Written by Jim Welsh
Macro Tides Weekly Technical Review 29 December 2017
Since bottoming in the spring of 2017 the Citi Economic Surprise Index has soared and reached a multi – year high in December. If I’m right and the economy slows in the first quarter, economic reports will come in lower than forecast and the Citi Economic Surprise Index will decline. The stock market ignored the sharp decline in the Citi Economic Surprise Index during the second quarter of 2017 since the allure of tax cuts kept selling pressure at bay as institutional investors expected the market to rally once tax reform was realized.
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Note: The next Weekly Technical Review will be published on January 8.
The rally in recent months has certainly ‘priced in’ a portion of the coming increase in corporate earnings and investors will be tempted to take some profits in the stocks that scored big in 2017. The big cap growth stocks could be vulnerable to profit taking in early 2018, and since they have a greater weight in the S&P 500 and DJIA, a correction in January in the major averages is likely. A deeper correction of more than 3% may develop during the first quarter if investors respond to less than robust growth as measured by the Citi Economic Surprise Index. A better feel for how the market will trade during the first quarter will be provided after the first two weeks in January.
I made two recommendations for 2018 in the December 18 WTR, so this brief report will cover just them.
Gold and Gold Stocks
As I noted in the December 18 Weekly Technical Review:
“The positioning in the futures suggests Gold is likely rally to at least $1305 and could make a run at the September high of $1357 in the first quarter of 2018.”
Today Gold traded up to $1307 before closing at $1303. Gold has quickly and quietly rallied from $1236.50 since its low on December 12. The lack of attention this rally has received increases the odds that Gold will breakout above $1306. As investors notice this breakout, it will draw more money into Gold so a test of $1357 could occur before the end of January. Short term the RSI on Gold is near 70 and modestly overbought and is at price resistance just above $1300, so a modest pullback would not be a surprise.
Click on any chart below for large image.
Gold stocks as measured by the Gold stock ETF (GDX) ratio have begun to show relative improvement which is an important positive. If Gold does test $1357, GDX could climb above $25.00 in the first quarter. In the December 11 WTR I recommended a 25% position in GDX if it traded under $21.30. The low on Tuesday December 12 in GDX was $21.27 and a 25% position in GDX was established at $21.28 on a limit order. Based on the improved positioning in the futures market, I increased this position to 50% on December 18 at $22.17. On December 19 GDX opened at $22.16 and traded down to $22.035, so subscribers had the opportunity to enter GDX below $22.17. Today GDX closed at $23.24.
On December 18, I also established at 25% position in the Junior Gold stock ETF GDXJ at $32.035. Short term it is overbought and nearly at the trend line connecting the February and September high at $34.80. If Gold trades up to $1357, GDXJ may trade up to the September high above $37.00. But first it will need to close above the down trend line.
Treasury Bonds
After jumping sharply Treasury yields have come back down to test their ‘breakout’ trend lines. Although this recent drop is a surprise, it does not change the bigger picture. As discussed at length in the monthly Macro Tides and these Weekly Reviews, I think Treasury yields are likely to rise in 2018 and potentially more than most investors expect. A move up to 3.17% to 3.20% on the 30-year Treasury bond, the highs last December and in March is likely in the first half of 2018. 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.
Short term the pattern in the Treasury bond suggests the 30-year yield could fall more before a concerted move up in yields takes hold. From a low of 149.05, the 30-year Treasury bond rallied 4.5 points to a high of 153.21 (Note each .01 equals .03125 in bonds since each 1.0 point is divided by 32 so 153.21 is 153.6562).
If the Treasury bond rallies an equal amount from its low of 150.14 on November 8, it could reach 154.30. This would bring the 30-year yield down to 2.687%, which was the low on December 15. A brief dip below 2.687% is possible. If it does reach that level I will add to my short position in the 1 to 1 short Treasury bond ETF TBF. My initial position was purchased at $21.73.
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.
