Written by Jim Welsh
Macro Tides Weekly Technical Review 03 February 2020
From its high on January 22 of 3338, the S&P 500 was off a scary -3.39% at its low of 3215 on January 31. Investors heard the clarion call to buy the dip after learning the Peoples Bank of China was injecting liquidity into their banking system, and believe it will be just a question of time before every central bank on the planet joins the effort to buttress the global economy. Within an hour of the opening the S&P 500 was up 1.74% off the low on January 31 and just shy of a 50% retracement of the 123 point drop from the high.
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The reported number of those infected has been doubling every three days. There are now more than 20,000 people reported infected and 425 fatalities. The Wuhan Coronavirus graphic is from January 30, when there were 9,000 reported infections and more than the total number of SARS cases which took 6 month to play out. There is zero indication that the exponential spread of nCoV-2019 has peaked.
The number of infections and fatalities will continue to grow for weeks, even after the acceleration phase has topped.
The phrase ‘whistling past the graveyard’ refers to an attempt to stay cheerful in a dire situation by proceeding with a task, ignoring a major risk, and hoping for a good outcome. If the nCoV-2019 coronavirus becomes a full blown pandemic, central bank rate cuts will inspire hope, but not enough buying in the real economy to prevent a global slowdown. As any investment veteran will tell you, hope is not a good investment strategy.
Prior to this correction bullish sentiment was excessive and the market was overbought. At the next intermediate low, bullish sentiment will have given way to caution or a level of bearishness, and the S&P 500’s RSI and market internals will be at least somewhat oversold. The 10-day day average of the Call / Put ratio is not even close to the levels it has reached coincident with trading lows in the past 18 months. This suggests that the complacent attitude so far expressed by investors could prove wildly misplaced, as the S&P 500 falls more than expected and turns stampeding bulls into shaken bulls and more likely timid bears.
The S&P 500’s RSI closed at 47.4 on February 3 which is well above the RSI lows on June 3 and August 5, and higher than the October 2 RSI of 33.4. During the fourth quarter of 2018, the S&P 500’s RSI fell comfortably below 30.0 as selling intensity picked up. The coronavirus certainly has the potential of unleashing more selling pressure, especially if China extends the reopening of businesses beyond February 9.
The 21-day average of Advances minus Declines is neutral after the recent decline and after being overbought in mid January. It is likely the 21-day average of Advances minus Declines will fall below the green horizontal line and become oversold, as it did in the fourth quarter of 2018 before a solid trading low takes hold.
As noted in last week’s WTR, the VIX closed at 18.23 on January 27 and well above the levels cited in the January 21 WTR:
“A VIX close above 16.5 would exceed the intra-day high of 16.39 on January 6 and break above the downtrend line from the December 2018 high of 36.20 in the VIX.”
Also noted last week was this observation about the trend of the VIX:
“As long as the VIX holds above the down trend line currently 15.60 (which is expected), volatility is likely to trend higher.”
The Trading Index (TRIN, ARMS) measures the balance between buying and selling pressure relative to the number of advancing and declining stocks. When selling pressure becomes disproportionate relative to the number of declining stocks, the TRIN rises over 1.0. Short term trading lows are often indicated when the 10-day average moves above 1.30. If the moving average of the TRIN is well above 1.30, the 10-day average of the Call / Put ratio is below 1.0 (C/P ratio chart earlier), and the 21 day average of Advances minus Declines is below -400, an intermediate low is probably nearby.
Although the TRIN moving average is above 1.30, the other indicators are nowhere near levels that could be construed as confirming a lasting trading low. While anything in the market is always possible, the odds favor a short term rally that allows the TRIN to come down a bit, before the next leg lower in the S&P 500 commences.
The level of 3244 has developed as a short term support area. As long as 3244 holds the S&P 500 has the potential to rally above 3293 to complete an a-b-c corrective rebound from the low of 3234.50 on January 27. The low of 3234.50 may be wave 1 of a much larger decline or wave A of a larger A-B-C correction that will likely pull the S&P 500 below 3200 before another trading low develops.
Are We There Yet? No.
Based on the analysis provided in the January 21 WTR that indicated the S&P 500 might top at 3336, I recommended establishing a 20% short position in the S&P 500 via the ETF (SH) as long as the S&P 500 was trading above 3320, using a stop of 3370. The S&P 500 traded above 3320 on January 21, 22, 23 and 24 topping at 3337 on January 22. SH could have been purchased at $23.35 or lower. Increase the short position to 40% if the S&P 500 trades above 3293. Lower the stop to a close above 3324.
Treasury Bonds
The 10-year Treasury yield closed at 1.788% on January 15 and below the green trend line and has continued to fall. It closed at 1.512% on January 31. The RSI is below 26.0 indicating that the decline in the yield has become over done. Remember bond yields are the inverse to prices, so the low yield RSI means Treasury bond prices are overbought. This suggests that yields can tick-up in the short term, but the longer term down trend remains intact.
The RSI for the 30-year Treasury bond is 29.4 so it is less overdone, but probably ready to take a breather in the near term. Longer term the expectation remains that the 30-year Treasury yield can fall to the low of 1.905% by mid-year. The red trend line (chart below) connecting the low in January 2015 at 2.26% and the low of 2.106% in July 2016 suggests the 30-year yield could fall to 1.80% or lower if it tags the trend line.
Since the high in November 2018 at 3.455%, the 30-year yield has been declining in what appears a 5 wave pattern (green numbers). A wave 5 and would be completed once it falls below 1.905% at a minimum. If correct this suggests a major turning point could develop once this pattern is complete, which would lead to a significant rise in Treasury yields.
Treasury Bond ETF (TLT)
As discussed previously:
“The correction that has developed since the high of $148.67 wave (3) may still be wave (4) from the November 2 low of $111.90. If correct, TLT would have the potential to rally above $148.67 in coming months.”
TLT rallied to $145.99 on January 31 and its RSI is a bit over 70, so a brief pullback is possible.
Gold
The bounce from the low of $1536 on January 14 is choppy and consistent with an upward correction, after the sharp decline from the high of $1609 on January 9. The pattern suggests Gold will fall below $1536 before any meaningful rally can take hold. A decline to near $1450 can’t be ruled out.
Commercials traders (red line middle panel) are holding their largest short position in history, while the trend followers (Large Specs – green middle panel, Managed Money – blue line bottom panel) have a large long position in Gold futures. My guess is the trend followers are going to get smacked. A decline to near $1450 can’t be ruled out.
Gold Stocks
I still expect GDX to fall below $27.68, potentially near $27.10, with an outside shot at $26.00.
Dollar
As long as the Dollar holds below 98.54, the Dollar is expected to trend lower and eventually trade below 96.00 and test 94.00.
Emerging Markets
The price pattern in the Emerging Market ETF (EEM) suggests that EEM could drop to $38.00 or so to complete a big A-B-C correction since the high of $51.76 in January 2018. It has become short term oversold (RSI 31), so a bounce to $43.50 or so is possible. If the Wave (C) decline from $46.32 is equal to the Wave (A) drop (51.76 – 37.35 = 14.41) EEM could fall to $32.00 (46.32-14.41).
If the global economy slows more than expected a decline to $38.00 seems plausible. The only way a decline to $32.00 occurs is if the global economy is admitted to the ER. No worries though. Central banks will cut rates repeatedly.
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, 2019 confirming the uptrend.
The January 2018, October 2018, and July 2018 highs are connected by the red trend line. The breakout above this trend line in early November was significant. Often, markets retest a breakout level before either negating the breakout or resuming the uptrend. The sharp 3 day drop from 3154 on November 27 to 3070 on December 3 was a retest.
Given the excessive persistent bullishness though so evident in January another retest seems plausible. The key will be the form of the pullback and how quickly bullish sentiment dissipates. If the S&P 500 retests 3100 after a down-up-down correction, it will likely continue to rally toward 3500 and higher.
If the S&P 500 falls in a 5 wave decline as it tests or breaks below 3100, it would suggest the subsequent rally will represent a shorting opportunity.
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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