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March 24th 2019

Market Review

U.S. stocks ended the week with losses. The Dow Jones Industrial Average fell 1.3 percent in five trading days to end at 25,502.32. The S&P 500 booked a 0.8 percent loss over the week and closed at 2,800.71. The Nasdaq dropped 0.6 percent for the week to 7,642.67. Among the key S&P sectors, discretionary was the best weekly performer, while financials dragged. The CBOE Volatility Index (VIX), increased to 16.96.

Strategy Review

In our last week’s comment, we highlighted the fact that the market still remained in consolidation period from a pure technical point of view. Consequently, we expected to see some broader based range-bound trading ahead, as the underlying tape was too weak to push the market significantly higher but too strong to justify a stronger correction. After the market had rallied towards a new high (on a year-to-date basis) on Thursday, the S&P 500 tumbled significantly on Friday, positing its biggest one-day drop since January. Such a move is a typical pattern during a volatile consolidation period/range-bound trading set-up as the market has gone too far the day before. Consequently, the market followed a typical textbook like consolidation period and, therefore, the quality of the underlying tape structure would give us further guidance where the market is heading.

Because under normal circumstances, a consolidation period is considered to be a healthy one as long as short-term to mid-term market breadth remains supportive or is at least forming some bullish divergences. In such a case, any short-term oriented trend break can be ignored as the market is just taking a (healthy) breather within an ongoing uptrend. Otherwise, such a consolidation period forces the market into a typical top building process, which is then of course just the harbinger of a more significant pullback/correction. Worth mentioning is the fact, that such a consolidation period could last from a few days until several weeks, whereas the tilt between corrective and supportive consolidation can also get quite narrow. Consequently, the quality of the underlying market tape during the following couple of days/weeks would give us further guidance which scenario is most likely to happen.

Short-Term Technical Condition

From a pure short-term oriented price point of view, the trend status from the S&P 500 turned pretty neutral after it had managed to close within both envelope lines of the Trend Trader Index. Despite the fact that we saw a stronger sell-off day on Friday, the underlying trend structure of the market remains quite supportive as both envelope lines of this reliable indicator are still drifting higher. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a solid uptrend, at least from a pure price point of view. The situation is different if we analyze the overall trend momentum of the market. Especially, the sideways-trading from the Modified MACD are still indicating further consolidation into deeper March. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator, as its gauge nearly dropped below its bearish threshold. All these facts are telling us that the recent consolidation period is highly likely to continue next week.

The readings from our short-term oriented breadth indicators also started to weaken and are, therefore, quite intermingled at the moment. Especially the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily strengthened their bearish signals last week. This indicates that the overall tape momentum turned quite bearish, plus the overall trend condition of the market also looks a bit weak-kneed at the moment. 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). Both gauges decreased significantly last week and are, therefore, not confirming the current levels from the S&P 500 at the moment. The picture looks different if we take a look at the NYSE New HighsNew Lows Indicator. There we can see that the total number of stocks hitting a fresh 52 weeks high was holding up quite well (especially on Friday), whereas the number of stocks hitting a fresh 52 weeks low did not increase considerably last week. Consequently, the High-/Low-Index Daily has not shown any signs of weakness so far. As a matter of fact, the sell-off on Friday was mainly driven by profit taking and should be, therefore, not be overrated (at least from the current point of view). Nevertheless, we should also not forget that there was absolutely no recovery/momentum within the short-term oriented tape structure visible last week. As a matter of fact, the market looks quite vulnerable for further consolidation work into late March.

This view is even confirmed from a pure contrarian point of view. Our reliable Smart Money Flow Index keeps trading sideways, indicating further range-bound trading ahead. Another interesting fact is that the gauge from the WSC Capitulation Index did not spike at all last week and was, therefore, not confirming the sell-off on Friday. On the other hand side, we can see that the option market still remains too optimistic (even after the sell-off on Friday) and, therefore, further down-testing cannot be ruled out at the moment. So all in all, the overall contrarian picture is giving a quite intermingled picture at the moment, which is another indication for further volatile sideways-trading (in combination with some nasty pullbacks).

Mid-Term Technical Condition

Another reason, why we believe that it is still too early to sell is due to the fact that our mid-term oriented indicators strengthened last week. The gauge from our Global Futures Trend Index increased by a few percentage points to the upper part of the bullish consolidation area. This can be seen as a positive technical signal, since in such a situation any upcoming short-term oriented weaknesses should be limited in price and time (of course only together with strong readings in mid-term market breadth). And also our WSC Sector Momentum Indicator did not show any signs of weakness last week (although we saw a stronger sell-off on Friday). This indicates that most sectors of the S&P 500 are in a strong mid-term oriented uptrend (currently 38 percent). This setting is also supported by our Sector Heat Map, which has been improving for weeks now. The momentum score of riskless money market decreased again last week and dropped to 13.5 percent. And currently, there are only three sectors left, which is trading below the one from riskless money market. Consequently, the current short-term oriented deterioration looks somehow capped on the downside (at least for the moment).

The mid-term oriented market breadth is still confirming the current mid-term oriented trend, although it deteriorated last week. This becomes obvious as the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) dropped last week and both gauges are now trading in bearish territory. Also mid-term oriented advancing issues as well as mid-term oriented up-volume weakened last week, although both gauges keep trading (far) above their bearish counterparts. Thus, it is still a bit too early to get concerned about the current technical condition of the market. On the other hand side, the Modified McClellan Oscillator Weekly improved once again. And also 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 in the last couple of trading sessions or have at least not shown any signs of bearish divergences yet. So all in all, the current technical condition of the market still looks quite confirmative and, therefore, it is a way too early to call for a major market top right now. Nevertheless, as conditions could change quickly, we will monitor the developments of them quite closely within the next couple of weeks.

Long-Term Technical Condition

The long-term oriented trend of the market was holding up quite well last week. Our WSC Global Momentum Indicator stabilized at quite high levels, indicating that currently 65 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend. This is a quite supportive technical signal, as it shows that the current rally still remains global in scope. Also our Global Futures Long Term Trend Index gained some bullish momentum, which can be seen as another quite supportive signal at the moment. And also all markets in our WSC Global Relative Strength Index increased last week. If we focus on our long-term market breadth indicators, we can see that the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly improved, while the percentage of stocks which are trading above their 200 day moving average weakened last week.

Model Portfolios

Last week, there have been no changes in the allocation advice of the WSC All Weather Model PortfolioWSC Inflation Proof Retirement Portfolio and the WSC Global Tactical ETF Portfolio. As the momentum score from utilities dropped below average and below the one from the S&P 500, we received a sell signal for that sector within our WSC Sector Rotation Strategy.

Bottom Line

Our strategic outlook remains almost unchanged compared to last week. Given the quite weak but somehow supportive readings within our indicator framework, the current consolidation still got a bullish tilt (at least for now). As a matter of fact, further (volatile) consolidation work into deeper March looks extremely likely and, therefore, it is still a bit too early to sell from a pure strategic point of view. Consequently, we would advise our conservative members to remain invested, whereas aggressive traders should stay at the sideline/or reduce leverage as it is quite difficult to trade a range-bound trading market.

Stay tuned!!!