January 22nd 2017

Market Review

U.S. stocks closed the week slightly lower with the Dow & S&P 500 logging their second straight weekly decline. For the week, the Dow Jones Industrial Average slid 0.3 percent to 19,827.25. The S&P 500 finished at 2,271.31 and posted a weekly drop of 0.2 percent. Nasdaq declined 0.3 percent from the week-ago close to 5,555.33. Among the key S&P sectors, consumer staples was the best weekly performer, while health care dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 11.5.

Short-Term Technical Condition

In line with our recent outlook, the market continued to be in a consolidation mode last week. From a pure short-term oriented price point of view, the trend status from the S&P 500 turned pretty neutral after it had managed to close within both envelope lines of the Trend Trader Index. Nevertheless, the underlying trend structure of the market remains supportive as both envelope lines of this reliable indicator are still drifting slightly higher. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a solid uptrend, at least from a pure price point of view. The situation looks quite different if we analyze the overall trend momentum of the market. Especially, the weak readings from the Modified MACD are still indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator, as its gauge closed on quite low bullish levels, indicating that the recent consolidation period is highly likely to continue next week.

It is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate or even turn completely bearish, when the market is consolidating. In such a situation, short- to mid-term market breadth will give further guidance as it helps to analyze if such a bearish short-term oriented trend structure is the vanguard of a stronger correction or just part of the ongoing (and healthy) consolidation period. In other words, if short- to mid-term market breadth remains supportive, the impact of a short-term oriented trend-break should be pretty limited (not exceeding 3-5 percent).

Right now, short-term market breadth still looks somehow constructive, although the impact of the recent consolidation period has definitely left its mark on the readings of our tape indicators. This becomes pretty obvious if we focus on the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). The percentage of stocks which are trading above their 20 days simple moving average dropped further below their bullish threshold and the ones trading above their 50 days simple moving average also touched their bearish threshold. Moreover, we can see that the Modified McClellan Oscillator Daily flashed a bearish crossover signal and the Modified McClellan Volume Oscillator Daily has not managed to turn bullish yet. On the other hand, we still can see that the remaining market internals remain somehow pretty robust. This is mostly due to the fact that the total number of stocks which are hitting a fresh yearly high remains at quite encouraging levels, whereas the number of stocks which have been pushed to a new yearly low has not shown any negative spikes so far. Consequently, it was not a big surprise at all that the High-/Low-Index Daily was still holding up quite well last week. Thus, most of the consolidation period was still driven by profit taking rather than by a significant structural change within the market internals. As a matter of fact, we have not seen any significant losses so far. Nevertheless, we cannot ignore the fact that there are a lot of bearish divergences around, if we compare the current levels from the S&P 500 with the actual readings from our short-term oriented indicator framework. Consequently, the upside potential of the market looks pretty capped at the moment, whereas the risk for a 2-3 percent pullback is increasing on a very short-time frame.

The overall situation on the contrarian side remains almost unchanged compared to last week. This is mainly due to the fact that the Smart Money Flow Index is still indicating further sideways-trading ahead, whereas the recent consolidation period has definitely dampened short-term optimism (Global Futures Put/Volume Ratio Oscillator Weekly, All CBOE Options Call-/Put Ratio Oscillator Weekly, Equity Options Call-/Put Ratio Oscillator Weekly and market sentiment), which can be seen as quite positive factor within the current consolidation period. Only on a very short-time frame, the market remains vulnerable for further increased volatility, as the fisher transformation from the WSC Capitulation Index has not indicated a risk-on scenario so far.

Mid-Term Technical Condition

However, right now we do not think that the recent consolidation period will cause a pullback than 3-5 percent, as the mid-term oriented uptrend of the market remains outright bullish at the moment. This becomes pretty obvious if we focus on the gauge from the Global Futures Trend Index, which closed slightly below the extremely bullish 90 percent threshold last week. As a matter of fact, this reliable indicator is definitely confirming the current levels from the S&P 500! Moreover, it is worth mentioning the fact that as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming consolidation period/pullback should be limited in price and time (of course only in combination with quite solid readings in mid-term market breadth). Additionally, the WSC Sector Momentum Indicator again gained more bullish ground last week, indicating that most sectors of the S&P 500 remain in a strong mid-term oriented uptrend. Having a closer look at our Sector Heat Map reveals that the momentum score of nearly all sectors remain above the one from riskless money market. The only sectors below are, like in the previous weeks, health care and consumer staples.

Another strong reason why we believe that the chances for a stronger correction looks pretty limited at the moment is due to the fact that the current mid-term oriented up-trend of the market is still strongly confirmed by mid-term oriented market breadth. To be more precise, it was quite encouraging to see that the Advance-/Decline Index Weekly as well as the Upside-/Downside Volume Index Weekly kept trading at quite solid levels, although the broad market closed slightly lower for the week. Furthermore, we can see that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) are still trading strongly above their bearish 50 percent threshold, indicating that the majority of all NYSE listed stocks are still per definition in a robust mid-term oriented up-trend. Above all, the Modified McClellan Oscillator Weekly has not shown any signs of weaknesses yet and even flashed a bullish crossover signal. Therefore, the current tape condition still remains constructive in its nature and therefore, it might be a bit too early to take the chips from the table – at least for the time being.

Long-Term Technical Condition

The long-term oriented up-trend of the market remains intact from a pure technical point of view. Mainly due to the fact that the Global Futures Long Term Trend Index has not turned bearish yet and its gauge even increased slightly again last week. Also the WSC Global Momentum Indicator strengthened its bullish signal within the last weeks and indicates that now 62 percent of all local equity markets around the world (all quoted in USD) remain within a long-term oriented up-trend for the time being. The relative strength of most risky markets keeps trading again above the one from U.S. Treasuries, another indication for the current risk-on market environment. There were also further improvements within our long-term oriented breadth indicators. Specifically the Modified McClellan Volume Oscillator Weekly continued to improve and also the percentage of stocks which are trading above their 200 days simple moving average are trading at very high bullish levels. Also our long-term oriented High-/Low Index Weekly is still trading at supportive levels, indicating that the long-term tape of the market remains well intact.

Model Portfolios

Last week, there have been no changes within our model portfolios (WSC All Weather Model Portfolio, the WSC Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio and the WSC Global Tactical ETF Portfolio).

Bottom Line

Our strategic bullish outlook remains unchanged compared to last week. However, given the quite mixed readings from our contrarian indicators, together with the quite bearish divergences within our short-term oriented indicator framework, the risk of a moderate pullback is increasing. As matter of fact a break below 2,230 would suggest more down-testing towards 2,200 whereas a break of that level would give way to a final overshoot towards 2,170-2,180 (which represents our worst-case scenario for the time being). Nevertheless, with quite supportive readings all across the board, we strongly believe that any upcoming pullback should turn out to be pretty shallow in its nature. Therefore, it is just a question of time until further gains can be expected (at least from the current point of view). Consequently, our bullish outlook remains unchanged and therefore, we would advise our conservative members to hold their equity position, while it is time for aggressive short-term traders to take profits.

Stay tuned!