September 17th 2017

Market Review

U.S. stocks finished the week with solid gains. For the week, the Dow Jones Industrial Average gained 2.2 percent to close at a record of 22,268.34. The Dow also recorded its best weekly gain in 2017. The S&P 500 ended at a record of 2,500.23 and booked a weekly gain of 1.6 percent. Friday marked the first time the index broke above 2,500. The Nasdaq climbed 1.4 percent over the week to finish at 6,448.47. The heavy-tech index just closed about 12 points shy of its record hit Sept. 13. Most key S&P sectors ended in positive territory for the week, led by energy. Utilities were the only decliners. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 10.2.

Strategy Review

From early-August until early September, the technical condition of the market was extremely damaged. This was mainly due to the fact that the latest bull-run during this time was based on an extreme narrow leadership. In other words, our indicator framework showed that the bullish trend of the market was only driven by a handful of mega-caps (mainly within the tech-sector). We told our members that such a situation was extremely dangerous since a quick trend-reversal within those stocks could lead to a quite fast paced correction as the remaining market was already faltering. As the situation was getting worse in mid-August we advised our members to step on the sideline as the risk-reward ratio was just too low.

The main rationale behind that fact was to avoid any kind of larger drawdown since a pullback of 10 percent needs an annualized gain of more than 11 percent to offset such losses (which is quite a lot). Moreover, we said that even if we did not see a stronger pullback – with such weak readings all across the board – the market should remain capped on the upside. Consequently, stepping at the side-line (until we see further improvements within our indicator framework) in such a situation does not come with huge opportunity costs. In fact, after our call the Dow suffered its largest two-week percentage decline since mid-September 2016, whereas the S&P 500 was struggling for direction.

However, as the tape structure recovered over past weeks, we issued immediately a strategic buy signal on early September. In the end that trade was a zero sum game afterwards, but remember: In the past such a situation not always led to a stronger correction, but absolutely all correction started that way. Anyhow, after issuing our strategic buy signal we also said that in our preferred scenario, we would see further improvements within our indicator framework which would then of course lead to further (record) gains. Consequently it was good to see that the tape structure continued to improve significantly (especially during the beginning of the week) and therefore, it was not a big surprise at all that the market got back on track. But let’s have a closer look at our indicator framework.

Short-Term Technical Condition

In line with our recent outlook, the short-term oriented trend of the market clearly continued to strengthen last week. This is mainly due to the fact that the S&P 500 strongly increased for the week and managed therefore, to close 45 points above the bearish envelope line from the Trend Trader Index. So from a pure price point of view, the short-term uptrend of the market remains intact as long as the S&P 500 does not drop below 2.455 (bearish threshold from the Trend Trader Index). Furthermore, we can see that both envelope lines of this reliable indicator continued to drift higher, which is another constructive trend signal at the moment. Above all, the overall trend momentum also strongly increased as the both trend lines from Modified MACD showed also an outright increasing bullish gap. With such strong readings it is highly unlikely to see any major trend-reversal ahead. This view is also widely confirmed by the Advance-/Decline 20 Day Momentum Indicator, which jumped to its highest level for month. Consequently, our entire short-term oriented trend indicators are confirming the latest gains from the S&P 500.

This picture also is widely confirmed by our short-term oriented market breadth indicators; all of them further increased last week or have not shown any signs of weakness. First of all we saw a healthy spike in the number of stocks which are hitting a fresh yearly high (especially at the beginning of the week), together with an outright low number of stocks which were pushed to a new yearly low. Consequently, it was not a big surprise at all that stocks continued to rally during the whole week. Above all, it pushed the bullish gauge from the High-/Low-Index Daily to outright confirmative levels. This is another encouraging signal that the latest gains were not caused by a few mega-caps but they were a result from a strong demand all across the board.  Basically, the same is true if we focus on our short-term oriented breadth momentum indicators. The gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily also increased strongly and widened their bullish gaps. This is indicating that the underlying breadth momentum of the broad market remains very constructive at the moment. This can be also observed if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Both gauges succeeded to get back to solid bullish levels. Especially the 20 days’ time frame gauge jumped to the highest level for month (78%). So in the end, the sound readings within our short-term oriented tape indicators are telling us that that further record highs into fall can be expected.

On the contrarian side it is pretty quiet at the moment. After the strong gains from last week, the market is quite overbought (Upside-/Downside Volume Ratio Daily and the Advance/Decline Ratio Daily) and therefore, the pace is likely to slow down a bit. A quite encouraging signal is the fact that the percentage of bulls increased fairly last week and therefore, a lot of purchasing power should come back into the market. Moreover, we can see that the WSC Capitulation Index continued to decline, which is another sign for a strong risk-on mode. Only the Smart Money Flow Index is a bit neutral at the moment and is therefore, not completely confirming the latest gains for the week. However, given the quite supportive readings all across the board, this fact can be definitely ignored at the moment.

Mid-Term Technical Condition

Another reason for further record gains into fall is the fact that our entire mid-term oriented indicators remain bullish and also continued to strengthen significantly last week. This becomes pretty obvious if we focus on the gauge from the Global Futures Trend Index, which continued to climb higher and closed therefore, slightly below the extremely bullish 90 percent threshold last week. As a matter of fact, this reliable indicator is now definitely confirming the current record levels from the S&P 500! This can be seen as quite strong trend signal, as readings near or even above 90 percent never led to any stronger short-term oriented trend-reversal! As per last week’s report, the WSC Sector Momentum Indicator is still trading at a solid level, indicating that many sectors of the S&P 500 remain in a mid-term oriented uptrend. Also our Sector Heat Map reveals that the momentum score of all sectors (except Energy which is again 0%) remains above the momentum score from riskless money market.

On top of that, we can see that this current mid-term oriented up-trend of the market is also widely confirmed by mid-term oriented market breadth. Our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) strongly increased in the last couple of trading sessions and are therefore, clearly confirming the recent level of the S&P 500! Moreover, mid-term oriented advancing issues and mid-term oriented up-volume continued to gain more bullish ground and are therefore, trading well above their bearish counterpart. This is probably the most important signal, as it indicates a strong underlying demand. Also our Modified McClellan Oscillator Weekly narrowed its bearish gap and is about to flash a bullish crossover signal soon. In addition, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) got back on track as they passed their bullish threshold. These facts signal that the total upside participation within the market is recovering, which is another indication that the market is back on track.

Long-Term Technical Condition

As per last week’s report, the long-term uptrend of the market remains intact and therefore, the risk for another bear-market is virtually nonexistent. The Global Futures Long Term Trend Index is still indicating a technical bull market for the S&P 500 and trading at the highest levels for months. As we can see from the WSC Global Momentum Indicator, 95 percent of all local equity markets around the world remain within a long-term oriented uptrend. This can be also monitored if we focus on the WSC Global Relative Strength Index, as the relative strength of all risky markets keeps trading above the one from U.S. Treasuries (except commodities). More importantly, long-term oriented market breadth still looks very constructive at the moment. The percentage of stocks which are trading above their 200 day simple moving average continued to strengthen last week and are trading at solid bullish levels. Also the amounts of stocks which are hitting a fresh 52 weeks high are trading far above their bearish counterparts. And also the Modified McClellan Volume Oscillator Weekly flashed finally a bullish crossover signal last week.

Model Portfolios

If we have a closer look at our Model Portfolios (WSC Inflation Proof Retirement Portfolio, the Global Tactical ETF Portfolio, the WSC Sector Rotation Strategy and the WSC All Weather Portfolio) we can see that there have been no changes in the allocation last week. However, we are proud to announce that the WSC All Weather Portfolio reached another all-time high last week.

Bottom Line

 

The technical picture of the market continued to improve significantly compared to last week and therefore, our strategic bullish outlook remains unchanged. To be more precise, with broadening strengths all across the board the latest break-out attempt looks extremely sustainable in its nature. Consequently, the rally is not at risk of fading out at the moment. As a matter of fact, we strongly believe to see further record highs into fall. On a very short-time frame it could be possible that the pace is likely to slow down a bit, as the market is a bit overbought at the moment. However, given the fact that the current risk/reward looks outright attractive at the moment, we would advise our conservative members to hold their equity position, while aggressive short-term traders should keep buying the dips.

Stay tuned!