econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 22 August 2017

Is That All There Is?

Written by

Macro Tides Technical Review 21 August 2017

In last week’s commentary “A Crack Before The Break?", the question ‘Is That All There Is’ was asked if the decline was over. I didn’t think so:

“The deterioration under the surface suggests the risk for a deeper correction is rising. As discussed in the July 31 and August 7 WTR’s, for more than 150 years, years ending in 7 have usually experienced a period of weakness from early August through late October.

is.that.all.there.is

A seasonal pattern of weakness during this window of time has also been prevalent during the past 20 years. This suggests that surprises are more likely to be negative than positive. The crack in the market last week is setting the market up for a break."


Please share this article - Go to very top of page, right hand side, for social media buttons.


On Tuesday August 15, President Trump provided a negative surprise which led to conjecture about Gary Cohn’s departure and a pick-up in selling pressure. The majority of the major averages traded below their August 10 lows on Friday and again today. For the first time in a very long time, selling pressure has been persistent, but not enough to end the S&P’s streak of 290 days without a 3% correction.

Although the S&P and other major averages declined to a lower low today, there are a number of signs that a short term bounce is coming. Despite the lower low, the 21 day average of net advances minus declines posted a higher low on Friday when compared to August 10 (green line).

Click on any chart below for large image.

Short term sentiment has also become a bit over done as measured by the Call / Put ratio. Whether the increase in put activity is a sign of outright bearishness (buying puts) or selling puts to buy stocks at lower prices, which is longer term bullishness, the ratio is low enough to support a near term bounce.

As noted in last week’s WTR:

“At last week’s low, the Russell bounced off the black trend line connecting the February 2016 low and November 2016 low. I expect the Russell to break below this trend line."

The Russell did fall below the black trend line and in doing so also closed below its 200 day average. I don’t use 200 day averages in my work since market averages often trade 5% to 10% above and below their 200 day average, and occasionally trade as much as 15% away. Waiting for a market average to rally or decline 5%, 10%, or 15% before adjusting risk is just not good enough.

But advisors and other investors do rely on the 200 day average. This is why I pay attention to them since money does move when a 200 days average is crossed. The 1350 level is an area that is likely to provide decent support, the Russell has been the weakest major average, and its RSI is near 30 an oversold level.

This suggests the Russell is due a bounce soon that could approach 1390 - 1400. Longer term, I expect the Russell 2000 to close below the blue trend line at 1350, which could lead to a quick drop to 1250-1270 before the end of October.

The Equal Weight S&P, which gives each of the stocks in the S&P 500 an equal representation and weight. It has been increasingly lagging behind the S&P 500. The Relative Strength of the Equal Weight S&P broke below the red trend line in mid May and its relative strength has fallen sharply since early July.

On the S&P 500 the black trend line connecting the February 2016 low and November 2016 comes in near 2365, 2.6% below today’s close (Chart top of pg. 2). The Equal Weight S&P closed today -0.8% below the black trend line connecting the February 2016 low and November 2016, with most of the underperformance occurring since July 3.

This weakness is a sign of an unhealthy market.

The top 5 stocks in the Nasdaq 100 represent 33.7% of the Index and the top 10 stocks make up 52.1%. Needless to say the performance of these stocks can influence how the Nasdaq 100 performs. The Equal Weight Nasdaq 100 gives each of the 100 stocks in the Nasdaq 100 an equal representation. It may be hard to believe but the Equal Weight Nasdaq 100 made a new all-time low last week, well below the 2009 low and the lower low in 2012.

The August 8 high in the S&P was 2490 and today’s low was 2417, so the decline covered 73 S&P points. A 50% retracement would allow for a rally to 2453 and 61.8% rebound would target 2462. The more bearish outcome (and not expected) would be a rally to a new high which would put a cherry on the topping process. The divergences would be extreme and temp me to recommend a short position.

Dollar

The Federal Reserve of Kansas City is holding its annual meeting at Jackson Hole WY this week and Janet Yellen and Mario Draghi will be speaking, so volatility in the currency market could pick-up. I think Mario is more likely to take a victory lap rather than divulge a change in the ECB’s QE program. The next ECB policy meeting is on September 7 and a more appropriate venue to announce any change. GDP improved to 2.5% in the second quarter and inflation, although still below the ECB’s target of 2.0%, is up to 1.3%. Although he will cite the improvements, he will also restate that the Eurozone economy still requires support.

As time passes, the forward guidance provided by the Fed and the FOMC members could be mistaken for the Tower of Babel. Last week, William Dudley president of the New York (And first among district presidents) said he "would be in favor of doing another rate hike this year." Robert Kaplan president of the Dallas Fed said he wanted to see ‘more evidence’ that inflation is heading to 2.0% before supporting another rate hike. Chicago Fed president Charles Evans urged his fellow FOMC to “be very careful in assessing future rate moves." After sounding fairly hawkish after the June FOMC meeting, Janet Yellen did a 180 and was quite dovish when she testified before Congress on July 12.

Confused? Me too. I don’t know who’s driving the car, but being a passenger is almost like a joyride without the fun since the driver doesn’t seem to know the destination.

Not much has changed during the last three weeks. As noted in the July 31 WTR, the Dollar was nearing significant support between 92.00 and 92.50. On August 2 the Dollar spiked down to 92.548 and then reversed sharply. This was the first encouraging sign that a low was beginning to form.

Ideally, the Dollar will post a lower low so that a divergence can form in its RSI. This seems increasingly likely given the nature of the Dollar’s rebound from the low at 92.548. From a trading perspective, taking a small long position in the Dollar (1/4 or 1/3) if it drops below 92.93 is appropriate. The low in May 2016 was 91.92 so the risk is about 1%. Adding (1/4 or 1/3) on a decline below the 92.54 low makes sense since there should be an RSI divergence.

The Dollar has declined by more than 10% since January, so a rally of at least 3% to 4% is coming. A reversal of the downtrend in the Dollar could coincide with a reversal in a number of other markets that often benefit from a weak Dollar, ie oil, gold, and maybe ECB policy.

Oil

The positioning in oil futures contracts suggests WTI crude oil could drop to $42.50 and potentially to under $40.00 in coming months. Large speculators are holding more long contracts than when Oil was trading near $100 a barrel and almost as many when Oil topped last February. Large speculators are trend followers who typically hold their largest long or short position near a top (long) or bottom (short).

Commercials are considered the smart money and take the opposite side of the trades of Large and Small speculators. As a result, they are holding a very large short position. Last week, oil broke down below the rising trend line from the June low, and then retested the underside of the trend line. This is a classic bearish trading pattern.

As noted last week, the oil Stocks, as measured by the Energy ETF (XLE), have not traded well since topping in mid December. The 61.8% retracement from the low in January 2016 at $52.33 to the high of $78.45 in December 2016 comes in at $62.30, which the XLE closed below last week. The 78.6% retracement is $57.92 which XLE might reach if oil declines as expected. At the low in January 2016, XLE’s RSI posted a large positive divergence, (Green line on RSI) even though it was much lower in price than in September 2015. If a similar divergence develops in coming months, the Energy stocks will offer a good buying opportunity.

Gold and Gold Stocks

Last week I thought Gold still looked as if it wanted to make a run at $1300.

“I still do not think gold will breakout and close above $1306, as commercials have increased their shorts on each rally over the past month. A pullback below $1245 is possible."

On Friday, December Gold traded up to $1306.90 before reversing and closing at $1291.60. This type of trading action suggests the commercials were again selling into strength, as I have noted previously. It is noteworthy that Silver is lagging by a wide margin. The last time Gold was trading near $1300.00, silver traded up to $18.69, but closed today at $17.04, - 8.37% below its prior high. Negative divergences this large are usually not a good sign for Gold.

In February, December Gold was trading just over $1250 and the gold Stocks as measured by the Gold Stock ETF GDX topped at $25.70. Gold is now more than 4% higher, but GDX is more than 9.3% lower. It would be an understatement to say the gold stocks have been lagging gold during the past 6 months. As noted the last two weeks, the relative strength of the Gold stocks compared to Gold is still not showing any signs of life. As long as this persists, the chance that GDX will trade down and close the gap at $19.43 is still alive and well. When Gold traded above $1306.00 on Friday, GDX traded up to $23.48 before falling back. A close above $23.50 would be a short term positive. Today GDX looks like it may have closed slightly above the black trend line connecting the highs in February and April.

Treasury Yields

Two weeks ago, I recommended a partial short position through one of the inverse Treasury bond ETFs if the 10-year yield dropped below 2.20%, and the 30-year yield fell below 2.806%. Today, the 10-year closed at 2.18% and the 30-year at 2.763%.

The Treasury market is currently pricing in less than a 30% chance that the Fed will raise the federal funds rate at the December meeting after doing nothing at the September 21 meeting.

One of the keys is the yield on the German 10-year bund which has fallen from 0.60% to 0.391%. Mario noted the strengthening and broadening in the Eurozone economy in a speech on June 27, which resulted in the quick move to 0.60%. I have no doubt that the ECB has focused their buying on the German 10-year Bund, after it broke out above 0.50%. It appears that speech was a trial balloon to see how the European bond market would react at the first hint that ECB may alter its QE program. This is another reason why I doubt Mario will have much to say at Jackson Hole this week.

Eurozone GDP was up 2.5% in the second quarter, about the same as the 2.6% increase in U.S. GDP. Inflation in the U.S. and the Eurozone is also comparable, but the yield on the 10-year Treasury is 2.18% and the Bund is 0.39%. Something is going to give and my guess it will before the end of 2017, as the ECB finds it increasingly difficult to maintain such an accommodative policy. A stronger Dollar and weaker Euro would certainly make it easier, so the expected rally in the Dollar could influence the ECB’s policy decision in coming months.

The long term projection is for the 10-year yield to break out above 3.0% and potentially reach 3.4%. Since the low in July 2012, the 10-year has had two moves higher in yield and both were about 1.3%. My guess is that something similar will develop over the next year and an equal rally of 1.3% from the June low at 2.10% will lift the yield to 3.25% - 3.4%. Buyers will certainly come in if the yield reaches 3.0% as pension funds increase their allocation to Treasury bonds.

Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking

The Sector Relative Strength Ranking is based on weekly data and used in conjunction with the Major Trend Indicator (MTI). As long as the MTI indicates a bull market is in force, the Tactical Sector Rotation program is 100% invested, with 25% in the top four sectors. When a bear market signal is generated, the Tactical Sector Rotation program is either 100% in cash or 100% short the S&P 500.

The MTI crossed above its moving average on February 25, 2016 generating a bear market rally buy signal. The MTI confirmed a new bull market on March 30, 2016. As discussed earlier, the MTI continues to indicate that a bull market is in force.

The Tactical U.S. Sector Rotation Model Portfolio is 100% in cash. Although a bounce is likely in the short term, it is likely part of the topping process that began in earnest in early July. The weakening of the broader market, as measured by the Equal Weight S&P 500 and the Russell 2000, suggests that the topping process is continuing.

Through July 31, the Tactical Sector Rotation program is up 8.52%.

Disclosure

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Nasdaq 100 is composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. All indices, S&P 500, Russell 2000, and Nasdaq 100, are unmanaged and investors cannot invest directly into an index.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Investing








search_box
Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.







Keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved