February 5th 2017

Market Review

U.S. stocks finished the week nearly unchanged. For the week, the Dow Jones Industrial Average lost 0.1 percent to close at 20,071.46. The S&P 500 recorded a weekly gain of 0.1 percent to end at 2,297.42. The Nasdaq rose also 0.1 percent for the week to end at 5,666.77. Among the key S&P sectors, health care was the best weekly performer, while materials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 10.81.

Short-Term Technical Condition

The recent sideways trading of the S&P 500 caused a small deterioration in the readings of our short-term oriented trend indicators. From a pure price point of view, the short-term oriented uptrend has not been broken yet as the S&P 500 is still trading 28 points above the bearish threshold from the Trend Trader Index. But the Modified MACD flashed a small bearish crossover signal last week. As already mentioned a couple of times, we are not taking a bearish Modified MACD too seriously, as long as we do not see further bearish crossover signals within our other short-term oriented trend indicators. But this still indicates some form of short-term exhaustion, which is a sign that the recent consolidation from last weeks is likely to continue (at least on a very short-time frame). This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator. The gauge from this indicator is trading more or less sideways on quite bullish levels, indicating that the pace is likely to slow down within the next couple of trading sessions. All in all, the short-term uptrend of the market remains pretty bullish biased and therefore, we think it is still too early to get concerned about the recent weaknesses we saw last week. It is not quite unusual, that some of our short-term trend indicators turn bearish during times, when the market is crawling higher on a very slow pace. On the other hand side, short-term oriented trend-breaks are also very often the vanguard of a major trend reversal/pullback. To distinguish between the beginning of a stronger pullback and a healthy breather, short- to mid-term market breadth is key area of focus.

If we focus on our short-term oriented breadth indicators, we can see that their readings slightly deteriorated for the week and are therefore, quite intermingled at the moment. The Modified McClellan Volume Oscillator Daily flashed a small bearish crossover signal last week, whereas the readings from the Modified McClellan Oscillator Daily remains slightly bullish as its gauges are trading more or less sideways at the moment. As a matter of fact, the underlying tape momentum of the broad market can be described as pretty flattish, as it has no clear direction for the time being. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges are trading more or less quite shy above (20) or below (50) their 50 percent threshold, indicating that the underlying trend force of the market looks pretty neutral at the moment. On the other hand side, a quite encouraging tape signal is still coming from the High-/Low Index Daily, as it is far away from being bearish. This is mainly due to the fact that we have not seen any stronger spike/decline in the amount of stocks hitting a fresh yearly low/high, indicating that the it might be a bit too early to bet on a major trend reversal (at least for the time being). On the other hand, the underlying tape signals might be a bit too weak at the moment to trigger a stronger rally/break-out at the moment.

The situation on the contrarian side looks quite unspectacular at the moment as we have not received any new signals last week. The Smart Money Flow Index is still indicating further consolidation ahead, as its gauge continued to trade sideways last week. On the other hand, we can see that the fisher transformation from the WSC Capitulation Index grew almost in its cautious territory last week, indicating that some form of tension right now. This can be also seen if we focus on the z-score of the Daily Put/Call Ratio All CBOE Options, which fell almost into bearish territory on Friday.

Mid-Term Technical Condition

Moreover, the mid-term uptrend of the market remains intact so far, as the Global Futures Trend Index is still trading far above its bearish 60 percent threshold. Therefore, it is too early to issue a strategic sell signal at the moment as the indicator remains within the upper range of its bullish consolidation area. On the other hand, as long as the gauge keeps trading within its bullish consolidation area and does not simultaneously show some signs of positive momentum, the upside potential of the market should remain limited as well. As a consequence further sideways trading with increased volatility is quite possible. Anyhow, we would get quite cautious if the gauge will drop below 60 percent (in combination with weakening market breadth, especially within the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly), as it would be a clear indication that a stronger correction lies ahead! Therefore, those indicators are always key area of focus. Moreover, from a pure momentum point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator is far away from being bearish. This is telling us that most underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we have a closer look at our Sector Heat Map as the momentum score of all sectors remains above the one from riskless money market (currently at 0 percent).

On top of that, mid-term oriented market breadth is also confirming the current mid-term oriented scenario. 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) remain quite supportive as they have not shown any signs of major 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). Both gauges are trading on very strong bullish levels, which 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 are (still) trading well above their bearish counterparts. Based on the fact that our entire mid-term oriented market breadth indicators are trading at quite supportive levels, it is a bit too early to change our strategic bullish outlook at the moment.

Long-Term Technical Condition

The long-term oriented technical picture of the market remains almost unchanged compared to last week. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. The global bull market also improved and shows that now 68 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. Focusing on the on the WSC Global Relative Strength Index, we can see, that the relative strength of all risky markets keeps trading above the one from U.S. Treasuries. More importantly, 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 remained nearly unchanged at very high bullish levels. Plus the Modified McClellan Volume Oscillator Weekly continued to gain more bullish ground last week. In this context, also long-term new highs are still strong (although they decreased for the week), whereas long-term new lows kept trading at not really threatening levels. This can be seen as another positive long-term tape signal. Therefore, the gauge from our long-term oriented High-/Low Index Weekly keeps trading at very solid bullish levels. This indicates that the long-term tape of the market remains well intact (at least for the time being).

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, Global Tactical ETF Model Portfolio and the WSC Sector Rotation Strategy).

Bottom Line

Given the quite intermingled readings within our short-term oriented indicator framework, we think the market is caught in a tug-of-war for the very short-time frame and therefore, we could see some rocky sessions ahead.  Nevertheless, as long as our mid- to long-term oriented indicator framework remains bullish and as long as we do not see a typical top-building process pattern, we think it is too early to call for a major market top right now. For that reason, we would advise our conservative members to hold their equity position, while aggressive short-term traders should remain in the bullish camp as long as our short-term oriented indicator framework does not turn completely bearish.

Stay tuned!