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posted on 07 November 2017

Rally Since October 13 Is Thinning

Written by

Macro Tides Weekly Review 06 November 2017

Since October 13, the S&P and DJIA have rallied by 1.4% but the market’s internal momentum has been getting weaker based on a number of indicators. Since October 13, the 21 day average of advances minus declines has fallen from 322 to 93 today, and the 21 day average of the percent of stocks making a new 52 week high minus new lows has dropped from 5.92% to 4.07%.

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The percent of stocks above their 200 day average has also declined since October 13, falling from 68% to 59% as of Friday November 3.

The Advance / Decline line has been leading the way since November 2016 by making new high after new and confirming the new price highs in the S&P 500. However, since October 13, the A/D line has made no progress.

When all this is added up, what does it spell? C-O-R-R-E-C-T-I-O-N. Of course this is 2017 and the deepest pullback has been a stunning -2.9% which is the most shallow draw down ever, or at least going back to 1914 which is almost forever except for those born before 1914. All of these charts illustrate that the rally in the S&P and DJIA has been dominated by mega cap stocks like Apple and Amazon, while the average stock has not been participating all that much. The Russell 2000 is down -0.31% since October 13.

As I showed last week, the Equal Weight S&P 500 has been lagging behind the cap weighted S&P for months but the underperformance has really accelerated in the last two weeks as highlighted by the decline in the relative strength line.

Last week, the percent of Bulls in the Investors Intelligence survey rose to 63.5% while the percent of Bears fell to 14.4%. The ratio of Bulls to Bears is the highest since August 1987.

The price pattern in the S&P 100 (shown above) and the S&P 500 suggests the market could be nearing the end of the bull market that began in March 2009, or at least be approaching the point where a 10% correction is more likely. In the short run it is hard to point to what would cause the selling pressure necessary for such a correction. The prospect of tax reform will tempt investors to hold onto their winners until 2018 which is not the prescription for a correction. If the strongest stocks don’t correct, the rest of the market won’t either. Performance chasing has been and will continue to be a factor as institutional investors feel compelled to hold their nose and jump on board lest they underperform the S&P 500. Within this context a blow off run up in the S&P is certainly possible.

Dollar

As noted last week, the Dollar index broke out of an inverse head and shoulders pattern on October 26. The breakout generated a measured move to 96.00 and maybe 97.00. Based on instructions, traders are long the Dollar index from 92.44 and should use a close below 93.40 as a stop.

Euro

The Euro is pretty much the inverse of the Dollar and has broken below the neckline of a head and shoulders top. A move below 1.15 seems probable in the next few weeks.

Treasury Bonds

After the ECB’s decision to maintain its QE program through September 2018 and hold its policy rate unchanged at -0.40%, bond yields throughout Europe have declined. The yield on the 10-year German Bund has dipped from 0.48% to 0.338% today. Given the global nature of bond yields the drop in European yields have tugged yields in the US down, with the yield on the 30-year Treasury closing at 2.809% today. As I noted in the October 23 WTR:

“Until a close in the 30-year Treasury yield above 2.94% (blue horizontal trend line) occurs, it is still possible for another dip to 2.75% to develop."

Gold and Gold Stocks

As discussed last week, the nature of the decline from the recent high of $1305.72 cash opens the possibility that Gold could test $1306 - $1310 before falling below $1260. Last week, Gold dropped to $1262.50 before rebounding to $1282.20 today. If Gold does rally to $1310, an equal decline of $97 would bring down to near $1220. This process could take 4 to 6 weeks.

If Gold does make another run to $1310, the Gold stock ETF (GDX) could rally back up to $24.00.I expected GDX would at least test the blue trend line near $22.26 which it did on several days last week before bouncing to $22.91 up 2.1% today. If Gold does fall below $1260, my guess is that the blue trend line won’t hold and GDX will fall to the green trend line currently near $21.50. If Gold falls to near $1220, GDX could drop to the black trend line near $20.75.

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. The MTI continues to indicate that a bull market is in force.

Although the Major Trend Indicator is positive, the MTI has been posting lower highs since peaking in early March. Since late July, the odds of the S&P continuing the streak of no corrections of either 3% or 5% seemed quite low based on historical patterns and signals from a number of reliable technical indicators.

The Tactical U.S. Sector Rotation Model Portfolio has been 100% in cash since July 24 based on the probability of a 5% correction. In my judgment (so far incorrect), upside potential has been limited relative to the level of risk. Through September 30, the Tactical Sector Rotation program is up 8.52%. The Major Trend Indicator continues to hold above the green horizontal line which is another sign that the market is not yet vulnerable to a major trend change.

Since mid August I have tried to identify special situations that were uncorrelated to the stock market and oversold. On August 24 I purchased the Powershares DB Agriculture fund (DBA) at $18.66. On August 29, I purchased the Dollar ETF (UUP) at $23.83 since I thought the Dollar was poised for a rally.

On October 27, I purchased the VanEck Oil Services ETF at $23.67. This position was reduced by 20% today at an average price of $25.79.

welsh.tech.2017.nov.06.tactical.table

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.

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