September 16th 2018

Market Review

All three major U.S. averages finished the week with solid gains. The Dow Jones Industrial Average rose 0.9 percent to close the week at 26,154.67, its fourth positive week of the past five. The S&P 500 increased 1.2 percent for the week to end at 2,904.98, its ninth positive week of the past 11. The Nasdaq gained 1.4 percent from the week ago close to finish at 8,010.04, its third positive week of the past four. At current levels, the S&P 500 is 0.4 percent below its record close set in late August, while both the Dow Jones Industrial Average and the Nasdaq are within 2 percent of their all-time highs. Most key S&P sectors ended in positive territory for the week, led by financials. Financials were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.1.

Short-Term Technical Condition

The short-term oriented uptrend of the market got back on track as the readings from our entire short-term oriented trend-indicators strengthened last week. This is mainly due to the fact that the S&P 500 is now trading 30 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 2,874. Unchanged compared to last week, we can see that both envelope lines of this reliable indicator are still increasing, which is another positive short-term oriented price driven trend-signal. On the other side we can see that the underlying trend momentum of the market remains quite weak-kneed as the Modified MACD has not managed to close its bearish gap so far. Therefore, it is not a big surprise at all that the gauge from the Advance-/Decline 20 Day Momentum Indicator finished the week at quite supportive but not really confirmative levels (given the current levels from the S&P 500).

Basically, the same is true if we focus on our short-term oriented tape indicators. Despite the fact that the S&P 500 is trading slightly below its all-time high, the readings within our short-term oriented breadth indicators were developing moderately last week. Consequently, the signals from most of our short-term oriented tape indicators can be described as somehow supportive, but they are far away from being confirmative at the moment. As a matter of fact, most of them are still showing a quite concerning bearish divergence if we consider the current levels from the S&P 500! This applies in particular to the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both indicators have not shown any signs of strengths recently! This is signaling that the underlying tape momentum of the market is still outright negative. This view is also supported by the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Both gauges have not shown any bullish moves recently and are still trading in bearish territory, indicating that the current short-term oriented uptrend is only driven by a few heavy weighted stocks rather than by a broad basis! This is a quite dangerous situation, as a short-term oriented trend-break within these stocks could cause a sharp trend reversal. However, the only positive short-term oriented tape signal is coming from the NYSE New HighsNew Lows Indicator as the number of stocks hitting a fresh yearly low slightly decreased last week. As a matter of fact, the High-/Low-Index Daily flashed a small bullish crossover signal last week. Nevertheless, we could also monitor a quite bearish divergence, if we consider the fact that the total number of new highs was above 300 at the beginning of the year (at that time the S&P 500 was trading at similar levels).

On the contrarian side, we can see that the latest rally has definitely relieved oversold conditions from last week. Apart from that fact, the situation on the contrarian side looks quite grim at the moment. This is mainly due to the fact that the market flashed another Hindenburg Omen on Friday. This is supporting our view, that the market might face stronger headwinds within the next couple of weeks. Moreover, we can see that a lot of bulls started to switch into the bearish camp, indicating a decreasing demand (which could be also a short-term stumbling block for the current rally). Unchanged compared to last week, the Smart Money Flow Index is far away from confirming the current levels from the Dow Jones Industrial Average. Given the deteriorating tape structure all across the board, this red flag on the horizon is definitely getting closer right now. Last but not least, further headwinds can be expected from a cyclical point of view as September tends to be one of the weakest months in the year.

Mid-Term Technical Condition

Another concerning fact is that the mid-term oriented condition of the market continued to deteriorate last week. This is mainly due to the fact that the gauge from the Global Futures Trend Index dropped almost 12 percentage points for the week and closed at 53 percent! This is below the important 60 percent threshold. As a consequence, the risk of a fast paced correction is outright high (of course only in combination with weak or bearish readings in mid-term oriented market breadth) and it is now definitely time to get a 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! Not surprisingly, only from a pure price point of view, the mid-term oriented uptrend of the market still remains intact as the WSC Sector Momentum Indicator keeps trading at solid bullish levels so far. This indicates that most sectors within the S&P 500 are still in a mid-term oriented up-trend at the moment (as we have not seen a stronger pullback so far). This can be also seen if we focus on our Sector Heat Map as the momentum score of all sectors keeps trading above the one from riskless money market (currently at 0.0 percent).

Another concerning fact is that mid-term market breadth has also started to show some signs of exhaustion recently. Despite the fact the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) remain bullish from a pure signal point of view, they continued to decrease for the week. This is telling us that a lot of stocks did not participate within the latest rally we saw. In other words, their signals remain supportive but not really confirmative (if we consider the current level from the S&P 500). On top of that we can see that the bullish gauges from the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly also dropped significantly last week. Despite the fact that they have not turned bearish so far, their absolute bullish levels can be described as quite weak-kneed at the moment. This is a quite concerning development, because in the past, all corrections were accompanied by bearish or outright weak readings within both indicators (together with a Global Futures Trend Index score below 60 percent).  As a matter of fact, the risk for a stronger disappointments grew significantly last week. On top of that we can see that the bullish gap from the Modified McClellan Oscillator Weekly continued to narrow, which is another indication that the overall tape momentum of the market is outright weak-kneed at the moment. The only positive signal is coming from our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as they were still holding up quite well last week. So from a pure mid-term oriented tape perspective, it looks like the market does not have enough power to break substantially above its old record high, whereas the downside potential of the market started to increase significantly! As a matter of fact, it looks like the market is heading into a make or break set-up within the next couple of weeks.

Long-Term Technical Condition

The long-term oriented uptrend of the market shows – once again – exactly the same picture as in the previous week. The WSC Global Momentum Indicator has been trading for 7 weeks at the same level, 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. As already pointed out several times, this is a clear signal that the current global bull-market is quite fragile at the moment. On the other hand side, our Global Futures Long Term Trend Index has been increasing for 8 weeks, signaling that the long-term oriented trend of U.S. equities is regaining momentum. Our WSC Global Relative Strength Index shows that the relative strength of all risky markets increased last week, but all markets (except one) are trading below the one from U.S. Treasuries. This is a sign for a slow growth period. Looking at our long-term oriented tape indicators, the Modified McClellan Volume Oscillator Weekly was holding up quite well last week, while the High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average weakened last 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 points below its all-time high, we are extremely cautious at the moment. Mainly because our entire indicator framework continued to deteriorate last week and remains, therefore, 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 strongly lagging behind). In general, such a large-cap driven rally is quite dangerous to play. Because if we see a trend-reversal in these large-caps (and a further deterioration within our tape indicators), there is literally no safety-net around to cushion such a move. In such a situation, the risk of a strong and sharp trend-reversal remains outright high. However, as our mid-term oriented tape condition is still somehow supportive (albeit on quite low levels), another large-cap driven overshoot cannot be ruled out at the moment. Consequently, it might be a bit too early to pull the trigger immediately (as we would like to see some negative price action first). As a matter of fact, we would advise our conservative members to keep/place a stop-loss limit around 2,790 (as the risk of a fast paced pullback can also not be ruled out in such a non-confirmative technical market environment). This stop loss limit should be in place until our mid-term indicator framework turns positive again! Aggressive traders should go short, if the S&P 500 drops below 2,790 and should increase their exposure if we see further down testing below 2,750/2,720.

Stay tuned!