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September 8th 2019

Market Review

In line with our latest technical market forecast, U.S. stocks finished the week with solid gains. The Dow Jones Industrial Average rose 1.5 percent from the week-ago close to 26,797.46. The S&P 500 climbed 1.8 percent for the week to 2,978.71. The Nasdaq also gained 1.8 percent over the week to 8,103.07. The Dow Jones Industrial Average stands 2.1 percent shy of its record closing peak at 27,359.16, hit July 15, while the S&P 500 is about 1.6 percent short of its all-time closing high set July 26 at 3,025.86, and the Nasdaq is 2.7 percent from its July 26 record at 8,330.21. All key S&P sectors ended in positive territory for the week, led by the discretionary sector. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped to 15.

Short-Term Technical Condition

If we have a closer look at our short-term oriented indicator framework, we can see that the technical condition of the market continued to improve all across the board last week. On Friday, the S&P 500 closed 89 points above the bearish threshold from the Trend Trader Index. Consequently, the market remains in a solid price driven short-term oriented uptrend as long as the S&P 500 does not drop below 2,889 (lower threshold from the Trend Trader Index). Furthermore, we can see that both envelope lines of this reliable indicator formed a rounding bottom and finally started to increase. This is another very important bullish signal as it confirms our view that last week’s increase is the beginning of a new short-term oriented uptrend rather than being just a short-lived oversold bounce. This view is also confirmed by our reliable Modified MACD, which significantly increased its bullish gap and indicates that the underlying trend-momentum of the market is getting back on track. The only weak but still very bullish signal is coming from the Advance-/Decline 20 Day Momentum Indicator. Despite the fact that its gauge also improved compared to last week, it lost some steam on Friday and did not fully confirm the close of the S&P 500. As this indicator tends to be a leading one, we would not be surprised to a see some form of short-lived bullish consolidation ahead.

However, any upcoming bullish biased consolidation period should turn out to be limited in price and time as our entire short-term oriented market breadth indicators continued to improve or have not shown any signs of weakness so far. Especially, the short-term gauges from the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to strengthen and both widened their bullish gaps last week. Like in the previous week, this is telling us that the underlying momentum of advancing stocks and advancing volume is getting back on track and that the latest recovery is definitely driven by a border basis and not only by a few heavy weighted stocks in the S&P 500. Also the percentage of stocks which are trading above their short-term oriented moving averages (20/50) continuously improved over the past weeks. Although both indicators still remain bearish from a pure signal point of view, it is still a quite constructive signal, as it indicates that the broad market is getting back into a short-term oriented uptrend. But as pointed out in our previous outlook, we should not forget that their overall scores are still a bit weak-kneed at the moment, which might be another indication for a short-lived consolidation period. But with the quite stable readings in the number of stocks which are hitting a fresh yearly high, together with low readings in the number of stocks which were pushed to a new yearly low, we think the current short-term oriented recovery is not at risk of fading out at the moment. This can be also seen if we focus on the High-/Low-Index Daily, which showed a widening bullish gap (indicating that the risk of another significant trend-reversal should be quite subdued at the moment).

The picture on the contrarian side looks quite intermingled at the moment. Despite the fact that the market just trades a few percentage points below its all-time high, we can see that the amount of bulls on Wall Street remains outright depressed. This is a quite positive signal, as it indicates that there is still enough fire power left to push prices higher. This can be also observed if we focus on the z-score of the CBOE Put-/Call Ratio Daily. On the other hand side, we can see that the WSC Capitulation Index remains bearish, whereas our reliable Smart Money Flow Index has not confirmed the latest break-out by the S&P 500 (which is a quite bearish mid-term oriented signal). As a matter of fact, it could be possible to see further troubles down the road. However, given the quite bullish short-term oriented set-up, this signal can be ignored at the moment.

Mid-Term Technical Condition

More importantly, also our mid-term oriented indicators continued to improve last week and have, therefore, reached quite supportive levels at the moment. First of all, our Global Futures Trend Index increased to 64 percent and is signaling that the risk of another correction cycle is outright low at the moment. Consequently, any upcoming short-term oriented pullbacks should be limited in price and time (as long as this indicator shows positive momentum above 60 percent). Another encouraging fact is that our WSC Sector Momentum Indicator also slightly increased once again last week, indicating that the mid-term oriented price-trend of the S&P 500 remains intact. This setting is also supported by our Sector Heat Map. First, the momentum score of riskless money market decreased by nearly 5 percentage points (to 18.8 percent) during the week and second, the momentum score of all sectors (except energy) keeps trading above the one from riskless money market.

On top of that, we can see that the re-strengthening mid-term oriented up-trend of the market is also supported by an improving mid-term oriented tape-structure. Our entire advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) strongly increased in the last couple of trading sessions and some even reached their highest levels for months. Therefore, they are clearly confirming the latest recovery from the S&P 500. Also the short-term oriented gauge from the Modified McClellan Oscillator Weekly flashed a small bullish crossover signal, indicating that the underlying tape momentum of the market is getting back on track. Moreover, the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) increased for the week (although they have not succeeded to enter the bullish territory yet). The only weak signals are coming from the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly as both of them have not shown any major signs of improvements so far. As already mentioned in our last week’s comment, if the current rally is not able to bring both indicators back on track, the current recovery could turn out to be just part of a multi-week top-building process. However, right now it is still a bit too early to say but we keep a close eye on these indicators within the next couple of weeks.

Long-Term Technical Condition

The long-term oriented trend of the market  also showed positive signs last week. Our WSC Global Momentum Indicator increased for the week and nearly got back into the bullish territory. Currently it indicates that 48 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. Also our Global Futures Long Term Trend Index has started to form a bullish rounding bottom, which is another supportive momentum signal at the moment. A view, that is also supported by stronger momentum scores in nearly all markets in our WSC Global Relative Strength Index. If we focus on long-term market breadth, we can see that all of them recovered last week. The bullish gauges from the Modified McClellan Volume Oscillator Weekly formed a bullish rounding bottom, whereas the percentage of stocks which are trading above their 200 day simple moving average also increased significantly. Also the High-/Low Index Weekly remains quite supportive for the time being.

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 Dynamic Variance Portfolio. Moreover, we are proud to announce that the WSC All Weather Model Portfolio reached a new all-time high last week.

Bottom Line

In line with our latest view, the technical picture of the market continued to improve significantly compared to last week and, therefore, our bullish outlook remains unchanged at the moment. To be more precise, with broadening strengths all across the board (WSC Short-Term Composite and the WSC Mid-Term Composite), we think that the current recovery is not in danger of fading out at the moment (although we would not be surprised to see a short-lived consolidation period or a few painful down days ahead). Consequently, we strongly believe to see further gains into deeper September. As already mentioned above, if the current rally will not be able to bring our mid-term oriented tape indicators back on track, it could be possible to see further negative surprises later this year. But for now, the picture still looks quite supportive. For that reason, we would advise our conservative members to remain invested, whereas aggressive traders should focus on buying into weaknesses, as long as our short-term oriented indicator framework remains constructive. Stay tuned!