Written by Jim Welsh
Macro Tides Technical Review 09 October 2017
Yes, major market averages are setting new highs almost daily. The S&P posted a new record for 8 consecutive days before plunging 0.107% on Friday and losing another 0.18% today. While the new record highs have been making headlines, the real news is the absence of selling pressure which has made the record prices possible
We’re more than 75% through 2017 and the largest decline in the S&P has been a scary -2.9%. Since 1914 that is the smallest decline in any year, which means the odds of this occurring as we entered 2017 was less than 1%. President Trump has sent many Tweets and made numerous comments that certainly sound like he’s taking credit for the record highs in the stock market. I’m fairly confident the President is unlikely to send a Tweet about something small, so this amazing record of such a small drawdown won’t get the attention it deserves.
Through today the S&P has gone 333 days without experiencing a 5% correction which ties the all time prior record that began on November 23, 1994 and extended through most of 1995. If the S&P is able to avoid a decline of 4.72% (remember it was down 0.107% on Friday and 0.18% today), the S&P will set a new record for the longest stretch without a 5% correction. The odds in Las Vegas of the S&P losing 4.72% tomorrow are 1 to 3444, which means one has to wager $3,444 to win $1.
During the prior streak, the S&P gained 58% or 0.17% per day. During the current streak, the S&P has averaged a daily increase of 0.1% and a total of just over 32%.
Coming into 2017 if an investor knew that the Russian investigation would still be active, the Republicans would fail not once but twice to pass any health care legislation, North Korea would launch multiple missiles with 2 sailing over Japan, political partisanship would worsen, and Trump’s approval rating would be the lowest of any president at this point in his administration, I doubt that any investor would wager the S&P would have the smallest drawdown in any year since 1914. Given this, it’s reasonable to speculate on why the S&P could be so immune to the normal three 5% corrections a year.
As I have noted many times in recent months, the prospect of a tax cut and the expected rally it would ignite is the main reason why selling pressure has remained so muted. Why sell if a tax cut is coming that will boost earnings and lead to higher stock prices?
And institutional investors have not sold. Instead they have aggressively rotated from one sector to another, but never sold to raise cash. This has led to large sector moves, both up and down, that have been offset by other sectors going down or up.
This has led to a narrow daily range for the S&P this year of just over 0.51%, which is an all-time record low. Even though the odds of the tax cut being passed as presented before year end is low, the lack of selling pressure is likely to persist as investors believe one will arrive sooner or later. And very few institutional managers are willing to risk their career on being right about the difficulty in passing a tax cut, but wrong about the market continuing to rise on the anticipation of it.
Since 1932 the DJIA has recorded a major low or high every 17 years or so i.e. 1932, 1949, 1966, 1982, 2000, and maybe 2017?
The one ‘miss’ was in 1982 when the DJIA bottomed in August 1982 instead of sometime 1983. In 1982 the economy was in the throes of a deep recession and the Fed eased monetary policy. The Fed wasn’t sitting around discussing the 17 year cycle and saying we can’t cuts rates until 1983 so the 17 year cycle is fulfilled.
Conversely, the market’s internals are strong. The A/D line is making new highs, the number of stocks making 52 week highs has expanded nicely during the last two weeks, and the majority of major market averages have made new all-time highs. This suggests that the market is not likely to roll over and decline sharply, unless a major event occurs or time is spent going sideways as the market’s internals deteriorate
The 17 year cycle, coupled with the high level of bullishness suggests that being on the lookout for an important top is just being smart, whether in 2017 or the first half of 2018. Last week I noted that the CNN Fear and Greed Index had reached 90. By mid-week it was up to 95, before settling at 84 on today.
The stock market crashed and bottomed on October 19, 1987. Fifteen years later (180 months), the DJIA bottomed on October 9, 2002. Fifteen years (180 months) after that low is October 2017, which suggests that October 2017 could be an important turning point.
The S&P became very overbought last week as measured by its RSI. After such a high reading, the S&P would be expected to make another new high with the RSI recording a lower high, before a deeper pullback is likely.
Click on any chart below for large image.
Dollar
From the low at 91.01, the Dollar has now traced out a series of higher lows and higher highs, and a 5 wave advance is apparent on the daily chart. This further confirms that the low is in and that after any price weakness, another rally is likely.
As noted last week, I thought the next stop would be near 94.14. That was the high on August 16 and where I expected some selling to occur. The high on Friday was 94.267 before selling came in. From the low to high, the Dollar rallied 3.25 points. A 50% retracement would bring the Dollar down to near 93.00, which should be good support. From whatever price low that develops, another rally of 3.25 points is likely.
I have expected the Dollar to rally a minimum of 4.5 points and maybe as much as 7.5 points from 91.01. If the Dollar trades between 93.00 and 94.14 for a couple of weeks, the chart pattern will form a potential inverse head and shoulders. If it does, and subsequently closes above 94.20, and move up to just over 97.00 would be expected based on the neckline at 94.10 and the low of 91.01.
Treasury Bonds
Last week I expected the yield on the 30-year Treasury bond to rise to 2.91% – 2.94% (blue horizontal trend line) before the 30-year yield became overbought and a decline in bond yields developed. On Friday, the yield popped to 2.933% before falling to 2.894% by the close. From the low of 2.65%, the yield rose 0.28%, so a decline to 2.79% is possible if a 50% retracement develops. After this modest decline in yields, a rise to near 3.0% is likely to follow.
Emerging Markets
Two weeks ago the Emerging Markets ETF (EEM) tested the blue trend line from the low in December and retested the high last week. If the Dollar continues to rally, the blue trend line is expected to be broken. A decline to near $42.00 is certainly possible in coming weeks.
Gold and Gold Stocks
I have expected gold to drop below $1260 and on Friday it traded down to $1260.72 before rebounding. This rally will serve the purpose of unwinding some of the oversold condition that developed after Gold declined by more than $95 during the past 4 weeks. A rebound that tests the highs in April and June near $1295 is likely, with a possible bounce to $1310.
It is bearish that the Commercials (red line middle panel) didn’t cover more of their short position during the recent decline, and the Large Specs didn’t sell more of their long position even after a 7% decline. 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.
The relative strength of Gold stocks continues to trend sideways and above the red horizontal trend line. Until the relative strength improves, as it did in late December 2016, a protracted rally is unlikely.
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.
As noted earlier, 2017 is so far the year with the lowest drawdown (the 2.9% pullback in the S&P in April) since 1914.
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, upside potential has been limited relative to the level of risk. Through September 30, the Tactical Sector Rotation program is up 8.52%.
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.
