Written by Jim Welsh
Macro Tides Weekly Technical Review 29 June 2020
Resilience in the Face of Bad News
Today’s title is in reference to a movie from 1976 “The Bad News Bears” about a Little League Team that couldn’t do anything right but improved to the point of almost winning a championship. With today’s market it seems that the bulls don’t have “much on the ball” with fundamentals, but they keep on making money in the market.
Please share this article – Go to very top of page, right hand side, for social media buttons.
After reviewing a number of the major market averages and their respective 5 day and 13 moving averages last week I summarized the outlook:
“The table is set for a top soon and will be confirmed once the major averages close below their rising trend lines and the 5 day moving averages fall below the 13 day average. The depth of any correction will be dictated by the degree of weakness in the Nasdaq 100.”
On June 24 the 5 day average closed below the 13 day on the DJIA, Transports, Russell 2000, and S&P 500, and every average closed below its rising trend line. The DJIA, Transports, and Russell 2000 have been trading under their 200 day average since June 10, and on Friday the S&P 500 closed below its 200 day average.
Over the weekend a number of mayors and governors rolled back a portion of the reopening of their economies, with Texas closing bars and Miami closing all of its beaches during the July 4th weekend. These moves are well short of broad closures which investors have been comforted by since it will only slow the reopening process. While this is true it overlooks the reality in how people will react to the spike in infections in so many other states. Many people will adjust their behavior voluntarily and choose not to go out to dinner or go to a shopping mall, so the economy will take a hit even though no governors take more aggressive action.
Given the downbeat news about roll-backs and significant increases in COVID-19 cases, which are not a plus for the economy, the strength in bank stocks was a surprise after they took it on the chin Friday. The regional bank stock ETF (KRE) was up 4.3% and the S&P Bank Index jumped 3.7%. The market also got a boost from Gilead Sciences which announced it will charge $2,340 for a five day treatment for its drug Remdesivir, while Insurance companies will pay $3,120.
Despite the strength today the 5 day average is still below the 13 day average for every major average. However, the S&P 500 did close back above its 200 day average after breaking below it on Friday, so this is a short term positive. In addition, seasonality going into the Fourth of July holiday should support additional upside. At a minimum the S&P 500 is likely to exceed its June 25 high of 3086 and could test the uptrend line near 3110 it broke below last week. If the S&P 500 closes above this trend line it could surpass the high of 3155 reached on June 23 to complete an a-b-c from the low of 2966.
The Nasdaq 100 (QQQ) traded under its rising trend line for the first time in two months on June 29 before reversing. The difference today is that the Nasdaq 100 was lifted by the strength in the other sectors that previously have been weak.
The bifurcation between the major market averages has been going on for a long time, with the Nasdaq 100 zooming to a new all time high while the broader market averages lag far behind. There is also a bifurcation between measures of sentiment which have become extraordinary.
The American Association of Individual Investors (AAII) conducts a weekly survey of its members and reports the percentage of those who are bullish or bearish. Last week the percent of Bulls was just 24.1% while the percent of Bears were 48.9%, creating a spread of -24.8. This is a low number and indicates that individual investors are quite glum about the market. Readings below -20.0 (green horizontal line) have coincided with a number of short term and intermediate trading lows.
Investors Intelligence canvasses investment letter writers and records how many are bullish or bearish. While the AAII survey shows a high level of bearishness, the II survey shows a high level of bullishness. This is really strange. As you can see, both surveys indicated a high level of bearishness in late 2018 and in March 2020, and in December 2019 and January 2020 both showed that bullishness had become excessive.
The Call / Put ratio indicates that bullishness is still quite high (way above red horizontal line) and suggests that a good trading low is not at hand. The Call / Put ratio was very low and thus bullish in late 2018 and in March 2020, just like the AAII and II surveys.
What accounts for the discrepancy between these three measures of sentiment that have in the past aligned with tops and bottoms? The AAII reflects the sentiment of retail investors and are likely more prone to news. The recent uptick in infections would resonate with them and cause them to become cautious.
AAII’s membership probably includes a sizable portion of small business owners and from their view the economy doesn’t look too good, which is likely affecting their expectations for the stock market.
The investment writers that comprise the II survey incorporate trend following strategies and are generally more knowledgeable and would readily embrace the notion that the Fed’s actions will continue to be positive for the stock market. The Call / Put ratio measures what short term traders are doing with their money and is sensitive to short term momentum trends. Measures of sentiment are of value when they reach extremes. Investors become overly bearish after a big decline which has caused them to sell. Once the selling is exhausted a bottom usually forms. The reverse occurs at tops as investors buy as the market goes up and become fully invested near a high.
Measures of sentiment are the tools to form a contrary opinion relative to the prevailing bullish or bearish sentiment. On balance sentiment is now more indicative of a high in the market after some additional short term strength.
The market had the opportunity to break down and it didn’t in part because investors are bullish and are willing to ignore bad economic news and the recent surge in COVID-19 infections. Traders have been rewarded by buying every dip no matter how small and they will continue to trade that way until it stops working. The economy is not going to experience a V-shaped or strong recovery, but for now that doesn’t matter. The current surge in infections will continue into the middle of July.
Dollar
The Dollar looks poised to push above the recent high of 97.74 and make a run to 98.50 – 98.80. A close above 99.00 could lead to a rally to 100.50. In the June 8 WTR I recommended buying the Dollar index below 96.44 and the Dollar ETF UUP under 26.10. These positions were triggered on June 9. Use a close below 96.10 as a stop on both positions.
Gold
As forecast last week Gold did post a new high of $1778.40, and is likely to modestly exceed this high to complete the rally off the March low. Gold is up less than 3% from the high of $1744 on April 14. Bullish sentiment is high even though Gold hasn’t made much progress in two months.
Silver
Inter market divergences between the major market averages in the stock market are usually a sign of a coming change in trend. The Nasdaq 100 has made a new all time high but no other major average has confirmed it by also posting a new high.
Inter market divergences develop in the metals market when Gold or Silver make a new high or low and the other metal fails to confirm. Gold has made a higher high above the high it reached in March, but Silver has failed to better the high it reached in February.
Bullish sentiment is high, Gold and Silver are just coming off overbought levels, and the inter market divergence is just one more reason why a correction is likely before another rally begins. Silver is 1.5% above the high it made on May 18 at $17.46, so like Gold it hasn’t made much progress in the past month. Last week Silver broke the uptrend line from the low in March and is hugging the underside of the line. A rally in the Dollar in coming weeks would provide an excuse for profit taking in Gold and Silver.
Treasury Yields
I know I sound like a broken record but I still expect Treasury bond yields to fall with the 10-year Treasury yield dipping below 0.543%. The 10-year Treasury yield has closed below the lower trend line for two days so it’s on its way.
It just occurred to me that there is a large population of younger people who have no idea what the expression ‘like a broken record’ means, and probably what a turntable is as well.
The 30-year Treasury yield has broken below the rising trend line and is expected to fall to 1.25% and possibly retest 1.126%.
The Treasury ETF TLT has broken out above the down trend line and is expected to rally above 168.00 and possibly to 172.15, which was the high on April 21.
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
The MTI generated a Bear Market Rally (BMR) buy signal when it crossed above the red moving average on April 16 when the S&P 500 closed at 2800. A new bull market was confirmed on June 4 when the WTI rose above the green horizontal line. Although the MTI has confirmed the probability of a bull market, it doesn’t preclude a correction.
For the first time the MTI has begun to roll over as the upside momentum in the S&P 500 has started to decelerate, and the S&P 500 has formed a shelf of critical support. A close below 2965 would violate that support and open the door to additional weakness.
Investors have blindly assumed that as long as the Fed maintains its accommodative policy they have nothing to worry about. Their faith is likely to be tested in coming months. The economy is going to struggle, infections are going to rise which will keep many consumers from spending at anything approaching ‘normal’, especially those over 55 whose spending represents 40% of GDP. This will continue to inhibit how fast and the extent the economy can reopen, and raise solvency issues for more consumers and businesses before year end.
Investors are likely to become increasingly concerned if the polls not only show that President Trump is well behind Joe Biden, but that the Senate may also be in play. The market may receive one last shot of adrenalin if as I believe, Congress extends federal unemployment benefits beyond July 31 and funds for state and local governments. This would allow the S&P 500 to rally to a new all time high before having to face the prospect of a second wave of COVID-19.
.