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July 28th 2019

Market Review

U.S. stocks climbed last week, lifting the S&P 500 and Nasdaq to record closes. The Dow Jones Industrial Average eked out a small weekly gain of 0.1 percent to finish at 27,192.45. The S&P 500 gained 1.7 percent in the past five days to finish at 3,025.86, posting a record high. The Nasdaq gained 2.3 percent for the week to end at an all-time high of 8,330.21. Nearly all key S&P sectors ended in positive territory for the week, led by financials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed at 12.16.

Short-Term Technical Condition

If we have a closer look at the Trend Trader Index, we can see that the short-term oriented (price-driven) uptrend of the market remains quite unchanged compared to last week. On Friday, the S&P 500 closed 45 points above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.980. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy price driven uptrend. However, the picture looks quite different, if we analyze the underlying momentum of this ongoing short-term oriented uptrend. According to the Modified MACD, the trend momentum still looks quite weak-kneed, indicating that the current short-term oriented up-trend has already reached a mature stadium. A fact, which is also confirmed by the Advance-/Decline 20 Day Momentum Indicator. This indicator still remains bullish from a pure signal point of view but is still not confirming the current level from the S&P 500 at the moment. As already mentioned last week, it is not unusual that some of our short-term oriented trend-indicators are slowing down, after a stronger rally. To evaluate if such a slow-down will turn out to be healthy or more corrective in its nature, short- to mid-term market breadth are a key area of focus.

Last week, we highlighted the fact that the short-term oriented tape structure of the market was indicating that the tilt between bullish and bearish looked quite narrow. Therefore, it was good to see that the short-term oriented tape condition of the market showed some signs of improvements last week. Especially, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) jumped back into the bullish territory, indicating a broadening trend participation within the whole market. This can be also seen if we focus on the NYSE New HighsNew Lows Indicator. There we saw solid readings in the number of stocks which are hitting a fresh yearly high (especially in the middle of the week), together with an outright low number of stocks which were pushed to a new yearly low. Consequently, the bullish gauge from the High-/Low-Index Daily closed at quite confirmative levels, although it could be also a bit stronger if we consider the current level from the S&P 500. A fact, which also holds if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Another weak tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators have not shown any signs of strengths recently. As a matter of fact, both indicators have not confirmed the gains from last week indicating that the underlying breadth momentum of short-term advancing issues and advancing volume stays weak-kneed. So all in all, the underlying tape condition of the market slightly improved compared to last week, but still could be much stronger if we consider the current levels of the S&P 500.

On the contrarian side, the situation looks quite unspectacular at the moment. The fisher transformation of the WSC Capitulation Index is still indicating a risk-on scenario, although its gauge increased significantly for the week. On the other hand, we can see that the Smart Money Flow Index keeps trading sideways, showing that the big guys remain in a waiting position. This uncertainty can be also seen if we focus on market sentiment, as there is no tilt in one specific direction visible. This is a quite dangerous mix, as it indicates that there are no bargain hunters around which might buy in when the market starts to face stronger declines. Moreover, even from a pure cyclical point of view (Presidential Cycle), the market often faces a quite challenging time period from late July up until mid-August.

Mid-Term Technical Condition

Despite the fact that the mid-term oriented up-trend of the market still remains bullish, it continued to deteriorate last week. This is mainly due to the fact that the Global Futures Trend Index dropped another 6 percentage points last week but succeeded to stay in the middle of in its bullish consolidation range. This is another indication for a supportive but not really confirmative market environment at the moment. This view is also confirmed by the WSC Sector Momentum Indicator, which is definitely trading at quite solid bullish levels but has not shown any signs of strength for the last couple of weeks. This patchy landscape can be also seen if we focus on our Sector Heat Map, as the momentum score from riskless money market increased by 2 percentage points to 10 percent, although the S&P 500 had reached a new all-time high last week. Right now, this 10 percent are not a huge deal-breaker but it still remains a quite red flag on the horizon.

On the other hand, we can see that mid-term oriented market breadth showed stronger signs of improvement last week. First of all, the Modified McClellan Oscillator Weekly (slightly) increased its bullish gap, telling us that the underlying breadth momentum of the broad market is regaining strength. In addition, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) increased and are now trading in bullish territory. This is indicating that the current upside participation within the whole market is getting back on track (although both indicators still remain a quite weak-kneed if we consider the current level from the S&P 500). Another supportive signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as both indicators also widened their bullish gaps last week. Also our advance-decline indicators (Advance-/Decline Volume LineAdvance-/Decline Line DailyAdvance-/Decline Line Weekly) increased last week or were at least holding up very well. This quite strong mid-term oriented market breadth signals are telling us that the risk of a stronger correction still remains quite limited at the moment (although we saw a slow-down on a short-term time perspective).

Long-Term Technical Condition

Nearly unchanged compared to the previous weeks remains the long-term oriented trend of the market. The WSC Global Momentumindicates that 60 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are now trading above their long-term oriented trend lines. A clear signal that the current global bull-market has regained momentum. Also our Global Futures Long Term Trend Index increased once again and reached its highest level for months, signaling that the long-term oriented trend of U.S. equities remains intact. Also our WSC Global Relative Strength Index showed some small gains, as the relative strength of nearly all risky markets increased. This risk-on market environment is also confirmed by our long-term oriented tape indicators (High-/Low Index WeeklyModified McClellan Volume Oscillator Weekly, percentage of stocks which are trading above their 200 day moving average) as all of them improved compared to the previous week.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Model Portfolio and the WSC Inflation Proof Retirement Portfolio. As the momentum score from utilities dropped below average and below the one from the S&P 500(within our Sector Momentum Heat Map), we received a sell signal for that sector within the WSC Sector Rotation Strategy, whereas the allocation from the WSC Global Tactical ETF Portfolio remains unchanged.

Bottom Line

Despite the fact that the technical condition of the market slightly improved last week, the tilt between corrective and supportive still looks quite narrow at the moment (especially on a short-term time perspective). Right now, it looks like it is getting again a more positive drift but this situation could change literally within days. In the end, we still remain cautiously bullish as we think it is a way too late to buy (add exposure/invest taken profits) and too early to sell. In such a situation, it makes sense not to take too much risk and to monitor our short-term oriented indicators quite closely. As a matter of fact, we would advise our aggressive traders to remain bullish as long as the S&P 500 does not drop below the lower envelope line of the Trend Trader Index. Conservative members should remain invested, since our strategic bullish outlook has not changed so far.

Stay tuned!