Written by Jim Welsh
Macro Tides Weekly Technical Review 16 June 2020 Special Update
The market continues to exhibit a multiple personality in terms of the major market averages. The Nasdaq 100 made a new all time high last week accompanied by no other major market average. The new high in the Nasdaq 100 was not confirmed by a new high in the Nasdaq Advance – Decline line. This divergence is more negative than February’s divergence since it is after more time. In February the divergence was one month in the making while this is five months after the high in the A-D Line in January. If the Nasdaq continues to move higher this divergence can be overcome if the Nasdaq A-D Line exceeds the January peak.
Please share this article – Go to very top of page, right hand side, for social media buttons.
There is a quadruple expiration on June 19, and positioning in options and futures have likely enabled the market to recover from the large decline on June 11. As noted in the June 8 WTR the length of the rallies from the lows on March 23 and May 14 would be equal in time on June 22:
“The initial rally off the March 23 low was concentrated in the shelter in place stocks that benefited from COVID-19. The rally off the May 14 low has relied on the economically sensitive stocks like airlines, banks, and small caps. The first rally lasted from March 23 to April 29 and 27 trading days. An equal rally in time from the May 14 low would target a high on June 22.”
This time aspect is another reason why the market may hold up until June 22. Since the Nasdaq 100 has been the leading average there is a decent chance the Nasdaq 100 can make a new high in the next week. If the Nasdaq 100 does make a new high its RSI could post a lower high, which would represent another negative divergence.
The 21 day Advances minus and Declines Oscillator for the Nasdaq has so far remained below its June 8 high momentum. The majority of corrections are preceded by a negative divergence in this Oscillator so the next few days are important.
If the majority of market averages were also making a new high, the market would be in a much better place. A review of a number of the other major market averages reveals the market’s multiple personality, and is part of the market’s irrationality. All of the other major market averages are below their prior high, and in some cases by a lot.
The longer this type of divergence is maintained it is more negative.
The Value Line Composite includes 1700 stocks and is not capitalization weighted, which means every stock carries the same representation. The Value Line Composite is thus not skewed by the Mega cap stocks and is a better reflection of how the ‘average stock’ is performing. The Value Line Composite topped in August 2018 and at the high on June 8 was more than -16.0% below its high. The high on June 8 was less than 1% from being a perfect A=C from the lows on March 23, April 29 high, and low on May 14 at 498.97.
The Russell 2000 also hits its all time high in August 2018 and on June 8 was -11.8% below its peak. At its low on June 15, the Russell 2000 did not close below the rising trend line from the March 23 low. A close below this line and 1343 would be negative.
Even the S&P 500, which has been carried higher by the 21% weighting of the Mega cap stocks, was still -4.7% below its February 19 high. The Transportation average topped on June 8 and was -13.1% below its all time high. The NYSE includes more than 1700 stocks and on June 8 was -9.5% under its high in January 2020. The percent of stocks above their 200 day average is less than 25%, which is an amazingly low percentage after such a big rally in the S&P 500.
The strength in the high flying Mega cap stocks has kept bullish sentiment elevated. This is noteworthy since so many stocks are still far under water, as illustrated by the other market averages.
The Call / Put Ratio isn’t the only indicator of excessive optimism and aggressiveness, as the surge in day trading accounts shows.
After the economy was locked down, Millennials unlocked an interest in speculation that has included trading bankrupt stocks and options
The spike in Google searches for trading options has soared and much of the option trading is in the Mega cap stocks. The historic increase in speculation is another symptom of a top. These inexperienced traders believe the market only goes up since they read an article that told them the Fed’s increase in liquidity is always bullish. So far this simplistic investment ‘strategy’ is working, but the clock is ticking.
Economic news has improved relative to expectations which were extremely low. The economy is bouncing back and the better than expected data points have convinced many they confirm that a Vshaped recovery is taking hold. The economy is improving but most companies will be lucky if their revenue rises to 90% of what it was at the start of 2020. Most companies can’t make much money if their revenue is down 10%, since that last 10% of revenue is where most of their profits come from. This wakeup call may take a few more months to sink in, as 40% of those who lost their job are not rehired and more companies layoff middle management workers to lower costs.
The better than expected economic data has caused the Citigroup Economic Surprise Index to climb to a record high. It is important to understand that this Index is based on expectations, but investors are likely equating the improvement as further proof of how well the economy is doing
It is worth noting the increases above +50 and below -50 have coincided with tops and bottoms in the stock market. The S&P 500 recorded a good trading low in early 2016. The drop below -50 Index in mid 2017 and mid 2019 in the Citigroup Surprise was followed by strong rallies. The move above +50 in early 2017 was followed by consolidation, while the big spikes above +50 in early 2018 and 2020 were followed by corrections. The current record high suggests that disappointment may become a factor as higher expectations are not met by the actual data in coming months.
The 78.6% retracement of the plunge in the S&P 500 from the mid February high at 3393 to the low of 2192 on March 23 is 3236. Even if the Nasdaq 100 does manage to record a new high, as long as the S&P 500 doesn’t close above 3265, a correction is likely after June 22.
.
