October 22nd 2017
U.S. stocks rallied for the week, lifting the major averages to new records highs. For the week, the Dow Jones Industrial Average added 2.0 percent, to 23,328.63. The S&P 500 advanced 0.9 percent during the week to end at 2,575.21. The Nasdaq gained 0.4 percent in five trading days to 6,629.05.
The Dow and the S&P 500 close out their sixth straight weekly gain, while the Nasdaq notched its fourth straight positive week. This is the longest stretch of weekly gains for the Dow since a seven-week rally that ended in December. Among the key S&P sectors, financials was the best weekly performer, while consumer staples dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 10.
Short-Term Technical Condition
The market is moving right in line with our recent outlook and therefore, it is not a big surprise at all that the short-term oriented uptrend of the market remains pretty unchanged compared to last week. The S&P 500 is still trading 41 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 2.533. Furthermore, we can see that both envelope lines of this reliable indicator are still drifting higher on a quite fast pace, 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 uptrend. Moreover, the outright bullish status from the Modified MACD remains pretty unchanged compared to last week and is therefore, still confirming the latest high from the S&P 500. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator is trading at quite confirmative levels, although it dropped for the week. As a matter of fact it has therefore, formed of a small bearish divergence recently (albeit on very high levels). As this indicator tends to be a leading one, it could be possible that the pace is likely to slow down within the next couple of trading sessions.
This potential slow-down is also getting increasingly likely, if we focus on our short-term oriented market breadth indicators. To be more precise, short-term market breadth still looks quite constructive although we can also see some form of exhaustion in their readings. This becomes pretty obvious if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators slightly strengthened their bearish signal last week. After the Modified McClellan Volume Oscillator Daily had flashed a bearish crossovers signal two weeks ago, the Modified McClellan Oscillator Daily followed this week. This is showing us that the underlying breadth momentum of the market continued to deteriorate, which is often an early sign for a potential consolidation period. 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), as both decreased for the week. Especially those on a 20-day frame nearly touched the bearish threshold, which is another indication for such a scenario. On the other hand, we still can see that the remaining market internals remain outright robust. This is mostly due to the fact that the total number of stocks which are hitting a fresh yearly high closed at outright encouraging levels (also on Friday), whereas the number of stocks which have been pushed to a new yearly low have not shown any negative spikes so far. Consequently, the readings from the High-/Low Index Daily kept trading at outright bullish/supportive levels. As a matter of fact, any upcoming slow-down will not be a major game changer at the moment and therefore, it will be definitely too early for any counter trend activities at the moment.
If we focus on the contrarian side, we can see that the latest rally has scared a lot of bullish option traders as the z-score of the Daily Put/Call Ratio All CBOE Options Indicator grew back into normal levels. Basically, the same is almost true if we focus on the All CBOE Options Call-/Put Ratio Oscillator. This indicates a stronger reduction in complacent, which can be definitely seen as a quite supportive signal on the sentiment side. Another outright bullish signal is coming from the Smart Money Flow Index as it grew towards a new record high last week. This is telling us that the big guys continued to buy heavily into the market. Moreover, we can see that the gauge from the WSC Capitulation Index dropped to the lowest level since month, indicating an outright risk-on scenario at the moment.
Mid-Term Technical Condition
If we analyze the mid-term oriented technical condition of the market, the thread of a stronger pullback can be definitely ignored at the moment. Mainly because the Global Futures Trend Index is trading close below the edge of its bullish 90 percent threshold. Therefore, it is a way too early to issue a strategic sell signal at the moment. We would take a more cautious stance if any upcoming slow-down pushes the gauge below 60 percent (of course only in combination with weakening market breadth). As this is not the case right now, any upcoming short-term weaknesses will definitely be limited in price and time. In addition, we can also see that the WSC Sector Momentum Indicator is trading at a high level, indicating that all sectors within the S&P 500 remain in a strong mid-term oriented uptrend. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all sectors (except consumer staples which is 0 percent) remains above the momentum score from riskless money market and the one from the S&P 500.
This strong mid-term oriented up-trend is also strongly confirmed by mid-term oriented market breadth. Particularly, the Modified McClellan Oscillator Weekly continued to show a widening bullish gap last week, indicating that the overall tape momentum remains very positive for the time being. And for the fifth week, all our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) increased for the week or have at least not shown any signs of bearish divergences yet. Some of them reached their highest readings for months. Therefore, they are clearly confirming the current high of the S&P 500! Another encouraging signal is coming from the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) as they were holding up quite well. Also mid-term oriented advancing issues as well as mid-term oriented up-volume rocketed last week and therefore, we think to see further strong gains/record highs ahead.
Long-Term Technical Condition
The long-term uptrend of the market remains well intact and therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index is indicating a technical bull market, whereas the WSC Global Momentum Indicator shows that currently 88 percent of all local equity markets around the world remain in a long-term oriented uptrend. Moreover, the relative strength of most risky markets keeps trading above the one from U.S. Treasuries, which is another indication for a risk-on market environment. Also long-term market breadth is currently giving no reason to worry and therefore, we think that the current long-term uptrend of the market is not in danger at all (at least for the time being). Especially our long-term oriented High-/Low Index Weekly is still trading at supportive levels, indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the Modified McClellan Volume Oscillator Weekly as it clearly widened its bullish gap. And also the number of stocks which are trading above their longer-term oriented moving averages (200) showed a very positive picture.
If we have a closer look at our Model Portfolios (WSC Inflation Proof Retirement Portfolio, the Global Tactical ETF Portfolio, the WSC Sector Rotation Strategy and the WSC All Weather Portfolio) we can see that there were no changes in the allocation last week. However, we are proud to announce that the WSC All Weather Portfolio and the WSC Sector Rotation Strategy reached another all-time high last week.
Our view remains pretty unchanged compared to last week. With quite stretched signals within some of our short-term oriented tape indicators, the chances for a short-lived slow down or even a healthy consolidation period remain intact. However, with quite solid readings all across the board, it is a way too early to bet on a major trend reversal at the moment. Thus, our strategic bullish outlook remains unchanged. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips rather than to chase the market too aggressively on the upside.