August 19th 2018

Market Review

U.S. stocks closed the week with a mixed performance. For the week, the Dow Jones Industrial Average gained 1.4 percent to 25,669.32, its highest close since February. The S&P 500 gained 0.6 percent to end at 2,850.13. The Nasdaq, in contrast, lost 0.3 percent during the week to finish at 7,816.33. Most key S&P sectors finished higher, led by consumer staples and utilities, while energy ended in the red. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 12.6.

Short-Term Technical Condition

From a pure price point of view, the bullish trend-status from the S&P 500 remains unchanged. To be more precise, the S&P 500 managed to close slightly above the bullish threshold of the Trend Trader Index. Above all, both envelope lines of this reliable indicator are still drifting higher. This indicates that the underlying short-term oriented trend-structure of the market remains bullish, as we have seen slightly higher highs and higher lows within the past 20 days. Moreover, the gauge of the Advance-/Decline 20 Day Momentum Indicator also increased last week. In contrast, the Modified MACD weakened and even flashed a bearish crossover signal last week. Such a situation often occurs, when the price action of the market has slowed down for a couple of trading days. Normally, as long as our other short-term oriented market breadth remains bullish, would not even take a bearish Modified MACD too seriously as it would only indicate some signs of short-term exhaustion. Consequently, short-term market breadth is key area of focus as it will tell us if the current slowdown/consolidation period can be still classified as healthy or if it got a more corrective tilt recently.

If we focus on our short-term oriented breadth indicators, we can see that their readings weakened and are, thus, not confirming the current level from the S&P 500 at the moment! First of all both, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily, decreased further for the week. This is telling us that the underlying momentum of advancing stocks and advancing volume stocks on NYSE is extremely weak-kneed at the moment, although the S&P 500 is trading near record highs. Also the percentage of stocks which are trading above their short-term oriented moving averages (20/50) have not shown any bullish moves recently and are still trading below their bullish threshold. To be more precise, right now there are only 44/49 percent of all NYSE listed stocks which are trading above their 20/50 days moving average, although the market is trading near record highs. This is a quite non-confirmative signal, as it is telling us that the current price action of the market is mainly driven by a handful of heavy-weighted stocks in the index, rather than by the whole market. This picture is widely confirmed by our High-/Low-Index Daily as it also shows a quite unclear and non-confirmative signal. This is mainly due to the fact that we have seen some stronger spikes in new lows recently. As a matter of fact, the underling short-term oriented tape condition of the market can be described as weak/non-confirmative at the moment. This is telling us that the upside potential of the market looks quite capped at the moment. On the other hand side, we can also see that the market is getting increasingly vulnerable for a negative driven news flow. In other words, the risk-/return ratio started to deteriorate last week.

The situation on the contrarian side remains unchanged compared to last week. This is mainly due to the fact that most of our option based indicators are trading in neutral territory at the moment. The only interesting fact is that the gauge from the Smart Money Flow Index continued to stabilize on quite low levels recently. Despite the fact that this can be interpreted as a somehow supportive signal, we should not forget its gauge is still far away from confirming the current levels from the Dow Jones Industrial Average. As a matter of fact, we would not be surprised, if the market is running into major headwinds later this year. On a more short-term perspective, we can also see that the WSC Capitulation Index started to grew into cautious territory last week, which can be seen as another red flag on the horizon.

Mid-Term Technical Condition

Another reason why we believe that the upside potential of the market looks quite capped is due to the fact that the mid-term oriented condition of the market also weakened last week (albeit the S&P 500 finished the week on a higher note). Mainly, since the gauge from the Global Futures Trend Index decreased and dropped below its important 60 percent bullish threshold. As always stated in our market comment, from a formal point the market will be at risk for stronger disappointments as long as its gauge keeps trading below that important threshold. Consequently, the current consolidation period could easily turn out to be more corrective in its nature, as long as the gauge from the Global Futures Trend Index remains within its bearish biased consolidation brackets and does not simultaneously show some signs of positive momentum. As this is already the case, it is definitely time to get a more cautious stance. So even if we do not see a stronger pullback immediately, as long as the gauge of this indicator remains near or below 60 percent (in combination with weak mid-term market breadth), the upside potential of the market should be limited as well! Consequently, the risk-/reward ratio slightly started to deteriorate last week. However, from a pure price point of view, the mid-term oriented trend of the market remains well in place (as we have not seen any stronger down-days/pullbacks yet). This is due to the fact that our WSC Sector Momentum Indicator is still trading at solid bullish levels, although it slightly decreased last week. An indication that most sectors within the S&P 500 are still in a strong price-driven mid-term oriented up-trend. This can be also observed if we look at our Sector Heat Map. The momentum score of all sectors keeps trading above the one from riskless money market (currently at 0.0 percent).

If we focus on our mid-term oriented breadth indicators, we can see that most of them still remain quite confirmative although the recent consolidation period has slightly started to leave a mark on their readings as well. Nevertheless, this is telling us that the downside potential of the market looks quite capped as well – at least from the current point of view. If we focus on the Modified McClellan Oscillator Weekly and the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150), we can see that they are still holing up quite well and thus, remain on confirmative levels. On the other hand, we can also see that they have not shown any signs of positive momentum recently, indicating that the underlying mid-term oriented trend momentum of the market is quite flattish at the moment. This is another confirmation that the upside potential of the market should be quite limited on a very short-time frame. Moreover, we can see that our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) increased for the week or have at least not shown any weaknesses. And also the mid-term oriented up-volume is still trading above its bearish counterpart, although it has again lost some bullish ground recently.  This is telling us that the market is not at risk for a stronger correction (above 7 percent) from a current point of view. Nevertheless, we can also see some negative signs on the horizon. This is due to the fact that mid-term oriented advancing issues deteriorated significantly and almost turned bearish last week. This indicates that a lot of purchasing power was pulled out of the market. Right now, this is not a big concern at all, but if this trend continues within the next couple of weeks, we would not be surprised to see a stronger reprising of the S&P 500.

Long-Term Technical Condition

Once again, the long-term oriented uptrend of the market shows the same picture as in the previous weeks. The WSC Global Momentum Indicator stabilized at quite bearish levels, indicating that just 22 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 lines. A clear signal that the current global bull-market is quite fragile at the moment. In contrast, our Global Futures Long Term Trend Index has been increasing for 4 weeks, indicating that the current long-term oriented trend of U.S. equities is regaining momentum. And like in the previous weeks, another positive signal is again coming from our shorter-term oriented WSC Global Relative Strength Index. The relative strength of all risky markets was holding up quite well, but all markets (except one) are already trading below the one from U.S. Treasuries, which is another sign for a slow growth period. Our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly, percentage of stocks which are trading above their 200 day moving average) remained unchanged compared to the previous week.

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 Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Global Tactical ETF Model.

Bottom Line

Although the S&P 500 only trades a few percentages below its all-time high, we are not really euphorically bullish at the moment. This is due to the fact that most of our short-term oriented indicators remain quite weak-kneed/non-confirmative at the moment. This indicates that most of the recent price action is caused by heavy weighted stock in the index (whereas the broad market is still lagging behind). In general, a large-cap driven rally is never sustainable in its nature. Because if we see a trend-reversal in these large-caps, there is literally no safety-net around to cushion such a move. However, right now the mid-term oriented condition of the market is still somehow supportive and, therefore, we remain cautiously bullish at the moment. Nevertheless, we will monitor the development of our mid-term oriented breadth indicators quite closely within the next couple of days. Because if we see a further deterioration within their readings, there is a very high chance that the current slow growth period/bullish biased consolidation period will transform into a more corrective top building process. If we consider the quite bearish readings within our Smart Money Flow Index, such a scenario looks quite possible within the next couple of weeks. However, right now the upside as well as the downside potential of the market looks quite capped. In such an environment, aggressive traders should not take too much leverage (or should focus on profit taking), whereas conservative members should still hold their equity position. Nevertheless, we think it would make sense to place a stop-loss limit around 2,750 just in case if the technical condition changes quickly during the week.

Stay tuned!