admin No Comments

April 2nd 2017

Market Review

U.S. stocks ended the week with gains. The Dow Jones Industrial Average eked out a small gain of 0.3 percent over the week to end at 20,663.22. The blue-chip index is 0.7 percent lower for the month, while notching a 4.6 percent gain for the quarter. The S&P 500 recorded a 0.8 percent gain over the week and closed at 2,362.72. The broad index is down less than 0.1 percent for the month and up 5.5 percent for the quarter. The Nasdaq climbed 1.4 percent for the week to 5,911.74. It rose 1.5 percent for the month, and nearly 10 percent for the quarter. Among the key S&P sectors, energy was the best weekly performer, while utilities dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.3.

Strategy Review

In our last week’s comment, we highlighted the fact that we remained outright cautious as we had received a growing number of ingredients within our indicator framework that the market was highly likely to run into an intermediate market top. Moreover, we highlighted the fact that the main reason why we had not seen any stronger losses so far was due to the fact that large caps were still holding up quite well (and due to the fact that our indicator framework had not completely turned bearish). Consequently, any upcoming rally attempt was highly likely to turn out to be corrective in its nature if such a move was accompanied by a continuation of faltering market breadth. Moreover, such a pattern would be then also the ultimate piece of evidence for the last burst of strength in a typical top building process. As such a typical (large cap driven) bounce could easily overshoot in terms of price, we advised our conservative members to wait until the S&P 500 closes below 2,335, before taking any actions. After we had seen some small gains last week, no threshold levels have been triggered so far. Consequently, the big question is if we see further overshooting into early summer or if we should use this strength to sell. To answer that question, the quality of the recent gains and of the underlying market remains key area of focus right now.

Short-Term Technical Condition

If we have a closer look at our short-term oriented trend indicators, we can see that their readings have shown some small signs of strength recently. This is mainly due to the fact that the S&P 500 managed to close within both envelope lines from the Trend Trader Index. So from a pure price point of view, this indicates more or less a neutral trend scenario at the moment as long as the S&P 500 does not drop below 2,356. Above all, we can see that the Advance-/Decline 20 Day Momentum Indicator managed to flash a small bullish signal last week, signaling that the overall trend-internals are also slightly getting back on track at the moment. So although the overall trend-condition of the market slightly improved last week, we think that further consolidation work into next week might look possible. That is mainly due to the fact that the Modified MACD has not turned bullish yet and the readings from the Advance-/Decline 20 Day Momentum Indicator are still a bit too low to be taken too seriously at the moment!

More importantly, the short-term oriented market breadth also showed some signs of improvements last week! In particular, the current trend participation of all NYSE listed stocks recovered significantly as the percentage of stocks which are trading above their short-term oriented moving averages (20/50) managed to pass their bullish 50 percent threshold.  Especially on a 20 days time frame, the indicator reached quite solid levels and is therefore, forming (somehow) a bullish divergence if we consider the latest weekly gains. In addition, we can see that the Modified McClellan Oscillator Daily flashed a stronger bullish crossover signal, whereas the Modified McClellan Volume Oscillator Daily looks like it will follow soon. This is signaling that the underlying breadth momentum of the broad market is slightly getting back on track. Another encouraging fact is that the High-/Low Index Daily strengthened its bullish signal for the week. This is due to the fact that the total amount of all NYSE-listed stocks which reached a new yearly high kept trading at supportive bullish levels, whereas the total amount of new lows literally collapsed after the initial spike in early March. This is telling us that the selectivity within the broad market has fallen sharply which is another positive technical signal at the moment. As a result, this setting is telling us that the short-term oriented technical picture of the market slightly improved last week, although some bearish divergences have not been sorted out yet.

The situation on the contrarian side also turned a bit more neutral last week. This is mainly due to the fact that the gauge from the Smart Money Flow Index showed some form of stronger recovery last week, whereas the NYSE Member Debt in Margin Accounts Indicator remains kept trading at record levels. As a consequence, the signals on a mid-term time horizon have shown some positive signs recently. On the other side, we can see that the overall market environment (on a very short-time frame) can be still classified as vulnerable since the WSC Capitulation Index is still indicating a tense market environment. Above all, we can see that there is still a lot of uncertainty  within the option market (which is actually a good sign) right now as the OEX Call-/Put Ratio Oscillator Weekly remains quite bearish whereas the All CBOE Call-/Put Ratio Oscillator Weekly turned bullish last week. Above all, we can see that market sentiment measured by market vane is also slightly getting back towards normal levels, whereas the AII Bulls & Bears survey is indicating a lot of indecisiveness (which is also not a good sign). So from a pure contrarian point of view, further volatile sideways trading looks quite likely.

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, we basically get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market strengthened last week. This is mainly due to the fact that our reliable Global Futures Trend Index continued to recover and was therefore, able to close in the middle of its bullish consolidation range last week. This can be seen as a quite constructive signal, as it indicates that the recent correction risk has clearly diminished (as its gauge closed above 60 percent together with a stronger recovery in market breadth). As per last week’s report, the WSC Sector Momentum Indicator is still trading on the upper end of its scale (although it came down a bit in the last week). This indicates that most sectors within the S&P 500 are per definition in a mid-term oriented uptrend! This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all industries (apart from energy) is far above the one from riskless money market. Nevertheless, we can also see that most sectors have a lower momentum score than the S&P 500, which also indicates a larger selectivity within the market. That means that a few larger weighted stocks within the S&P 500 (mostly technology) are definitely outperforming the rest of the market. Normally, such a selective environment tends to be a super red flag on the horizon (if it is accompanied by faltering/bearish readings within short- to mid-term market breadth) as it indicates that only a few heavy weighted stocks prevent the market from stronger losses.

Therefore, it was good to see that a stronger recovery within our tape indicators took also place within a mid-term oriented time frame. Especially, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) got back on track and have therefore, confirmed the latest gains we saw. The Upside-/Downside Volume Index Weekly, the Advance-/Decline Index Weekly as well as our entire our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) have shown some signs of strengths recently. Only the bearish readings from Modified McClellan Oscillator Weekly finished the week literally unchanged, indicating that the underlying breadth momentum is still somehow lagging behind on a mid-term time horizon. So all in all, the mid-term oriented technical picture has improved a bit compared to last week, as the entire trend- as well as the breadth-structure of the market has given some encouraging signals. Despite the fact that the correction risk has diminished under the prevailing circumstances, we should not forget that readings within our mid-term oriented tape indicators still remain a bit weak-kneed (Upside-/Downside Volume Index Weekly) or have not turned bullish yet (Modified McClellan Oscillator Weekly). For that reason, we keep a close eye on the development within those two indicators within the next 2-3 weeks.

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market remains intact and therefore, we do not think that any upcoming pullback/correction should lead to a new bear market at the moment. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and trading at the highest levels for months. As we can see from the WSC Global Momentum Indicator, 80 percent of all local equity markets around the world remain within a long-term oriented uptrend. This can be also monitored if we focus on the WSC Global Relative Strength Index, as the relative strength of all risky markets strongly strengthened last week. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stocks which are trading above their 200 day simple moving average continued to strengthen last week, whereas the amounts of stocks which are hitting a fresh 52 weeks high are trading well above their bearish counterparts. Only, like already in the previous week, the Modified McClellan Volume Oscillator Weekly continued to decrease, which is somehow supporting our quite cautious short-term oriented view.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio and the WSC Inflation Proof Retirement Portfolio. As the momentum score of financials dropped below average and below the one from the S&P 500 within our Sector Heat Map, we received a sell signal for that ETF within our WSC Sector Rotation Strategy. The allocation of the Global Tactical ETF Portfolio remains unchanged. Moreover, we are proud to announce that the WSC All Weather Model Portfolio reached a new all-time high last week!

Bottom Line

The technical situation slightly improved all across the board. Especially, the stronger readings within our mid-term oriented indicators are indicating that the recent corrective top building process might transform back into a healthier consolidation process/market environment. Consequently, the risk of a stronger correction clearly diminished (as long as our indicator framework remains supportive). For that reason, we would advise our conservative members to remove any stop-loss limits as the current risk-/reward ratio looks somehow supportive again (at least for the time being). However, given the quite fast changing market environment, we would not be afraid of issuing a strategic sell signal immediately, if the current mid-term trend-/breadth condition of the market turns negative again as capital appreciation is the most important driver for success. As a matter of fact, the next 2-4 weeks will become quite critical as they will give further guidance.

Stay tuned!