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June 17th 2018

Market Review

U.S. averages finished the week with a mixed performance. For the week, the Dow Jones Industrial Average fell 0.9 percent to close at 25,090.48. The S&P 500 finished the week nearly unchanged (plus 0.01 percent) at 2,779.42. The Nasdaq rose 1.3 percent for the week to end at 7,746.38. Both averages posted their fourth straight weekly gain. Among the key S&P sectors, the utilities sector was the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), the gauge of S&P 500 options known as the VIX, ended near 12.

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 41 points above the bearish threshold from the Trend Trader Index. Above all, both envelope lines of this reliable indicator are still drifting higher on a very fast pace. This is another indication for a stronger short-term oriented 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 pretty bullish, although it lost momentum last week. As this indicator tends to be a leading one, a period of bullish biased sideways-trading looks likely.

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 Volume Oscillator Daily even 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). Despite the fact that they are still trading at quite encouraging levels (58/73 percent) they have lost some steam recently (indicating that the market is ready to take a healthy breather). 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 also decreased (and are, 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.

From a pure contrarian point of view, we see that dumb money is getting quite greedy again as the z-score from the Daily Put-/Call Ratio All CBOE Options fell into bearish territory last week. This can be also observed if we focus on the Global Futures Put Volume Ratio Oscillator, Equity Options Call-/Put Ratio Oscillator and the All CBOE Options Call-/Put Ratio Oscillator. On a very short-time frame this is a quite bearish signal and, therefore, a period of consolidation/volatile sideways trading looks quite likely. However, the only outright long-term bearish signal is coming from the Smart Money Flow Index (as this reliable indicator 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” started. Compared to back then, the Smart Money Flow Index is now showing a huge bearish divergence. Therefore, we would not be surprised if the market is facing major headwinds in deeper summer.

Mid-Term Technical Condition

However, as the mid-term oriented technical condition of the market is giving absolutely 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 consolidation period 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 (46 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. Only utilities and consumer staples have a lower scoring.

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

Unchanged compared to the previous weeks remains the long-term oriented trend of the market. The WSC Global Momentum Indicator decreased again and passed its 50 percent threshold, falling to the lowest level for months. As pointed out in our previous comments, this is a clear indication that a lot of local equity markets around the world are falling below their long-term trend-lines and that the current bull-run is fading out. To be more precise, the current global bull market is now mainly driven by U.S. equities (whereas the remaining regions are definitely running out of steam). This is a red flag on the horizon but given the quite supportive readings all across the board, we think it is still a bit too early as U.S. investor to get concerned about that fact. Additionally, the Global Futures Long Term Trend Index continued its bearish ride and dropped (again) to the lowest level for months. Also like in the previous weeks, a positive sign is coming from our WSC Global Relative Strength Index. The relative strength of all risky markets increased once again last week and all markets (except two) are trading above the one from U.S. Treasuries. Also the readings from our long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the percentage of stocks which are trading above their 200 day moving average) were holding up quite well or have not shown any signs of weakness.

Model Portfolios

Last week, there have been 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

Our call remains unchanged compared to last week. Given the small non-confirmative signals within our short-term tape indicators, in combination with increased greed within the option market, the market still looks a vulnerable for a healthy but short-lived consolidation period into deeper June. Apart from that fact, the technical picture of the market remains quite bullish at the moment. To be more precise, with quite bullish signals within our mid-term oriented indicator framework, we think it is a bit too early to bet on a major trend reversal at the moment. So all in all, we would advise our aggressive traders should not chase the market too aggressively on the upside, whereas our conservative members should hold their equity position as our positive mid- to long-term outlook has not been changed so far.

Stay tuned!!!