Written by Jim Welsh
Macro Tides Technical Review 05 December 2016
Sentiment is usually early in signaling a potential trend change, which is why momentum must be monitored to identify when the odds of a trend change are increasing enough to become more opportunistic near a low and cautious near a high.
As long as momentum remains strong during a rally, sentiment can become even more bullish, or bearish if momentum remains weak. Last week I discussed that sentiment had issued a warning since the percent of bulls had jumped dramatically in the three weeks since the election.
Suddenly, almost everyone can recite all the bullish points a Trump presidency brings to the table, which justify higher stock prices. A cut in corporate tax rates will boost profits and support higher stock prices, even if the multiple on the S&P 500 shrinks a bit. A reduction in individual tax rates will allow consumers to spend more and lift GDP growth above 3%, and maybe to 4%. Longer term a reduction in the excessive burden of regulation will unleash animal spirits and business investment.
While I don’t disagree with this analysis, I always get uncomfortable when just about everyone on CNBC is singing the same song. I think there is a reasonable chance that investors will become impatient, when it becomes apparent that all these wonderful changes are going to take time before they collectively lift growth in the second half of 2017 at the earliest.
With the DJIA, S&P, and Russell 2000 posting new all time highs it’s a good time to review a number of momentum indicators. One of the better indicators is the percent of stocks above their 200 day average. On September 8, 81% of the stocks on the NYSE were above their 200 day average. The percent topped during the post election rally so far at 62% and was 60% today. The divergence between today’s 60% and September high of 81% is quite large. Even if the rally persists, and the percent climbs from its current level, this divergence is likely to remain.
Click on any chart below for larger image.
The primary reason for this divergence is the performance bifurcation between various sectors I’ve discussed previously. While financials, energy, and industrials are going up, utilities, consumer staples, and REITs have been selling off. In a ‘normal’ rally these sectors would be trading higher, just lagging the S&P. But this has not been a normal rally.
It is noteworthy that the NYSE Composite has not been able to make a new high.
The percent of stocks making a new 52 week high on the NYSE was 3.68% today, well below the high of 7.17% back on August 9, when the S&P was trading at 2182, about 1% below today’s close. In contrast, the percent of stocks making a new 52 week high on the Nasdaq topped on September 8 at 4.58%, but reached 6.26% on November 20. This is happening because there are fewer interest sensitive stocks.
But even on the Nasdaq there is a bifurcation between large cap stocks like Amazon, Apple, Google, and Microsoft which have been lagging during the rally. As a result, the cap weighted Nasdaq 100 has been weaker than the Nasdaq Composite and failed to confirm the new high in the Nasdaq Composite on November 29. More weakness is likely if the Nasdaq 100 closes below 4635, which I expect.
The DJIA is the most narrow market average, as it only includes 30 stocks and is cap weighted. Since November 7, the DJIA has rallied over 1,300 points and almost half of the gain is the result of 3 stocks, Caterpiller, Goldman Sachs, and United Healthcare. The NYSE advance/decline peaked on September 22 and has yet to make a new high, even though the DJIA is 4.4% higher than on September 22. As you can see below, the DJIA is bumping up against the red long term trend line connecting the highs in April and July of this year. The S&P 500 has reached resistance around the 2210 area I cited in the last two weeks (black trend line in chart – second above).
The momentum divergences cited suggest the market is becoming more vulnerable to at least a pullback. Short term, the S&P could punch above the recent high of 2214 for a brief period before a reversal takes hold. As noted last week, my guess is that the S&P could fall to 2140 – 2160 in the first half of December, before rallying into year end. If the Russell rallies above 1347, selling a little would make sense, especially in qualified accounts.
Oil
Last week I thought OPEC would package some kind of deal just to save face, after announcing they would have an agreement last month. If a deal was announced, I thought oil could rally to $50.00 – $52.00:
“If oil does rally to that price range, a potential short trade could set up. Sooner or later, I expect oil to trade below $42.95 and eventually fall under $41.00.”
Today oil traded as high as $52.42 before closing at $51.79. The deal goes onto effect on January 1. I will be interested to see how producers and commercials reacted to the last week’s spike. I will be surprised if the Commitment of Traders report released this Friday doesn’t show that the smart money didn’t sell into the rally.
Euro
This is a quote from last week:
“The Euro has declined from 1.129 on the night of the U.S. election to 1.052 on November 22, a decline of -6.8% in two weeks. This is an enormous decline for a major currency in such a short time and sentiment has become extremely negative toward the Euro. My guess is that the Euro will rally soon, which makes me lean toward thinking the referendum in Italy will pass. If I’m wrong and it doesn’t pass, I expect a spike lower and then a good rally as short covering results in a sharp rally.”
After it was reported that Italy had voted no on the referendum on Sunday night in the U.S., the Euro spiked down to 1.0505 and then rallied 2.45% to close at 1.07632. Given the high level of negative sentiment, the Euro should have a choppy rally for a number of weeks at a minimum.
Dollar
I think the Dollar is nearing a high in anticipation of a Fed rate increase on December 14, as noted in the last two ETR reports. As I stated last week:
“Although the Dollar may push modestly higher going into the Fed meeting or year end, the next bigger move is likely to be down. A positive reversal in the Euro would be necessary to cause the Dollar to drop since it represents 57% of the Dollar index.”
The Euro did reverse which suggests the Dollar has either topped or will do so if it manages to push above 102.00 once more.
Gold and Gold Stocks
Gold continues to provide every indication that it is in the process of making an intermediate low. Although gold and its ETF GLD has made five lower lows since November 14, silver has not, nor has the gold stock ETF GDX. This is a positive divergence, which if maintained, supports the potential of a meaningful rally.
A bottom could be confirmed if GDX closes above $22.25 after 15 trading days of base building. A close above $13.84 by GLD would be positive for gold.
Treasury 10-year Yield
Two weeks ago, week I thought the yield on the 10-year Treasury bond was nearing a high and that the Treasury ETF TLT was nearing a low:
“The Treasury bond ETF (TLT) is approaching what has the potential of being good support between118.00 – 120.00. There is a gap at 129.71. If TLT retraces just 38.6% of the decline from 143.62, it could fill the gap.”
Last week I wrote:
“On Friday November 25, TLT traded down to 119.71 and has since bounced. Although the low may be in place, given the potential for tax loss selling, another drop into this support zone is certainly possible. I think the economy is going to slow in the first quarter and the Fed is likely to make sure investors know they will be in no hurry to raise rates quickly, after they increase the Fed funds rate on December 14. This could create a window for longer term Treasury rates to fall.”
TLT fell to $117.64 on December 1 and $118.45 today. Encouragingly, the RSI on TLT is making higher lows on each new price low. This is a positive divergence and supports the potential of a decline in Treasury yields in coming weeks.
Tactical S&P Sector Rotation Portfolio Model: Relative Strength Ranking
Although the S&P made a new intra-day high on November 30, the Major Trend Indicator (MTI) is still below the high it made in mid August as the S&P reached 2193. If this negative divergence persists in coming weeks, the market could set up a shorting opportunity in early 2017. Given the strong upside momentum since the election and the impact of lower taxes next year, selling pressure is likely to remain muted through year end in most sectors. The MTI supports the other momentum indicators discussed previously. The S&P is bumping into the black resistance line near 2210.
In a conference call on the morning of November 9, I suggested that the Industrials and the Russell 2000 could benefit from the excitement about infrastructure spending and the perception that a pick-up in U.S. economic growth would benefit domestic small cap stocks. After Financials, those two sectors have performed well.
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 smallcap 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.
