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April 28th 2019

Market Review

U.S. averages finished the week with a mixed performance. The Dow Jones Industrial Average remained nearly unchanged for the week (down less than 0.1 percent) and closed 1.5 percent below its all-time high at 26,543.33. The S&P 500 increased 1.2 percent for the week to a new all-time high of 2,939.88. The Nasdaq jumped 1.9 percent for the week to end also at an all-time high of 8,146.40. Among the key S&P sectors, the health care sector was the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed near 12.7.

Short-Term Technical Condition

In our last week’s comment we highlighted the fact that – on a very short-time frame – the market looked quite vulnerable for a bullish biased consolidation period, before we should see a new all-time high. In fact, the latest bull-market high in the S&P 500 was just driven by two strong up-days, whereas the remaining trading days showed a quite lackluster performance. Therefore, from a pure price point of view, the short-term oriented trend of the market continued to strengthen last week. This is mainly due to the fact that the S&P 500managed to close 54 points above the bearish envelope line from the Trend Trader Index. Moreover, we can see that both envelope lines of this reliable indicator are still drifting higher. This can be seen as a quite constructive technical signal as higher highs and higher lows are a typical pattern for a healthy uptrend (at least from a pure price point of view). However, the situation looks quite different if we analyze the overall trend momentum of the market. The Modified MACD is about to flash a bearish crossover signal soon, indicating some form of short-term exhaustion. This is not a big surprise at all, if we consider the fact that the latest bull-market high was only driven by two strong up-days. This can be also seen if we have a closer look at the Advance-/Decline 20 Day Momentum Indicator which was trading sideways and did not fully confirm the all-time high of the S&P 500. Consequently, the pure price driven trend of the market is not fully confirmed by a broadening trend momentum. As a matter of fact, the short-term oriented trend is not as solid as the latest new high headline might indicate!

This can be also seen if we focus on our short-term oriented tape indicators, as most of them remain somehow supportive but not really confirmative at the moment. 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 last week. This indicates that the underlying tape momentum (momentum of advancing stocks and advancing volume) of the market turned quite bearish. Another concerning fact is that the market internals have not shown any signs of strength so far, although the S&P 500 reached a new all-time high last week. This becomes quite obvious if analyze the percentage of all NYSE listed stocks which are trading above their short-term oriented moving averages (20/50). Both indicators kept trading more or less at quite non-confirmative levels (although the S&P 500 reached a new all-time high). This indicates a quite narrow leadership within the ongoing short-term oriented uptrend. The only positive signal is coming from the NYSE New HighsNew Lows Indicator as the total number of stocks hitting a fresh 52 weeks high kept trading at quite supportive levels, whereas the numbers of stocks hitting a fresh 52 weeks low have not shown a bearish spike so far. Nevertheless, the total amount of new highs could also be a bit stronger, if we consider the current circumstances. Consequently, the High-/Low-Index Daily also weakened a bit last week, although it remains bullish from a pure signal point of view. So in the end, there was hardly any strength within the underlying short-term oriented tape structure visible, although the market closed at new record highs on Friday. Consequently, the current short-term oriented technical condition of the market still looks somehow supportive (as we have not seen any stronger spike in new lows yet) but it is definitely not confirmative at the moment.

Even, from a pure contrarian point of view, the picture looks quite mixed at the moment. This is mainly due to the fact that the WSC Capitulation Index is still indicating a risk-on market environment, whereas we even have seen strength within our Smart Money Flow Index recently. On the other hand side, we can see that the option market still remains too complacent at the moment. As approximately 90 percent of all uncovered options are an also-ran, we would be surprised if the market will trade much higher at the 17th of May, when the option expiring date is due. Interestingly, this time perspective would be totally in-line with the Presidential Cycle where historically the market faces its first stronger pullback for the year (before further rallying into summer can be expected). Moreover, if we consider the current divergences on a short-term time perspective, such a scenario looks quite likely (at least from the current point of view).

Mid-Term Technical Condition

However, if we analyze the mid-term oriented technical condition of the market, any potential technical pullback in May (3-6%) will be definitely not be the start of a stronger correction as our entire mid-term oriented trend indicators remain quite bullish at the moment. Our reliable Global Futures Trend Index is still trading in the middle of its bullish consolidation range. As a matter of fact, the current technical condition of the market can be still classified as supportive rather than corrective. So as long as we do not see readings below 60 percent (in combination with bearish readings within mid-term oriented market breadth), the thread of a stronger correction can be definitely ignored at the moment. This view is also confirmed by the WSC Sector Momentum Indicator, which increased to the highest level for months, signaling that most sectors within the S&P 500 remain in a strong price-driven mid-term uptrend. Our Sector Heat Mapreveals that the momentum score of riskless money market succeeded to stay at 0 percent. And finally, all sectors are now trading above the one from riskless money market! This is another indication that it might be a bit too early to take all chips from the table (at least for now).

The mid-term oriented market breadth condition shows a quite intermingled picture at the moment. Despite the fact the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) remain bullish from a pure signal point of view, they are far away from confirming the current record level of the S&P 500. On top of that we can see that the bullish gauges from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly continued to decrease last week, indicating a weakening (albeit on quite supportive levels) mid-term oriented tape structure at the moment. In contrast, all 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 (as they closed at their highest levels for months) or have not shown any serious signs of bearish divergences yet! And in addition, 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. So from a pure mid-term oriented tape perspective, the market still looks quite supportive but would also justify a stronger pullback (3-6%) within an ongoing bull-market (if we see further deterioration down the road).

Long-Term Technical Condition

The long-term oriented trend of the market improved once again and clearly supports our view that the current consolidation still looks quite supportive in its nature. Once again, our WSC Global Momentum Indicator increased to its highest level for months and indicates that currently 78 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. This is a very supportive technical signal, as it shows that the current rally still remains global in scope. Our Global Futures Long Term Trend Index again gained some bullish ground and finally passed the bullish threshold, which is also a very supportive momentum signal at the moment. Also all markets in our WSC Global Relative Strength Index increased last week. If we focus on our long-term market breadth indicators, we can see that all of them increased (Modified McClellan Volume Oscillator Weekly, the High-/Low Index Weekly, percentage of stocks which are trading above their 200 day moving average).

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 All Weather Model Portfolio, the WSC Sector Rotation Strategy and the WSC Inflation Proof Retirement Portfolio. As the relative strengthscore from the MSCI Peru ETF dropped out of the top 10 ranked markets within our Global ETF Momentum Heat Map, we received a sell signal for this specific ETF within our WSC Global Tactical ETF Portfolio. Instead, the MSCI Netherland is being added to the portfolio.

Bottom Line

Although the S&P 500 just reached a new all-time high, the technical condition on a short-term time perspective looks a bit weak-kneed at the moment (indicating that most of the recent price action is caused by heavy weighted stock in the index, whereas the broad market is still lagging behind). In general, such a large-cap driven rally is quite dangerous to play. Because if we see a trend-reversal in these large-caps (and a further deterioration within our tape indicators), there is literally no safety-net around to cushion such a move. In such a situation, the risk of a strong and sharp trend-reversal remains outright high. On the other hand, it could be possible that a large-cap driven overshoot (into early-/mid-May) also leads to a stronger demand within the broad market (which would transform the technical set-up into a healthier environment). However, as our mid-term oriented tape condition is still supportive the risk of a stronger correction (decline below minus 10%) can be definitely ignored, at least at the moment. Nevertheless, in such a technical environment, it makes sense to reduce high leverage/beta- and short-volatility trades as well as other high risky bets as the risk for a short-term trend reversal remains high. Nevertheless, before we issue a short-term oriented sell-signal for aggressive traders (and a take profit advice for our conservative members), we would like to see some negative price action first (bearish Trend Trader Index), together more new lows than new highs in our NYSE New HighsNew Lows Indicator. Consequently, we would advise our member to remain bullish but cautious (and to monitor our daily indicator) quite closely within the next couple of days.

Stay tuned!!!