March 17th 2019
U.S. stocks closed out the week in positive territory with all three major averages logging strong gains. The Dow Jones Industrial Average advanced 1.6 percent, to 25,848.87. The 30-stock gauge recorded its best weekly advance since February 15th. The S&P 500increased 2.9 percent over the five days to finish at 2,822.48. The broad index booked its biggest weekly gain since Nov. 30. The Nasdaq jumped 3.8 percent for the week to 7,688.53, its strongest weekly advance since Dec. 28th. All key S&P sectors closed in positive territory for the week, led by technology. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 12.9.
Short-Term Technical Condition
From a pure price point of view, the short-term oriented trend of the market turned clearly bullish last week. If we have a closer look at our short-term oriented indicators, we can see that the market got back into a pure price driven uptrend on Monday, as the S&P 500managed to close above the bullish envelope line from the Trend Trader Index. So from a pure price point of view, the short-term oriented uptrend remains intact as long as the S&P 500 does not close below 2,775. Moreover, both envelope lines from the Trend Trader Index started to increase again, which is another constructive technical signal. This pure price driven uptrend is now also getting support by the Modified MACD, which succeeded to flash a (small) bullish crossover signal on Friday and is, therefore, indicating a more bullish biased setup. Also our Advance-/Decline 20 Day Momentum Indicator gained further bullish ground compared to the previous week. But its gauge did not fully confirm the latest gains by the S&P 500 and should be a bit higher, given the fact that the broad index jumped nearly 3 percent for the week. Additionally, we should not forget that any stronger down-day could easily lead to a bearish crossover signal within the Modified MACD. So from a pure trend point of view, the latest recovery still looks a bit fragile, although the current set-up looks got definitely a more bullish tilt.
This view is also widely confirmed by short-term market breadth as we saw major signs of improvements last week. The most encouraging tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators softened their bearish free fall, telling us that the underlying tape momentum started to recover. 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). Both gauges gained some bullish ground compared to the previous week. Nevertheless, we should not forget that the gauge of the 20 days frame still keeps trading well below its bullish threshold. This indicates that the current recovery still looks a bit weak-kneed in its nature. Consequently, we would not expect to see a strong rally towards the latest bull-market high immediately. However, another very positive signal is coming from the High-/Low-Index Daily, which widened its bullish gap last week. The main reason for this bullish signal is the fact that we have recently seen a quite strong spike in new highs (already at the beginning of the week), in combination with encouraging decrease in new lows. This indicates that the market internals are strengthening as the latest recovery was driven by a strong demand rather than by short-covering. This is another piece of evidence that the current technical condition transformed into a more bullish biased set up. Normally, as long as we have more new highs than new lows, the underlying tone should remain supportive. So all in all, the underlying tape condition recovered significantly last week but still remains a bit weak-kneed from an absolute point of view. Consequently, the market still remains in a consolidation mode (from a pure technical point of view), although it has now definitely transformed into a more healthy set-up.
From a pure contrarian point of view, we can see that the market is quite overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and, therefore, the pace is likely to slow down a bit in the next couple of trading session. This view is also confirmed by our reliable Smart Money Flow Index, which indicates further sideways trading ahead. This indecisiveness can be also seen if we focus on market sentiment, as the amount of bears is almost as high as the amount of bulls on Wall Street. Another indication that the pace is likely to slow down again (even together with some nasty pullback) is the fact that we saw a stronger spike in NYSE volume last week. This view is also supported from a pure seasonal point of view (Presidential Cycle), as the market tends to trade sideways until early April until further gains can be expected.
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. The main reason is that the gauge from the Global Futures Trend Index stopped its outright bearish free fall from last week and is, therefore, now trading in it the middle range of its bullish consolidation area. This is a quite important signal, as it is telling us that the underlying technical condition of the market remains supportive (even if we see some nasty pullback days on a short-term time perspective). Nevertheless, its gauge should be a bit stronger, given the recent bounce from the S&P 500. Nevertheless, it is a way too early to issue a strategic sell signal as long as the gauge from this reliable indicator remains above 60 percent. 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 should be limited in price and time. In addition, the WSC Sector Momentum Indicator succeeded to increase by 2 percentage point from last week. This is an indication that most sectors of the S&P 500 are back in a strong mid-term oriented uptrend (currently 40 percent). Also our Sector Heat Map, which has been improving for weeks now, was able to improve once again. The momentum score of riskless money market dropped to 14.1 percent and as a consequence, there is only one sector left (energy at zero percent), which is trading below the one from riskless money market! As a matter of fact, the risk of a stronger pullback looks quite capped at the moment.
Examining mid-term oriented market breadth reveals a small recovery as the picture generally improved compared to the previous weeks. This becomes obvious if we focus on our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line), as all of them gained bullish ground last week and are confirming the latest move from the S&P 500. Also the Modified McClellan Oscillator Weekly gained more bullish ground last week, indicating that the overall tape momentum remains positive for the time being. Moreover, the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) increased for the week, although the gauge from the 150 days frame is still trading slightly below the bullish threshold. The only weak signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly, as both indicators slightly lost some ground on high bullish levels. So all in all, our mid-term oriented tape indicators are telling us that any upcoming short-term oriented weaknesses should not lead to a stronger pullback at the moment!
Long-Term Technical Condition
The long-term oriented trend of the market also showed signs of improvements last week. The most encouraging signal is coming from our WSC Global Momentum Indicator. It jumped by 11 percentage points last week, indicating that 68 percent of all local equity marketsaround the world (which are covered by our Global ETF Momentum Heat Map) are now trading above their long-term oriented trend. This is a very supportive technical signal, as it shows that the current recovery is global in scope. In addition, it is once again an indication for our case, that the current recovery could have the potential to push the S&P 500 above its old bull-market high within the next couple of months). Also our Global Futures Long Term Trend Index was holding up quite well, although it could be a bit stronger given the sound environment. The same is true if we examine the WSC Global Relative Strength Index. It improved for the week, but it is still indicating a long-term risk-off market scenario, as the relative strength of nearly all risky markets is trading below the one from U.S. Treasuries. If we focus on our long-term market breadth indicators week (Modified McClellan Volume Oscillator Weekly, High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average), we can see that all of them strengthened. These facts are telling us that the long-term market internals are getting back on track.
Last week, there have been no changes in the allocation advice of our model portfolios (WSC All Weather Model Portfolio, WSC Inflation Proof Retirement Portfolio, WSC Sector Rotation Strategy and the WSC Global Tactical ETF Portfolio).
Last week, the technical situation improved all across the board. Especially, the stronger readings within our tape indicators are telling us that the recent recovery was broad based in its nature. As a matter of fact, the latest consolidation period transformed back into a healthier market environment. Consequently, the risk of a stronger pullback/trend-break is definitely off the table right now. Nevertheless, we should not forget that the market still remains in a consolidation period from a pure technical point of view. So in other words, even if we see further range bound trading ahead, the underlying technical condition tape has definitely a bullish tilt. For that reason, we would advise our conservative members to remove any stop-loss limits as the current risk-/reward ratio looks supportive again. Aggressive traders should switch to the bullish camp again, but should reduce leverage since it could be quite tricky to trade a bullish biased range bound market.