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July 21st 2019

Market Review

U.S. stocks closed the week slightly lower. For the week, the Dow Jones Industrial Average slid 0.6 percent to 27,154.20. The S&P 500finished at 2,976.61 and posted a weekly drop of 1.0 percent. The Nasdaq declined 1.0 percent from the week-ago close to 8,146.49. Most key S&P sectors finished lower, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.5.

Short-Term Technical Condition

From a pure price point of view, the short-term oriented trend-status of the market still looks quite constructive as S&P 500 finished the week just slightly lower. This can be seen if we focus on the Trend Trader Index which is signaling a neutral trend scenario, as the S&P 500 closed between the two envelope lines of this reliable indicator. Despite the fact that this indicates some form of slow-down, the underlying price driven trend still looks quite supportive as both envelope lines from the Trend Trader Index are still drifting higher. This is telling us that we saw higher highs and higher lows within the past 20 days. If we analyze the underlying trend momentum of the market, we definitely receive a different picture. This is mainly due to the fact that the Modified MACD flashed a small bearish crossover signal last week, whereas the gauge of the Advance-/Decline 20 Day Momentum Indicator dropped significantly for the week, although it still remains bullish from a pure signal point of view. Consequently, our short-term oriented trend indicators are telling us that the market is highly likely to enter a consolidation period. However, after such a strong rally, it is not unusual that the market is taking a breather. To evaluate if such a breather/slow-down/consolidation will turn out to be healthy or more corrective in it nature, short- to mid-term market breadth are a key area of focus.

Unfortunately, short-term oriented market breadth had to take a hard hit during the last couple of trading sessions as most of our tape indicators weakened or even turned bearish. The most threatening tape signal is coming from the Modified McClellan Oscillator Dailyand the Modified McClellan Volume Oscillator Daily, as both indicators also flashed a strong bearish crossover signal last week. This indicates that the underlying tape momentum of the market has clearly turned negative on a short-term time perspective. This fact can be also observed if we have a closer look at the percentage of stocks which are trading above their short-term oriented simple moving averages (20/50). Both gauges decreased for the week and even passed the bearish threshold (20). As a matter of fact, both indicators have formed a quite bearish divergence (if we consider the current level of the S&P 500). This is another threatening signal at the moment, as it tells us that the latest decline of the S&P 500 was driven by the whole market and not only by a few-heavy weighted stocks in the index. The only positive signal is coming from the NYSE New HighsNew Lows Indicator, as the number of new highs was holding up quite well, while the number of new lows remained quite depressed (and only increased slightly at the end of the week). Therefore, also our High-/Low-Index Daily remained nearly unchanged. As a result, the market looks quite capped in both directions at the moment (although a more bearish biased tilt looks quite likely) and we would not be surprised to see some longer-lasting consolidation period ahead (whereas the tilt between positive and negative looks quite narrow at the moment).

On the contrarian side, the picture of the market looks quite unexciting at the moment. The z-score from the Daily Put/Call Ratio All CBOE Options Indicator grew further into neutral territory, whereas the WSC Capitulation Index is still indicating a risk-on market environment. The only negative signal is coming from the Smart Money Flow Index, which continued to trade sideways, indicating a longer-lasting consolidation period ahead. Even from a pure cyclical point of view (Presidential Cycle), the market often faces a stronger but limited pullback from end of July until early August, before another stronger rally into September should push the market towards a new record high.

Mid-Term Technical Condition

If we focus on the mid-term oriented technical condition of the market, this scenario looks quite likely as we basically get the same set-up as we have on a short-term time frame. The mid-term uptrend of the market has lost some stream recently as the Global Futures Trend Index dropped to 80 percent last week. This is telling us that the overall mid-term oriented trend condition of the market still remains supportive but not really confirmative at the moment. As a matter of fact, it is a bit too early to take the chips from the table (as the gauge is still trading in the middle area of the bullish consolidation range). But we would get quite cautious if the gauge from the Global Futures Trend Index drops below 60 percent (in combination with weakening market breadth), as the market is extremely vulnerable for a stronger correction in such a weak tape environment. However, from a pure price point of view, the mid-term oriented uptrend of the market remains quite powerful as the WSC Sector Momentum Indicator has not shown any signs of weaknesses so far and keeps trading at solid levels. This indicates that most sectors within the S&P 500 are per definition still in a mid-term oriented up-trend. These bullish facts are also supported by our Sector Heat Map, as the momentum score of all sectors (except energy like in the previous weeks) remains above the one from riskless money market (currently at 8.0 percent).

Mid-term market breadth remains supportive but also lost some steam last week. The percentage of stocks which are trading above their mid-term oriented moving averages (100/150) dropped below their bullish threshold last week (100) or about to do so (150), indicating that the current rally is slowly running out of fuel! Also our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) as well as our the Modified McClellan Oscillator Weekly weakened for the week, but still were holding up quite well. This indicates also some potential slow-down ahead. However, the most important mid-term tape signal is coming from the Upside-/Downside Volume Index Weekly and the Advance-/Decline Index Weekly. Both indicators slightly strengthened last week and, therefore, we think the market is not at risk for a stronger correction right now. Nevertheless, both gauges should also be much stronger, if we consider the current levels of the S&P 500. In other words, the market looks quite capped in both directions at the moment.

Long-Term Technical Condition

The long-term oriented trend of the market remains positive. The WSC Global Momentum Indicator strengthened last week and indicates that now 60 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. A clear confirmation that the current global bull-market is still in force. Also our Global Futures Long Term Trend Index continued its bullish ride and also reached its highest level for months. This is signaling that the long-term oriented trend of U.S. equities remains intact. The only weaker signal is coming from our WSC Global Relative Strength Indexas the relative strength of all risky markets showed an intermingled picture. 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 increased or have not shown any form of weakness, while the percentage of stocks which are trading above their 200 day moving average decreased last week.

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 Global Tactical ETF Portfolio.

Bottom Line

If we consider the quite weak readings and bearish divergences within our short-term oriented indicator framework, we think that the market hit an intermediate high last week. As a matter of fact, a period of weakness or even a limited 2-5 percent pullback into early August looks quite likely. However, given the still quite supportive readings within our mid-term oriented trend-indicators, we think that any upcoming weaknesses/pullback will not be a major game changer – at least from the current point of view. In our preferred scenario, any upcoming weaknesses will deaden short-term optimism and will act as basis for another stronger rally attempt in later summer. Consequently it is still a bit too early to change our strategic bullish outlook for now! On the other hand, we also received some early signals of an ageing rally as there was a stronger deterioration within mid-term market breadth. Right now it is a bit too early to say if this was driven by seasonal effects or through a weakening underlying demand. If the second one holds, any upcoming short-term weaknesses or even an August rally will cause further deteriorations within our mid-term market tape structure which will then of course force the market into an important top at the end of summer. Therefore, aggressive investors should take profits in the first place and should then even switch into the bearish camp (in combination with close stops) if the S&P 500 drops below the lower envelope line of the Trend Trader Index. Conservative investors could also take some profits but should remain invested, since our strategic outlook still remains bullish so far.

Stay tuned!