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May 14th 2017

Market Review

Last week U.S. stocks finished the week with a mixed performance. The Dow Jones Industrial Average lost 0.5 percent in five trading days to end at 20,896.61. The S&P 500 declined 0.4 percent over the week to finish at 2,390.90. Both the Dow and the S&P 500 record their first weekly retreat in nearly a month. The Nasdaq Composite added 0.3 percent during the week to 6,121.23. The hevy-tech index booked its fourth straight weekly gain. Among the key S&P sectors, technology 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.

Short-Term Technical Condition

The short-term oriented trend condition of the market remains almost unchanged compared to last week. If we have a closer look at the Trend Trader Index, we can see that the price driven short-term oriented up-trend of the market has not been broken yet as the S&P 500 is still trading about 18 points above the bearish threshold from that reliable indicator. Furthermore, we can see that both envelope lines have not shown any signs of a major rounding top yet and therefore, the pure price driven short-term oriented up-trend of the market looks pretty intact as long as the S&P 500 does not close below 2,372. If we analyze the underlying momentum of this current short-term oriented uptrend, we can see that the chances for a stronger move in both directions look pretty capped at the moment. This becomes pretty obvious if we focus on the Modified MACD, which is about to flash a bearish crossover signal soon, whereas the Advance-/Decline 20 Day Momentum Indicator continued to trade sideways on low bullish levels. So from a pure short-term oriented trend point of view, the market will not have enough power to break substantially above its latest all-time high, whereas the down-side also look pretty limited at least for now.

Another reason, why we believe that the market is about to hit an intermediate high is due to the fact that the readings from our short-term oriented breadth indicators continued to weaken for the week (and remain therefore, quite intermingled at the moment). Especially, the Modified McClellan Oscillator Daily as well as the Modified McClellan Volume Oscillator Daily strengthened their bearish signals last week. This indicates that the overall tape momentum turned pretty bearish, plus the overall trend condition also looks a bit damaged right now. This becomes pretty obvious if analyze the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50) as both gauges decreased significantly last week and are trading now in their bearish range. This can be also seen if focus on the NYSE New HighsNew Lows Indicator as the total amount of stocks hitting a fresh 52 weeks high has come down recently, whereas the amount of stocks hitting a fresh 52 weeks low has started to show some persistence strength on low levels recently. Consequently, the High-/Low-Index Daily also came down substantially last week. So in the end, there was absolutely no recovery/momentum within the short-term oriented tape structure visible, although the market finished the week slightly below its all-time high! As a matter of fact, those short-term oriented bearish divergences are a way too heavy to be ignored at the moment.

From a pure contrarian point of view, the market is getting increasingly complacent (which is not a big surprise at all, given the latest new-high headlines and the fact that the CBOE Volatility Index (VIX) dropped to a 24 year low). As a matter of fact, some of our short-term oriented sentiment-/option based indicators are already issuing signals that a lot of good news has already been priced in, leaving the market quite vulnerable for disappointments. This becomes pretty obvious if we focus on the Daily Put/Call Ratio All CBOE Options, the Uptick-/Downtick Ratio Daily and the sentiment survey from Market Vane. Moreover, the Hindenburg Omen from last week also remains a thread for the next 3-4 weeks. On the other hand, we can see that our longer-term oriented contrarian indicators still remain supportive. Especially the NYSE Member Debt Margin Indicator has not shown any signs of negative divergence yet, whereas the divergence between the Smart Money Flow Index and the Dow remains a thread but it has continued to narrow recently.

Mid-Term Technical Condition

Another negative tendency is the fact that the mid-term oriented condition of the market also showed some deterioration last week. This is mainly because the gauge from the Global Futures Trend Index dropped for the week and has therefore, closed at 76 percent! This is still 16 percentage points above the threshold of the bearish consolidation area. But, if this trend continues it is just a question of time until we see a drop of this indicator below 60 percent. If this is the case, the risk of a fast paced correction is extremely high (of course only in combination with weak or bearish readings in mid-term oriented market breadth). Right now we are not there yet but nevertheless, it is definitely time to get a more cautious stance as the gauge could easily drop quite quickly below that important threshold. On the other hand, as long as this indicator does not show any signs of positive momentum, the upside potential of the market should also remain pretty capped! However, from a pure price point of view, the mid-term oriented uptrend of the market still remains intact as the WSC Sector Momentum Indicator keeps trading at quite bullish levels so far (which is not a big surprise as the market is trading near its all-time high). This indicates that most sectors within the S&P 500 are still in a mid-term oriented up-trend. This can be also seen if we focus on our Sector Heat Map as the momentum score of all sectors (except Energy which is 0 percent) remains above the one from riskless money market (currently at 7 percent).

Another reason why we believe that the market is getting increasingly toppish (on a very short-time frame) is due to the fact that nearly all of our mid-term oriented tape indicators also deteriorated last week. Especially, our Modified McClellan Oscillator Weekly finished its fifth week again nearly unchanged; indicating that the underlying breadth momentum is still somehow lagging behind on a mid-term time horizon. Additionally the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) came down substantially last week and those on a 100 days’ time frame nearly passed the bearish threshold. Consequently, if this development continues with that speed we saw last week, it might be just a question of time until we see further bearish readings here. The same is true if we have a look at the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly, as their readings weakened again for the week. In the past, bearish readings within those indicators (in combination with a bearish Global Futures Trend Index) mostly led to a stronger correction. Consequently, it is time to get a more cautious stance.

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market remains intact (and therefore, any upcoming pullback will not lead to a new bear-market at the moment). The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and trading at the highest levels for months. As we can see from the WSC Global Momentum Indicator, 82 percent of all local equity markets around the world 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 strengthened last week and keeps trading above the one from U.S. Treasuries (except commodities). Also, long-term oriented market breadth still looks quite constructive at the moment. Although the percentage of stocks which are trading above their 200 day simple moving average decreased last week, they are still trading at solid bullish levels. Also the amounts of stocks which are hitting a fresh 52 weeks high are trading far above their bearish counterparts. And, like already in the previous week, the Modified McClellan Volume Oscillator Weekly continued 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 overall situation remains almost unchanged compared to last week. Given the still supportive/bullish readings within our indicator framework, we think it is still a bit too early to take the chips from the table as it is too late to buy but also too early to sell. As a matter of fact our long-term strategic bullish outlook remains unchanged (at least for now). Nevertheless, on a short-term time frame we received a lot of evidence that the market is about to run into an intermediate high. As a matter of fact, the chances for a limited pullback into deeper May are definitely increasing on a very fast pace at the moment. As we do not fight an existing trend, we would like to see some negative price action (within our short-term oriented price driven trend indicators) first before we would advise our conservative members to take actions. Nevertheless, we think it is time to take profits, whereas we also think it makes sense to place a stop-loss limit around 2,328 as a drop below that number would imply that a more important is in place.

Stay tuned!