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August 26th 2018

Market Review

U.S. stocks ended the week in positive territory, with the S&P 500 and the Nasdaq posting new record highs. The Dow Jones Industrial Average added 0.5 percent over the week to end at 25,790.35. The S&P 500 recorded a weekly 0.9 percent gain to close at a record high of 2,874.69, its first record since January. The Nasdaq advanced 1.7 percent from last Friday’s close to finish at a record of 7,945.98. Among the key S&P sectors, energy was the greatest gainer for the week, while utilities and consumer staples were the only negative sector for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded higher, near 12.

Strategy Review

In our last week’s comment we highlighted the fact that we remained cautiously bullish as the underlying tape condition was still somehow supportive but not really overwhelming. As a matter of fact, we said that we would monitor our indicator closely, since – from a technical point of view – such a slow growth/consolidation phase is always a fork in the road. Because during such a time period, we either see a healthy rotation back into small caps (which would lead to significant improvements within our short- to mid-term tape indicators) or that those divergences within our tape indicators are piling up, which would lead to a significant trend-reversal/sell-off (e.g. in early 2018, 2016, mid 2015 or 2011). Consequently, the quality of the underlying market tape structure during that time period will give us further guidance which scenario is going to happen. Such a process could normally take a couple of days/weeks, whereas the tilt between corrective and supportive consolidation is sometimes also quite narrow.

Short-Term Technical Condition

Not surprisingly, the bullish status from the S&P 500 clearly strengthened last week. Compared to last week, the S&P 500 managed to close significantly above the bearish envelope line from the Trend Trader Index. So from a pure price point of view, the short-term uptrend of the market remains intact as long as the S&P 500 does not drop below 2.832 (bearish threshold from the Trend Trader Index). Unchanged compared to last week, we can see that both envelope lines of this reliable indicator are drifting higher, which is another constructive trend signal at the moment. Above all, the overall trend momentum also slightly increased as the Modified MACD flashed a weak but bullish crossover signal last week. Normally, we would not take such a weak bullish signal too seriously, as any stronger down-day could easily produce a bearish crossover signal within that indicator again. Therefore, it was good to see that the Advance-/Decline 20 Day Momentum Indicator jumped to its highest level for weeks. As this indicator often reacts before prices do, the recent jump was clearly a quite confirmative signal. Even tough, the latest trend recovery can be seen as a green flag on the horizon, it should be always counterchecked with our breadth indicators (to make sure it is broad-based and, therefore, sustainable in its nature).

According to our tape indicators, the latest trend recovery was definitely healthy in its nature (as most of them increased further last week or have not shown any signs of weakness). First of all, we saw a healthy spike in the number of stocks which are hitting a fresh yearly high (especially at the beginning of the week), together with an outright low number of stocks which were pushed to a new yearly low. Consequently, it was not a big surprise at all that stocks continued to rally during the whole week. Above all, this pushed the bullish gauge from the High-/Low-Index Daily to quite confirmative levels. This is another encouraging signal that the latest gains were not caused by a few mega caps but the result from a strong demand all across the board. The same is true if we focus on our short-term oriented breadth momentum indicators. The gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily recovered significantly last week and even flashed a bullish crossover signal. This is indicating that the underlying breadth momentum of the broad market is getting back on track. This can be also observed if we look at the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges succeeded to get back to bullish levels! So in the end, the demand was quite broad based and, therefore, we think the risk of a stronger short-term trend reversal is definitely off the table right now.

If we focus on our contrarian indicators, we can see that a lot of bears have switched into the bullish camp recently. This is due to the fact, that the AII bulls score jumped 38.5 percent last week. As a matter of fact, a lot of investors are planning to get back into the market or that they are planning to increase their equity exposure. In our opinion, this will lead to an increased demand, which is another positive signal on the horizon. This view is also confirmed by the gauge from the WSC Capitulation Index, which is still signaling a risk-on market environment of a very short-term frame.  Unchanged compared to last week, the only negative signal is coming from the Smart Money Flow Index. However, as long as we do not see a significant break-down in short- to mid-term market breadth, we keep ignoring this signal for the time being. Nevertheless, we will be pretty sure that it will be just a question of time until this negative divergence will be wiped out.

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, we get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market strengthened last week and, therefore, the corrective top building process scenario is definitely off the table – at least for now. First of all, our reliable Global Futures Trend Index recovered last week and got back into its bullish consolidation area. This is telling us that the mid-term oriented up-trend of the market regained momentum. As always stated in our market comment, as long as this indicator is showing positive signs of momentum and keeps trading above 60 percent (in combination with supportive mid-term market breadth), the risk of a stronger trend-reversal is literally not given. Last week, the situation was slightly different and, therefore, we think the situation looks quite different today. Also from a pure price point of view, the mid-term oriented trend of the market remains well in place. Our WSC Sector Momentum Indicator is still trading at solid bullish levels, although it slightly decreased last week. An indication that most sectors within the S&P 500 are still in a strong price-driven mid-term oriented up-trend. This is also supported by our Sector Heat Map. The momentum score of all sectors keeps trading above the one from riskless money market (currently at 0.0 percent) – the only exception is the materials sector, which is also at 0.0 percent.

More importantly, mid-term oriented market breadth also showed stronger signs of confirmation and is, therefore, confirming the current mid-term oriented up-trend of the market. First of all, the Modified McClellan Oscillator Weekly (slightly) increased its bullish gap, telling us that the underlying breadth momentum of the broad market is regaining strength. In addition, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) where holding up quite well, indicating the current upside participation within the whole market remains quite broad-based! Above all, we can observe that the gauges of mid-term oriented up-volume as well as mid-term oriented advancing increased their bullish gaps. Another encouraging breadth signal is coming from our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) which reached new all-time highs last week. This is another indication, that the broad market is regaining momentum at the moment. So all in all, this is telling us that the current break-out definitely looks healthy at the moment/turned out to be supportive and, therefore, further new record highs might be at hand soon.

Long-Term Technical Condition

Unchanged compared to the previous weeks remains the long-term oriented trend of the market. The WSC Global Momentum Indicator has been trading for 4 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. A 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 5 weeks, signalling that the long-term oriented trend of U.S. equities is regaining momentum. Our WSC Global Relative Strength Index shows the same picture as in the previous months. The relative strength of all risky markets was holding up quite well, but all markets (except one) are trading below the one from U.S. Treasuries. This is sign for a slow growth period. Our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly, percentage of stocks which are trading above their 200 day moving average) remained unchanged compared to the previous 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. Moreover, we are proud to announce that our WSC Sector Rotation Strategy reached a new all-time high last week.

Bottom Line

Last week, the technical situation improved all across the board. Especially, the stronger readings within our short- to mid-term oriented tape indicators are telling us that the recent break-out was broad based in its nature. As a matter of fact, the quite narrow driven latest slow growth period transformed back into a healthier market environment.  Consequently, the risk of a corrective top-building process is definitely of the table right now. Therefore, we strongly believe to see further record highs into deeper Q3. So in the end, we would advise our conservative members to remain invested (and to remove their stop-loss limit), whereas aggressive traders should definitely increase their risk-budgets.

Stay tuned!