Written by Jim Welsh
Macro Tides Weekly Technical Review 06 August 2018
See the August issue of Macro Tides which was published earlier today. This weekly review will be shorter than usual because of the details in in the monthly report. A particular focus this week is Gold. Like the characters in the Samuel Beckett play “Waiting for Godot“, we have been waiting for a gold bull to come by for several weeks. Unlike the play, we expect our “Godot” will arrive and probably soon.
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Here’s a quick summary of a few of the points covered in this month’s issue of Macro Tides.
1) Global growth has slowed in the first half of 2018 which means the synchronized global growth theme coming into 2018 has downshifted.
2) Growth in the U.S. is likely to slow from the Q2’s estimate of 4.1% growth, although growth is likely to hold above 3.0% in the second half of 2018.
3) The risk of a recession beginning before the end of 2018 is about 12%.
4) Inflationary pressures are continuing to build.
5) Investors are too complacent about trade negotiations.
6) China has been easing monetary policy and increasing fiscal stimulus to spur growth and insulate itself from any trade fallout.
7) These policy actions and recent comments suggest China is likely to be more resistant and less agreeable to resolving trade differences with the U.S. than investors realize.
8) The lack of progress with China could reach a crescendo within the next 60 days.
9) Coincidently, during the last 20 years August and September have been the most volatile months.
10) Since 1950 the S&P has experienced an intra-year decline of more than 15% during mid-year election years. 1
11) The technical health of the stock market is not as good as it looks on the surface leaving it vulnerable if selling pressure picks up.
Dollar
Click on any chart below for large image.
The Dollar is still expected to exceed its July 19 high of 95.65 before a high is recorded and the onset of a 4% correction. Hedge funds have shifted from being net short in February as the Dollar was bottoming near 88.25, to net long. Their buying power has already been absorbed by the market.
Euro
The Euro is still expected to fall below the June 21 low of 1.15089 which is one of the reasons the Dollar should exceed its 95.65 high. A decline below 1.15089 would complete a 5 wave decline from the February high. Establish a 50% long position in FXE if it declines below $110.55.
Treasury Yields
Large and Small Speculators along with Managed Money have established a record number of short Treasury bond contracts in 5- year, 10-year, and Ultra Long bond futures. In total 1.438 million Treasury contracts have been sold short and at some point will be bought to close out the positions.
If the economy loses some steam in the second half of 2018, investors who are short could be pressured to cover some of the short positions, which would help push Treasury yields lower, rather than higher. This suggests that the 10-year Treasury yield could test the March low of 2.715% and possibly the 2017 high of 2.63% in coming months. The 30-year Treasury may fall below the July 6 low of 2.925%.
Gold
The positioning in Gold futures is the most bullish since December 2015 and early January 2016. Large Speculators (green line middle panel below) have their second smallest long position in more than 15 years, while Managed Money (blue line bottom panel) have their largest short position ever. These two groups are trend followers and usually are positioned wrongly at important turning points. Commercials (red line middle panel) are considered the ‘smart’ money since they are typically positioned to profit from a subsequent move in Gold. Notice how close to 0 all of these lines were when Gold was bottoming in late 2015, December 2016, July 2017, and NOW. The positioning lines below are based on data through July 24. It is likely that positioning has improved even more since Gold is down 1% since July 24.
The Gold ETF GLD has made 3 new lows since July 2 but its RSI continues to post higher lows, even though GLD is down an additional 2.6%. A similar compression formed in December 2016 (green arrow) after which GLD rose by 11.2% in less than 10 weeks.
A recent analysis by Pimco comparing Gold to the level of Treasury yields suggests that Gold has become cheap:
“We’ve observed that over the past decade, gold has traded like an asset with nearly 30 years’ duration (meaning that a 100-basis-point move lower in Treasury real yields has translated to a roughly 30% increase in the price of gold). Falling gold prices in the absence of rising real yields indicate that gold has cheapened relative to other U.S.-denominated flight-to-quality assets, like TIPS and Treasuries. We think the sell-off will prove transient and that the relationship of real yields to gold observed over the past decade will prevail.”
The last time Gold was this cheap relative to Treasury yields was in late 2015 and late 2016, which supports the message provided by the positioning in Gold futures. If Treasury yields fall as I expect and the Dollar corrects 4% in coming months, Gold is likely to get a lift and begin to squeeze the historic Managed Money short position.
Gold Stocks
The Gold Stock ETF GDX has been performing in line with Gold, which means it has been losing altitude at the same pace as Gold. The RSI for GDX is holding under 35 so a level of oversold compression is building.
Stocks
The stock market has been supported by a lack of selling pressure since the consensus outlook is for continued economic growth and good earnings. Second quarter corporate earnings have been good (up 23.5% according to Thomson Reuters), with the majority of companies meeting or beating estimates. But for those companies that have missed, their stock has been taken to the woodshed and greeted by a firing squad of sellers often resulting in double digit declines. The tranquility of the overall stock market is potentially masking an underlying vulnerability if a good reason to sell materializes.
Over the past 20 years the biggest increase in Volatility (VIX) has occurred in August and September. The next 60 days is likely the window in which the trade dispute with China will come to a head. Midyear elections years have experienced an average drawdown in excess of 15% since 1950 with most of the declines occurring in August and September. The stock market has done particularly well in the year following mid year declines.
Only 53% of stocks were above their 200 day average as of Augusts 3, the percent of stocks making a new 52 week high on both the NYSE and Nasdaq are below where they were in mid June and far below where they were in January, and the Nasdaq Advance / Decline line has been weakening since it peaked on July 9. The Nasdaq 100 is up 2.1% since July 9 carried by Apple. The S&P 500 is less than 1% was its January peak but the NYSE which covers 1700 stocks, is 5.3% below it January high. These are all signs of vulnerability but they won’t mean much until a reason to sell materializes.
I thought a normal bout of profit taking after the positive GDP report was likely to bring the S&P 500 down to 2700. That has simply not developed.
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 which is still in effect.
The MTI remains well below its high from January and barely above its level on June 13 when the S&P 500 it traded up to 2792. 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.
