March 19th 2017

Market Review

U.S. stocks finished the week nearly unchanged. For the week, the Dow Jones Industrial Average gained 0.1 percent to close at 20,914.62. The Dow recorded its fifth positive week in six. The S&P 500 rose 0.2 percent to end at 2,378.25. The Nasdaq advanced 0.7 percent for the week to end at 5,901.00. Both the S&P 500 and the Nasdaq booked their seventh positive week in eight. Among the key S&P sectors, utilities were the best weekly performer, while financials dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 11.3.

Strategy Review

In our last week’s comment we highlighted the fact that we remained outright cautious at this time as the technical condition of the market looked extremely damaged. With such weak readings all across the board we have not expected to see any stronger and sustainable rally rather than some further bearish biased consolidation, which could then easily result in a stronger correction. In fact, the broad index ended almost where it had started one week ago. Consequently, it is not a big surprise at all that the technical condition of the market remains almost unchanged compared to last week.

Short-Term Technical Condition

If we have a closer look at the Trend Trader Index, we can see that the price driven short-term oriented up-trend of the market has not been broken yet as the S&P 500 is still trading about 15 points above the bearish threshold from that reliable indicator. Furthermore, we can see that both envelope lines have not shown any signs of a major rounding top yet and therefore, the pure price driven short-term oriented up-trend of the market looks pretty intact for the time being. Nevertheless, we can see that the underlying trend-momentum of the market remains pretty weak and therefore, we do not think to see any stronger break-out rally immediately. This becomes pretty obvious if we focus on the Modified MACD, which has not turned bullish so far. Additionally, we can see that the bearish readings from Advance-/Decline 20 Day Momentum Indicator are far away from confirming the current levels from the S&P 500, although it has shown some small signs of recovery recently. So in the end, our short-term oriented trend indicators are telling us that that the chances for a significant move in both directions look pretty capped at the moment.

Basically, the same is true if we focus on short-term oriented market breadth. The overall short-term oriented tape momentum looks pretty exhausted as the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily have not turned bullish yet. On the other hand, we can see that the market internals still look pretty solid at the moment and therefore, the risk of a significant short-term oriented pullback remains pretty limited at the moment. This becomes pretty obvious if we focus on the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50) as both gauges saw a solid surge last week. On the other hand we can also see that they should be much (much) higher, if we consider the current levels from the S&P 500. Basically, the same is true if we focus on the NYSE New HighsNew Lows Indicator or the High-/Low-Index Daily, as the total amount of new highs has shown some stronger signs of recovery recently. As a matter of fact both indicators are somehow constructive but not confirmative at the moment. As a consequence we think to see further sideways-trading within the next couple of trading sessions (which should bring definitely more guidance).

From a pure contrarian point of view, the overall technical picture of the market is a bit intermingled at the moment. This is mainly due to the fact that market sentiment measured by market vane looks quite complacent whereas the AII Bulls & Bears survey is indicating a lot of pessimism among market participants. Moreover, we can see that the long-term gauge from the Smart Money Flow Index still looks quite confirmative, whereas it looks like it has shown some non-confirmation recently.  Above all, we can see that the fisher transformation of the WSC Capitulation Index clearly turned bearish last week, plus the gauge from the OEX Options Call-/Put Ratio Oscillator Weekly also dropped into bearish territory last week. Consequently, further volatile sideways-trading looks pretty likely on a very short-time frame.

Mid-Term Technical Condition

This view is also confirmed by the current mid-term oriented technical condition of the market. Especially, the gauge from the Global Futures Trend Index remains in the bearish consolidation brackets and has therefore, not shown any signs of strength yet. As long as we do not see any upside-momentum in the gauge of this reliable indicator or at least some bullish divergences, any upcoming gains should be pretty capped. Moreover, we can say that the current dynamics/consolidation will definitely not be over as long as its gauge remains below its outright bearish 60 percent threshold (as the market remains extremely vulnerable in such a situation). On the other hand we can see that from a pure price point of view, the mid-term oriented up-trend of the market still remains intact. This is mainly due to the fact that the WSC Sector Momentum Indicator still remains quite bullish for the time being and has not shown any signs of major weaknesses so far. This can be also seen if we have a closer look at our Sector Heat Map, as the all sectors still have a higher momentum score than riskless money market which can be interpreted as quite bullish trend sign. Nevertheless, we can also see that most sectors have a lower momentum score than the S&P 500, which also indicates a growing selectivity among the market. This selectivity indicates that only some large-caps are holding up quite well, whereas the broad market is already lagging behind and therefore, the pure price driven trend information from the index might be a bit misleading at the moment.

In addition, mid-term market breadth does not look rosy at all, which is another indication that the market looks quite vulnerable for a fast paced correction at the moment. Despite the fact that the market is trading at record levels, the Modified McClellan Oscillator Weekly is about to roll over into bearish territory, indicating that the momentum of the market internals remains outright weak. This can be also seen if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). They are trading at quite low levels and are therefore, not confirming the current levels from the S&P 500. As a matter of fact, they still remains somehow constructive but definitely not confirmative. The same applies if we examine the readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Although both indicators remain bullish from a pure signal point of view, they dropped significantly last week indicating that a lot of purchasing power was pulled out of the market. In the past, bearish readings within those indicators (in combination with a bearish Global Futures Trend Index) mostly led to a stronger correction as the market is pretty vulnerable for disappointments in such a situation. However, right now we are not there yet but the recent speed of the deterioration is quite concerning. So even though we might not see a stronger selling pressure immediately, we would be quite surprised to see sustainable gains ahead with such weak mid-term oriented tape readings. Consequently, we keep a close eye on the development of those indicators within the next couple of week.

Long-Term Technical Condition

On a very long-time frame, the technical picture of the market remains pretty bullish at the moment and therefore, we do not think that any upcoming correction should lead to a new bear market at the moment. This is due to the fact that the bullish Global Futures Long Term Trend Index showed further signs of improvements last week. Above all, we can see that the gauge from the WSC Global Momentum is trading at its highest level for weeks. This indicates that most local equity markets around the world (in detail 78 percent) remain in a long-term oriented uptrend whereas the relative strength of most risky markets keeps trading again far above the one from U.S. Treasuries. This is another indication that the current bull-market might have not come to an end even if we see a stronger correction. Moreover, long-term market breadth is giving no reason to worry and therefore, we think that the current long-term uptrend of the market is not in danger at all (for the time being). The percentage of stocks which are trading above their 200 day simple moving average remained at solid bullish levels. Only the Modified McClellan Volume Oscillator Weekly showed some signs of weakness last week. In contrast, long-term new highs are still strong, whereas long-term new lows kept trading at not really threatening levels.

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 All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. The WSC Global Tactical ETF Portfolio is selling Russia (RSX) and is therefore, adding Chile (ECH). The main reason for the sell signal of Russia is the fact that its relative strengths score dropped out of the top 10 within our WSC Global ETF Momentum Heat Map and therefore, the next highest relative score market (ECH) will be added.

Bottom Line

Although the market only trades a few percentages below its all-time high, we remain outright cautious at the moment! This is due to the fact that the technical condition of the market looks quite damaged and therefore, the evidences for an important intermediate market top are increasing at the moment. As a matter of fact, we are quite cautious as the market looks quite vulnerable for disappointments. The main reason, why we have not seen any stronger losses so far is the fact that large-caps are still holding up quite well (and due to the fact that our indicator framework has not completely turned bearish yet). So even though we might not see a stronger selling pressure immediately, we would be quite surprised to see sustainable gains ahead with such a weak indicator framework. Moreover, we would like to see some stronger negative price action below 2,335 first, before we advise our members to take any (countertrend) actions. As a matter of fact, we would advise our conservative members to keep/place a stop-loss limit at 2,335. 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 2,335 and should increase their exposure if we see further down testing below 2,316/2,300.

Stay tuned!