Written by Jim Welsh
Macro Tides Weekly Technical Review 01 April 2019
My expectation has been that the monetary and fiscal stimulus applied since mid 2018 by the Peoples Bank of China and the Chinese government would begin to show stabilization in the Chinese economy before mid year and a firming in the second half of 2019.
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The initial confirmation of this expectation came when the Caixin PMI report for March recorded a marked improvement for manufacturing and services. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) came in at 50.8 for March the fastest pace in 8 months and well above the estimate of 49.6. The Caixin/Markit Non-Manufacturing (PMI) rose to 54.8 comfortably above the expansion level of 50 and above the estimate of 54.4. New orders within the Manufacturing PMI report climbed to their highest level in four months and also rose above 50 signaling expansion. This is significant since a pick-up in new export orders has led to an improvement in the PMI’s for Europe in a few months. This positive domino effect is why China is one of the keys to how the global economy will perform in 2019 and how financial markets will respond to that level of growth.
Despite the new recovery high in the S&P 500, its RSI was well below the level it reached on March 21, which was slightly below the RSI high on February 20.
Click on any chart below for large image.
It is a positive that the DJIA finally exceeded it February high, but its RSI is well below its February level.
Despite the new highs in the S&P 500 the negative divergence with the Russell 2000 is still in place
The strength of today’s move suggests there should be some follow through in the next few days. Although the Transports did not make a new today they likely will soon, if there is some additional strength.
More importantly internal breadth on the NYSE and NASDAQ, as measured by the 21 day net advances minus declines, are well below the levels reached in mid February. These negative divergences may be negated if there is strong follow through in market breadth in the next few days. If the market only pushes modestly higher, (less than 1%), these internal momentum shortfalls will carry a bit more weight.
The breadth shortfall is more significant for the NASDAQ.
The Advance / Decline on the NYSE recorded a new high today which suggests the momentum divergences are a short term problem.
The Advance / Decline line for the NASDAQ is modestly below its mid February level and way under the peak established in September. This suggests the underpinnings for the NASDAQ are weaker than on the NYSE
Buybacks have provided a huge lift for the stock market since the December low. The volume of buybacks has almost doubled.
Between April 7 and April 21 the majority of companies in the S&P 500 will not be able to buy back their stock due to the quarterly blackout period surrounding earnings reports. This will remove a big source of demand for a period of time.
Inflows into equity funds have been low despite the rebound in the market. This implies that most mutual funds are not sitting on high cash balances. This could become a real problem as there are a boatload of IPO’s coming. Lyft came last week but Uber, AirBnB, We Work and 60 more companies will offer close to $250 billion worth of supply in the second quarter. For mutual fund managers who want to purchase some of the IPO’s, but don’t have enough cash on hand to do so, they will be forced to sell other stocks to raise cash so they can participate in the coming IPO’s. Some of the stocks that have rallied the most from their low in December may be the most likely candidates for some selling. Given the weaker technical picture for the NASDAQ, my guess is that the high-flying NASADAQ stocks may be the most vulnerable to selling.
The first quarter was soft for most companies and the market will be sensitive to the forward guidance companies provide for the second quarter and beyond. My expectation is that the majority of companies will likely be somewhat conservative in their guidance, so they can establish a low bar given the level of uncertainty that still exists for the global economy and, if possible, set their stocks up for positive surprises. If companies do guide their second quarter earnings modestly lower, investors may be disappointed which is unlikely to met with cheers or buying. This may result in a pick-up in selling, which would add to supply in April and May.
Treasury Bonds
The rally since the November low has taken the form of an a-b-c with wave a ending on January 3, when the Treasury ETF (TLT) topped at $123.86 Wave (A). Wave (B) took the form of an a down, b up, and c down which ended at $118.64. Since that low TLT rallied to $126.69 which appears to the high for wave 3 of (C). The sharp decline on April 1 after the positive news from China is likely wave 4. This suggests there should be one more rally that exceeds $126.69 to complete wave 5 and the entire rally from the November low.
Last week the percent of bulls exceeded 90% for several days, so sentiment is excessively bullish and commensurate with an intermediate high. Although a reversal will take a few weeks to complete, the next big move in Treasury yields is up not down. The April issue of Macro Tides discusses the fundamental reasons why Treasury yields may rise by more than 1.0% in coming months.
Once I am confident that bond yields have bottomed I will recommend buying an inverse Treasury bond ETF that would profit from a rise in interest rates. If TLT exceeds $126.69 it may be a good idea to sell a portion of any long Treasury bonds in your portfolio.
Dollar & Euro
After a fake-out brakeout above the trend line connecting the December high and February high on March 7, the Dollar closed above the trend line again on April 1. This increases the odds that the Dollar will at least rally above the prior high of 97.71 and could work its way up to 100.0. Sentiment and positioning continue to suggest that once the Dollar tops it should be vulneralbe to a meaningful decline. Larry Kudlow suggested last week that the Federal Reserve should lower the federal funds rate by 0.50%. Although Kudlow talked about the slowing in the global economy, his real target may have been an attempt to get the Dollar to fall.
The Euro had its own fake-out break-out above its down trend line after the FOMC indicated it wouldn’t be raising rates at all in 2019 on March 20. If the Dollar moves higher as expected, the Euro is likely to fall under 1.110 and may tag 1.10 in coming weeks. The short position in the Euro continues to grow which suggests a good rally is coming once the Euro reverses.
British Pound
The British Pound appears to have formed an inverted head and shoulders pattern since last July. A close above 129.10 on the British Pound ETF (FXB) would complete the pattern. The distance from the bottom of the head (121.10 and the neckline at 129.00) is 7.9 points and projects a rally to 135.80 – 137.00 once FXB closes above 129.10. A 50% position in FXB was recommended below 129.00 on March 18 and a 100% if FXB dropped below 126.80.
On March 19 FXB opended at 128.77 and dropped below 126.80 on March 21. Last week FXB dropped to 126.89 and tagging the uptrend line again. Raise the stop on 50% of the position on a close below 126.10 with a stop of 125.40 on the remaining half. The British Parliament appears to fumbling its way toward a less than smooth Brexit. On April 1 the Parliament voted down all four Brexit alternatives. There is another vote scheduled for April 3.
Gold
Last week I wrote:
“Although Gold has moved above the initial target of $1310, the pattern still suggests that Gold will drop below $1282 and potentially under $1250.”
Gold looks poised to fall below $1282 which sets up a decline to near $1250 soon.
Gold Stocks
The Gold stock ETF (GDX) closed below the rising trend line from the November low on April 1. This sets up GDX for a drop to $21.40 and ideally below $21.00. Major support comes in near the blue horizontal line and black uptrend line near $20.50. I would recommend a 33% position if GDX falls below $21.00.
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
The MTI generated a Bear Market Rally (BMR) buy signal on January 16, 2019 (green arrow) and climbed above the green horizontal trend line last week, as it did on March 30, 2016. This increases the probability that a bull market has been confirmed. This does not negate the potential of a pullback to 2720 – 2680 in coming weeks, although the China news and today’s strength probably delays when this will develop. Corrections of 4% to 7% are common in a bull market, which would allow the S&P 500 to fall to 2630 in coming months.
When the S&P 500 closed at 2872 in January 2018 the Weekly RSI was a record high 91.2. In August 2018, as the S&P 500 made a higher closing high, the Weekly RSI had dropped to 69.4 and slipped to 69.2 as it made an even higher closing high in September. With the S&P 500 closing at 2867 on April 1 (today), it is within 5 points of its closing high in January 2018 but the RSI is just 60.7. This is a large negative divergence and that the RSI is so far below 70 is a sign that upside momentum has been waning since January 2018. This is supportive of the potential for another decline that tests or modestly falls below the December low, or at least brings the S&P 500 down to 2630 in coming months.
If interest rates rise in coming months, as the chart of Treasury bonds and TLT suggest, a rotation out of the interest sensitive sectors that have benefited from the decline in long term rates since November is likely.
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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