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June 18th 2017

Market Review

The U.S. stocks finished another week with mixed results. For the week, the Dow Jones Industrial Average added 0.5 percent, to a new record of 21,384.28. The blue-chip average recorded its fourth week of consecutive gains. The S&P 500 eked out a 0.1 percent weekly gain to finish at 2,433.15. The Nasdaq closed at 6,151.76, to end the week 0.9 percent lower. Among the key S&P sectors, the utilities sector was the best weekly performer, while technology dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 10.4.

Short-Term Technical Condition

Apparently, the short-term oriented trend of the market remains almost unchanged compared to last week as the S&P 500 finished nearly flat for the week. The Trend Trader Index 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 2,412. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend, at least from a pure price point of view. In addition, it was quite encouraging to see that the Advance-/Decline 20 Day Momentum Indicator has reached its highest level since late April and is therefore, forming a quite bullish divergence to the market if we consider the current levels from the S&P 500. But if we focus on the overall trend momentum, we can see that the Modified MACD flashed a small bearish crossover signal last week, indicating some form of short-term exhaustion. But as already mentioned in previous comments, it is not quite unusual, that some of our short-term trend indicators turn bearish during times, when the market has entered a sentiment driven consolidation period. Anyhow, to evaluate if any upcoming consolidation period will turn out to be more corrective in its nature, short-term market breadth is key area of focus.

Having a closer look at our short-term oriented market breadth indicators, we can see that the percentage of stocks which are trading above their short-term moving averages (20/50) slightly decreased for the week, but their gauges are far away from being bearish. The situation is similar if we analyze the High-/Low Index Daily. On the one hand, we have not seen any significant increase in the amount of stocks hitting a fresh 52 week’s low (Nyse New Highs/New Lows and the High-/Low Index Daily). This means the current consolidation period is mainly driven by profit taking, which can be seen as absolutely constructive. But on the other hand, the number of stocks which are hitting new highs were slightly decreasing over the last week, indicating that the consolidation period is not over yet. In addition, the Modified McClellan Volume Oscillator Daily flashed a bearish crossover signal and the Modified McClellan Oscillator Daily narrowed its bullish gap. So all in all, the short-term oriented technical picture of the market did not improve last week and some bearish divergences arose which is nothing special when the market is taking a breather.

In last week’s comment we highlighted that we would not be surprised to see a sentiment driven (healthy consolidation) period that should relieve overbought conditions and dampen short-term optimism. In fact, the recent consolidation period has started to have its designated impact on short-term optimism. This is due to the fact that our option based indicators (Global Futures Put-/Volume Ratio Oscillator, the Equity Options Call-/Put Ratio Weekly and the All CBOE Options Put-/Call Ratio Weekly) have gradually moved away from their bearish/cautious readings. In our opinion it is still a bit too less but the direction is definitely correct. Moreover, we can see that smart money is still on a buying spree, whereas the WSC Capitulation Index is still indicating a quite extreme risk-on environment. As a matter of fact, we think that the recent consolidation period should be limited in price and time.

Mid-Term Technical Condition

This view is also widely confirmed if we have a closer look at the mid-term oriented uptrend of the market. This is mainly due to the fact that the reading from the Global Futures Trend Index remains quite bullish, although it slightly lost some momentum for the week. Right now the indicator keeps trading within the middle part of its bullish consolidation area. As long as this is the case, any pullback should only turn out to be a temporary weaknesses/consolidation within an ongoing bull market. We would get quite cautious if the gauge dropped below 60 percent (in combination with weakening/bearish mid-term oriented market breadth), as it would be an indication that a stronger correction lies ahead. This is not the case right now and therefore, it is a way too early to issue a strategic sell signal at the moment. Above all, from a pure price point of view, the mid-term oriented up-trend of the market remains also intact as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far and is trading at solid levels. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of riskless money market keeps trading at outright low levels (currently 10 percent) and below all other sectors (except energy).

More importantly, mid-term oriented market breadth is still confirming the current mid-term oriented uptrend of the market, although we can already see some small signs of exhaustion. Especially, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) have come down recently, although they remain pretty bullish from a pure signal point of view. Basically, the same is true if we have a look at the mid-term oriented advancing issues. But on the other side, mid-term oriented up-volume improved for the week and our Modified McClellan Oscillator Weekly increased its bullish gap (although on very tiny levels), indicating that the underlying mid-term oriented market breadth momentum remains pretty supportive. Once again, all our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) continued to strengthen in the last couple of trading sessions or have not shown any signs of bearish divergences yet. Right now it is a bit too early to get concerned about contradicting signals, as some small deteriorations are just the impact of the recent consolidation period. Consequently, as long as the readings from most of our mid-term oriented tape indicators remain pretty strong, it is a way too early to issue a strategic sell signal.

Long-Term Technical Condition

The long-term uptrend of the market remains intact. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and is trading at the highest levels for months. Also the WSC Global Momentum Indicator is trading at the highest level for months and indicates that 90 percent of all global markets remain within a long-term oriented uptrend. This can be also monitored if we focus on the WSC Global Relative Strength Index, as the relative strength of all risky markets keeps trading above the one from U.S. Treasuries (except commodities). In addition, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stocks which are trading above their 200 day simple moving average are trading at solid bullish levels (although they have come down a bit recently). Also the amounts of stocks which are hitting a fresh 52 weeks high are trading far above their bearish counterparts, pushing our High-/Low Index Weekly to supportive levels. The only bearish signal is coming from the Modified McClellan Volume Oscillator Weekly – as it has started again to decrease.

Model Portfolios

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

Bottom Line

The technical picture of the market remains pretty unchanged compared to last week. With quite bullish indicators all across the board we have not seen any typical signs for a major top-building process yet and therefore, we expect to see further record highs into deeper summer. However, with quite stretched sentiment signals on the contrarian side, the current consolidation period might continue for a very short-time frame. However, our bullish outlook remains unchanged and therefore, we would advise conservative members to hold their equity position, while aggressive short-term traders should definitely stay in the bullish camp.

Stay tuned!