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July 15th 2018

Market Review

U.S. stocks ended the week with solid gains. The Dow Jones Industrial Average booked a 2.3 percent weekly gain to end at 25,019.41. The S&P 500 recorded a weekly climb of 1.5 percent and closed at 2,801.31. The Nasdaq increased 1.8 percent for the week to close at 7,825.98 and to mark a fresh all-time high. Nearly all key S&P sectors ended in positive territory for the week led by industrials. Utilities were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 12.2.

Short-Term Technical Condition

Not surprisingly, the short-term oriented uptrend of the market turned quite bullish as our entire short-term oriented trend-indicators strengthen last week. The S&P 500 is now trading 61 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 2,740. Additionally, both envelope lines of this reliable indicator started to flatten out. This is a quite encouraging signal, as it indicates that the latest recovery is definitely a bit more sustainable in its nature. This bullish short-term uptrend is also clearly supported by the Modified MACD, which flashed a stronger bullish crossover signal last week. This indicates that the overall short-term trend momentum is back on track and, therefore, further bullish biased gains are quite likely on a short-term time horizon. Above all, the gauge from the Advance-/Decline 20 Day Momentum Indicator finished the week also at quite supportive levels, although it could be a bit stronger (if we consider the current level from the S&P 500).

Essentially, we receive the same picture if we analyze short-term market breadth. For the time being, our entire short-term oriented tape indicators remain supportive. The most encouraging fact is that both, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily, flashed a bullish crossover signal last week. This indicates that the underlying breadth momentum of the market turned positive again on a short-term time horizon. Another positive signal is coming from the High-/Low-Index Daily, which slightly strengthened its bullish signal last week .The main reason for this bullish signal is the fact that we have recently seen some stronger moves in new highs, without any offsetting spikes in new lows. But in contrast, the percentage of stocks which are trading above their short-term oriented moving averages (20/50) decreased for the week. Normally they should be much stronger if we consider the current level of the S&P 500 (especially on a on a 20 days’ time frame). So all in all, the readings of short-term market breadth are quite supportive but not really confirmative at the moment. This is mainly due to the fact that not all stocks participated in the rally from last week. As a consequence, it could be possible that the pace is likely to slow down a bit (although the overall direction should remain bullish).

On the contrarian side, we can see that the latest rally into expiration had its designated impact on short-term sentiment. This is mainly due to the fact that our Daily Put/Call Ratio All CBOE Options Indicator turned neutral again. Moreover, we can see that most of our sentiment indicators remain pretty supportive at the moment. In other words, if the rally continues (which will be in line with our current call) a lot of bears will switch into the bullish camp and will, therefore, fuel the current rally even more.  However, apart from that fact our remaining contrarian indicators still look quite grim. Especially, the Smart Money Flow Index is far away from confirming the current levels from the Dow Jones Industrial Average. The last time we saw such strong divergences between this reliable indicator and the Dow was a couple of months before the “Trump Rally” had started. Compared to back then, the Smart Money Flow Index is now showing a huge bearish divergence. As a matter of fact, we would not be surprised, if the market is running into major headwinds later this year.

Mid-Term Technical Condition

However, right now this is not a big concern at all. The main reason behind this fact is that the current mid-term oriented condition of the market looks quite healthy. First of all, our reliable Global Futures Trend Index showed a strong positive momentum last week and was, therefore, able to get back into the bullish consolidation range (currently at 68 percent) last week. This can be seen as a very constructive technical signal, since in such a situation any upcoming weaknesses should be limited in price and time (of course only together with strong readings in mid-term market breadth). In addition, the WSC Sector Momentum Indicator is still trading at a solid bullish level. This is telling us that most sectors within the S&P 500 are per definition in a mid-term oriented uptrend. Looking at our Sector Heat Map reveals that the momentum score of nearly all industries is still above the one from riskless money market. As a matter of fact, further gains into deeper July can be expected (at least for now).

More importantly, this current mid-term oriented up-trend is also widely confirmed by mid-term market breadth. Particularly, the Modified McClellan Oscillator Weekly showed a widening bullish gap last week, indicating that the overall tape momentum remains positive for the time being. In addition, 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 good 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 gained momentum last week. With such strong readings of both indicators (and within our remaining mid-term oriented indicators), we think the current rally will definitely not run out of fuel at the moment.

Long-Term Technical Condition

The long-term oriented trend of the market remains almost unchanged compared to last week. The WSC Global Momentum Indicator continued its bearish ride and dropped again to the lowest level for months. A clear sign that a lot of local equity markets around the world are trading below their long-term trend-lines and that the current bull-run is slightly fading out. Also the Global Futures Long Term Trend Index continued its decrease and dropped again to the lowest level for months. But once again, a positive signal is coming from our shorter-term oriented WSC Global Relative Strength Index as the relative strength of all risky markets was holding up quite well last week. But currently, already 5 markets are trading below the one from U.S. Treasuries, which is another sign that the global bull market is slightly losing steam. If we focus on our long-term oriented tape indicators, the High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly were holding up quite well last week, 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 our model portfolios (WSC All Weather Portfolio, WSC Inflation Proof Retirement Portfolio, WSC Sector Rotation Strategy and the Global Tactical ETF Model Portfolio).

Bottom Line

The technical picture of the market improved compared to last week and, therefore, our bullish outlook remains unchanged at the moment. To be more precise, with quite supportive/bullish readings within our indicator framework (especially on a mid-term time horizon), we think that the current recovery/rally looks quite healthy in its nature. Therefore, we strongly believe to see further gains into deeper July (although we would not be surprised if such gains were accompanied by increased volatility). So in the end, we would advise our conservative members to remain invested, whereas aggressive traders should focus on buying into weaknesses instead of chasing the market too aggressively on the upside.

Stay tuned!