June 9th 2019

Market Review

U.S. stocks wrapped a turbulent week. After closing in outright negative territory on Monday, all three major U.S. averages recovered on Tuesday and finally finished the week with solid gains. For the week, the Dow Jones Industrial Average gained 4.7 percent to end at 25,983.94. The S&P 500 returned 4.4 percent during the week and finished at 2,873.34. The Nasdaq climbed 3.9 percent from the week-ago close to end at 7,742.1. All key S&P sectors ended in positive territory for the week, led by materials. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.3.

Strategy Review

Over the past weeks, we received a growing number of evidences that the market was highly at risk for stronger disappointments. To be more precise, our indicator framework showed that only due to the strong performance of a handful of large caps, the S&P 500 was holding up quite well, although the remaining stocks were already faltering. We warned our members that such a situation was extremely dangerous as just a trend-reversal within these few stocks could trigger a fast paced pullback as there is literally no safety net around which would be able to cushion such a move (as the broad market was already in a weak technical condition). As a matter of fact, we advised our conservative members to pull the trigger at 2,790 as the opportunity cost (risk-/reward ratio) of not being invested was extremely low. In fact, since then we have seen further selling pressure towards 2,728 before the S&P 500 showed a stronger recovery last week, which also led to stronger improvements within our indicator framework lately. Consequently, the big question is if the current correction cycle has already come to an end (at least for now) or if the latest bounce was just part of a bigger top-building process/suckers rally?

Short-Term Technical Condition

From a pure price point of view, the short-term oriented trend of the market turned bullish, as the S&P 500 managed to close 64 points above the bearish envelope line from the Trend Trader Index. As a matter of fact, the latest recovery can be classified as a new short-term oriented up-trend rather than just a short lived bounce (as long as the S&P 500 does not drop below 2,809). 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 up-trend 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. 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 flash a small bullish crossover signal on Friday. Consequently, any upcoming weakness would most likely just produce a bullish divergence in its readings, as extremely heavy losses would be necessary to bring this short-term oriented gauge back to its former low! As a matter of fact, it looks like that the market hit an important (intermediate) low on Monday at 2,728.

This picture is also widely confirmed by short-term market breadth as we also saw major signs of improvements last week. The most encouraging tape signal is coming from the High-/Low-Index Daily, which flashed a bullish crossover signal. The main reason for this bullish crossover signal is the fact that we have recently seen a quite strong reduction in the number of new lows, in combination with the strongest increase of new highs this year (especially on Friday). This indicates that the market internals are strengthening on a very fast pace as the latest recovery was heavily driven by a strong demand rather than by short-covering. And, as long as we do not see a stronger spike in new lows (or other typical short-term oriented tape deterioration signals), the current positive momentum will be too supportive to be at risk of fading out – at least on a short-term time perspective. Another supportive signal is coming from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily. Both indicators recovered for the week and nearly flashed a bullish crossover signal. Therefore, both indicators are confirming the latest gains we saw (although they did not manage to flash a bullish crossover signal last week). In addition, they are also telling us that the underlying tape momentum of the market is getting back on track. However, the only weaker signal is coming from percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges slightly increased for the week, they are still trading in deep bearish territory and their performance should be much stronger if we consider the latest rally from the S&P 500. Consequently, we would not expect to see a full recovery towards the latest high immediately, since the broad market is still a bit too weak-kneed at the moment.

From a pure contrarian point of view, the market is heavily overbought (Advance-/Decline Ratio Daily and the Upside-/Downside Volume Ratio Daily) and, therefore, the pace is likely to slow down a bit in the next couple of trading sessions. Moreover, we can see that the WSC Capitulation Index is indicating some form of risk-off market environment, although we saw a stronger recovery last week. Apart from that facts, the overall short-term oriented contrarian situation looks extremely supportive – at least on a very short-time frame. This is mainly due to the fact that we saw huge inflows in puts last week (especially on Monday). As a matter of fact, most of our option based indicators are trading at quite bullish levels at the moment (Global Futures Put/Volume Oscillator, Daily Put/Call Ratio All CBOE Optionsand the Equity Options Call/Put Ratio Oscillator). Therefore, we strongly believe the latest low will hold at least until 21st of June, when option expiration date is due. Another outright bullish fact is that the amount of bears on Wall Street has reached quite contrarian levels. As a matter of fact, many of them will get forced to get back into the market if we see a continuation of the latest short-term oriented uptrend. This could act as additional strong catalyst until end of June.

Mid-Term Technical Condition

Despite the fact that the conditions on a short-term time frame are brightening up, the technical mid-term condition of the market still looks quite weak/vulnerable for the time being. This is mainly due to the fact that the gauge from the Global Futures Trend Index has not managed to pass its bullish 60 percent threshold yet. 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. Therefore, it was good to see that the gauge from the Global Futures Trend Index has at least shown a quite positive momentum recently. Although this can be still seen as quite red flag, there might be a good chance that it will pass it’s very important 60 percent threshold soon, especially if we consider the quite strong readings on a very short time frame. From a pure price trend point of view, the mid-term oriented uptrend of the market still remains intact, as our WSC Sector Momentum Indicator is not only trading at quite solid levels, but also increased for the week. 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 materials and energy) keeps trading above the one from riskless money market. And in addition, the momentum score of riskless money market decreased by 17 percentage points (to 23.1 percent) during the week (which is another encouraging signal that 2,728 represents an important intermediate low). Nevertheless, we should also not forget that the overall momentum score of riskless money market still remains quite high from an absolute level (which can be also seen as red flag on the horizon).

Basically, we receive the same picture if we focus on our mid-term oriented tape indicators, as all of them improved compared to the previous week. This becomes obvious if we examine our advance-decline indicators (Advance-/Decline Volume LineAdvance-/Decline Line Daily and the Advance-/Decline Line Weekly), as all of them have confirmed the latest move from the S&P 500 or have even formed a bullish divergence recently. Another positive signal is coming from our Modified McClellan Oscillator Weekly, which remains bullish and more importantly, succeeded to stop its negative development we saw over the past couple of weeks. This indicates that the underlying tape momentum of the market is getting back 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. As already mentioned above, this is another indication that we do not expect to see a V-shaped recovery towards the latest high immediately (as the tape condition still looks a bit weak-kneed at the moment). This can be also seen if we focus on the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly. Despite the fact that we saw a small recovery in both indicators, their overall signal still remains a bit too depressed to see an immediate rally above the latest bull-market high. On the other hand, their overall signal is still a bit too strong to justify another sell-off below 2,728.

Long-Term Technical Condition

The long-term oriented trend of the market shows an intermingled picture. Our WSC Global Momentum Indicator dropped 10 percentage points last week and signals that only 38 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. One month ago, the gauge was trading at 75 percent. This is an indication that the current bull-market cycle is already quite late-staged at the moment. Also nearly all markets in our WSC Global Relative Strength Index continued to decrease last week (which is another long-term red-flag on the horizon). If we focus on U.S. equities only, we can see that our Global Futures Long Term Trend Index succeeded once again to gain more bullish ground last week, which can be still seen as quite supportive signal. If we focus on our long-term market breadth indicators, we can see that the Modified McClellan Volume Oscillator Weekly weakened, while the High-/Low Index Weekly and the percentage of stocks which are trading above their 200 day moving average slightly increased last week

Model Portfolios

Last week, there have been no changes within the WSC All Weather Model Portfolio, the WSC Inflation Proof Retirement Portfolio, the WSC Sector Rotation Strategy and the WSC Global Tactical ETF Portfolio. Moreover, we are proud to announce that the WSC All Weather Model Portfolio reached a new all-time high last week.

Bottom Line

On a short-term time perspective, the technical condition of the market got definitely back into a bull-mode (especially if we consider the strong spike in new highs recently). Consequently, we strongly believe that 2,728 represents an important intermediate low. This picture is also confirmed by a contrarian point of view, as the market should face further tailwinds until end of June (when the option expiration date is due). However, the main reason, why we mention intermediate and not final low is due to the fact that the latest correction cycle has definitely left its mark on our mid- to long-term oriented indicators (although they also showed some stronger improvements last week). So if the upcoming recovery will not be able to bring our mid-term oriented tape/trend indicators back to quite confirmative levels, the latest recovery will turn out to be just part of a typical top-building process. Normally, a typical top building process starts with a sharp correction (like the recent one) which is then followed by a low quality/large cap rally which often pushes the market towards or slightly above its old bull-market high. As such a large-cap driven rally can never be sustainable in the long-run, the result is another but stronger correction which always pushes the market to a new low.

On the other hand, if we see that the market internals are gearing up, the market will definitely continue to rally since the latest correction was just a healthy process within an ongoing bull market. So all in all, with quite brightening readings within our short-term oriented framework, we think that we have seen the worst already – at least for now. That does not mean that the market will continue to rally with that pace we saw last week, but we think it is time for conservative members to get back into the market again (by buying into weaknesses rather than chasing the market too aggressively on the upside). This is mainly due to the fact that the positive environment should remain in place within the next couple of weeks. Nevertheless, given the fact that the Global Futures Trend Index has not turned bullish so far, there is still a small chance that the technical condition of the market is deteriorating again within that time period. In such a case, we are not afraid of issuing a strategic sell signal again. Consequently, aggressive traders should focus on buying into weaknesses rather than selling strength (as long as there is no major spike in new lows/or further negative signals within our short-term oriented indicator framework).

Stay tuned!