Written by Jim Welsh
Macro Tides Weekly Technical Review 06 April 2020
The stock markets around the world rallied on April 6 and the headline was because the number of new cases fell. However, the number of reported COVID-19 cases around the World actually rose when measured from April 5 to April 6, increasing in Italy, Spain, USA, Germany, and France. Obviously the number of new World cases didn’t fall and actually went up by 64,305 when compared to April 5.
Please share this article – Go to very top of page, right hand side, for social media buttons.
Although the number of new cases didn’t decline, the rate of change did rise more slowly on April 6 compared to April 5, which investors took as a sign that a turn for the positive had occurred. So even the second derivative (rate of change) didn’t decline either, but instead rose at a slower rate.
For markets desperate for some glimpse of the light at the end of the tunnel this was enough. As noted in the April issue of Macro Tides:
“It is possible there won’t be a retest as investors rush in to buy before the S&P 500 gets back to 2192, because they don’t want to miss out on the big rally they are sure is to follow based on unprecedented monetary and fiscal accommodation. Ironically, it may be more bearish in the long term if the S&P 500 drops to 2360 (near the December 2018 low of 2347), and then rallies to 2750 – 2800.”
Does today’s rally rule out the potential for a retest of the March 23 low of 2192? I don’t think so but it does suggest a rally to 2750 – 2800 is coming and maybe sooner than later.
From the low of 2192 the S&P 500 rallied to a high of 2641 on March 31 a gain of 449 points, which appears to be Wave A. The quick sharp drop to 2447 on April 1 was likely Wave B. The rally since the low of 2447 is the beginning of what should be Wave C. If Wave C is equal to Wave A, the S&P 500 would move up to 2896. The other two primary targets are the 50% retracement of the plunge from 3393 to 2192 which is 2792 and the 61.8% retracement target of 2934. Wave A lasted about 6 trading days which suggests Wave C could rally until April 9 if it is equal in time, and potentially to April 14 – 15 if it lasts 1.618 times as long.
This rally can be fueled by more less bad news, and especially if Saudi Arabia, Russia, U.S., and other major oil producers agree to lower oil production. An answer could come as soon as April 9 when a meeting is scheduled. It is also possible that today’s strong rally is wave b within Wave B and could be followed by wave c of Wave B that would bring the S&P 500 down to near 2447. If wave c of Wave B does cause the S&P 500 to drop to 2447, it would represent a short term buying opportunity, in anticipation of Wave C to 2750 or higher.
History suggests that a retest is quite likely. In the prior 12 major declines since 1929, the S&P 500 rallied and then posted a secondary low which was on average -0.4% below the original low. The range of outcomes was quite large.
If and when the S&P 500 begins to descend toward the March23 low of 2192, the momentum of the decline must be monitored. The stronger the downward thrust the more likely a full retest will develop.
The most important determinant will be the progression of COVID-19 and whether the shelter in place order is rescinded on April 30. It is estimated that at least 25% of those infected with COVID-19 are asymptomatic as the CDC has indicated. According to Robert Redfield, the director of the Centres for Disease Control and Prevention, 25% of people infected don’t present any symptoms or fall ill, but can still transmit the illness to others:
“We have pretty much confirmed that a significant number of individuals that are infected actually remain asymptomatic.”
The only way to identify who is infected is to test everyone, or wait until they show symptoms and seek medical attention. The numbers being reported are only for the very small numbers of those who have been tested or received medical care.
The real risk is to suspend the shelter in place order before more people are tested. New York has done more testing than any other state but it has only tested 1.6% of its population, while many large states are less than 0.50%.
As more tests are performed in Florida, Texas, and California, the number of infections and deaths are going to ramp up. It is certainly good news that the rate of increase in New York, Italy, and Spain are beginning to flatten, but to extrapolate that this represents a real turning point toward reopening the global and U.S. economy seems premature. If the S&P 500 does manage to rally into mid April, there is a substantial risk of a meaningful decline, if the shelter in place order is extended beyond April 30 as discussed in the April Macro Tides:
“If the shelter in place rule is extended from April 30 to May 31 or beyond, GDP estimates for 2020 will be revised lower as will S&P 500 earnings. I’m not sure the stock market has priced in this risk, which is another reason why a retest of the March 23 low seems likely.”
Treasury Bonds
Treasury yields may move higher if the S&P 500 rallies above 2800, a deal is lower oil production is achieved, and more discussion of a $1 to $2 trillion Treasury bond offering for infrastructure advances. The move from 0.398% to 1.266% was 3 waves as was the drop to 0.568%. The pattern suggests the 10- year Treasury yield will rise to 1.15% and potentially above 1.266% before the next decline in yields takes hold.
The 30-year Treasury yield is likely to rise to 1.670% and potentially above 1.940% before the next decline in yields takes hold, since it exhibits the same pattern as in the 10-year Treasury yield.
Gold
Last week I thought the short term pattern suggested that Gold could push above the March 26 high of $1638.60 before a more protracted decline sets in. Gold spiked up to $1666 on April 6. The closing high was $1678.60 on March 9. Should Gold close above $1678.60 its RSI may register another lower high reinforcing the loss of upside momentum.
The next leg lower could take Gold down to $1400 – $1425 before a more significant trading low is in place. The positioning in Gold remains negative.
Gold Stocks
GDX may test $30.00 before another decline takes hold and brings GDX below $23.00.
Dollar
The Dollar rallied to 100.93 on April 6 which is an important level of resistance as noted last week:
“The Dollar will continue to be a key in coming weeks, as it has been. There is a chance it could rally above 101.00.”
A rally above 101.00 would suggest the Fed’s efforts to provide other central banks with Dollar liquidity had been insufficient and a sign that liquidity is still a problem. A close above 101.00 would open the door for the Dollar to rally above 103.00, which would not be good for financial markets.
Emerging Market
After some additional upside, especially if the S&P 500 rallies above 2800, EEM is expected to trade down to $30.10, which was the intra-day low on March 23. This would complete its Wave 5 decline from the high of 46.32, and set up a great buying opportunity.
Monitoring Coronavirus Trends
Hong Kong, Taiwan, and especially Singapore have been praised for their handling of the outbreak of COVID-19. Each of these countries was successful in damping down the number of infections. It is thus worrisome that infections have begun to increase. Whether this is due to asymptomatic infections or merely a secondary outbreak is not known. Irrespective of the reason the rebound in infections is not a good sign.
It is sobering when the total deaths for every country are published each day. Sadly the actual number of deaths are from COVID-19 are underreported. In most cases this is not intentional since the cause of death is not attributed to COVID-19, unless a test is performed conforming the victim was infected. In a number of cities in Italy, Spain, and France, the number of deaths were more than double those ‘officially’ attributed to COVID-19.
WorldoMeters is the site that tracks the number of cases and deaths by country. If you click on USA, the data for each state is provided.
The column on the far right below compares the number of tests performed in each country per each 1 million in population. Switzerland and Israel have two of the highest test rates while the U.S. is one of the lowest. This will change in coming weeks as the number of tests in the U.S. increase, as will the number of new cases and deaths
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
Once the S&P 500 closed beneath 3214 (the intra-day low on January 31 and February 24), which was the expectation discussed in the February 24 WTR, an intermediate peak was confirmed. The unrelenting decline that has followed has caused the MTI to drop sharply. The MTI fell below the blue horizontal line on March 11, confirming the onset of a bear market. A cross above the red moving average would generate a bear market rally buy signal. Despite the large rally off the March 23 low the MTI is just now turning up.
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.
Bonus
A little humor in the midst of the negative news, sadness, and death is important as everyone deals with this crisis. This reminds me of a Jay Leno monologue and I hope you enjoy this. Thanks to Santiago Cuneo for passing it along.
THE ECONOMY IS SO BAD THAT….
- My neighbor got a pre-declined credit card in the mail.
- CEO’s are now playing miniature golf.
- Exxon-Mobil laid off 25 Congressmen.
- I saw a Mormon with only one wife.
- McDonald’s is selling the 1/4 ouncer.
- Angelina Jolie adopted a child from America.
- Parents in Beverly Hills fired their nannies and learned their children’s names.
- A truckload of Americans was caught sneaking into Mexico.
- A picture is now only worth 200 words.
- When Bill and Hillary travel together, they now have to share a room.
- The Treasure Island casino in Las Vegas is now managed by Somali pirates.
- And, finally… I was so depressed last night thinking about the economy, wars, jobs, my savings, Social Security, retirement funds, etc., I called the Suicide Hotline. I got a call center in Afghanistan, and when I told them I was suicidal, they got all excited, and asked if I could drive a truck.
.
