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May 21th 2017

Market Review

It was a turbulent week on Wall Street as U.S. stocks started out the week with small gains but fell by nearly 2 percent on Wednesday, posting the largest decline since September 2016. U.S. stocks stabilized on Thursday and rallied on Friday. In the end, U.S. stocks finished the week in negative territory. The Dow Jones Industrial Average lost 0.4 percent for the week to 20,804.84. The S&P 500 declined 0.4 percent during the week as well to finish at 2,381.73. Both the Dow and the S&P 500 turned in a second week of losses. The Nasdaq booked a weekly loss of 0.6 percent to 6,083.70. Among the key S&P sectors, consumer staples was the best performer on the week, while financials was the worst. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell back towards 12 after jumping almost 50% on Wednesday.

Strategy Review

In our last week’s comment we said the market was about to run into an intermediate high and therefore, we expected to see a limited pullback into deeper May. In fact, after the market had touched a new all-time high on Tuesday, the market faced its biggest and fastest one-day pullback of the year on Wednesday. Consequently, big question is if this event was just a necessary and healthy washout day that settled negative divergence or was it a vanguard of a stronger correction. To answer that question, our short- to mid-term oriented indicator framework remains key area of focus.

Short-Term Technical Condition

The recent dynamics caused a deterioration of the short-term uptrend of the market, as the Modified MACD flashed a bearish crossover signal last week. Additionally, the S&P 500 closed exactly at the same level of the bearish threshold from the Trend Trader Index. Above all, we can see that the bearish divergences between the S&P 500 and the Modified MACD have not been sorted out yet. Despite the fact that this can be seen as quite concerning trend signal on a very short-time frame, we should not forget that both envelope lines of the Trend Trader Index are still rising/holding up pretty well. This indicates that from a structural point of view, the short-term oriented uptrend of the market still remains intact. This can be also seen, if we focus on our Advance-/Decline 20 Day Momentum Indicator, which remains somehow supportive (although its gauge is showing a quite big bearish divergence to the current levels from the S&P 500). So in the end – from a pure trend point of view – the market looks pretty capped in both direction and therefore, a period of volatile sideways trading looks pretty likely.

The deterioration in the short-term trend structure is also widely confirmed by short-term market breadth this time. Especially, our Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to gain more bearish ground, indicating that the underlying tape momentum of the market remains outright negative at the moment. Another onerous fact is that the percentage of stocks which are trading above their short-term oriented moving averages (20/50) dropped deeply below their 50 percent bullish threshold (although the S&P 500 is trading near record levels). On the other hand, we still can see that the High-/Low Index Daily remains pretty supportive, although it lost some bullish ground recently. This is mainly due to the fact that the total amount of stocks hitting a fresh yearly high have not dropped significantly, although they came down a bit recently. Moreover, we can say that the total amount of stocks hitting a fresh yearly low remains somehow subdued (especially if we consider the recent circumstances). So even on Wednesday, there was not a stronger spike in new lows and therefore, we can say that most of the selling pressure was caused by profit taking. As a matter of fact, the latest decline was not a structural game changer, at least for now. So in the end, the overall tape structure looks weak-kneed at the moment and therefore, we do not think further sideways-trading/down-testing can be expected on a very short time frame.

On the contrarian side, we can see that the latest washout-day had definitely its designated impact on short-term optimism as the gauge from the Daily Put/Call Ratio All CBOE Options moved gradually out from its bearish territory. Nevertheless, we think the optimism among the crowd still remains a bit too high (also if we consider the Uptick-/Downtick Ratio Daily and the sentiment survey from Market Vane) and therefore, we think that the latest pick-up in volatility was a foretaste. However, if we focus on the Smart Money Flow Index, it looks like that the market will run into a longer-lasting trading range as its gauge has not shown a stronger spike in any direction yet. And if we consider the mixed picture all across the board, such a scenario looks pretty likely for the next couple of weeks.

Mid-Term Technical Condition

Basically, the same is true if we focus on our mid-term oriented indicators. Although the Global Futures Trend Index again decreased for the week (to 67 percent), it is still trading above its bearish 60 percent threshold. Therefore, the mid-term uptrend of the market remains intact so far. As a consequence, it is too early to issue a strategic sell signal at the moment as the indicator remains within its bullish consolidation area. But as long as the gauge keeps trading within its bullish consolidation area and does not simultaneously show some signs of positive momentum, the upside potential of the market should remain limited as well. As a consequence further sideways trading with increased volatility is looks quite likely. Anyhow, we would get quite cautious if the gauge will drop below 60 percent (in combination with weakening market breadth, especially within the Advance-/Decline Index Weekly and the Upside-/Downside Volume Index Weekly), as it would be a clear indication that a stronger trend-break lies ahead – which is not the case right now! Moreover, from a pure momentum point of view, the mid-term oriented uptrend of the market remains intact as the WSC Sector Momentum Indicator is far away from being bearish. 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 energy) remains above the one from riskless money market (currently at 7 percent).

Mid-term oriented market breadth showed also some signs of exhaustion last week. Especially, the Modified McClellan Oscillator Weekly has not shown any improvements so far. For six weeks now this indicators seems to be paralyzed, as it has not shown any movements and kept trading sideways (which might be another piece of evidence for our range-bound scenario). This signals that the underlying breadth momentum is still somehow lagging behind on a mid-term time horizon. The Upside-/Downside Volume Index Weekly continued to weaken and is contradicting the readings from the Advance-/Decline Index Weekly, which is the only indicator with bullish readings. This can be also observed if we focus on the percentage of all NYSE listed stocks which are trading above their mid-term oriented simple moving averages (100/150) as both indicators dropped into bearish territory last week. So all in all, the mid-term technical condition of the market looks pretty intermingled at the moment.

Long-Term Technical Condition

The long-term uptrend of the market remains well intact. The Global Futures Long Term Trend Index is trading at quite encouraging record levels and thus, indicating a technical bull market. Also the WSC Global Momentum Indicator is trading (for several weeks now) at the highest levels for months and indicates that 82 percent of all global markets remain within a long-term oriented uptrend. Additionally, we can see that the relative strengths of all risky markets keep trading far above the one from U.S. Treasuries (except commodities). Also, long-term market breadth is giving no reason to worry currently and therefore, we think that the current long-term uptrend of the market is not in danger at all. Especially our long-term oriented High-/Low Index Weekly is still trading at solid levels, indicating that the long-term tape of the market remains well intact. This can be also seen if we have a look at the number of stocks which are trading above their longer-term oriented moving averages (200) – as they are still trading in a solid bullish area (although they have dropped recently). Only the Modified McClellan Volume Oscillator Weekly continued to decrease.

Model Portfolios

Last week, there have been no changes in the allocation advice of our model portfolios (WSC All Weather Portfolio, WSC Inflation Proof Retirement Portfolio, WSC Sector Rotation Strategy and the Global Tactical ETF Model Portfolio). Moreover, we are proud to announce that the WSC All Weather Portfolio reached again a new all-time high again last week!

Bottom Line

The overall situation remains almost unchanged compared to last week. Given the still supportive/bullish readings within our indicator framework, we think it is still a bit too early to take the chips from the table as it is too late to buy but also too early to sell. As a matter of fact our long-term strategic bullish outlook remains unchanged (at least for now). However, on a short- to mid-term time frame, it looks like the market is pretty capped in both directions. As a matter of fact, a longer-lasting period of volatile sideways trading looks quite possible. Such a range-bound period tends to be healthy if existing divergences are getting sorted out. Otherwise, it is just part of a multi-months top-building process which is then of course the vanguard of a more significant move.  As mentioned above, we remain cautiously bullish and therefore, we advise our conservative members to remain invested. Nevertheless, we think they should keep their stop loss limit around 2,328 just in case if things change quickly during the week.

Stay tuned!