May 7th 2017

Market Review

U.S. stocks closed the week with gains, lifting the S&P 500 and the Nasdaq to record closes. For the week the Dow Jones Industrial Average climbed 0.3 percent to end at 21,006.94. The S&P 500 recorded a weekly 0.6 percent gain to close at a record high of 2,399.29. The Nasdaq advanced 0.9 percent from last Friday’s close to finish at a record of 6,100.76. Most key S&P sectors ended in positive territory for the week, led by financials. Energy were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 10.7.

Short-Term Technical Condition

According to our short-term oriented indicators, the bullish trend-status from the S&P 500 remains unchanged and is therefore, in line with our recent outlook. To be more precise, the S&P 500 closed nearly 40 points above the bearish threshold from the Trend Trader Index. Above all, both envelope lines of this reliable indicator are still drifting higher on a fast pace. This is another indication for a strong short-term oriented uptrend. The same is true if we focus on the readings from the Modified MACD, as they strengthened their bullish signals last week. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator remains pretty bullish, although it lost momentum last week and is therefore, not completely confirming the recent break-out. As already mentioned several times, given the fact that this indicator tends to lead price movements, such a small non-confirmation could indicate that the pace is likely to slow down a bit next week.
If we focus on our short-term oriented breadth indicators, we can see that their readings slightly weakened for the week and are therefore, quite intermingled at the moment. Both, the Modified McClellan Volume Oscillator Daily and the Modified McClellan Oscillator Daily flashed a small bearish crossover signal last week. As a matter of fact, the underlying tape momentum of the broad market can be described as pretty flattish, as it has no clear direction for the time being. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges are trading above their 50 percent threshold, they strongly decreased last week and are therefore, not confirming the recent high of the S&P500. On the other hand side, the High-/Low-Index Daily is still trading at a solid level and far away from being bearish (although it also decreased last week). This is mainly due to the fact that we have not seen any stronger spike/decline in the amount of stocks hitting a fresh yearly low/high, indicating that the it might be a bit too early to bet on a major trend reversal (at least for the time being). Nevertheless, we cannot ignore the fact that the latest high was not really supported by a broad basis (if we consider the fact that most of our short-term oriented tape indicators have not confirmed the latest high). Consequently, the market looks quite vulnerable at the moment.
On the contrarian side, we can see that the WSC Capitulation Index and the Uptick-/Downtick Ratio are indicating some form of risk aversion and therefore, it could be possible to see increased volatility ahead on a very short-time frame. The mid-term signals are quite mixed at the moment. This is due the fact that the NYSE Member Debt Margin has definitely confirmed the latest high, whereas the Smart Money Flow Index has slightly started to diminish its bearish divergence to the Dow Jones Industrial Average. Nevertheless, the gap remains huge and is therefore, still a thread on a mid-term horizon. This view is also strongly supported by the fact that the market triggered a Hindenburg Omen last week. This is a quite rare bearish technical signal and when it occurs, the market should be at risk for a correction within the next 30 days. According to our research, this pattern occurred over 65 times since 1966. Since then in about 25 percent of all cases, the market faced a maximum loss, exceeding the 5 percent range within the following 30 days! So from a pure contrarian point of view, it looks like that the clouds are gathering on the horizon.

Mid-Term Technical Condition

The mid-term uptrend of the market remains intact so far, as the Global Futures Trend Index is still trading in the upper range of the bullish consolidation area. Nevertheless, we can also see that this reliable indicator has not confirmed the latest high from the S&P 500. Right now this is not a big deal at all as the indicator is trading well above its bearish 60 percent threshold. we would get quite cautious if the gauge will drop below 60 percent (in combination with weakening market breadth, especially within the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly), as it would be a clear indication that a stronger correction lies ahead – which is not the case right now! On the other hand, as long as the gauge keeps trading within its bullish consolidation area and does not additionally show some signs of positive momentum, the upside potential of the market tends to be limited as well! As a consequence, we are not expecting a fast bullish market within the next couple of trading sessions. However, also from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator is far away from being bearish. This is telling us that most underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. 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 which is 0 percent) remains above the one from riskless money market (currently at 2.1 percent).

The mid-term oriented market breadth shows also a quite ambiguous picture at the moment. On the one hand, there are a lot of positive signals. For example, our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have not shown any weaknesses within the last couple of trading sessions and are therefore, confirming the recent level of the S&P 500! And on the other hand, there are also a lot of neutral as well as negative signals in our tape indicator framework. Like in the previous 4 weeks, the Modified McClellan Oscillator Weekly finished the week again nearly unchanged. This is telling us that the underlying breadth momentum is still somehow lagging behind on a mid-term time horizon. And also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) gained more bearish ground last week. Especially those on a 100 days time frame nearly touched the bearish threshold. This is an indication that the underlying trend structure of the market remains extremely narrow-based/weak at the moment – especially given the records of the S&P 500. And in addition, the Upside-/Downside Volume Index Weekly as well as the Advance-/Decline Index Weekly have not shown any improvements recently, signaling a weak tape momentum on a mid-term oriented time frame. All in all, the readings within our mid-term oriented tape indicators are quite weak-kneed at the moment. For that reason, we keep a close eye on the development within those indicators within the next weeks as further bearish readings would be definitely a sign that the rally has reached a mature stage.

Long-Term Technical Condition

The long-term uptrend of the market remains well intact. The Global Futures Long Term Trend Index is trading at quite encouraging levels and thus, indicating a technical bull market. Also the WSC Global Momentum Indicator is trading at the highest levels for months and indicates that 82 percent of all global markets remain within a long-term oriented uptrend. Additionally, we can see that the relative strengths of all risky markets keeps trading far above the one from U.S. Treasuries (except commodities). Also, long-term market breadth is giving no reason to worry currently and therefore, we think that the current long-term uptrend of the market is not in danger at all. Especially our long-term oriented High-/Low Index Weekly is still trading at solid 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 number of stocks which are trading above their longer-term oriented moving averages (200) – as they are still trading in a solid bullish area (although they have come down a bit recently). Only the Modified McClellan Volume Oscillator Weekly continued to decrease.

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., WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. As the S&P Latam 40 dropped out among the top 10 markets within our Global ETF Momentum Heat Map, we received a sell signal for that specific ETF. On the other hand, as the MSCI Netherlands is now ranked within the top 5 markets within our Global ETF Momentum Heat Map, it is now being added to the portfolio. Moreover, we are proud to announce that the WSC All Weather Portfolio reached a new all-time high again last week!

Bottom Line

Given the still supportive/bullish readings within our indicator framework, we think it is still a bit too early to take the chips from the table. As a matter of fact our strategic outlook remains unchanged.  Nevertheless, we cannot ignore the fact that there are lot of bearish divergences around which have not been sorted out yet (although the market reached a new all-time high). So if the market continues to crawl higher without a broader based confirmation this would be definitely a sign that the air is getting thinner. Right now, those negative divergences are nothing more than a quite big red flag on the horizon but we will definitely screen them quite closely within the next couple of weeks.

Stay tuned!