April 21st 2019

Market Review

U.S. stocks finished the holiday-shortened week nearly unchanged. The Dow Jones Industrial Average booked a weekly gain of 0.6 percent to close at 26,559.54. The S&P 500 slipped 0.1 percent during the week to end at 2,905.03. The Nasdaq eked out a little weekly gain of 0.2 percent to finish at 7,998.06. Among the key S&P sectors, the industrials sector was the best weekly performer, while health care dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed at 12.1.

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 55 points above the bearish threshold from the Trend Trader Index, indicating a strong price driven up-trend. Furthermore, we can see that 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, therefore, flash a bearish crossover signal soon. Also, the gauge from the Advance-/Decline 20 Day Momentum Indicator remains at a quite supportive bullish level 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 or even flashed a bearish crossover signal last week and are, thus, signaling that the underlying 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 HighsNew 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 Dailyweakened 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 quite 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 2,915. 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 confirm the gains from the Dow Jones Industrial Average last week. The only positive signal on the contrarian side is coming from the WSC Capitulation Index, which is still telling us the market remains in a strong risk-on market mode. Moreover, from a pure cyclical point (Presidential Cycle) of view the market tends to enter a quite volatile time period from early May until July. Therefore, only from a pure contrarian point of view, it could be possible to see another (large cap driven) rally attempt in mid May, before a longer-lasting consolidation period might start.

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. Closing at 85 percent last week, our reliable Global Futures Trend Index is still trading in the upper clip of its bullish consolidation 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 (66 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 1.6 percentage points last week and dropped to 8 percent! Consequently, there are only 2 sectors left, which are trading below the one from riskless money market! Based on these sound readings, we strongly believe that any upcoming short-term oriented trend-break will not lead to a stronger pullback (at least from the current point of view).

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 quite 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 closed out the session at quite comfortable bullish levels last 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 small signs of improvements last week. Our WSC Global MomentumIndicator closed unchanged at quite bullish levels last week. This is telling us that 70 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are still 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. And once again our Global Futures Long Term Trend Index gained some 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 all of them increased (Modified McClellan Volume Oscillator Weekly, the High-/Low Index Weekly, percentage of stocks which are trading above their 200 day moving average).

Model Portfolios

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 and the WSC Inflation Proof Retirement Portfolio. As the relative strength score from the MSCI Brazil ETF dropped out of the top 10 ranked markets within our Global ETF Momentum Heat Map, we received a sell signal for this specific ETF within our WSC Global Tactical ETF Portfolio. Instead, the S&P 500 is being added to the portfolio. Moreover, we received a sell signal Utilities within our Sector Rotation Strategy as the momentum score of this sector dropped below average and below the one from the S&P 500 within our Sector Heat Map.

Bottom Line

The technical picture of the market remains quite unchanged compared to last week. Despite the fact that the short-term momentum is slowing down a bit, our strategic bullish outlook has not been changed so far. With quite supportive 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 mid 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.

Stay tuned!!!