Written by Jim Welsh
Macro Tides Special Update Weekly Technical Review 13 March 2020
Last night the S&P 500 futures were down 75 points and traded as low as 2393.50 before reversing higher. As discussed in the March 12 Special Update the market was expected to rally when Congress passed a safety net bill:
Please share this article – Go to very top of page, right hand side, for social media buttons.
“The stock market will rally when Congress passes the bill to help cushion the blow for most Americans and the economy. I suspect that rally will last longer than any rally since the peak, but it will not turn the tide of the trend.”
In conversations with many financial advisors yesterday I thought the S&P 500 would trade lower in the first two hours on March 13 and then begin to recover in expectation that Congress would act over the weekend. It appears that reversal took place in overnight trading.
This low in the S&P 500 futures probably marks the low of wave 3 from the February peak. The S&P 500 futures rallied 284 points from a low of 2853 on February 28 to 3137 on March 3 for Wave 2, after the Fed cuts rates by 0.50%. If Wave 4 matches the extent of Wave 2 the S&P 500 could rally up to 2678 and possibly up to 2734, which was the intra-day low on March 9, March 10, and March 11 on the S&P 500 cash before the final thrust lower.
Once this bounce is over the expectation is that the S&P 500 will either retest the overnight low or come very close in the next few weeks. As noted in the March 12 Special Update, large institutions are expected to reduce exposure to stocks as the economic news deteriorates in coming weeks, and corporate earnings estimates are lowered:
“One of the problems is that the majority of large institutional investors were very optimistic about the outlook for the U.S. economy, especially after the trade deal was announced last December. The speed of the decline has caught most institutions off sides, which is why the rallies have been so short lived – measured in minutes rather than in days and weeks. Since the fundamental outlook for the economy has turned negative so quickly, most large institutions haven’t had the opportunity to lower their exposure. This is why they are likely to sell into any Congressional inspired rally, especially since the news is going to get worse as more infections are reported.”
As reviewed in the March 2 WTR there have 5 high energy declines since 2011 prior to the recent smash. A review of each may prove instructive as to whether a retest of the low on March 12 is likely or not. A high energy decline is determined when the 5-day average of Advances minus Declines falls below -1200.
I would suggest you read the March 09 WTR again, as the 5-day average of Advances minus Declines was -1824 on March 12. Will institutions respond to the coming negative news by selling or will they ignore the downgrades in GDP and earnings in anticipation of a recovery in the second half of 2020? I don’t know as much will depend on the rate of increase in infections and the extent the U.S. economy is shut down in coming weeks.
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.
.
include(“/home/aleta/public_html/files/ad_openx.htm”); ?>
