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December 17th 2017

Market Review

U.S. stocks rose for the week, lifting all three major indices to new records. For the week, the Dow Jones Industrial Average added 1.3 percent, to 24,651.74. The S&P 500 advanced 0.9 percent during the week to 2,675.81. Both the S&P 500 and Dow booked a weekly gain for the past four consecutive weeks. The Nasdaq gained 1.4 percent from last week’s close to end at 6,936.58. Most key S&P sectors ended in positive territory for the week, led by technology. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 9.4.

Short-Term Technical Condition

The market is moving right in line with our recent outlook and therefore, it is not a big surprise at all that the short-term oriented uptrend of the market remains pretty unchanged compared to last week. The S&P 500 is still trading 53 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 2.622. Furthermore, 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 is a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend. Moreover, the outright bullish status from the Modified MACD remains unchanged compared to last week and is therefore, still confirming the latest high from the S&P 500. On top of that we can see that the gauge from the Advance-/Decline 20 Day Momentum Indicator is trading at quite confirmative levels. As this indicator tends to be a leading one, this is another piece of evidence that further gains into December can be expected.

If we focus on our short-term oriented breadth indicators, we can see that their readings slightly weakened for the week and are, therefore, a bit intermingled at the moment. While the Modified McClellan Volume Oscillator Daily showed a good performance and even increased its bullish gap, the Modified McClellan Oscillator Daily, in contrast, flashed a small bearish crossover signal (albeit on solid levels). As a matter of fact, the underlying tape momentum of the broad market started to slow down a bit. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges slightly increased for the week, they should be much stronger, given the record readings of the broad index. But this is not a big surprise at all, if we consider the fact that the market scored one record high after another. Moreover, it is not unusual that the overall trading action slows down a bit at the end of the year. Consequently, some small non-confirmative signals within some of our breadth indicators should not be taken too seriously in that time period. Moreover it was good to see that the High-/Low-Index Daily is still trading at a solid level, mainly because we have not seen any stronger spike/decline in the number of stocks hitting a fresh yearly low/high. This is telling us that it is still a way too early to bet on a major trend reversal (at least for the time being).

On the contrarian side, the signals remain quite inconsistent. The option market (Global Futures Dumb Money Indicator, Uptick-/Downtick Ratio Daily and the All CBOE Options Put-/Call Ratio) is still indicating a high degree of optimism among investors. Despite the fact that this can be seen as a red flag on the horizon, the overall tape structure is a way too strong to get concerned about that fact. Consequently, any upcoming washout/down-testing days will not lead to a major trend reversal at that point in time. Moreover, we can see that our more mid-term oriented contrarian indicators remain quite confirmative (Smart Money Flow Index, NYSE Member Margin Debt and the WSC Capitulation Index).

Mid-Term Technical Condition

The mid-term uptrend of the market remains intact so far, as the Global Futures Trend Index is still trading in the middle of its bullish consolidation area. Also from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator increased for the week to the highest level for months. This is telling us that most underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we have a closer look at our Sector Heat Map as the momentum score of all sectors remains above the one from riskless money market (currently at 0 percent).

The mid-term oriented market breadth condition shows also an intermingled picture. This becomes obvious as the Modified McClellan Oscillator Weekly remains in its paralyzed status. Also the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) have not shown any significant bullish moves recently. This indicates that the underlying trend momentum of the market is a bit flattish at the moment. On the other hand, we can see that mid-term oriented advancing issues as well as mid-term oriented up-volume are still trading above their bearish counterparts. Basically, the same set up is true if we focus on our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) as they continued to strengthen in the last couple of trading sessions or have at least not shown any signs of bearish divergences yet. So all in all, the current technical condition of the market still looks quite confirmative and therefore, it is a way too early to call for a major market top right now. Nevertheless, as conditions could change quickly, we will monitor the developments of them quite closely within the next couple of weeks.

Long-Term Technical Condition

The long-term uptrend of the market remains well intact. Therefore, our long-term bullish outlook has not been changed so far. The Global Futures Long Term Trend Index jumped to its highest level for months and is indicating a technical bull market. Also the WSC Global Momentum Indicator shows that currently 80 percent of all local equity markets around the world remain in a long-term oriented uptrend. Moreover, the relative strength of most risky markets keeps trading above the one from U.S. Treasuries, which is another indication for a risk-on market environment. Also long-term market breadth is currently giving no reason to worry and, therefore, we think that the current long-term uptrend of the market is not in danger at all (at least for the time being). Especially our long-term oriented High-/Low Index Weekly is still trading at very supportive levels, indicating that the long-term tape of the market remains well intact. And the Modified McClellan Volume Oscillator Weekly succeeded to flash a bullish crossover signal last week. Also the percentage of stocks which are trading above their longer-term oriented moving average (200) were holding up quite well.

Model Portfolios

If we focus on our Model Portfolios, we can see that the WSC Sector Rotation Strategy is selling materials as its momentum scores dropped below average and below the one from the S&P 500 within our Sector Heat Map. As the relative strength score from the MSCI Italy dropped out of the top 10 ranked markets within our Global ETF Momentum Heat Map, we received a sell signal for those specific ETFs within our WSC Global Tactical ETF Portfolio. Instead, the MSCI South Korea is added within the portfolio. There have been no changes in the allocation advice from the WSC Inflation Proof Retirement Portfolio and the WSC All Weather Portfolio.

Bottom Line

Our strategic bullish outlook remains unchanged compared to last week. On a very short time frame, the market looks vulnerable for increased volatility. However given the quite supportive/bullish readings within our mid- to long-term indicator board, we think it is a way too early to bet on a major trend reversal at the moment. As a consequence, our bullish outlook has not been changed so far. Therefore, would advise conservative members to hold their equity position, while aggressive short-term traders should focus on buying the dips again rather than chasing the market too aggressively on the upside.

Stay tuned!