Written by Jim Welsh
Macro Tides Weekly Technical Review 04 June 2018
It seems as if investors feel the Russell 2000 and the big cap growth stocks (FAANG) that comprises 38.3% of the Nasdaq 100 are immune to anything – trade wars, higher interest rates, or the prospect of a new sovereign debt crisis brewing in Italy. The Russell 2000 has made a new all time high but its RSI has posted its second lower high and is also below 70. The divergence could be overcome if the Russell 2000 continues to climb but a modest pullback seems more likely.
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Last week I expected the Russell 2000 and the Nasdaq 100 to record new all time highs based on their relative strength:
“The relative strength of the Nasdaq 100 and the Russell 2000 suggests that both averages may make a new all-time high in coming weeks which would not be confirmed by the S&P 500 or the DJIA. In October 2007, the S&P 500 and DJIA made new all-time highs which were not confirmed by the majority of the major averages. The strength in the Russell 2000 and Nasdaq 100 has the feel of money jamming into these sectors.”
Click on any chart below for large image.
While the Nasdaq 100 posted a new closing high today it has yet to make a new all time high. I suspect that will occur shortly. After breaking out above the black down trend line connecting the March and April highs, the Nasdaq 100 quickly followed through to the upside. The RSI is in a strong uptrend (blue trend line) although it is overbought. The move up in recent days (vertical) is beginning to look a bit like the pop between the March 3 low and the high on March 13. This suggests the Nasdaq 100 may have more upside before a pullback commences and more time before a real decline takes hold.
The S&P 500 ‘broke out’ above the black down trend connecting the January and March highs, but has yet to follow through as the Nasdaq 100 did when it broke above its down trend line. The primary reason is the concentration of FAANG stocks in the Nasdaq 100 compared to the smaller weighting in the S&P 500. The FAANG stocks comprise 12.55% weighting in the S&P 500 compared to 13.11% for the bottom 250 stocks.
The big cap tech stocks are over owned and over loved and may still face legislative hurdles in coming months and a backlash from users who become more concerned about privacy.
The S&P 500 ‘broke out’ above the black down trend connecting the January and March highs, but has yet to follow through as the Nasdaq 100 did when it broke above its down trend line. The primary reason is theAfter peaking at 2872.87 on January 26 the S&P 500 plunged 340 points in a 5 wave decline to a low of 2532.69 on February 9. It then rallied 269 points before peaking on March 13 at 2801.90.
The 3 wave rally (a up, b down, c up) from the February 9 low retraced 269 points or 79.1% of the 340 point decline. The high on March 13 is labeled a. From its high of 2801.90 on March 13, the S&P 500 fell in a 5 wave decline of 248 points before posting a low on April 2 at 2553.80. The 5 wave decline from the March 13 high to the April 2 low is labeled X. If the S&P 500 were to retrace 79.1% of the 248 point decline from its low on April 2 it would rally to 2750.01. Today’s high was 2749.16.
The S&P 500 rallied 163 points from the April 2 low of 2554 to the April 18 high of 2717. An equal rally from the May 3 low of 2594.62 would allow the S&P 500 to rally to 2758. The 3 wave rally (a up, b down, c up) from the April 2 may be completing with the S&P 500 topping between 2750 and 2758 soon. The blue trend line from the April 2016 high comes in near 2764. The weighting of the FAANG stocks in the S&P 500 and the Nasdaq 100 may allow the S&P 500 to trade above the blue trend line briefly. Waiting for more signs of a high in the Nasdaq 100 seems prudent before going short.
Treasury Yields
The yield on the 30-year Treasury bond plunged from 3.247% on May 17 to 2.954% on May 29, before rebounding to 3.086% today.
The decline in bond prices and the increase in the 30-year yield has the appearance of an a-b-c pullback with wave c equaling wave a at 143.27 on the June Treasury bond futures. The pattern suggests that the T-bond futures will exceed the high of 146.23 at some point.
In the May 14 WTR I discussed the price pattern in Treasury yields and why Treasury yields might top soon:
“If Treasury yields rise above the April 25 high, the Treasury bond ETF TLT is likely to drop below the low of wave 3 ($116.51) and complete a 5 wave decline from the price high in September 2017. It took 3 months from the time TLT made its wave 3 low in December 2016 and the wave 5 low in March 2017. An equal amount of time from the wave 3 low on February 21 would target May 14 – May 21 as a guess of when Treasury yields will exceed their recent high and TLT records a low for wave 5. Establish a 50% position in TLT if it trades under $116.51 in the next few weeks.”
On May 17, the 30-year Treasury yield rose to 3.247% and TLT dropped to $116.09 triggering the buy signal. In the may 29 WTR I recommended selling half of TLT since it had exceeded its initial target of $121.00:
“I recommended buying TLT at $116.50 in anticipation of a rally to $121.00. I would recommend selling half of the TLT position tomorrow since it closed at $122.24 and has more than achieved the price target.”
On May 30 TLT opened at $121.00. I would place a stop on the remaining position at $118.25. Sell the remaining 50% if TLT trades above $122.52 the high on May 29.
Dollar
I initially recommended buying the Dollar’s ETF UUP in the April 2 WTR since I thought the Dollar had the potential to rally to 94.50 to 95.00 from a low of 88.25 in February. On May 29 the Dollar traded up to 95.02 which is likely the high for wave 3. A recent survey of trader sentiment showed that more than 90% of traders were bullish, which was one reason why I thought the Dollar was ready for a pullback of 1% to 1.5%. The current dip is likely wave 4, which should be followed by wave 5 to a new high.
Gold
In the May 14 WTR, I recommended
“Buying a 50% position in Gold or the Gold ETF GLD, if Gold trades under $1301. Increase it to 100% if Gold trades under $1285.”
On May 15 Gold traded under $1301 and the Gold ETF GLD opened at $122.82. I established a 25% notional position (using 8.33% of cash) in the 3 to 1 Gold ETF UGLD at $10.43. Although Gold has traded under $1285 during night trading sessions, it has not traded under $1285 while GLD was trading. For now I’m going to rescind the recommendation to add if Gold trades under $1285 as explained below.
Gold traded up to $1307 two weeks ago and $1306 last week only to be met by a big yawn. The resistance near $1307 is understandable since Gold traded down to near that level in February and March, so support has become resistance. I continue to expect Gold to rally to $1318 – $1325 at a minimum. If Gold is able to overcome this resistance, the next target would be $1360 – $1370.
Bullish sentiment remains low but large Speculators did increase their long position from 90,957 contracts on May 22 to 115,130 contracts on May 29 as Gold traded up to $1307. This increase suggests Gold may need even more time before a sustainable rally is capable of taking hold and lifting Gold above the heavy duty resistance at $1368.
Gold didn’t establish a solid trading low in December 2017 until Gold broke below the dashed trend line. This was an important trend line since it connected the significant low in December 2016 with the next important low in July 2017 that preceded the rally from $1205 to $1357 in September 2017.
It is certainly possible that Gold may break below the solid trend line connecting the December 2016 low and December 2017 low in order to shake out the last remaining bulls. This trend line was tested two weeks ago and has so far held. The pattern in the Dollar suggests it will rally once more in wave 5 and Treasury yields look like they will fall one more time. After the strong employment report it will take a geopolitical event to drive yields down in the short term.
If Gold breaks below the solid trend line, a quick drop to $1250 may follow. If this occurs before a rally to $1318 – $1325, add another 25% to Gold or the Gold ETF GLD if Gold trades under $1264, which is just above the lower dashed trend line.
Gold Stocks
With Gold not doing much, Gold stocks have been languishing. GDX’s RSI has not closed below 35 which would be more supportive of a bigger rally. GDX’s RSI is still above 45 which leaves open the door for another shoe to drop which might include a drop below $21.75. If Gold drops to $1262 or lower, GDX could easily drop below $21.75 and possibly down to $21.30. I wouldn’t add to the Gold stocks until GDX’s RSI is below 32. Conversely, if Gold trades up to $1320, GDX may rally up to $24.00 – $24.25 in the next few weeks before another correction takes hold. If GDX’s relative strength doesn’t improve significantly and GDX trades up to $24.00 – $24.25, it may be a sign that selling into that strength will prove a good idea. We won’t know until (and if) it gets there.
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. Based on the buy signal, a 100% invested position in the top 4 sectors was adopted. The MTI confirmed a new bull market on March 30, 2016. Although the MTI has rebounded since the May 3 low, it is only back to where it was in November 2016. This high is just above the green horizontal line and is similar to the high posted in November 2015. Past performance may not be indicative of future results.
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.
Caption photo via Good Free Photos.
