April 23rd 2017

Market Review

U.S. stocks finished the week with gains. For the week the Dow Jones Industrial Average eked out a gain of 0.5 percent to finish at 20,547.76. The S&P 500 finished at 2,348.69 and recorded a weekly gain of 0.9 percent as well. The Nasdaq jumped 1.8 percent during the week to end at 5,910.52. Among the key S&P sectors, industrials were the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.7.

Short-Term Technical Condition

On a short-term time frame, the trend of the market remains almost unchanged compared to last week. From a pure price point of view, the current short-term oriented trend remains pretty neutral as the S&P 500 managed to close within both envelope lines of the Trend Trader Index. Nevertheless, we can see that both envelope lines of this reliable indicator continued to drift lower, indicating that – from a pure structural point of view – the underlying trend structure of the market remains damaged. This view is also widely confirmed by the bearish readings from the Modified MACD, which has not shown any signs of recovery since the S&P 500 reached its high in late February. On the other hand we can see that the readings from the Advance-/Decline 20 Day Momentum still remains quite bullish which is another indication that the market is struggling for direction. As already mentioned last week, during a consolidation period it is not quite unusual to see a lot of bearish or even fast changing signals within short-term oriented trend indicators as there is no specific trend within a trading range. Therefore, short- to mid-term market breadth will give more guidance to identify which direction the market will take after such a consolidation period.

Unfortunately, short-term market breadth shows the same ambiguous picture as in the previous weeks. The bearish status from the Modified McClellan Volume Oscillator Daily remains unchanged, whereas the readings from the Modified McClellan Oscillator Daily are neutral at best. 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). Despite the fact that we saw some small positive momentum within their readings last week, both indicators remain more or less within their neutral range (if we focus on their absolute levels and their recent developments since the trading range has started in late February). A quite positive signal is coming from the High-/Low Index Daily as it strengthened its bullish signal for the week and has therefore, started to form a minor bullish divergence to the latest developments we have seen within the S&P 500. This is due to the fact that the total amount of all NYSE-listed stocks which reached a new yearly high started to show some strength recently, whereas the total amount of new lows literally collapsed after the initial spike in early March. So all in all the market internals remain too supportive to force a pullback but still too weak to trigger a sustainable break-out.

On the contrarian side, we receive basically a similar picture. The quite bearish divergence from the Smart Money Flow Index to the Dow Jones Industrial Average has not been sorted out yet but at least the SMFI has stopped its freefall last week. Moreover, we can see that the WSC Capitulation Index is still indicating a risk-off market environment and therefore, we would not expect to see an increasing risk-appetite among investor. On the other hand, we can see that the more long-term oriented NYSE Member Debt Margin has set a new record. This is a quite bullish long-term signal which is in-line with our general outlook that any upcoming pullback won’t be the beginning of a new bear market.

Mid-Term Technical Condition

The mid-term oriented technical condition of the market has hardly changed compared to last week and signals that the thread of a stronger correction (fast pullback exceeding 5-7 percent) is very little at the moment. The Global Futures Trend Index keeps trading in the upper area of its bullish consolidation range, and is far away from the thread of dropping below the 60 percent threshold (in combination with weakening market breadth). In addition, the WSC Sector Momentum Indicator is still trading at a solid level, indicating that many sectors of the S&P 500 remain in a mid-term oriented uptrend. Also our Sector Heat Map reveals that the momentum score of all sectors (except Energy which is 0 percent) remains above the momentum score from riskless money market (2.2%). But still most sectors have a lower momentum score than the S&P 500, indicating a growing selectivity among the market. In more detail this means, that only some industries are holding up quite well, whereas the broad market is still lagging behind and therefore, the pure price driven trend information from the index might be a bit misleading at the moment.

Also the mid-term tape condition has shown some small signs of recovery recently. Especially, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) got slightly back on track and have therefore, at least confirmed the latest (small) gains we saw. Nevertheless, their readings also kept trading more or less sideways, which is another piece of evidence that further sideways trading can be expected (even if we see some stronger bullish or bearish gains on single days). Like in the previous weeks, nearly all our advance-decline indicators continued to increase or strengthened (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line). The Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly – in contrast – finished the week nearly unchanged. Also the Modified McClellan Oscillator Weekly has shown hardly any movement recently and has finished its fifth week already unchanged. This is an indication that the underlying breadth momentum is still somehow lagging behind on a mid-term time horizon. But all in all, the current tape condition still remains constructive in its nature and therefore, it might be a bit too early to take the chips from the table or even to bet against the market – at least for the time being.

Long-Term Technical Condition

Looking at the long-term oriented technical picture of the market exposes that the technical setting of the market remains very bullish at the moment. The Global Futures Long Term Trend Index is indicating a technical bull market, whereas the WSC Global Momentum Indicator shows that 82 percent of all global markets have not broken below their long-term uptrend yet. Also the relative strength of all risky markets keeps trading above the one from U.S. Treasuries, another indication that any upcoming short-term pullback won’t be the end of this current bull-market. Our long-term oriented High-/Low Index Weekly is still trading at supportive levels, indicating that the long-term tape of the market remains well intact. The percentage of stocks which are trading above their 200 day simple moving average remain at solid bullish levels. Only the Modified McClellan Volume Oscillator Weekly continued to show some signs of weakness, as it also did in the previous weeks.

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 Global Tactical ETF Portfolio, WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. As the momentum score of consumer discretionary rose above average and above the one from the S&P 500 within our Sector Heat Map, we received a buy signal for that ETF within our WSC Sector Rotation Strategy. Moreover, we are proud to announce that the WSC All Weather Portfolio reached a new all-time high again last week! Right now the year to date performance is 5.8 percent, whereas its volatility is just below 4 percent!

Bottom Line

The technical situation remains almost unchanged compared to last week. The market is struggling for direction and therefore, the tilt between corrective and supportive consolidation is extremely narrow. Right now, it looks like it’s getting again a more positive drift but this situation could change literally within days. Consequently, it more confirmation is needed. All in all, we still remain cautiously bullish as we think it is a way too late to buy (add exposure) and too early to sell. As a matter of fact, aggressive traders should wait until we get a clear trend again. Conservative investors should remain invested but we think it still makes sense to keep a stop loss limit around 2,295 (closing price)  just in case things change quite fast within the next couple of days). This stop-loss should remain in place as long as we do not see any improvements within our indictor framework.

Stay tuned!