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posted on 27 November 2017

Positive Seasonal Trend Brings A New High And Thinning Ice

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Macro Tides Technical Review 27 November 2017

The positive seasonal affect discussed last week did result in new all-time highs for the majority of major market averages through today. As the S&P posted a new high on October 13, 68% of the stocks on the NYSE were above their 200-day average. On Friday only 59% were above their 200-day average, which is the lowest percent since May 21, 2015 and with the S&P within one day of a new high.

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As the summer of 2015 progressed fewer and fewer stocks participated even as the S&P was within 2 points of its high on July 20 even though the percent of stocks above their 200-day average had drooped to only 37%. The under the surface deterioration was followed by a sharp correction in late August 2015.

Click on any chart below for larger image.

Welsh.tech.2017.nov.27.fig.01

It’s a bit early to draw a parallel comparison but if the percent continues to dip toward 50% in coming weeks it could represent a tipping point in terms on the market’s internal strength.

The S&P continues to post higher highs and higher lows so on a trend following basis the uptrend in price is clearly intact. However, the gradual but persistent under the surface weakening suggests that a break in the price uptrend is drawing closer. Any other time of the year and I would say the market was skating on thin ice and that a correction was imminent. But the seasonal lift during December can hold the market up as long as no reason to sell materializes. If the Republicans fail to push tax reform through the S&P could experience a hard break that won’t last long since the buy the dip mentality is virulent.

Welsh.tech.2017.nov.27.fig.02

The percent of NYSE stocks making a 52 week high is also diverging significantly with its mid October level and looks fairly weak relative to its position throughout 2017.

The percent of NYSE stocks that participated in the recent push to new highs as measured by the Net percent of advancing stocks over the last 21 days looks pathetic when compared to the strength exhibited in the October rally and every other rally during 2017.

The High-Low 21 Day Net % and the A/D 21 Day Net % are thrust indicators that measure how much energy is behind a rally or a decline. They are showing that there hasn’t been much OOMPH! in the rally to the new high in recent days. Despite this underlying weakness, the Advance / Decline line has managed to post a new high. This is positive but the trajectory and angle of ascent in the A/D line has been rolling over and is clearly not as strong as it was prior to mid October.

The Call/Put ratio soared last week as investors seemed to capitulate and just jumped on board. The C/P ratio is back to levels it was in early December as investors celebrated the impact of the election on the market. The difference now is that the upward thrust in the market going into the high on December 13 was much stronger than it is now as measured by the High-Low and A/D oscillators. The High/Low percent was 6.33 on December 13 versus 3.30% on Friday, while the A/D percent was 2.73% on Friday compared to 6.08% on December 13. The level of bullishness now is not commensurate with the actual strength of the market.

These are all indications that the risk / reward relationship is not in favor of the bulls. But until a reason appears to sell, no one wants to sell and seasonality will remain supportive.

Dollar

After the Dollar broke below the neckline at 94.20 of the inverse head and shoulders on November 14, the Dollar continued to decline. This morning the Dollar traded down to 92.50 before bouncing. At the low today, the Dollar’s RSI was near 30 indicating that it was oversold and due to bounce.

Unless the Dollar rises above the neckline, which I doubt, the downtrend is likely to resume after the Dollar bounces enough to relieve the oversold condition. A test of the September 8 low at 91.01 is coming, but may not occur until January. As noted last week, I sold my position in the Dollar ETF (UUP) at $24.43 on November 14 after buying it on August 29 at $23.83.

Euro

The economic news in Europe has been positive with the IFO Business Climate Survey in Germany and Business Confidence in France reaching their highest levels since 2011. The Euro is responding more to the better economic news than to the prospect of continued QE through next September. The notion that good economic news might begin to put pressure on the ECB to scale back its QE before September is not on anyone’s radar. I think that will change in the first half of 2018. As long as the Euro holds above the neckline of its head and shoulders pattern near 1.1675, the trend is up and a rally to 1.2200 seems likely.

Treasury Bonds

A move up to 3.17% to 3.20% on the 30-year Treasury bond, the highs last December and in March, is likely before year end or in the first quarter. It took nine months for the yield to rise from 2.20% to 3.20%. An equal move in yield and time suggests the yield on the 30-year Treasury could approach 3.75% by June of next year. The 10-year Treasury yield remains tethered to the 10-year yield in Germany with a spread of 2.0%.

Gold and Gold Stocks

I’ve thought the nature of the decline from the high of $1305.72 cash on October 16 left open the possibility that Gold could test $1306 - $1310 before falling below $1260. Today Gold rallied to $1298.70 and could still breach $1305.72. The positioning in the futures market continues to suggest a decline below $1260 is likely since Large Speculators are still holding a large long position while the smart money Commercials are short -225056 contracts and Producers are short -185382 contracts.

From a high of $1357.09 on September 8, Gold dropped to $1260.72 on October 6. An equal decline of $97 would bring Gold down to under $1220, if Gold does rally to $1310. This process could take 3 to 5 weeks.

The Gold stock ETF (GDX) was modestly oversold on October 26 when its RSI fell to 31.8. The choppy rebound has lifted the RSI to 55.0 so GDX is no longer oversold. GDX looks like it is preparing to break below the blue trend line near $22.60. A close below $22.20 should usher in a new leg lower.

If Gold does fall below $1260, my guess is that GDX will fall to the green trend line currently near $21.15. If Gold falls below $1220, GDX could drop to the black trend line near $20.70. The relative strength of the GDX versus Gold continues to weaken which is not a good sign.

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 November 24, the Tactical Sector Rotation program is up 9.6%.

Although the Major Trend Indicator is below its peak registered in early March, the MTI continues to hold above the green horizontal line which is another sign that the market is not yet vulnerable to a decline greater than 10% or 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 and sold it on November 15 at $19.02. On August 29, I purchased the Dollar ETF (UUP) at $23.83, since I thought the Dollar was poised for a rally. This position was sold on November 14 at $24.43. On October 27, I purchased the VanEck Oil Services ETF at $23.67. This position was reduced by 40% on November 8 at an average price of $25.79.

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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