March 3rd 2019
U.S. stocks finished the week mostly with small gains. The Dow Jones Industrial Average closed at 26,026.32 and shed about 0.1 percent for the week to snap its nine-week winning streak, the longest since May 1995. The S&P 500 ended at 2,803.69 and booked a weekly gain of 0.4 percent. The Nasdaq added 0.9 percent over the week to finish at 7,595.35. Most key S&P sectors finished higher, led by energy. The materials sector was the worst performer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 13.6.
Short-Term Technical Condition
According to our short-term oriented indicators, the bullish trend-status from the S&P 500 remains unchanged. To be more precise, the S&P 500 closed 59 points above the bearish threshold from the Trend Trader Index. Furthermore, both envelope lines of this reliable indicator are drifting higher on a quite fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite strong technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. Moreover, the Modified MACD also increased for the week, but the bullish gauge formed a rounding top and might flash a bearish crossover signal soon. Also, the gauge from the Advance-/Decline 20 Day Momentum Indicator remains at quite solid bullish levels but also slightly decreased for the week. Both indicators are, therefore, signaling that the market appears ready for a bullish biased consolidation period.
This picture is also confirmed by short-term market breadth. Currently, our entire short-term oriented tape indicators remain supportive, but we can see some small signs of non-confirmation within their readings. Particularly, the gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed some signs of exhaustions last week. In addition both indicators are about to flash a bearish crossover signal soon and are, thus, signaling that the overall breadth momentum is currently slowing down a bit. This view is also confirmed by the percentage of stocks which are trading above their short-term oriented moving average (20/50) as both indicators have lost some steam recently – especially the 20 days’ time frame gauge. This can be also seen if focus on the NYSE New Highs – New Lows Indicator as the total number of stocks hitting a fresh 52 weeks high slightly decreased (and is, therefore, not completely confirming the current level from the S&P 500 at the moment). Consequently, the High-/Low-Index Daily weakened slightly last week, although it is still trading at quite solid levels. So in the end, there was hardly any positive momentum within the short-term oriented tape structure visible, although the market finished slightly higher for the week. This can be also seen, if we focus on short-term up-volume, which also slowed down last week. As a consequence, the current underlying technical condition of the market is signaling that a bullish biased/volatile sideways-trading set-up looks pretty likely on a very short time frame.
Another reason for a potential slow-down is the fact that we can see a lot of greed in the option market right now (as the put-/call ratio dropped below 0.9). This indicates that a lot of market participants are betting on a fast rally towards the latest bull-market high, once the S&P 500 manages to break through its strong resistance line at 2,813. Given the fact, that short-term market breadth is slowing down, together with a quite optimistic option market, we think the market needs a few attempts to do so. Moreover, we can see that a lot of bears have switched into the bullish camp recently, which tells us that a lot of purchasing power is already invested at the moment. Another reason for a short-lived consolidation period is the fact that the Smart Money Flow Index did not fully confirme the gains from the Dow Jones Industrial Average last week, whereas the WSC Capitulation Index has shown some signs of strength on quite bullish levels recently. Even from a pure cyclical point of view (Presidential Cycle), the market often faces stronger headwinds until mid-March before further rallying can be expected.
Mid-Term Technical Condition
However, as the mid-term oriented technical condition of the market is giving no reason to worry right now, we definitely think it is still a bit too early to take the chips from the table at the moment. As a matter of fact, any upcoming consolidation period/down-testing should be limited in price and time. Reaching 92 percent last week, our reliable Global Futures Trend Index is still trading in its absolute bullish area. And as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming weaknesses should be limited in price and time (in combination with strong readings in mid-term oriented market-breadth). This view is also confirmed by the WSC Sector Momentum Indicator, which measures how many key sectors remain in a mid-term oriented up-trend (31 percent currently) and which has been increasing for weeks. So from a pure price point of view, most key sectors keep drifting higher and, therefore, the underlying trend-condition of the S&P 500 looks quite healthy at the moment. Also our Sector Heat Map has been improving for weeks now and the momentum score of riskless money market decreased by 13 percentage points last week and dropped to 27 percent! And currently there are only 3 sectors left, which are trading below the one from riskless money market! Based on these sound readings, we strongly believe to see further gains ahead, which could finally lead to a re-test of the latest bull-market high on a mid-term time horizon!
Mid-term oriented market breadth is also confirming the current mid-term oriented trend at the moment. All of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) were holding up quite well at the highest levels for months or have not shown any serious signs of bearish divergences yet! Additionally, the Modified McClellan Oscillator Weekly continued to widen its bullish gap, indicating that the momentum of advancing stocks improved on a mid-term time horizon. This picture is also supported by the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Although they decreased a bit for the week, both gauges still were holding up quite well, especially if we consider that the market finished just slightly higher for the week. This is another indication that the underlying tape structure of the market remains pretty broad-based at the moment. Such a broader tape confirmation can also be seen if we concentrate on mid-term oriented advancing issues as well as mid-term oriented up-volume – both indicators strongly improved for the week. Based on the fact that our entire mid-term oriented market breadth indicators are trading at quite bullish/supportive levels, our strategic bullish outlook remains definitely unchanged so far.
Long-Term Technical Condition
The long-term oriented trend of the market also continued to show signs of improvements last week. Our WSC Global MomentumIndicator increased by another 7 percentage points last week, indicating that 55 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are now trading above their long-term oriented trend. This is a quite supportive technical signal, as it shows that the current recovery is global in scope. In addition, it 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. Also our Global Futures Long Term Trend Index was holding up quite well, which can be seen as another quite supportive signal at the moment. The only weak signal is coming from the WSC Global Relative Strength Index, as it is still indicating a long-term risk-off market scenario, since the relative strength of nearly all risky markets is trading below the one from U.S. Treasuries. If we focus on our long-term market breadth indicators, we can see that all of them continued to strengthen (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly) or did not show any weaknesses (the percentage of stocks which are trading above their 200 day moving average) last week. This is telling us that the long-term market internals are still gearing up.
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 All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Sector Rotation Strategy. As the underlying risk management indicator (WSC Global Momentum Indicator) of the WSC Global Tactical ETF Portfolio flashed a bullish environment for global risky assets, the portfolio is now switching back into risky assets (the 5 most attractive markets according to our Global ETF Momentum Heat Map).
The technical picture of the market remains pretty unchanged compared to last week. Despite the fact that the market is entering a quite challenging time period from a pure seasonal point of view (Presidential Cycle), our strategic bullish outlook has not been changed so far. With quite bullish indicators all across the board (especially on a mid-term time horizon), we strongly believe to see further strengths towards/above the old bull-market highs in late Q1/early Q2. However, on a very short-time frame the optimism within the market is quite high and together with some stretched readings within our short-term oriented trend indicators, a period of bullish biased consolidation (even with some nasty pullbacks) looks quite likely. As a consequence, we would advise our conservative members to hold their equity position, while aggressive short-term traders should stay in the bullish camp as long as we do not see a significant drop within short-term market breadth. Nevertheless, we would also advise them to reduce leverage.