July 22nd 2018

Market Review

U.S. stocks finished the week nearly unchanged. The Dow Jones Industrial Average eked out a 0.2 percent weekly gain to close at 25,058.12. The S&P 500 was flat over the week and finished at 2,801.83. The Nasdaq also ended the week nearly unchanged at 7,820.20. Among the key S&P sectors, financials and industrials were the top gainers and energy the worst performer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 12.9.

Short-Term Technical Condition

According to our short-term oriented indicators, the bullish trend-status from the S&P 500 remains unchanged. To be more precise, the S&P 500 closed 51 points above the bearish threshold from the Trend Trader Index. Furthermore, we can see that both envelope lines of this reliable indicator have started to drift higher, indicating that the resistance/support levels for the S&P 500 are increasing as well. This can be seen as a quite strong technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. Moreover, the bullish status from the Modified MACD remains pretty unchanged compared to last week. Also, the gauge from the Advance-/Decline 20 Day Momentum Indicator remains quite supportive, although it is not completely confirming the current levels from the S&P 500. As this indicator tends to be a leading one, we received further confirmation for our bullish biased slow growth scenario into deeper July.

This picture is also confirmed by short-term market breadth. Currently, our entire short-term oriented tape indicators remain supportive, but we can see some small signs of non-confirmation within their readings. Particularly, the gauges of the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily showed exhaustions last week (whereas the Modified McClellan Oscillator Daily almost flashed a bearish crossover signal) and are, thus, signaling that the overall breadth momentum is currently slowing down a bit. This view is also confirmed by the percentage of stocks which are trading above their short-term oriented moving average (20/50) as both indicators have lost some steam recently. This can be also seen if focus on the NYSE New HighsNew Lows Indicator as the total number of stocks hitting a fresh 52 weeks high slightly decreased (and is, therefore, not completely confirming the current level from the S&P 500 at the moment). Consequently, the High-/Low-Index Daily weakened last week, although it is still trading at quite solid levels. So in the end, there was hardly any positive momentum within the short-term oriented tape structure visible, although the market finished nearly unchanged for the week. As a consequence, the current underlying technical condition of the market is also signaling that further bullish biased sideways-trading on a very short time frame looks pretty likely.

On the contrarian side, there are still some short-term oriented supportive signals around. This is mainly due to the fact that the gauges from our option based oscillators (Equity Options Call-/Put Ratio Oscillator and the All CBOE Options Call-/Put Ratio Oscillator) dropped into bullish territory last week. Moreover, we can see that most of our sentiment indicators remain pretty supportive at the moment as the total amount of bears decreased last week. However, apart from that fact our remaining contrarian indicators still look quite grim. Especially, the Smart Money Flow Index is far away from confirming the current levels from the Dow Jones Industrial Average. The last time we saw such strong divergences between this reliable indicator and the Dow was a couple of months before the “Trump Rally” had started. Compared to back then, the Smart Money Flow Index is now showing a huge bearish divergence. As a matter of fact, we would not be surprised, if the market is running into major headwinds later this year.

Mid-Term Technical Condition

However, as the mid-term oriented technical condition of the market is giving no reason to worry right now, we definitely think it is still a bit too early to take the chips from the table at the moment. Our reliable Global Futures Trend Index is still trading in the middle of its bullish consolidation area. Worth mentioning is the fact that as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming weaknesses should be limited in price and time (in combination with strong readings in mid-term oriented market-breadth). This view is also confirmed by the WSC Sector Momentum Indicator, which measures how many key sectors remain in a mid-term oriented up-trend (44 percent currently). So from a pure price point of view, most key sectors keep drifting higher and, therefore, the underlying trend-condition of the S&P 500 looks quite healthy at the moment. This can be also seen if we have a closer look at our Sector Heat Map as the momentum score of most sectors remains above the one from riskless money market.

Mid-term oriented market breadth is also confirming the current mid-term oriented trend at the moment. All of our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) were holding up quite well or have not shown any serious signs of bearish divergences yet! Additionally, the Modified McClellan Oscillator Weekly continued to widen its bullish gap, indicating that the momentum of advancing stocks improved on a mid-term time horizon. This picture is also supported by the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Both gauges were holding up quite well, although the market finished the week nearly unchanged. This is another indication that the underlying tape structure of the market remains pretty broad-based at the moment. Such a broader tape confirmation can also be seen if we concentrate on mid-term oriented advancing issues as well as mid-term oriented up-volume – both indicators are trading well above their bearish counterparts. Based on the fact that our entire mid-term oriented market breadth indicators are trading at quite bullish/supportive levels, our strategic bullish outlook remains unchanged so far.

Long-Term Technical Condition

The long-term oriented trend of the market shows almost the same bearish picture as in the previous weeks. The WSC Global Momentum Indicator stabilized at quite bearish levels, indicating that only 18 percent of all local equity markets around the world (which are covered by our Global Momentum ETF Heat Map) are still trading above their long-term oriented trend lines. This is telling us that the current global bull-market is quite fragile at the moment. Also the Global Futures Long Term Trend Index is signaling that the current long-term oriented trend of U.S. equities remains intact but is also showing major signs of exhaustion.  Basically, the same is true if we focus on the WSC Global Relative Strength Index as the relative strength of almost all risky markets is trading in positive territory. Nevertheless, most of them have also a lower relative strength score than U.S. Treasuries, which is another sign for a slow growth period. This can be also observed if we focus on our long-term oriented breadth indicators. The High-/Low Index Weekly and the Modified McClellan Volume Oscillator Weekly are far away from being confirmative. Only the percentage of stocks which are trading above their 200 day moving average is holding up quite well so far. So all in all, the long-term condition of the market is indicating that the current bull market has already reached a mature stage.

Model Portfolios

Last week, there were no changes in the allocation advice of our model portfolios (WSC All Weather Portfolio, WSC Inflation Proof Retirement Portfolio, WSC Sector Rotation Strategy and the Global Tactical ETF Model Portfolio).

Bottom Line

The technical situation of the market is almost unchanged compared to last week and, therefore, we think it is still a bit too early to take the chips from the table. Nevertheless, we think it is more likely to see some kind of a volatile bullish biased slow growth period instead of a stronger rally into deeper summer. This is mainly due to the fact that most of our indicators remain quite supportive but not really confirmative in their nature. As a matter of fact, aggressive traders should focus on buying the dips instead of chasing the market too aggressively on the upside, whereas conservative members should hold their equity position as there is still some potential left, before major troubles might be due.

Stay tuned!