Written by Jim Welsh
Macro Tides Weekly Technical Review 16 July 2018
On July 13 the S&P 500 closed above 2800 for the first time since February 1 and rose above the intraday high of 2801.90 on March 13. This has led to an expectation that these new recovery highs signal that this is the beginning of the S&P 500’s run to a new all time high above 2873.
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While this is certainly possible, there are more signs that the S&P 500 is near the end of the rally which began at the April 2 low of 2554. By rising above the March 13 intra-day high of 2801.90, the S&P 500 may have completed wave c from the April 2 low, and an a-b-c countertrend rally from the February 9 low which also completes wave (B).
If this pattern analysis is correct, the S&P 500 is vulnerable to a wave (C) decline that has the potential of bringing the S&P 500 below the February 9 low of 2532. Despite the higher close on July 13 than on June 12, the RSI is lower which indicates upward momentum is waning.
Click on any chart below for large image.
Since the February 9 low, the S&P 500 has peaked whenever the 21 day average of net Advances minus Declines has exceeded 300. (March 9, April 17, June 6, July 9). After topping on July 9, the 21 day average of net Advances minus Declines oscillator rolled over even as the S&P 500 was posting new highs on July 13. This indicates that fewer stocks are participating and supporting the move in the S&P 500. The percentage of stocks above their 200 days average was just 51% on July 13 which confirms that the price advance is not broad based and being led by a small number of stocks that have a big weighting in the S&P 500.
In July 2017 67% of stocks were above their 200 day average and in October and January it was 68%. At those highs, the ratio of stocks above their 200 days average was better than 2 to 1. On July 13, the ratio was 1.04 to 1.0, which is more a sign of weakness than strength.
One doesn’t have to look far to know which stocks are holding the S&P 500 up. Through June 30, the FAANMG stocks Facebook Inc., Apple Inc., Amazon, Netflix Inc., Microsoft Corp., and Google were up 2.66%. The other 494 stocks were collectively down -0.40 %. For the first half of 2018 the S&P 500 was up 2.26%. If and when the FAANMG stocks undergo a correction, it is unlikely that the 494 stocks that have been lagging are going to become strong enough to offset the downward pull of the FAANMG stocks.
The percent of stocks that have made a new 52 week high during the past 21 trading days is also revealing. On October 13, 2017 5.92% of NYSE stocks had posted a new high during the prior 52 weeks (Chart below). On January 24 that rose to 6.92%. When the S&P 500 closed at 2787 on June 12 just 2.61% of NYSE had made a new 52 week high. On July 13 it was down to 1.39% even though the S&P 500 closed at 2801.31 about 0.50% higher than on June 12. The divergence with June 12 is striking since it wasn’t that long ago and on July 16 (today) there were more new lows than new highs. (46-55)
It is possible that the Russell 2000 has completed a 5 wave rally from its low on May 3 and potentially wave (5) from the major low in February 2016. The Russell 2000 posted a new intra-day high but not a new closing high on July10. Even if the Russell is able to better its July 10 high on a closing basis, its RSI is likely to record a significant negative divergence. When the Russell 2000 closed at 1706.99 on June 20 its RSI was a strong 77.2, but only 65.2 on July 9 when it closed at 1704.60. The Russell 2000 has been a leading sector for the market in recent weeks, but its run higher looks like it will end soon.
The FAANMG stocks comprise 48.7% of the Nasdaq 100 (QQQ) and their strength enabled QQQ to make a new all time closing high on July 13. However, the new high was accompanied by a significant negative RSI divergence. When QQQ closed at 177.60 on June 14, its RSI was a strong 74.9 compared to just 65.8 on July 13 when QQQ closed at 179.61 or 1.11% higher than on June 14. A similar divergence occurred when QQQ made a new high on March 12 compared to its January peak. That divergence was followed by a sharp decline. This suggests that the FAAMNG stocks may be on the cusp of a sharp correction.
If the S&P 500 was poised to run to a new all time high, the percent of stocks above their 200 day average would be increasing and closer to 60% and the percent of stocks recording a new 52 week high would be above the level posted on June 12. The Russell 2000 and QQQ’s would not be recording significant negative RSI divergences as they make new highs, and the chart pattern for each wouldn’t be suggesting each may be finishing the rally from the April 2 low, and possibly the major low in February 2016.
The blue trend line on the S&P 500 dates back to a high in April 2016 and contained the S&P 500 until the blow off in January. It is noteworthy that the high in March was not as far above the trend line as in January, and in June the S&P 500 barely got above it. This is another indication that each rally is losing steam.
If the S&P 500 fails to break out above 2825 and instead falls below the June 28 low of 2692, I can’t imagine that selling pressure won’t pick up. The area around 2825 is important for this reason. The April 2 low was 2554 and 22 points above the low of 2532 on February 9. It is possible that the S&P 500 could rally 22 points above the wave b high of 2802 on March 13, which would make the rallies from the February 9 and April 2 lows equal.
In the March 12 WTR I offered this advice:
“If the S&P 500 trades above 2789 and you don’t like the idea of watching the S&P 500 subsequently fall to 2533 or possibly 2449, you should 1) hedge your portfolios, 2) do some selling, or 3) go short using a stop above 2840″.
The S&P 500 traded up to 2802 on March 13 and then lost -8.4% in the next 14 trading days, although the S&P did not fall to 2533. The S&P 500 is about where it was in mid March but the NYSE Composite is -1.65% lower. The majority of stocks are below where they were in mid March with the exception of the FAANMG stocks. Once again it’s time to 1) hedge your portfolios, 2) do some selling, or 3) go 25% short above 2805 and 50% short above 2820, using a stop above 2840.
Treasury Yields
The divergence between the 30-year Treasury yield and 10-year yield has continued, with the 30-year yield trying to break out below 2.95% while the 10-year yield posts higher lows.
Large Speculators are still holding a large short position in the 10-year futures market (green line in the middle panel) that is larger than in January 2017 when bond yields were topping. The large short position is likely to put a floor under prices and keep yields from rising too far. After trading the long side (TLT) and short side (TBF) of the 30-year Treasury bond in recent months, I don’t see a high percentage trade in Treasury bonds.
Dollar
When the Dollar was bottoming in February, positioning in the currency market showed that a very large Dollar short position had developed. This was one of the main reasons a rally in the Dollar seemed likely. The Total positioning line was near -30 in February, but is now up to +25 and the highest level since the Dollar topped in January 2017. After rallying 8.0% bearish sentiment toward the Dollar has disappeared and has been replaced by a new found bullishness now that everyone ‘knows’ why the Dollar surprised them by rallying so much.
I thought the Dollar had topped when it reached 95.53 on July 9 and appeared to have completed a 5 wave rally from the low in February. However, the 3 wave rally to 95.53 and the subsequent choppy trading since the May 29 high of 95.02 creates the opportunity for the Dollar to push above 95.53 briefly after some additional choppy trading. Ironically, the pattern in Gold offers some support for this conclusion since Gold and the Dollar have been trading inversely recently and Gold doesn’t look ready to rally quite yet.
Euro
One of the primary reasons I thought the Dollar could rally from 89.00 in February to 95.00 was the all time record long position in the Euro held by Large Speculators. Since the Euro comprises 57.6% of the Dollar index, a meaningful decline in the Euro would translate into Dollar strength.
When a position becomes ‘crowded’, any price reversal begins to apply pressure especially on those who came in late. In the case of the Euro the expectation was that selling pressure would beget more selling pressure as those long the Euro were forced to sell and cause the decline to accelerate. This is exactly what transpired as the Euro tumbled from 1.250 in February to below 1.16 in late May, a decline of 7.2% in three months. This declined enabled the Dollar to rally 8.0%.
On February 5, 2018 Large Speculators (green line middle panel) were long 140,823 contracts. After being forced to sell by the sharp decline, Large Speculators are now long just 24,357 contracts. The price pattern in the Euro allows for some additional choppy trading in the next 1-2 weeks, followed by a quick thrust to a new low. If this develops it would potentially complete a 5 wave decline from the high in February and set the stage for a rally in the Euro and decline in the Dollar.
Rather than shorting the Dollar with the ETF UDN, which only averages 109,000 shares a day, it may be better to go long the Euro via the ETF FXE which trades 280,000 shares per day. Establish a 50% long position in FXE if it declines below $110.55.
Gold
As noted last week:
“Sentiment remains lopsidedly bearish toward Gold and the positioning in the futures market is supportive of a decent rally. What’s missing is better price action.”
I also described what would lead to another decline based on the price action in Gold:
“So far Gold has carved out a 3 wave rally which would be labeled as an a, b, c and considered a counter trend rally within an ongoing decline. The 50% retracement of the $28 move up is just above $1251 which coincides with four intra-day lows near $1251.00. If Gold fails to trade above the July 9 high of $1265.59 and instead falls below $1251.00, the odds would increase that Gold may decline to a new low below $1237.85.”
Gold didn’t trade above $1265.59 and then fell to a new low of $1237.31 on July 13. The rebound from that low has again traced out 3 waves so Gold is likely to grind its way lower. Gold dropped $82 from its high of $1364 on April 11 to a low of $1282 on May 18. An equal decline from a high of $1309 on June 14 would target $1227. There is a decent chance that Gold may wait for the Dollar to move above 95.53 before reversing higher as it slips toward $1226. Although this is taking longer to play out than expected, the level of engrained negativity toward Gold is increasing, which could empower a larger rally once Gold gets going.
In the May 14 WTR, I recommended:
“Buy a 50% position in Gold or the Gold ETF GLD, if Gold trades under $1301.”
On May 15 Gold traded under $1301 and the Gold ETF GLD opened at $122.82. Last week the instructions were to add another 25% to Gold or the Gold ETF GLD if Gold traded under $1264, which occurred on June 26. GLD opened on June 26 at $119.28. I recommended adding another 25% if Gold traded under $1250. Gold traded under $1250.00 on June 28 at 8am when GLD was trading at $118.45. The average purchase price for the entire GLD position is $120.84.
If Gold and Silver post lower lows, GLD could test the July 2017 low under $115.00. Normally, I would suggest a stop above the recent lows. Sentiment and positioning suggest that Gold and Silver could spike lower and then reverse dynamically, which would make it difficult to execute a tight stop and repurchase that doesn’t result in buying back in above the level of any stop.
Gold Stocks
The relative strength of Gold stocks to Gold has improved significantly and has convincingly broken below the rising trend line that has contained the Gold stocks since their peak last September. The improvement in the relative strength of Gold stocks is a good sign for Gold stocks and Gold. If Gold and Silver fall to new lows, GDX will probably retest the recent of low of $21.77 on June 28. A 50% position is recommended if GDX trades under $21.80 and a 100% position if GDX falls below $21.56, using a close below $21.16 as a stop.
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.
The MTI remains well below its high from January and is far weaker when the S&P 500 it traded up to 2792 on June 13. If the S&P 500 marginally exceeds the March 13 high at 2802 and then reverses lower, the MTI will record a third lower high. A close below 2690 would suggest a meaningful top has been completed.
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.