Written by Jim Welsh
Macro Tides Technical Review 13 November 2017
Last week I noted that since October 13 a number of technical indicators had weakened despite the new all time highs in the most of the major market averages:
“The 21 day average of advances minus declines has fallen from 322 to 93 today, and the 21 day average of the percent of stocks making a new 52 week high minus new lows has dropped from 5.92% to 4.07%.”
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On Friday November 10 the 21 day average of advances minus declines had fallen to -57 and the 21 day average of the percent of stocks making a new 52 week high minus new lows was even lower 3.20%. Both of these measures fell further today. The percent of stocks above their 200 day average has also declined since October 13, falling from 68% to 58% as of Friday November 10. The Advance/Decline line is modestly lower than it was on October 13 even though the DJIA and S&P 500 have made a number of new all-time highs. I finished this assessment with a question:
“When all this is added up, what does it spell? C-O-R-R-E-C-T-I-O-N.”
For the first time in nine weeks the major market averages declined modestly last week. The S&P 500 and Nasdaq Composite dropped by –0.2% while the DJIA plunged –0.5%. You might consider the use of the word plunge as being an exaggeration but one must put last week’s decline in the DJIA in perspective. The DJIA has gone more than 60 days without experiencing a single intraday move of more than 1%. That’s an intraday move and not a closing move of 1%. The recent string is almost twice as long as the 33 days in 1945 and easily the longest string since 1930.
Last week also witnessed another rare occurrence in the stock market. As of October 31 the percent of Bulls in the Investors Intelligence survey rose to 63.5% while the percent of Bears fell to 14.4%. Last week the percent of Bulls rose to 64.4% as the percent of Bears remained unchanged at 14.4%, which pushed the ratio of Bulls to Bears to 4.47. The ratio of Bulls to Bears is the highest since August 1987.
But the real news is what happened on the Nasdaq Composite. The Nasdaq Composite made a new all time high on Wednesday November 8 but only 124 stocks posted a new 52 week high while 95 stocks made a new 52 week low.
On November 9, the number of stocks posting a new 52 week low exceeded the new highs by 68 to 92. It is rare for any market average to make a new high and the following day register more lows than highs. This indicates that a handful of large cap stocks are doing quite well even as a good number of stocks are actually declining. For the week, 352 stocks made a new high on the Nasdaq but a whopping 261 made new lows.
Since 2003 this is the only third time the Nasdaq Composite has made a new high, while more stocks made a new 52 week low than high, and the Bull/Bear ratio in the Investor Intelligence survey was above 3.0. The other two instances were in December 2007, which was followed by a devastating bear market, and July 2015 which preceded a decline of –15.1% in the S&P 500 and –16.5% in the Nasdaq Composite.
Those two declines were accompanied by a financial crisis in 2008 and in 2015 and early 2016 a precipitous decline in oil prices and a devaluation of the Chinese Yuan by China. The economy is on a much sounder footing than in 2008, oil prices posted a 2.5 year high last week, and the Chinese Yuan has strengthen in 2017. The ingredients for a decline of 15% or more are not present.
Domestic political risks are elevated since the Republicans must deliver on their promise of tax reform or the market will sell off since some of the strength in the past two months has been due to the expectation of lower taxes for corporations and individuals. By their nature geopolitical risks are tough to anticipate although geopolitical risks are now higher in terms of North Korea and the Middle East.
Irrespective of the domestic political uncertainties and geopolitical risks, we can monitor the market’s internal strength. The recent weakening in various technical indicators and the ominous signal from the Nasdaq Composite is instructive. The probabilities of the market experiencing a 5% decline are higher now than they have been in many months and the market is now more vulnerable to a decline that is more than 5%. All that is required for the growing under-the-surface weakness to become more apparent is a reason to sell.
The new high in the S&P 500 last week was not confirmed by its RSI which shows the upside momentum in the S&P 500 is beginning to wane. On November 9, when there were more new lows than new highs on the Nasdaq Composite, the new highs on the NYSE totaled 73 and the lows were 70. Today the new lows outnumbered the highs by 104 to 100 on the NYSE and 86 to 74 on the Nasdaq Composite.
With the major market averages so close to their all time highs, the expansion in new lows is not a healthy sign, nor is the recent weakness in the Russell 2000 and the DJ Transportation average.
A short term top will likely be signaled if the S&P falls below 2566 (blue trend line), especially on a closing basis. A close below 2540 (red trend line) would likely open the door for a drop to 2500. The price pattern in the S&P 100 (shown above on pg. 2) and the S&P 500 suggests the market could be nearing the end of the bull market that began in March 2009, or at least be approaching the point where a 10% correction is more likely.
Click on any chart below for a larger image.
Dollar
The Dollar index broke out of an inverse head and shoulders pattern on October 26, rallied to 95.15, and then pulled back to test the breakout when it fell to 94.258 on Friday. The breakout generated a measured move to 96.00 and maybe 97.00. Based on instructions, traders are long the Dollar index from 92.44 and should use a close below 93.80 as a stop.
Euro
Last week the European Commission increased its estimates for GDP growth for 2017 from 1.7% to 2.2% and to 2.1% from 1.8% for 2018. Although it lowered its forecast for 2017 inflation it raised it for 2018 to 1.4%.
Since bottoming in June, the 5 year Forward Euro Inflation Swap Rate has increased from 1.50% to 1.67%.
The improvement in the Eurozone economy and upward trend in the inflation rate will make it more difficult for the ECB to follow through on its plans to maintain it QE purchases at $30 billion a month through September 2018. The Italian general election in May 2018 can certainly provide an excuse for the ECB to stand pat, but the European bond markets may not have the same level of patience. A close above .50% on the German 10-year Bund will provide an indication that the European bond market is moving ahead of the ECB.
The Euro is pretty much the inverse of the Dollar and has broken below the neckline of a head and shoulders top. The Euro has bounced and tested the underside of the neckline. A move below 1.15 seems probable in the next few weeks, but this forecast will change if the Euro closes above 1.1685.
Treasury Bonds
As I noted in the October 23 WTR:
“Until a close in the 30-year Treasury yield above 2.94% (blue horizontal trend line) occurs, it is still possible for another dip to 2.75% to develop.”
On Wednesday November 8, the yield dipped to 2.767% before climbing to 2.869% today. A move up to 3.17% to 3.20%, the highs last December and in March is likely before year end. 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.
Gold and Gold Stocks
The nature of the decline from the recent high of $1305.72 cash leaves opens the possibility that Gold could test $1306 – $1310 before falling below $1260. The positioning in the futures market continues to suggest this is coming. On October 27 Gold dropped to $1262.50 before rebounding to $1287.70 on November 9. If Gold does rally to $1310, an equal decline of $97 would bring down to near $1220 and possibly below $1200. This process could take 4 to 6 weeks.
The Gold stock ETF (GDX) looks like it is preparing to break below the blue trend line near $22.50. If Gold does fall below $1260, my guess is that GDX will fall to the green trend line currently near $21.35. If Gold falls to near $1220, GDX could drop to the black trend line near $20.70. The relative strength of the GDX to 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 September 30, the Tactical Sector Rotation program is up 8.52%. The Major Trend Indicator 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. On August 29, I purchased the Dollar ETF (UUP) at $23.83 since I thought the Dollar was poised for a rally. On October 27, I purchased the VanEck Oil Services ETF at $23.67. This position was reduced by 20% last week at an average price of $25.79.
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.
