Written by Jim Welsh
Macro Tides Weekly Technical Summary 19 February 2019
According to the US Census Bureau, U.S. retail sales in December 2018 fell -1.2% from November 2018 and the biggest one month decline since November 2009. The Year-over-year (YoY) growth rate fell from 4.8% in October to just 2.3% in December.
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The Year-over-year (YoY) growth rate fell from 4.8% in October to just 2.3% in December. The retail sales report was so bad it was quickly dismissed since it didn’t jive with anecdotal evidence of how strong the Holiday season was and credit card transaction information from Master Card and Visa.
The report also was disputed by Redbook Retail sales that showed sales were up 5.7% at the end of December from a year ago. Any doubts were further diminished on February 19 by Walmart which said its sales were up 4.6% in the fourth quarter.
The monthly retail sales number is one of the most revised reports and will likely be revised higher in coming months. Until it is revised, estimates of Q4 GDP will reflect the weak number. The New York Fed’s Nowcast GDP Q4 estimate was lowered from 2.6% to 2.23%, while its Q1 2019 estimate is just 1.1%. The Atlanta Fed’s GDPNow estimate of Q4 fell to 1.5% after the retail sales report. The ambiguity in the data will simply reinforce the FOMC to be patient until they have data they feel is accurate.
The primary risk in the first quarter is global economic weakness which drags U.S. growth down. As noted last week the downward revisions for 2019 by the Bank of England (- 0.5%) and EU (0.6%) were significant and are likely to result in a further slowing in nominal sales growth for global companies in the first quarter at a minimum. If slowdown in sales persists, second and third quarter earnings estimates will be lowered. The stock market has not priced in the potential for weaker earnings beyond the first quarter which could prove to be a hurdle that the Fed’s pause may not overcome.
Stocks
In the December 24, 2018 WTR I discussed why it was too late to sell and why a significant rally was likely in the first few months of 2019:
“Once a 5 wave decline has finished, a significant rally is likely to take hold that lasts from 1 to 3 months and retraces 50% to 61.8% of the decline. If this roadmap is roughly the way the market path unfolds, it is too late to sell.”
From its high on September 21 of 2940 the S&P 500 fell 593 points to the low of 2347 on December 26. A 61.8% retracement suggested the S&P 500 could rally to 2713. I also expected the rally off the December low to rally up in wave a, correct in wave b, and possibly rally in wave c an equal number of S&P 500 points gained in wave a. The only correction since December 26 occurred between January 18 and January 29 resulting in a drop of -2.1% in the S&P 500. This seemed way too shallow to represent wave b of Wave (B). The choppy correction between January 18 and January 29 appeared to be a triangle and projected a rally to 2737 to complete wave a of Wave (B). The S&P 500 promptly rallied to 2738 and then pulled back to 2682 which suggested wave a of Wave (B) from the low on December 26 had completed on February 5. The expectation for wave b of Wave (B) was for the S&P 500 to fall to under 2630 at a minimum, before wave c of Wave (B) lifted the S&P 500 above 2800. This pattern structure was called into question as soon as the S&P 500 pushed above 2738 on February 12 and forced me to consider that wave b of Wave (B) may have ended on January 29. If so Wave (B) is unfolding in less time than I expected and may be closer to finishing. If correct, wave c of Wave (B) has already begun.
One factor that supports this conclusion is the quick and dramatic shift in investment sentiment. In Late December the CNN Fear and Greed Index was buried at a very low level indicating that the S&P 500 was oversold and Fear was the dominant emotion controlling investment decisions. Since late December the CNN Fear and Greed Index has jumped and is approaching the range where Greed is flashing caution as it is almost up to where it was last September and in early January 2018. If wave c of Wave (B) lifts the S&P 500 a bit more in coming weeks as expected, the Index should move up above 80 and closer to Extreme Greed.
The Option Premium Ratio is another measure of sentiment that has fallen to a low level indicating that traders are willing to pay more for Call options than Put options. In late December traders were willing to pay far more for Put options than Call options, which was another sign that the market nearing a trading low (chart below) as I noted in the December 24 WTR:
“The TRIN readings and the Call/Put Ratio suggest the S&P 500 is in the zip code and close to finishing wave 3 soon. After wave 4 carries the S&P 500 up by 150 – 200 points, a decline to a lower low is likely to follow in wave 5.”
As we now know the S&P 500 has yet to test the December 26 low of 2347. If it does test the low it won’t be wave 5 of Wave (A) as I expected in the December 24 WTR. Instead it will be Wave (C) of the larger correction I’ve discussed previously.
Click on any chart below for large image.
It is important to remember that Sentiment often reaches an extreme before momentum reverses. When investors are bullish they are unlikely to do much selling until provided a good reason to do so, and that usually takes some additional time. Conversely, investors won’t stop selling unless some fundamental factor changes. The S&P 500 dropped from 2519 on January 2 to 2444 on January 3 and seemed well on its way to a retest of the December low.
However, on January 4 investors finally heard what Federal Reserve Chairman Powell had previously said on December 19 that monetary policy was not on a preset course and the S&P 500 reversed higher. After topping on January 18, the S&P 500 appeared to be on the cusp of a correction that would bring it down to 2630 or lower. On January 30 the FOMC statement included the ‘patient’ which truncated wave b of (B) and launched wave c of (B).
If wave c of Wave (B) has begun, wave c of Wave (B) would equal wave a of Wave (B) at 2952. Sometimes wave c will be 61.8% of wave a and, if that were the case, the S&P 500 would carry up to 2827. In addition, the 78.6% retracement of the 593 point decline from 2940 to 2347 is 2813 which is also near the highs on October 17 (2817), November 7 (2815), and December 3 (2800). This suggests that the over head supply should slow what has been a freight train even though momentum has remained strong.
The 21 day average of net Advances minus Declines percent has held above 10.0% since January 8 which is rare. The last time it occurred was in March 2016 after the S&P 500 had successfully retested the January 2016 low in February 2016 before reversing higher. (Second chart below)
The persistent strength increases the odds that wave c of Wave (B) is progressing. If correct, it is likely to carry up toward 2952 if the resistance surrounding 2815 is overcome. The willingness to buy every dip no matter how shallow suggests the Fear Of Missing Out (FOMO) has returned with a vengeance.
Wave (B)’s often generate an intense level of optimism since the rampant fears that led to the sharp Wave (A) decline are proven to be way over done and replaced by a golden glow that all is well. In December investors were certain the Federal Reserve would increase rates until the U.S. economy was in recession since the economy was already slowing down.
Now that the Fed has hit the pause button the worst fears have been banished and the employment report showing 311,000 jobs were created in January proved the economy was not going into the abyss as feared. It has been amazing 180 degree reversal in sentiment and mindset. The widespread complacency that is growing every day will be rudely upset if the larger pattern analysis if on target.
Once Wave (B) is complete the pattern indicates that it will be followed by a Wave (C) decline that will in all likelihood crunch the S&P 500 below the December low of 2347 as noted by the red line on the chart below. My guess is that Wave (C) will begin before mid-year as investors confront the prospect that the Federal Reserve will increase rates in the second half of 2019. This is appealing since investors are now expecting the Fed to cut rates before the end of 2019 so the notion the Fed could raise rates would replace the golden glow with a dose of freezing cold water.
If this potential develops further it would create an attractive shorting opportunity.
Euro – Dollar
As of February 15 there were only 23% of traders who were bullish the Euro, which reflects a high level of pessimism. As noted, sentiment if often early and waiting for momentum to turn to confirm an intermediate low is necessary. The Euro experienced a postive key reversal on February 19 which suggests a rally above 1.170 has begun.
The Dollar index experienced a key reversal lower today (February 19), which suggests a decline to 95.00 should happen quickly, with a drop to 94.00 to follow.
Treasury Yields
More than $11 trillion of sovereign bonds are now yielding less than 0% which is certainly tugging Treasury yields down. The expectation is that the next move in the 10-Treasury yield will be higher, if the U.S. economy improves in the second quarter and inflation begins to drift higher. The 10-Treasury yield could reach the underside of the red trend line connecting the lows in July 2016 and September 2016 at 2.85%.
The 30-year Treasury yield could test of the red trend line from the 2016 low near 3.15%.
Gold
The expectation in recent weeks has been that Gold would rally above the high of $1326 on January 31 to complete the move up from the mid November and August low. Gold rallied to $1341 on February 19 and could test the horizontal trend line connecting the July 2016 and January 2018 highs near $1357. As long as Gold does not close above $1366 (January 2018 high), the triangle pattern I’ve discussed will remain the preferred pattern.
The rally from the low in August 2018 is in the context of a large triangle pattern that began in July 2016 after Gold topped at $1375 (A). The current rally from the low in August at $1160 would be wave d of the triangle and be followed by a decline representing wave e, which would finish Wave (B). If Gold completes the triangle in coming months, the next move should carry Gold up more than $300 in Wave (C).
Gold Stocks
Last week I wrote:
“If the pattern analysis for Gold is correct and Gold does rally above $1326, GDX may be able to attack the green down trend line, which connects the highs from April, May, and June near $22.90.”
Gold did indeed rally above $1326 and GDX closed at $23.14 and above the green trend line. This should open the door for a move up to the red trend line near $23.80.
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
The MTI fell below the blue horizontal trend line on November 21 so the probability of a bear market remains intact until the MTI climbs above the green horizontal trend line as it did in March 2016. However, the MTI generated a Bear Market Rally (BMR) buy signal on January 16, 2019. If the pattern analysis is correct and the S&P 500 is in Wave (B) of a larger correction that will ultimately carry the S&P 500 below 2347 in Wave (C), the MTI may repeat how it traded in 2015.
After dropping below the blue horizontal line and confirming the probability of a bear market on August 15, 2015, the MTI crossed above the red moving average on October 8, 2015 giving a Bear Market Rally buy signal. The MTI was able to briefly climb above the green horizontal trend line confirming the probability of a Bull market in November 2015. However, this was reversed when the MTI rolled over and then the S&P 500 broke below chart support on January 6, 2016
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.
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