May 12th 2019
U.S. stocks finished the week in negative territory. The Dow Jones Industrial Average slumped 2.1 percent over the week to 25,942.37. The S&P 500 booked a weekly loss of 2.2 percent to finish at 2,881.40. The Nasdaq shed 3.0 percent for the week to end at 7,916.94. The weekly declines for the S&P 500 and the Nasdaq were the biggest of the year. All key S&P sectors ended in negative territory for the week, led by technology. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped to 19.1
Short-Term Technical Condition
In our last week’s market forecast we mentioned the fact that – on a very short-time frame – further consolidation/down-testing to dampen short-term optimism could not be ruled out. Although we expected some form of selling pressure ahead, the magnitude of the latest decline turned out to be quite surprisingly strong. Consequently, we saw a stronger deterioration within our short-term oriented indicators last week. To be more precise, the S&P 500 closed 16 points below the bearish threshold from the Trend Trader Index on Friday. Consequently, the pure short-term oriented price trend of the market remains bearish as long as the S&P 500 does not close above 2,923 (upper threshold from the Trend Trader Index). Moreover, we can see that the Modified MACD continued show a widening bearish gap, indicating further selling pressure ahead. Nevertheless, from a pure structural point of view, the short-term oriented trend of the market has not completely turned bearish as the upper envelope line of the Trend Trader Index is still holing up quite well. This indicates that the latest decline can be still described as profit taking rather than the beginning of a longer-lasting down-trend (at least from the current point of view). Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator as its gauge managed to stay slightly above its bearish threshold, although the S&P 500 lost 2.2 percent for the week. So all in all, these mixed trend signals are telling us that the latest sentiment driven washout/consolidation period has still a constructive tilt. Moreover, we should not forget that the short-term oriented trend of the market is only a limited picture about the current condition of the market as it includes a lot of noise.
Therefore, it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate, when the price action of the momentum of the market is slowing down. In such a situation, short- to mid-term market breadth will give guidance if the current short-term oriented bearish trend will lead to further stronger losses or if it was only caused by too much market noise (profit taking or just from a few heavy weighted stocks in the index). In other words, it will determine our degree of confidence within these trend signals. So if short- to mid-term market breadth remains strong, the impact of a short-term oriented trend-break should be quite limited in price and time. In normal circumstances, a consolidation period is considered to be a healthy one as long as short-term to mid-term market breadth remains supportive or is at least forming some bullish divergences. In such a case, any short-term oriented trend break can be ignored as the market is just taking a (healthy) breather within an ongoing uptrend. Otherwise, it is highly likely that such a consolidation period is just a harbinger of a more significant pullback/correction.
Right now, short-term market breadth still looks quite constructive, although the impact of the recent washout has definitely left its mark on the readings of our short-term oriented tape indicators. This becomes pretty obvious if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators slightly strengthened their bearish signal last week. This is telling us that the underlying breadth momentum of the market remains outright weak at the moment. On the other hand, we still can see that the remaining market internals remain pretty robust (given the recent circumstances). This becomes quite obvious if we focus on the NYSE New Highs – New Lows Indicator. There we can see that the amount of stocks hitting a fresh yearly high kept trading at quite confirmative levels, whereas the number of stocks which have been pushed to a new yearly low have not shown a stronger negative spike so far. Consequently, it was not a big surprise at all that the High-/Low-Index Daily was holding up quite well (although it lost some bullish steam last week). Basically, the same is true if we focus on the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) as both gauges were still holding up quite well. As a matter of fact, the latest decline was mainly driven by profit taking, which is still a quite constructive technical signal (at least for now).
This view is also confirmed on the contrarian side, as most of our indicators are signaling a broader based capitulation among the crowd. Especially, the gauge from the Daily Put/Call Ratio All CBOE Options Indicator spiked significantly last week, indicating that a lot of market participants bought put options to hedge themselves for further declines. As a matter of fact, the z-score from the put-/call ratio grew almost into bullish territory last week. Nevertheless, its gauge has not reached bullish territory so far and, therefore, it could be possible to see further selling pressure ahead before a relieve rally might be due. Another quite bullish fact is that our Smart Money Flow Index has formed an outright strong bullish divergence to the Dow Jones Industrial Average recently. This indicates that the big guys have used the recent weaknesses to increase their exposure quite significantly last week (which is in line with our latest advice). On top of that, we can see that the market is a bit oversold (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily), whereas the WSC Capitulation Index is still signaling a risk-on market environment (although we saw some stronger selling pressure last week). Even from a seasonal point of view (Presidential Cycle), the market should hit rock bottom in mid-May which should be then the basis for a stronger rally into deeper summer! So far, the presidential cycle was quite correct and, therefore, it could be possible to see some increase selling pressure next week, before a stronger rally might be due.
Mid-Term Technical Condition
Given the fact that our entire mid-term oriented indicators remain bullish or have not shown any serious signs of weakness so far, we think that the current short-term oriented pullback should be limited in price and time. As a matter of fact, we strongly believe that it is definitely a way too early to bet on a major time-series momentum crash at the moment. This becomes pretty obvious if we focus on the gauge from the Global Futures Trend Index, which is still trading in the middle of its bullish consolidation area (although we saw a stronger selling pressure last week). This can be seen as a quite bullish trend signal, as readings near (or even above) 60 percent never led to any stronger short-term oriented trend-reversal! Also our WSC Sector Momentum Indicator is still trading at the highest levels for months (although it came down a bit last week), indicating that the majority of sectors of the S&P 500 remain in a mid-term oriented uptrend. These bullish facts are also supported by our Sector Heat Map as the momentum score from riskless money market keeps trading below most sectors (although is has shown some strength recently). In our view, this is another indication that the risk appetite among investors is still persistent (at least for now).
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 (although it showed some signs of weaknesses last week). Besides the Advance-/Decline Line in Percent, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) were holding up quite well compared to the broad market. Moreover, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume are still trading above their bearish counterparts (although they have lost some steam recently). However, as long as both indicators remain bullish (in combination with a readings above 60 percent within our Global Futures Trend Index it is definitely a bit too early to pull the trigger). Another encouraging signal is coming from the Modified McClellan Oscillator Weekly which increased its bullish gap last week. This indicates that the underlying momentum of advancing stocks on a mid-term time horizon still remains positive. This can be also seen if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Despite the fact that we saw some stronger selling pressure last week, both gauges kept trading above their bearish threshold and have, therefore, formed some kind of bullish divergence recently. All these facts are telling us that it might be a bit too early to pull the trigger yet as the current weaknesses can be still described as healthy in its nature (at least for now).
Long-Term Technical Condition
The long-term oriented trend of the market improved once again and clearly supports our view that the current consolidation still looks quite supportive in its nature. Our WSC Global Momentum Indicator keeps trading at outright bullish levels, and tells us that currently 75 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. This is a very supportive technical signal, as it shows that the current rally still remains global in scope. And once again our Global Futures Long Term Trend Index succeeded to gain more bullish ground, which is also a very supportive momentum signal at the moment. Also all markets in our WSC Global Relative Strength Index increased last week. If we focus on our long-term market breadth indicators, we can see that the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weeklyremain quite supportive, while the percentage of stocks which are trading above their 200 day moving average slightly weakened last week.
Last week, there have been no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Rotation Strategy and the WSC Global Tactical ETF Portfolio.
Despite the fact that the latest slow-down was in-line within our expectations, the deterioration within our short-term oriented indicator framework turned out to be quite strong. Nevertheless, our mid-term oriented indicator-framework is still telling us that it is too early to pull the trigger (as the overall technical condition of the market still looks quite supportive – at least from the current point of view). Moreover, we can see that our contrarian indicators are getting increasingly bullish, plus historically the market has often hit an important low in the upcoming week. As a matter of fact, we stick to our base scenario, where we think it could be possible to see further down-testing in the next couple of days, which could then be the basis for another strong rally into deeper summer. Consequently, we would advise our conservative members to remain invested, whereas our aggressive traders should also remain in the bullish camp as long as we do not see a significant break-down within our remaining short-term oriented breadth indicators. Nevertheless, we would also think it would make sense to place a stop-loss limit (closing price) at 2,780 (just in case things change quite fast within the next couple of days).