July 30th 2017

Market Review

U.S. stocks finished another week with a mixed performance, with one index notching a record high. The Dow Jones Industrial Average gained 1.2 percent in five trading days to end at a new record of 21,830.31. The S&P 500 declined less than 0.1 percent for the week to finish at 2,472.10. The Nasdaq Composite dropped 0.2 percent during the week to 6,374.68. Among the key S&P sectors, energy was the best weekly performer, while health care dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 10.3.

Short-Term Technical Condition

As already expected in our previous market comment, the market started its period of slow (bullish) growth last week. Consequently, the short-term oriented uptrend of the market remains unchanged as the S&P 500 finished nearly flat for the week. To be more precise, the S&P 500 is still trading 28 points above the bearish threshold from the Trend Trader Index. This is telling us that the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not drop below 2.444. On top of that, we can see that both envelope lines of this reliable indicator are still drifting higher on a quite fast pace, indicating that the resistance/support levels for the S&P 500 are increasing as well. This indicates that we have seen higher highs and higher lows within the last 20 days, which is an outright positive pattern for a healthy uptrend. The same is true if we focus on the trend lines from the Modified MACD, as they have not shown any sign of a threatening bearish crossover signal yet. This shows us that the underlying trend-momentum of the market remains well intact. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator closed still at quite encouraging bullish levels, although it lost some steam during the week. In our opinion, this small non-confirmation is just another sign that the slow positive growth period might continue on a very short-time frame.

This situation on the trend side is also widely confirmed by short-term market breadth, as the readings from nearly our entire short-term oriented market breadth indicators remain quite supportive/bullish. But nevertheless, we can see that some of them have lost some steam recently, which is another piece of evidence that the market might crawl higher within the next couple of weeks– but just on a slow pace. This becomes pretty obvious if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). The readings from both indicators (20/50) dropped for the week, whereas we have even seen a bearish signal on a 20 days’ time frame. This indicates a narrowing upside participation within the ongoing short-term oriented uptrend. This is not a big game changer at the moment but it indicates some form of exhaustion on a very short-time frame. This can be also seen if we focus on the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both short-term oriented trend-lines have also shown some small signs of fatigue, although their overall signals remain bullish. Basically, the same is true if we focus on the NYSE New HighsNew Lows Indicator, as the total amount of new highs remain supportive but it should be definitely a bit stronger if we consider the current circumstances. As matter of fact, the High-/Low-Index Daily narrowed its bullish gap. So all in all, this confirms our expectations that the market has entered a period of slow but bullish growth.

This view is now also widely confirmed by our contrarian indicators. The Smart Money Flow Index continued to narrow its bearish divergence to the Dow, indicating a rising demand by big institutional players. On top of that we can see that the WSC Capitulation Index is still indicating an extremely risk-on scenario at the moment. Despite those supporting signals, we cannot ignore the fact that optimism is getting increasingly a burden for the market. This becomes pretty obvious if we focus on the Daily Put/Call Ratio All CBOE Options Indicator as the put-/call ratio dropped to the lowest level for month. Right now, the z-score of this indicator is telling us that that this ratio is now almost 1.9 standard deviations away from its historical mean, which is an outright bearish signal. As approximately 90 percent of all uncovered options are an also-ran, we would be surprised if the market traded extremely higher until August 18th, when the option expiring date is due.

Mid-Term Technical Condition

Despite the fact that this extreme optimism might become a burden for the market in Q3, our strategic bullish outlook remains definitely unchanged so far. This is mainly due to the fact that the mid-term condition of the market remains well intact. Especially our Global Futures Trend Index increased substantially to the upper point of the bullish consolidation and closed only one percentage point below the 90 percent bullish threshold. This indicates that this gauge is confirming the current levels from the S&P 500. Moreover, with such strong readings it is extremely unlikely to see an abrupt trend reversal ahead. In addition, the WSC Sector Momentum Indicator is also trading at solid bullish levels, indicating that most sectors of the S&P 500 remain in a positive trend. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all sectors (except energy like in the previous weeks) remains above the one from riskless money market.

Another main reason why we believe that the downside potential of the market remains pretty capped at the moment is due to the fact that the current mid-term oriented up-trend of the market is still widely confirmed by mid-term oriented market breadth. Especially, the Modified McClellan Oscillator Weekly continued to increase last week, indicating that the overall tape momentum remains pretty positive for the time being. Moreover, as long as mid-term oriented advancing issues as well as mid-term oriented up-volume keep trading far above their bearish counterparts, it is a bit too early to get concerned about the current technical condition of the market. Also 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) increased last week or have not shown any signs of weakness recently. Only the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) decreased to moderate bullish levels. All in all, our mid-term oriented trend indicator framework is a way too supportive to change our strategic bullish outlook at the moment.

Long-Term Technical Condition

The long-term uptrend of the market remains intact. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and trading at high levels. Also the WSC Global Momentum Indicator increased last week and indicates that now 82 percent of all global markets remain within a long-term oriented uptrend. If we analyze the WSC Global Relative Strength Index we can see that the relative strength of all risky markets keeps trading above the one from U.S. Treasuries (except commodities). Also long-term oriented market breadth still looks very constructive at the moment as the Modified McClellan Volume Oscillator Weekly finally flashed a bullish crossover signal. The percentage of stocks which are trading above their 200 day simple moving average are also trading at solid levels. And also the amounts of stocks which are hitting a fresh 52 weeks high increased last week and are now trading far above their bearish counterparts, leaving our High-/Low Index Weekly on very supportive levels.

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 WSC Global Tactical ETF Portfolio remains unchanged. Moreover, we are proud to announce that the WSC All Weather Portfolio reached again new all-time highs last week.

Bottom Line

The development of our indicator framework have not been really a big surprise at all, as the market is moving in line with our expectations. Given the still bullish readings all across the board, we think it is a way too early to take the chips from the table. As a matter of fact our strategic bullish outlook remains unchanged for now. However, with quite stretched option signals on the contrarian side, the market is getting increasingly vulnerable for short-term disappointments. Right now, this is not a big game changer at all, as our entire trend- as well as breadth indicators remain supportive. So if we combine those two facts, the most likely outcome is that the market will remain in a slow growth period. Anyhow, our bullish outlook remains unchanged and therefore, we would advise conservative members to hold their equity position, while aggressive short-term traders should definitely stay in the bullish camp.

Stay tuned!