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posted on 30 January 2018

Stocks Stumble As Rates Break Out

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Macro Tides Technical Review 29 January 2018

The S&P has set a record for going the longest time in history without a 5% correction or even a pullback of 3%. Prior to today, the S&P has ‘suffered’ four days of decline during the 19 trading days since the end of December with a combined loss of -0.67%. This makes today’s decline of -0.67% notable for its severity and for breaking the streak of more than 100 days without a decline as much as -0.6%.

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welsh.tech.2018.jan.29.fig.01

Although there is likely more weakness in the short term, the odds favor another new high after this brief bout of selling runs its course. Despite today’s decline the majority of technical indicators have exhibited enough strength in recent weeks to suggest the S&P will rebound. The Advance / Decline line made a new high last week and the percent of stocks making a new 52 week high was very good. History suggests that it is very unlikely that the market would record a price high with such underlying strength.

Before a correction of 5% or more is probable, momentum indicators will display a significant loss of upside momentum that is simply not present. In addition, one modest decline is not likely to eliminate investor’s Fear Of Missing Out (FOMO) or the willingness to buy the dip. Buying the Dip has rewarded investors without fail since the election. A modest uptick in interest rates is not going to dissuade the dip buyers until it doesn’t reward this ‘investment strategy’.

Click on any chart below for large image.

Last week 621 stocks posted a new 52 week high on the NYSE and 694 made a new high on the Nasdaq. These are very strong numbers and would indicate that a meaningful price high is not likely for at least a couple of months.

On Friday the RSI for the S&P 500 was 87.2 which is one of the highest readings in history and a sign that the momentum behind the rally is comparable to a freight train. As noted last week, the S&P broke out above the blue trend line connecting all the highs after the trading low in February 2016. As long as the S&P 500 holds above this trend line, the break out suggests higher prices are likely, even after any period of short term weakness.

Interest Rates

As forecast, the 10-year Treasury yield has broken out above 2.63% and traded as high as 2.725% today before closing at 2.699%. Based on the chart, the 10-year yield can continue to march toward 2.80% were there may be temporary resistance (red line) from highs in April 2014. The more important target remains 3.03% (Green horizontal line) which was the high on December 31, 2013. The RSI on the 10-year Treasury yield has climbed above 70 which indicates that it is overbought on a short term basis. It is certainly possible that the 10-year yield may fall and test the breakout level of 2.63% to alleviate the overbought condition.

As noted last week, Bund yields ‘look’ like they wanted to go higher and they have. The fact that rates are moving higher on a global basis is important since it suggests that the tide toward higher rates has turned.

The 30-year Treasury yield is on the cusp of braking out above the blue trend line with a close above 2.95%. Today the 30-yield spiked to 2.971% before closing at 2.943%. In coming months a rise to 3.15% - 3.20% is expected by the end of June.

Gold and Gold Stocks

As I wrote last week:

“On January 17 and January 18 Gold closed just above $1326.00. If Gold does manage to rally above $1344, selling most of the Gold (GLD) position may be warranted since sentiment has turned overly bullish and the positioning in the futures market has become far less supportive."

On January 25 Gold jumped to $1365.68 in response to comments by Treasury Secretary Mnuchin espousing the benefits of a lower Dollar, before reversing and closing at $1345.71. Unless Gold closes above $1357, a trading high in Gold appears in place.

As discussed last week, Gold stocks acted poorly as measured by their relative strength to Gold when Gold pulled back from $1344 to $1324 on January 18. This was another sign that the outlook for Gold and the Gold stocks was weakening. On January 18 my GDX stop at $23.85 was triggered on the remaining portion (50%) of my position. The average sell price was $23.91 and the cost basis on the GDX position is $21.73. After Gold rallied to $1365, GDX rallied smartly to $24.86 before reversing. Today, the Gold stocks were quite weak. If GDX closes below the January 23 low of $23.39, the odds that a trading top is in place will increase.

Dollar

After Treasury Secretary Mnuchin commented that a weak Dollar was good for American exports, the Dollar fell sharply. President Trump attempted to stem the bleeding by saying the Dollar would rise on the back of a strong U.S. economy. This caused the Dollar to rebound.

At its low, the Dollar’s RSI was deeply oversold at 20.6. As I have noted in recent weeks, sentiment is so bearish toward the Dollar that looking for a good trading low in the first quarter is appropriate. However, the technical picture is just not positive enough to recommend a long trade yet. My guess is that the Dollar will at least test the 88.44 low on January 26 as part of a basing process that could take 1 to 2 months.

Euro

As expected the Euro was able to vault over the trend line connecting lows in 2005, 2010, and 2012 after Mnuchin’s weak dollar comment. The Euro rose to 1.2536 on January 25 before pulling back. The Euro should rally in five waves from the November 6 low of 1.1554. Last week’s high of 1.2536 looks like the end wave 3. After a modest pullback, the Euro is likely to rally above last week’s high to complete the rally from November 6 and potentially the entire rally from the January 2017 low of 1.0340.

The Euro topped on May 5, 2014 at 1.3993 and dropped .3652 until bottoming on January 2, 2017 at 1.0341. A 61.8% retracement of that large decline would carry the Euro back up to 1.259. The longer term chart of the Euro suggests it could rally back to the down trend line connecting the highs of April 2008 at 1.6008, May 2011 at 1.4938, and May 2014 at 1.3993. This trend line comes in near 1.2770 and will decline modestly in coming weeks.

This suggests that the Euro could make a major high between 1.23 and 1.2770 in the next month or so. Technically the pieces are not yet in place to confirm a bottom in the Dollar or a top in the Euro.

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. Past performance may not be indicative of future results.

The rally since mid November has been strong and has pushed the MTI to a level that suggests a meaningful correction in the S&P (greater than 7%) is likely months away.

welsh.tech.2018.jan.29.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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