October 29th 2017
U.S. stocks ended the week with gains and new records. The Dow Jones Industrial Average gained 0.5 percent over the week to end at 23,434.19. The blue-chip index advanced for the seventh straight week and the weekly run is the longest since December. The S&P 500 closed at an all-time high of 2,581.07 on Friday. The broad index eked out a weekly gain of 0.2 percent and rose for the seventh consecutive week, its longest positive weekly streak since late 2014. The Nasdaq finished at a record of 6,701.26. It climbed 1.1 percent for the week and recorded its fifth consecutive weekly gain. Among the key S&P sectors, technology 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 9.8.
Short-Term Technical Condition
Not surprisingly – from a pure trend point of view – the bullish short-term status of the market remains unchanged. This is due to the fact that the S&P 500 closed 32 points above the bearish threshold from the Trend Trader Index. Nevertheless, we can see that the underlying trend-momentum deteriorated significantly last week. This is mainly due to the fact that the Modified MACD flashed a bearish crossover signal last week on very high levels, indicating some form of short-term exhaustion. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator as its gauge plummeted to the lowest level for weeks. Right now it is a bit too early to get concerned about those bearish divergences as the S&P 500 is still trading 32 points above the bearish threshold from the Trend Trader Index. Nevertheless, with such weak readings, the market is getting increasingly vulnerable on a very short time frame.
Unfortunately, this picture is also widely confirmed by short-term market breadth. Especially, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily are showing major signs of non-confirmation as their bearish signals strengthened significantly last week. This indicates that the overall tape momentum of the market turned pretty bearish. Also the overall market internals look pretty damaged. This becomes pretty obvious if analyze the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50). Both gauges strongly decreased last week and even dropped deep into bearish territory (20), indicating a diminishing trend participation within the market. This can be also seen if focus on the NYSE New Highs – New Lows Indicator as the total amount of stocks hitting a fresh 52 weeks high decreased, whereas the amount of stocks hitting a fresh 52 weeks low has slightly started to increase. Consequently, the High-/Low-Index Daily also weakened last week (although it is still holding up quite well). So in the end, there was absolutely no strength within the short-term oriented tape structure visible, although the market closed at new record highs recently. Consequently, the current technical condition of the market looks pretty weak-kneed at the moment. As a matter of fact, we would not be surprised to see some rocky sessions ahead as we received even further confirmation that the market is about to enter a consolidation period. The main reason why we have not seen any slowdown yet is due to the fact that large caps (especially within the technology sector) are still holding up quite well at the moment.
The situation on the contrarian side is pretty unspectacular at the moment. This is mainly due to the fact that our entire option based indicators are trading in neutral territory at the moment. The only interesting fact is that the gauge from the Smart Money Flow Index has receded from very high levels recently, indicating that the big guys have slightly started to take profits. Moreover, we can see that the gauge from the WSC Capitulation Index also started to show some strength on low levels recently (although its gauge is far away from being bearish). As a matter of fact, our consolidation scenario is even confirmed on the contrarian side.
Mid-Term Technical Condition
The mid-term oriented uptrend of the market still looks outright healthy at the moment. Consequently, we do not think that equities appear to be at risk of facing a stronger correction or even a new cyclical bear market at the moment. Especially, the Global Futures Trend Index is far away from being bearish, although its gauge dropped into the middle part of its bullish consolidation area. This is another piece of evidence that the market is about to enter a bullish biased consolidation period. As already mentioned a couple of times, as long as the gauge from this indicator remains above its 60 percent threshold, any upcoming consolidation/weakness tends to be limited in price and time (only in combination with confirmative market breadth readings). Moreover, we can see that the most sectors within the S&P 500 remain in a mid-term oriented uptrend as the WSC Sector Momentum Indicator is trading at quite encouraging bullish levels. As a matter of fact, the underlying price trend of the S&P 500 looks pretty solid at the moment. This can be also seen if we have a closer look at our Sector Heat Map, as the momentum score of all sectors (except consumer staples like in the previous weeks) remains above the one from riskless money market (currently at 0 percent). Recapping the mid-term trend situation, we believe that it is a way too early to issue a strategic sell signal.
Another main fact why we believe that the downside potential of the market remains capped is due to the fact that the current mid-term oriented up-trend of the market is widely confirmed by mid-term oriented market breadth. Particularly, the Modified McClellan Oscillator Weekly was holding up quite well, indicating that the overall tape momentum remains quite constructive for the time being. Another very positive signal is coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Both bullish gauges from these indicators rocketed last week to their highest levels for months and are therefore, trading far above their bearish counterparts. This signals that the market internals look pretty healthy at the moment. Above all, we can see that the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) remain bullish, although they have lost some steam recently. Only our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line, Advance-/Decline Line in Percent) showed a weak performance on Friday although they were doing quite well during the week. So all in all, our mid-term oriented trend indicator framework remains supportive and therefore, we will stick our strategic bullish outlook at the moment.
Long-Term Technical Condition
The long-term oriented uptrend of the market remains unchanged. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500. Also our WSC Global Momentum Indicator increased last week and indicates that 85 percent of all global markets are currently within a long-term oriented uptrend at the moment. Also our WSC Global Relative Strength Index reveals that the relative strength of all risky markets keeps trading above the one from U.S. Treasuries. This is a quite strong positive signal for risky assets as it underlines the huge risk appetite among investors. Also our Modified McClellan Volume Oscillator Weekly still looks very supportive. The only weak signals are coming from the percentage of stocks which are trading above their 200 day simple moving average and from the amounts of stocks which are hitting a fresh 52 weeks high. Nevertheless, we can see that our High-/Low Index Weekly is still trading on very supportive levels. So all in all, the overall long-term technical picture of the market is not in danger at all – at least for the time being.
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. The allocation of the WSC Global Tactical ETF Portfolio and the WSC Sector Rotation Strategy remains unchanged. Moreover, we are proud to announce that the WSC Sector Rotation Strategy reached again new all-time high last week.
Our view remains pretty unchanged compared to last week. With quite stretched signals within some of our short-term oriented tape indicators, the market is getting increasingly vulnerable for a consolidation period. However, with quite solid readings all across the board, it is a way too early to bet on a major trend reversal at the moment. Thus, our strategic bullish outlook remains unchanged. Consequently, we would advise conservative members to hold their equity position, while aggressive short-term traders should focus on profit taking.