December 2nd 2018

Market Review

U.S. stocks finished the week with solid gains, with the S&P 500 and the Nasdaq notching their best week in nearly seven years. The Dow Jones Industrial Average jumped 5.2 percent over the week to close at 25,538.46. The blue-chip index posted its strongest week since November 2016. The S&P 500 gained 4.9 percent for the week to finish at 2,760.17. The Nasdaq ended at 7,330.54 and rocketed 4.9 percent over the past five days. Both the S&P 500 and the Nasdaq logged their best weekly performance since December 2011. The S&P 500 closed November with a 1.8 percent gain, while the Dow Jones Industrial Average rose 1.7 percent. The Nasdaq, meanwhile, eked out a 0.3 percent gain. All key S&P sectors ended in positive territory for the week, led by health care. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 18.1.

Strategy Review

In our last week’s comment, we highlighted the fact that we strongly believed that the market had hit an important intermediate low as the latest re-test had definitely not been confirmed by our indicator framework. Moreover, we said that there was still a very high chance that such a wash-out would then act as basis for another stronger rally/bounce into the year-end before further major troubles might be due. In fact, the bulls showed up right as the S&P 500 jumped nearly 5 percent for the week – its best weekly performance since December 2011. However, the main reason why we mentioned intermediate and not final low was due to the fact that the latest correction cycle has definitely left its mark on some of our mid- to long-term oriented indicator framework. Consequently, as long as the current year-end rally will lead to healthier readings within our indicator framework (increasing new highs/decreasing new lows, majority of stocks trading above their moving averages (20/50/100/150), stronger upside volume and advancing issues as well as a Global Futures Trend Index above 60 percent), we think that the current year-end rally will just turn out to be a huge bull-trap that could mark the end of the bull-run that started in 2009. Consequently, our market tape indicators remain key area of focus within the next couple of days as they will give us further confirmation if the market is heading into a make- or break set-up.

Short-Term Technical Condition

Not surprisingly, the short-term uptrend of the market got back on track as most of our short-term oriented indicators turned bullish last week. To be more precise, the S&P 500 closed 59 points above the bearish threshold from the Trend Trader Index, indicating that the market is now per definition in a bull-mode as long as the broad equity benchmark does not close below 2.701. Furthermore, we can see that both envelope lines of this reliable indicator have also started to bottom out as well, which can be seen as another encouraging positive trend-signal. Another important short-term trend signal is coming from the Modified MACD, which flashed a strong bullish crossover signal last week and has, therefore, confirmed the latest rally from the S&P 500. Only the Advance-/Decline 20 Day Momentum Indicator showed some small signs of non-confirmation recently as its gauge did not fully confirm the rally from last week. As the latter indicator tends to be a leading one, it could be possible to see a short-lived consolidation next week.

However, this is not a big deal-breaker at the moment as we also saw some stronger signs of recovery within our short-term oriented market breadth indicators last week. The most encouraging tape signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily as both of them flashed a stronger bullish crossover signal last week. This indicates that the latest rally was driven by the whole market and not only by a few heavy weighted stocks in the index (which is a quite healthy tape signal). This can be also seen if we examine the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both indicators remain below their bullish threshold, they increased last week and are clearly confirming the recent gains of the S&P 500. Moreover, it was good to see that both gauges closed higher than in mid-November, where the S&P 500 spiked towards 2,800. The only weak signal is coming from the NYSE New HighsNew Lows Indicator, as there was hardly any reduction in the total number of new lows – especially if we consider that the broad index had its best weekly gain since 2011. As a matter of fact, the High-/Low-Index remains quite bearish from a pure signal point of view and has, therefore, not confirmed the latest rally from last week. Nevertheless, it was also good to see that the total number of new highs has shown some signs of recovery recently. So all in all, the recent rally was widely confirmed by improved readings within our short-term oriented market breadth indicators. Nevertheless, we should not forget that most of our short-term oriented tape indicators are still a bit weak-kneed from an absolute level and, therefore, the upside potential of the market looks also a bit capped at the moment (at least from a current point of view). As a matter of fact, further bullish biased and volatile trading action into the year-end can be expected.

This picture is also widely confirmed from a pure contrarian point of view as the readings from most of our option based indicators (Daily Put-/Call Ratio All CBOE Options, Global Futures Put-/Volume Ratio, Global Futures Put-/Volume Ratio Oscillator, All CBOE Options Call-/Put Ratio Daily and the Equity Options Call-/Put Ratio Oscillator Weekly) got back towards neutral levels. Moreover, we can see that the market is slightly overbought (Advance-/Decline Ratio Daily) and in addition, we saw a stronger spike in NYSE volume. Such a spike often indicates a trend reversal (in combination with bearish market breadth) or just the beginning of a consolidation period (in combination with bullish biased market breadth). Even from a pure cyclical point of view (average performance from the DJIA since 1896), the market tends to be quite bullish until 8th of December. Afterwards, we often see a period of weaknesses until the 22nd of December, before further rallying into the year-end should bring some relief. Given the quite supportive readings within our short-term oriented market breadth indicators, such a path looks quite likely. The only driver for another stronger spike towards the year end is due to the fact that market sentiment was still outright bearish two weeks ago. Given the stronger rally from last week, a lot of money managers are forced to raise their equity exposure again and this could act as quite strong trigger as the overall volume tends to slow down during December. On the other hand side, we can still see that the Smart Money Flow Index has not shown any major bullish moves so far, indicating further troubles on a mid-term time horizon. This signal confirms our view, that the recent rally is just part of a bigger top-building process/bear market which should unfold in early next year.

Mid-Term Technical Condition

This picture is widely confirmed by the mid-term oriented condition of the market. Despite the fact that the conditions on a short-term time frame are brightening up, the technical mid-term condition of the market still remains extremely weak/vulnerable for the time being. Our Global Futures Trend Index did not show any major improvement last week and is, therefore, far away from passing the very important 60 percent threshold. As already mentioned a couple of times, from a pure formal point of view, this indicates that the recent correction cycle is definitely not over yet. Consequently, the current recovery can be still classified as corrective bounce rather than the start of a new and sustainable up-trend towards new record highs. This case is now even confirmed from a pure price point of view as the WSC Sector Momentum Indicator continued its bearish ride last week. To be more precise, its gauge did not only drop to the lowest level for years, but also nearly passed its bearish threshold. This signals that most sectors within the S&P 500 are not outperforming riskless money market on a relative basis anymore. This view is also supported by examining our Sector Heat Map as the momentum score of riskless money market weakened again and as it increased to 53 percent last week. In addition, already five sectors are trading below the one from riskless money market. In our opinion this is just another indication for our preferred scenario that the current recovery will just turn out to be a bear-market rally instead of a broader-based recovery.

Analyzing mid-term oriented market breadth shows a quite intermingled picture. On the one hand side, our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) increased for the week or were at least holding up quite well. Also the percentage of stocks which are trading above their mid-term oriented simple moving averages (100/150) increased for the week, although their gauges still remain slightly far below the bullish threshold. But in contrast, we can see that the readings from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly have not improved at all (although the market almost jumped 5 percent last week). Another outright weak signal is coming from our Modified McClellan Oscillator Weekly. In our opinion, this weak mid-term oriented tape structure is just another expression that the current year-end rally will turn out to be a huge bull trap in the end.

Long-Term Technical Condition

The long-term oriented trend of the market weakened again last week. The WSC Global Momentum Indicator dropped to the lowest level for years and signals that only 10 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. This is underlying our view, that the global-bull has entered its final stage. This view is also confirmed by our Global Futures Long Term Trend Index, which continued its bearish ride last week. And our WSC Global Relative Strength Index did not show any improvements last week and the relative strength of nearly all risky markets is trading below the one from U.S. Treasuries. These facts are another indication for our long-term oriented risk-off market scenario. Focusing on our long-term oriented tape indicators reveals that the Modified McClellan Volume Oscillator Weekly and especially the High-/Low Index Weekly again weakened last week while the percentage of stocks which are trading above their 200 day moving average showed some bullish gains. So all in all, the long-term condition of the market still looks outright grim which underlines our base case that the current bull-run has definitely entered its final stage (at least from a current point of view).

Model Portfolios

If we have a closer look at our Model Portfolios, we can see that there have been no changes in the allocation advice from the WSC Sector Rotation Strategy, the WSC Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Global Tactical ETF Model.

Bottom Line

The market has now successfully entered the fifth step of our projected path (low quality market top -> correction -> bounce -> re-test -> year-end rally = bull-trap -> bear market) and, therefore, our base call remains unchanged compared to last week. So if we are correct, then this year-end rally will be just part of a larger bull-trap which will unfold early next year. The main rationale behind that call is the fact that the overall mid- to long-term technical condition of the market looks outright grim and, therefore, the current year-end rally should definitely turn out to be corrective in its nature. However, a major game changer for such a scenario would be the fact if the current year-end rally will lead to major improvements within our indicator framework. Nevertheless, this scenario looks quite unlikely from a current point of view. As a matter of fact, the big question is when to finally pull the trigger? On a very short-time frame, we still remain bullish as long as we do not see another wave of bearish crossover signals within our short-term oriented indicator framework. If this is the case, it is definitely time to pull the trigger from a strategic point of view. But for now, it looks like the market has still a bit room left to grow before that might be the case. Nevertheless, we advise our aggressive and conservative members to keep a close eye on our short-term oriented indicator framework within the next couple of days.

Stay tuned!