October 13th 2019

Market Review

U.S. stocks finished the week with gains, whereas the Dow Jones Industrial Average and the S&P 500 managed to snap a three-week losing streak. The Dow Jones Industrial Average booked a 0.9 percent weekly gain to end at 26,816.59. The S&P 500 recorded a weekly climb of 0.6 percent and closed at 2,970.27. The Nasdaq ended the week up 0.9 percent and closed at 8,057.0. Most key S&P sectors ended in positive territory for the week led by materials. Utilities led the decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 15.6.

Short-Term Technical Condition

From a pure price point of view, the short-term oriented trend of the market turned neutral, as the S&P 500 managed to close within both envelope lines of the Trend Trader Index. Nevertheless, we can also see that both envelope lines of the Trend Trader Index are still decreasing and, therefore, the current short-term oriented price-driven recovery still looks quite fragile in its nature. Apart from that fact, we can observe further positive developments within our remaining short-term oriented trend indicators. This is mainly due to the fact that the gauge from the Advance-/Decline 20 Day Momentum Indicator jumped back into bullish territory last week and has, therefore, clearly confirmed the latest recovery from the S&P 500. Another quite encouraging signal is coming from the Modified MACD which succeeded to narrow the bearish gap, as its short term gauge looks like it started to bottom out last week. So all in all, these positive developments are confirming our latest call that we might have seen the worst already (at least on a short-term time perspective). Nevertheless, we should also not forget that it is not quite unusual to see a lot of fast changing signals within our short-term oriented trend indicators during a volatile consolidation period. Consequently, the development within our short- to mid-term market breadth indicators remains key area of focus as they will give us further guidance if the latest recovery was driven by a broad basis or if it was just the result of short-covering and/or driven by a few heavy weighted stocks in the index.

If we focus on our short-term oriented breadth indicators, we can see that they showed stronger signs of recovery last week, although some of them have not turned bullish so far. The first positive signal is coming from the High-/Low-Index Daily, which almost flashed a (very small) bullish crossover signal on Friday. This positive development was mainly driven by the fact that we have seen a quite strong reduction in the number of new yearly lows, in combination with a quite encouraging increase of new yearly highs. This is telling us that the latest rally (especially on Friday) was mainly driven by a stronger demand rather than being the result of stronger short-covering. This is quite a positive signal as it indicates that the market internals are strengthening (at least on a low level). 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) as both gauges recovered significantly last week. Nevertheless, we cannot ignore the fact that the SMA 20 still keeps trading well below its bullish threshold. Basically, the same is true if we focus on the Modified McClellan Oscillator Daily and on the Modified McClellan Volume Oscillator Daily. While the first one succeeded to narrow its bearish gap, the latter one weakened last week. These facts indicate that the recent recovery is still a bit weak-kneed it its nature. So from a strict technical point of view, the latest recovery can be still classified as bounce rather than the start of a new and healthy/sustainable uptrend. As a matter of fact, we would not be surprised to see further nasty pullbacks towards 2,900, although we strongly believe that 2,855 represents an important (intermediate low).

This view is also confirmed on the contrarian side, as the extreme fear within the market remains quite persistent. The number of bulls on Wall Street dropped to a new low last week, whereas the option market remains outright bearish at the moment. This is telling us that a lot of negative fear is already priced in, which is a quite positive short-term oriented signal (as the market is able to climb the wall of worry).  Moreover, last week we mentioned the fact that approximately 90 percent of all uncovered options were an also-ran and, therefore, we would be surprised if the market was trading much lower until the 18th of October, when the option expiration date was due. In fact, the market strongly recovered last week and was, therefore, wiping out a lot of put options so far. So if we consider the still quite bearish readings within the option market, we think that the market will not break below its previous low at 2,855 next week. Nevertheless, the mid-term oriented contrarian situation still looks a bit tricky, since the Smart Money Flow Index has not fully confirmed the latest recovery from the Dow Jones Industrial Average. Moreover – from a pure seasonal point of view (Presidential Cycle) – the market is often facing a challenging time frame in Q4 after a stronger rally in October. Consequently, we remain alert although the short-term oriented situation still looks somehow supportive for the time being.

Mid-Term Technical Condition

Another reason for this mid-term cautious view is the fact that the mid-term oriented trend condition of the market deteriorated last week. This is mainly due to the fact that the gauge from the Global Futures Trend Index dropped below its bullish 60 percent threshold on Tuesday. Therefore, from a pure formal point of view, the current consolidation period has now definitely a corrective tilt. As a matter of fact, we remain a bit cautious at the moment. The main reason why we do not pull the trigger yet is due to the fact that there might be a good chance that this indicator will climb above its very important 60 percent threshold soon again, especially if we consider the quite positive readings on a very short time frame. Moreover, we can see that – from a pure price point of view – the mid-term oriented uptrend of the market still remains intact, as our WSC Sector Momentum Indicator was holding up quite well and is trading at quite solid levels. This signals that most sectors within the S&P 500 are still outperforming riskless money market on a relative basis. This view is also supported by examining our Sector Heat Map as the momentum score of all sectors (except energy like in the previous weeks and now also health care) keeps trading above the one from riskless money market (currently at 17.9 percent).

Basically, we receive the same picture if we focus on our mid-term oriented tape indicators, as nearly all of them improved compared to the previous week. This becomes obvious if we examine our advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily and the Advance-/Decline Line Weekly). Nearly all of them improved and have, hence, confirmed the latest move from the S&P 500. Another positive signal is coming from our Modified McClellan Oscillator Weekly and the Advance-/Decline Index Weekly, which were holding up quite well. This indicates that the underlying tape momentum of the market is still on track. A fact, which can also be seen if we focus on the percentage of stocks which are trading above their mid-term oriented moving averages (100/150). Nevertheless, we should not forget that both indicators still remain bearish from a pure signal point of view. This can be also observed if we focus on the Upside-/Downside Volume Index Weekly. Despite the fact that we saw a (small) recovery, its overall signal still remains a bit too depressed to justify a significant rally above the latest bull-market high of the S&P 500.

Long-Term Technical Condition

The long-term oriented trend of the market remains supportive so far. Our WSC Global Momentum Indicator slightly increased last week and indicates that still 45 percent of all local equity markets around the world (which are covered by our Global ETF Momentum Heat Map) are trading above their long-term oriented trend lines. Despite the fact that this signal is quite bearish from a pure signal point of view, it can be also interpreted in a positive way (if we consider the latest price action we have seen over the past three weeks). Also our Global Futures Long Term Trend Index was holding up quite well and signals that the long-term oriented trend of U.S. equities remains intact. Another small positive signal is coming from our WSC Global Relative Strength Index as the relative strength of nearly all risky markets slightly increased. If we focus on our long-term market breadth indicators, we can see that the Modified McClellan Volume Oscillator Weekly and the High-/Low Index Weekly slightly weakened while the percentage of stocks which are trading above their 200 day moving average increased last week (but has not succeeded to pass its bullish threshold).

Model Portfolios

Last week, there were no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Rotation Strategy and the WSC Dynamic Variance Portfolio.

Bottom Line

Our base call remains unchanged compared to last week. There we said that the market remained in a volatile (but still bullish biased) consolidation process. Moreover, we mentioned the fact that in our preferred scenario, the latest intra-day low at 2,855 represented an outright strong intermediate bottom, which acted as basis for further stabilization/bullish biased strength into mid-October. On top of that, we said that if any upcoming strength would not be accompanied by strong improvements within our market breadth indicators, another but much stronger correction leg would be highly likely.
In fact, we have seen a stronger rally last week and more importantly, this recovery was definitely accompanied by stronger improvements within our market breadth indicators. This is telling us that the mid-October recovery scenario is still well in place, as 2,855 represents an important intermediate low. Nevertheless, we should also not forget that the readings from most of our (breadth) indicators still remain quite weak-kneed (at least from a pure signal point of view), to justify further stronger rallying. Consequently, we would not be surprised if the S&P 500 will show some range-bound trading between 2,920 and 3,000 ahead. In the best case, this will lead to further improvements within our indicator framework, which would be then the basis for further rallying into Q4. If this is not the case, the recent recovery was just part of larger top-building process, which will then be the basis for a stronger correction leg later this year. Right now it is a bit too early to say which scenario will be most likely to happen. Therefore, we would advise our conservative members to remain invested, although it would make sense to adjust their stop-loss limit towards 2,860 (intra-day basis). This stop-loss should remain in place until we see stronger readings within our indicator framework.

Stay tuned!