January 21st 2018

Market Review

U.S. stocks finished the week in positive territory, with both the S&P 500 and the Nasdaq ending at records. For the week, the Dow Jones Industrial Average gained 1.0 percent to close 26,071.72. The S&P 500 booked a weekly gain of 0.9 percent and closed at a record of 2,810.30. Both the Dow and the S&P 500 posted their third straight weekly advance, as well as their eighth positive week of the past nine. The Nasdaq advanced 1.0 percent during the week to end at a record of 7,336.38. The heavy-tech index recorded its third positive week in a row, as well as its fifth of the past six. Among the key S&P sectors, consumer staples were the best weekly performer, while energy dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 11.3.

Short-Term Technical Condition

According to our short-term oriented indicators, the bullish trend-status from the S&P 500 remains unchanged. To be more precise, the S&P 500 closed 88 points above the bearish threshold from the Trend Trader Index. Above all, both envelope lines of this reliable indicator are still drifting higher on a very fast pace. This is another indication for a stronger short-term oriented uptrend. This can be also observed if we focus on the Modified MACD, which succeeded to widen its bullish gap. Also, the gauge from the Advance-/Decline 20 Day Momentum Indicator remains outright bullish, although it lost momentum last week. As this indicator tends to be a leading one, a start of a healthy consolidation period could be possible, and therefore, the pace may slow down a bit next week.

If we examine our short-term oriented breadth indicators, we can see that their readings slightly weakened for the week and are, therefore, a bit intermingled at the moment. The Modified McClellan Volume Oscillator Daily has not shown any bullish moves recently and the Modified McClellan Oscillator Daily decreased and even flashed a small bearish crossover. As a matter of fact, the underlying tape momentum of the broad market started to slow down a bit. This can be also seen if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). Although both gauges are trading far above their 50 percent threshold, they have not gained more bullish ground recently and are, therefore, showing some small signs of fatigue. This is not a big surprise at all, if we consider the fact that the market scored one record high after another. Consequently, it could be possible that the market is about to enter a small but healthy consolidation period. But this period should be limited in price and time, since the High-/Low-Index Daily is still trading at an outright solid level, and therefore, far away from being bearish. The main reason for such a strong bullish signal is caused by the fact that on Tuesday we saw a spike in the number of stocks hitting a fresh yearly high. This is telling us that it is still a way too early to bet on a major trend reversal (at least for the time being). So all in all, the market looks a bit vulnerable for a bullish biased consolidation/sideways trading at the moment.

From a pure contrarian point of view, the market also appears ready for a healthy slowdown. This is mainly due to the fact that the Smart Money Flow Index stalled at quite bullish levels and has therefore, not confirmed the latest high from the Dow Jones Industrial Average. The same is true if we have a closer look at the option market as the put-/call ratio dropped to the lowest level for months. Right now, the z-score of this indicator is telling us that that this ratio is now almost 2.3 standard deviations away from its historical mean, which is a quite bearish signal on a short-term time frame. Consequently, we would not be surprised to see a period increased (but bullish biased) volatility ahead.

Mid-Term Technical Condition

The mid-term uptrend of the market remains intact so far, despite the fact it lost some steam last week. Although the Global Futures Trend Index is still trading in the upper part of the bullish consolidation area, it decreased a bit last week and has, therefore, not confirmed the latest high from the S&P 500. Also from a pure price point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator is trading at solid levels (although it also decreased for the week). This is telling us that most underlying sectors within the S&P 500 have not broken below their mid-term oriented uptrend yet. This can be also seen if we have a closer look at our Sector Heat Map as the momentum score of all sectors (except utilities) remains above the one from riskless money market (0 percent).

The current mid-term oriented up-trend of the market is mostly confirmed by mid-term oriented market breadth. Like in the previous weeks, our entire advance-decline indicators (Advance-/Decline Volume Line, Advance-/Decline Line Daily, Advance-/Decline Line in Percent, Advance-/Decline Line Weekly) have not shown any bearish moves and are, consequently, confirming the recent level of the S&P 500! In other words, the recent high was widely supported by a broad basis, which is an absolutely healthy breadth signal. Moreover, mid-term oriented advancing issues and mid-term oriented up-volume continued to gain more bullish ground and are trading far above their bearish counterparts. On the other hand, some of our indicators have not shown any positive moves recently. The Modified McClellan Oscillator Weekly remains unchanged compared to the last week. And also the percentage of stocks which are trading above their mid-term oriented moving averages (100/150) lost some steam last week. But still both gauges are trading far above their bearish 50 percent threshold. This indicates that the majority of all NYSE listed stocks are still per definition in a robust mid-term oriented up-trend. These facts signal that the total upside participation within the market is still positive, which is another indication that it a bit too early to take the chips from the table.

Long-Term Technical Condition

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 level for years. As we can see from the WSC Global Momentum Indicator, 85 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. More importantly, long-term oriented market breadth still looks quite constructive at the moment. The percentage of stocks which are trading above their 200 day simple moving average is trading at solid bullish levels. Also the number of stocks which are hitting a fresh 52 weeks high are trading far above their bearish counterparts, positively impacting our High-/Low Index Weekly. In addition, our Modified McClellan Volume Oscillator Weekly continued to increase its bullish gap.

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 Inflation Proof Retirement Portfolio, WSC All Weather Portfolio and the WSC Global Tactical ETF Model Portfolio. As the momentum score of energy rose above average and above the one from the S&P 500 within our Sector Heat Map, we received a buy signal for that ETF within our WSC Sector Rotation Strategy. Moreover, we are proud to announce that the WSC Sector Rotation Strategy and the WSC All Weather Portfolio reached a new al-time high last week, whereas the .WSC Global Tactical ETF Model Portfolio gained a whopping 7 percent in January so far.

Bottom Line

If we consider the small non-confirmative signals within our short-term tape indicators, in combination with increased greed within the option market, we would not be surprised to see a period of consolidation ahead or a slowdown of the current price action. Apart from that fact, the technical picture of the market remains pretty unchanged compared to last week. To be more precise, with quite bullish signals all across the board (especially within our mid-term oriented indicator framework) the current bull-run is definitely not at risk of fading out at moment. As a matter of fact, any upcoming weaknesses should be limited in price and time. Therefore, we would advise our aggressive traders should not chase the market too aggressively on the upside, whereas our conservative members should hold their equity position as our positive mid- to long-term outlook has not been changed so far.

Stay tuned!