week to end at 26,031.8. The 30-stock index also broke above 26,000 for the first time since early November and posted its ninth consecutive weekly gain, its longest streak since May 1995. The S&P 500 also eked out a gain of 0.6 percent from last Friday’s close to finish at 2,792.67. The Nasdaq climbed 0.7 percent over the week to 7,527.54. It notched its ninth straight weekly gain, its longest streak since May 2009. Most key S&P sectors finished higher. The utilities sector was the best weekly performer, while energy dragged. The CBOE Volatility Index(VIX), widely considered the best gauge of fear in the market, traded near 13.5.

Short-Term Technical Condition

The market is heading down our expected road. Consequently, it is not a big surprise at all that the short-term oriented trend of the market clearly continued to strengthen last week as the S&P 500 succeeded to closed 88 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 500does not drop below 2.710 (bearish threshold from the Trend Trader Index). Furthermore, we can see that both envelope lines of this reliable indicator are increasing on a very fast pace, which is another outright constructive trend signal at the moment. Above all, the overall trend momentum also strengthened as both trend lines from the Modified MACD increased once again. 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 also increased for the week. Consequently, our entire short-term oriented trend indicators are confirming the current time-series momentum of the S&P 500.

This picture is also widely confirmed by our short-term oriented market breadth indicators. All of them further increased last week or have not shown any serious signs of weakness. First of all, we saw healthy readings in the number of stocks which are hitting a fresh yearly high (especially at the end of the week), together with an outright low number of stocks which were pushed to a new yearly low. Consequently, this fact strengthened the bullish gauge from the High-/Low-Index Daily. Furthermore this indicates that the latest gains were not caused by a few mega caps but they were a result from 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 strengthened last week. This is indicating that the underlying breadth momentum of the broad market is still gearing up. The only weaker signal is coming from the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges are trading on their highest levels for months they did not increase last week. But this is not a big surprise if we consider the outright high levels from those indicators at the moment. So all in all, our entire short-term oriented tape indicators are telling us that the current time-series momentum of the market is driven by the whole market and not only by a few heavy weighted stocks in the S&P 500. As a matter of fact, the current short-term oriented up-trend of the market is extremely powerful at the moment! Consequently, the risk of a sudden momentum crash is outright low at the moment.

Even from a pure contrarian point of view, the overall technical picture of the market also remains quite supportive at the moment. The WSC Capitulation Index dropped to the lowest level for months and is, therefore, indicating that dumb money still remains quite cautious at the moment. This is a quite important signal, as it indicates that the market has still enough potential to climb the current wall of worry. This can be even seen if we focus on our option based indicators (Equity Options Call/Put Ratio Oscillator, Global Futures Put/Volume Oscillator, All CBOE Call/Put Ratio Oscillator) as all of them dropped back towards normal levels. This is a quite interesting fact, as it is telling us that the crowd still remains quite skeptical regarding the continuation of the current rally. This view is still driven by mainstream media, which are stating that the current rally has already gone too far (a fact, they already told weeks ago). Consequently, the spread between bulls and bears on Wall Street remains outright high and could act, therefore, as additional driver on a short- to mid-term time horizon.

Mid-Term Technical Condition

Another main reason, why we believe it is still a way too early to bet on a major trend-reversal is due to the fact that our entire mid-term oriented indicators remain bullish and even strengthened significantly last week. At the beginning of the year the gauge from our Global Futures Trend Index was trading at its absolute bottom – last week it succeeded to pass the 90-percent threshold to its extremely bullish area. Consequently, this indicator is definitely confirming the current levels from the S&P 500! This can be seen as quite strong technical trend signal, as readings near (or even above) 60 percent (in combination with bullish mid-term oriented tape signals) never led to any stronger correction/trend-reversal in the past! Also the gauge from our WSC Sector Momentum Indicator jumped to the highest level since the beginning of the year, indicating that many sectors of the S&P 500 got back into a mid-term oriented uptrend. These bullish facts are absolutely supported by our Sector Heat Map as the momentum score of riskless money market (from our Sector Heat Map) decreased by 22 percentage points last week! And currently only 4 sectors are trading below the one from riskless money market! Based on these sound readings, we strongly believe to see further stronger gains ahead, which could finally lead to a re-test of the previous bull-market high!

This view is also driven by the fact that the current mid-term oriented time-series momentum of the market is also strongly confirmed by mid-term oriented market breadth. Like in the previous weeks, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) increased in the last couple of trading session and some of them reached their highest levels for years. Consequently, they have clearly formed a bullish divergence if we consider the current level of the S&P 500! Moreover, mid-term oriented advancing issues and mid-term oriented up-volume also showed very strong signs of confirmation. This is probably the most important signal, as it indicates a solid underlying demand. And also our Modified McClellan Oscillator Weekly succeeded to further increase its bullish gap last week. And finally, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) also strengthened last week. All these facts signal that the total upside participation within the market is extremely broad based at the moment, which is another indication that there is still some room left before major troubles might be due.

Long-Term Technical Condition

Once again, the long-term oriented trend of the market showed major signs of improvements last week. The WSC Global MomentumIndicator increased by 8 percentage points last week and signals that now 48 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-lines. As pointed out last week, this is a quite supportive technical signal, as it shows that the current recovery is globally in scope. And this is another indication for our case, that the current rally could be the beginning of a new bull-market instead of just being a huge bear-market rally. Furthermore, our Global Futures Long Term Trend Index bottomed out and finally started to increase last week, which can be seen as another quite supportive signal at the moment. The only weak signal is coming once again from our WSC Global Relative Strength Index, which is still indicating a long-term risk-off market scenario, as the relative strength of nearly all risky markets is trading below the one from U.S. Treasuries. Examining our long-term market breadth indicators (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weeklyand the percentage of stocks which are trading above their 200 day moving average), in contrast, reveals that all of them continued to strengthen. This is a clear signal that the long-term market internals are also gearing up.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Model Portfolio and the WSC Inflation Proof Retirement Portfolio. As the underlying risk management indictor (WSC Sector Momentum) for the WSC Sector Rotation Strategy turned bullish last week, the portfolio is switching back into risky assets and is, therefore, investing again in the strongest sectors within our Sector Heat Map. This also indicates that the overall technical environment for U.S. equities is definitely brighten up, which is in line with our strategic outlook. Only the WSC Global Tactical ETF Portfolio still remains invested in its bear-market portfolio, as the WSC Global Momentum Indicator has not turned bullish yet.

Bottom Line

So all in all, the current time-series momentum of the S&P 500 is well supported by a broad basis and, therefore, our strategic bullish outlook remains unchanged compared to last week. To be more precise, with outright strong readings all across the board, the current rally is not in danger of fading out at the moment. As a matter of fact, we strongly believe to see further gains into late Q1, where it is also possible to see new record highs soon. Consequently, the current risk-/reward ratio still looks extremely attractive at the moment. Thus, we would advise our conservative members to hold/increase their equity exposure, while aggressive short-term traders should keep buying the dips.

Stay tuned!!!