Written by Jim Welsh
Macro Tides Weekly Technical Review 30 December 2019
The 80-Year Cycle
The coming decade is the culmination of the 80 year cycle that has marked significant turning points in our nation’s history i.e. 1781, 1861, 1941, and potentially 2021. Each of the prior turning point decades included major changes and upheaval, so we should be prepared.
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Waiting to Exhale
The S&P 500 has rallied since the low on October 7 without taking a breath. Markets are a reflection of human behavior and the normal process is to inhale and then exhale, so the recent behavior is simply not normal. The S&P 500 has become overbought and sentiment is universally bullish. The S&P 500 will be vulnerable to at least a modest correction in the first part of January. With bullish sentiment so widespread and momentum strong, the initial pullback is likely to be shallow as investors buy the dip. A better feel for how the S&P 500 will trade in the first quarter won’t really be possible until we see how it rebounds after any setback.
Initial support should be the red trend from 2016 near 3170. The more significant level of support is the December 3 low at 3070. If and when 3070 is tested, how the S&P 500 responds will reveal much about what to expect in coming months.
Treasury Bonds
Today, December 30 was an interesting day in the Treasury bond market. The 10-year Treasury yield did not exceed its high of 1.949% on December 24 rising to 1.940% before closing at 1.895%.
However, the 30-year Treasury bond yield did exceed its December 24 high of 2.376% when it rose to 2.390%. In the process the 30-year Treasury yield tested the red down trend line and then reversed lower closing near the low yield of the day (2.343%).
The reversal lower after testing the red trend line, and the divergence between the 10-year and 30-year yields, could be a sign of an intermediate low. Obviously, trading was thin so trading next week will be important.
Treasury Bond ETF (TLT)
Last week I noted that TLT had made a series of intra-day lows below $136.00 and thought a decline below $135.76 would not be good.:
“In the last 3 trade days TLT has made an intra-day low of $135.76, $135.93, and $136.00. An intra-day drop below $135.76 would be bad.”
On December 30 TLT dropped to an intra-day low of $135.66, but then rallied to close at $136.82. In the process TLT fell below its version of the red trend line before rebounding strongly.
If today’s low is important, TLT should not drop below $136.00 in coming days and should mount a rally that carries it above the black down trend line near $139.50. A decisive close under $136.00 could open the door for a decline to $130.50. Maintain a close below $136.16 as a stop. If TLT trades above $141.77 raise the stop to $137.20. TLT paid a $0.218 dividend on December 19.
Dollar
The Dollar has been expected to fall to near 96.00. The Dollar’s RSI is down to 31, so a bounce is likely in coming weeks. Although the Dollar may hold up for awhile, in coming months I expect the Dollar to trend lower.
Gold
I thought Gold could jump above $1500 in the short term and it has rallied to $1515, which is near 4 separate highs during October near $1516. A rally to a higher high above $1556 is not likely until Gold drops below $1446 and ideally under $1420.
Positioning in Gold is negative with the trend following Large Speculators holding a large long position while the Commercials are shorting. The expectation of a rally that does carry Gold above the August high of $1556 is predicated on the price pattern and assumes the August peak was wave 3 from the August 2018 low near $1160. The choppy trading since then is wave 4. This is why aggressive traders can buy Gold (GLD or IAU) if it trades under $1420, using a 1.5% stop on a closing basis.
Gold Stocks
I thought Gold could pop above $1500, and if it did, GDX could test the September high of $29.50. Gold did jump above $1500 and GDX traded up to $29.49 on December 30. If Gold does drop below $1420 and GDX trades under $25.85, traders can establish a 50% position using $25.10 as a stop.
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 on February 26 confirming the uptrend. The progressive weakening in the technical structure of the market since late April led me to reduce exposure.
When the S&P 500 was trading at 2877 at 7am on May 16 I lowered the exposure in the Tactical U.S. Sector Rotation Model Portfolio from 100% to 50%. I lowered exposure to 25% in the Tactical U.S. Sector Rotation program on June 11 after the S&P 500 gapped up to 2903 at the open. I lowered exposure to 5% from 25% at the close on Wednesday when the S&P 500 was 2913. I sold the 5% position in Technology ETF (XLK) shortly after the opening on July 1.
I established a 25% short position in the S&P 500 through the purchase of the 1 to 1 inverse ETF SH on July 23, when the S&P 500 traded above 2995 (SH $26.09). The short position was increased to 40% on August 8 when the S&P 500 was trading at 2930 (SH $26.69). The short position was reduced to 20% on August 28 when the S&P 500 was trading at 2882 and SH was sold at $27.09. The remainder of SH was sold on September 25 at $26.03.
Becoming cautious in late April and July was prescient as the S&P 500 subsequently corrected by more than 5%. What I didn’t anticipate was how quickly the market would rebound after any positive Tweet from President Trump, nor how the market would rise so persistently after October 7 even though no concrete signs of a trade deal appeared.
When the S&P 500 traded up to 3040 on October 28 I purchased a 20% position in SH for my managed accounts at $25.59. SH is the 1 to 1 short S&P 500 ETF that gains in value when the S&P 500 declines. The short position in the S&P 500 was increased from 20% to 40% on the opening of November 19 when SH opened at $24.87, and sold on November 22 when SH trading at $25.03 or higher.
If the S&P 500 does pull back in the first quarter, as the measures of investor sentiment suggest, the key technical level will be the December 3 low 3070, which is also where the red trend line connecting the January and September 2018 highs resides. If the S&P 500 retests 3070 after a down-up-down correction, it will likely continue to rally toward 3500.
If the S&P 500 falls in a 5 wave decline as it tests or breaks below 3070, it would suggest the subsequent rally will represent a shorting opportunity. Between now and early to mid January, seasonality and the consensus bullish outlook for 2020 is likely to keep selling pressure muted. The market has been lifted by a string of good news raising expectations for 2020 and leaving an overbought and over loved market vulnerable to some profit taking in the first quarter. Of course, any hiccup before a Trade Agreement is actually signed will cause a flurry.
In the January Macro Tides (later this week) I discuss at length why the economy may slow more in the first quarter than investors expect. If correct that could provide a reason for profit taking in the first quarter.
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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