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August 6th 2017

Market Review

Once again, U.S. stocks finished the week with a mixed performance, with still one index notching a record high. The Dow Jones Industrial Average added 1.2 percent during the week to end at an all-time high of 22,090. The blue-chip index has now posted 34 record closes thus, far this year. The S&P 500 recorded a weekly gain of 0.2 percent to finish at 2,476. The Nasdaq Composite declined 0.4 percent during the week to 6,351. Among the key S&P sectors, financials was the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 10.

Short-Term Technical Condition

The market is moving exactly in line with our recent outlook as the slow growth period for the S&P 500 continued last week. More importantly, if we focus on our short-term oriented trend indicators, we can see that the Modified MACD flashed a small bearish crossover signal last week. This indicates that the underlying trend-momentum of the market turned negative last week. If we consider the fact that a slow growth period is always accompanied by extreme low volatility (and therefore, low momentum), this signal is a way too predictive to take it too seriously at the moment. In other words, in a slow growth period, we put more emphasis on our remaining short-term oriented trend indicators. There we can see that – from a pure price point of view – the short-term oriented uptrend of the market remains intact. To be more precise, the S&P 500 is still trading about 19 points above the bearish threshold from our Trend Trader Index. Furthermore, we can see that both envelope lines of this indicator are still drifting higher and therefore, the (pure price driven) short-term oriented up-trend of the market looks pretty healthy for the time being. On top of that, we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator also closed at solid bullish levels and is thus, confirming the current levels from the S&P 500!

As mentioned above, it is not quite unusual, that some of our short-term oriented momentum indicators turn bearish during times, when the market is crawling higher on an extremely slow pace. This phenomenon also affects some of our momentum based short-term oriented breadth indicators, like the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators are measuring the momentum of short-term oriented advancing issues and short-term oriented up-volume, which of course tends to slow down during a slow growth period. 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). If the market crawls higher on an extremely slow pace (and for a longer lasting time period), the simple moving averages of stocks tend to flatten out. As a matter of fact, small movements in both directions can trigger bullish or bearish signals quite easily. Despite this is the case right now, we should not forget that this signal still indicates some form of exhaustion on a very short-time frame. Therefore, it was good to see that the market internals (which are not affected by momentum) remain pretty solid/healthy at the moment. This becomes pretty obvious if we focus on the NYSE New HighsNew Lows Indicator, which measures the total number of stocks which are hitting a fresh yearly high or low. There we can see that the total amount of new highs kept trading at confirmative levels, whereas there are hardly any stocks around which are hitting a fresh yearly low. For that reason, the High-/Low Index Daily remains far away from flashing any bearish crossover signal and therefore, we think the recent slow growth period remains constructive in its nature. In such an environment, we would get cautious if we saw further short-term oriented trend breaks, stronger spikes in new lows, plus deteriorating readings on a mid-term time horizon (which is definitely not the case right now) and therefore, we think the slow growth period will continue for a while.

On the contrarian side, we can see that the latest slow growth period had definitely its designated impact on short-term optimism as the gauge from the Daily Put/Call Ratio All CBOE Options moved gradually out from its outright bearish territory. As already mentioned last week, we would be pretty surprised if all those call options got into the money until the 18th of August (option expiration date), as normally the crowd tends to be dead wrong. As an option price also strongly depends on volatility (high volatility increases an option price), it could be possible that this slow growth period will last until then (before another (maybe final) up-leg might be due). This would make sense at least from a pure contrarian point of view and would explain the fact that the Smart Money Flow Index continued to narrow its bearish divergence to the Dow. This indicates that the informed crowd is getting increasingly bullish on a mid-term time frame. Anyhow, on a very short-time frame, the WSC Capitulation Index is still indicating an extremely risk-on scenario at the moment.

Mid-Term Technical Condition

Another main reason, why it is a way too early to issue our strategic sell signal is due to the fact that  the mid-term oriented uptrend of the market still looks outright healthy at the moment. Consequently, we do not think that equities appear to be at risk of facing a high double digit drop or even a new cyclical bear market at the moment. Especially, the Global Futures Trend Index is far away from being bearish, although its gauge dropped into the upper range of its bullish consolidation area. As already mentioned a couple of times, as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming weaknesses tends to be limited in price and time (only in combination with confirmative market breadth readings). Moreover, we can see that the most sectors within the S&P 500 remain in a mid-term oriented uptrend as the WSC Sector Momentum Indicator is trading at quite encouraging bullish levels. As a matter of fact, the underlying price trend of the S&P 500 looks pretty solid at the moment. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all sectors (except energy like in the previous weeks) remains above the one from riskless money market (currently at 12.2 percent).

Another main fact why we believe that the downside potential of the market remains capped is due to the fact that the current mid-term oriented up-trend of the market is widely confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly was holding up quite well, indicating that the overall tape momentum remains quite constructive for the time being. Another positive signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both bullish gauges from those indicators are still trading well above their bearish counterparts, signaling that the market internals look pretty healthy at the moment. On top of that, 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 or have not shown any weak signals in the last couple of trading sessions. This indicates that the broad market is participating within the ongoing mid-term oriented uptrend. Above all, we can see that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) remain bullish, although they have lost some steam recently. So all in all, our mid-term oriented trend indicator framework remains supportive and therefore, we will stick our strategic bullish outlook at the moment.

Long-Term Technical Condition

The long-term oriented uptrend of the market remains unchanged. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. Also our WSC Global Momentum Indicator increased last week and indicates that 82 percent of all global markets are currently within a long-term oriented uptrend at the moment. Also our WSC Global Relative Strength Index reveals that the relative strength of all risky markets keeps trading above the one from U.S. Treasuries (except commodities). This is a quite strong positive signal for risky assets as it underlines the huge risk appetite among investors. And even our Modified McClellan Volume Oscillator Weekly, which has hardly shown any moves in the recent weeks, expanded its bullish gap. The only weak signals are coming from the percentage of stocks which are trading above their 200 day simple moving average and from the amounts of stocks which are hitting a fresh 52 weeks high. Nevertheless, we can see that our High-/Low Index Weekly is still trading on very supportive levels. So all in all, the overall long-term technical picture of the market is not in danger at all – at least for the time being.

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 Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Global Tactical ETF Model Portfolio. As the momentum score of financials rose above average and above the one from the S&P 500 within our Sector Heat Map, we received again a buy signal for that ETF within our WSC Sector Rotation Strategy.

Bottom Line

The situation compared to last week remains unchanged. Given the still bullish/supportive readings all across the board, we think it is a way too early to take the chips from the table. Thus our strategic bullish outlook remains unchanged and therefore, we would advise our conservative members to remain invested/hold their equity position. However, given the quite stretched signals within the option market a continuation of the slow growth period into mid-August looks quite likely. Even if we see some down-testing ahead, the overall set-up remains pretty supportive. As a matter of fact, we think aggressive short-term traders should also remain invested long as our short-term indicator framework does not turn completely bearish.

Stay tuned!