by Jim Welsh
Macro Tides Weekly Technical Review 20 July 2020
FAMANG Drags the S&P 500 Higher
After reaching 3235 and exceeding the June 8 high of 3233 on July 13, the S&P 500 experienced a sharp intra-day reversal lower falling to 3150 before closing at 3155.
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Despite the big reversal I thought the S&P 500 could still rally above 3300 as noted in the July 13 WTR:
“As long as the S&P 500 holds above 3115 a rally to 3350 and possibly to a new all time high above 3393 is possible before Labor Day.”
On July 14 the S&P 500 dropped to 3127 before regaining its footing and rebounding to 3238 on July 15. After trading sideways for two and half days, the S&P 500 broke out above 3240 on July 20 and is likely to test 3300 soon and potentially the blue and green trend lines near 3350.
Congress will be discussing another stimulus package and the question is not whether the Republicans and Democrats will pass a bill but how much money will be in it. It will be at least $1 trillion but could approach $1.5 trillion. The House passed a $3 trillion bill in May, which was more like a wish list a 7 year old would compose for Santa Claus. The ‘debate’ will include some measure of theatrics as both parties express their concern for the American people, desire to support the economy, and how much pork can be delivered to their constituants. The prospect of another shot of stimulus is likely to keep selling pressure muted.
The Call / Put ratio at one of the highest readings in the past 20 years as almost as high as it was on June 8. The red horizontal trend line represents what normally constitutes a high level of bullishness (125 calls for every 100 of puts). During 2019 the S&P 500 experienced a pullback of 5% to 7% whenever the 10-day average exceeded 1.25. On June 10 the 10-day average reached 1.678 and was 1.655 on July 17.
The high reading on the Call / Put ratio is obviously interesting given how high it is but it is also worth noting that the majority of stocks are not performing like the S&P 500 and certainly not like the Nasdaq 100. On July 20 the S&P 500 closed 0.61% above its June 8 close. In contrast the S&P 500 Equal Weight index is -6.9% below it June 8 close, while the New York Composite and Russell 2000 are -3.45% and -4.48% lower. The Nasdaq 100 closed +8.5% above its June 8 close on July 20. Traders are quite bullish but unless they bought calls on a very narrow list of stocks a trader would not have made money since June 8.
As discussed in the July 13 WTR the Nasdaq 100 experienced a negative Key Reversal which more often than not has been followed by additional weakness (Prior KR’s on Chart). If there was ever a market that could shake off a Key Reversal it is the current myopic focus on the FAMANG stocks which comprise almost 50% of the Nasdaq 100. Although the Nasdaq 100 is 1.1% below its July 13 intra-day high, the Nasdaq 100 did record a new all time closing high on July 20. Breadth on the Nasdaq was narrow with only 1768 stocks rising and 1581 falling as the Nasdaq 100 jumped +2.8%. Breadth on the NYSE was actually negative with 1693 declining stocks, as just 1277 stocks rose with the S&P 500 up +0.84%.
The overall market continues to underperform and that’s not likely to change other than when some promising news on a vaccine is announced. As long as the Mega cap Nasdaq stocks are strong the uptrend is likely to continue unless the Nasdaq 100 closes below the upper rising trend line.
Dollar
The Dollar has been expected to drop below the June 8 low of 95.71 and finish the correction that began on March 16 after the Dollar peaked at 102.99. Traders are expecting the Dollar to break below 95.00 and have been establishing positions in other currencies in anticipation of a rally in those currencies as the Dollar falls. Asset managers are more short the Dollar now than they were in February 2018, and non-commercial traders are also net short.
After the low in February 2018 the Dollar rallied more than 8% in the next 8 months. A rally of that magnitude is not likely but the pattern and positioning suggests the Dollar is setting up to rally and retrace at least half of the 7.0 point drop from 102.99, and rally to 98.00. The European Union is meeting to discuss a stimulus program for the EU, which may provide the ideal back drop for one more pop in the Euro and low in the Dollar before the end of this week.
Gold
GoId has been chopping sideways after trading above $1800 on July 8, which is a bit surprising since a more concerted move higher would have seemed likely. If the sideways chop is wave 4, then Gold may be able to push up to $1820 or so to finish the rally that started after Gold posted a low of $1672 on June 5. Gold has done better than I expected in the past month and the weakness in the Dollar has probably been a tailwind. I expect Gold to correct enough to bring its RSI below 50 before a buying opportunity develops.
Silver
Silver sure looks like it is completing wave 5 from the low in March. If correct a correction down to wave 4 of lesser degree near $18.00 is coming, which would bring its RSI down to 40 -50 before it resumes the uptrend.
Treasury Yields
Treasury yields have done nothing to change the outlook that yields are likely to grind lower. It may be instructive to see how they respond if Congress passes another stimulus bill. If yields fail to rise on that news, it would reinforce the outlook. The expectation has been that the 30-year yield would grind lower to 1.25% and possibly retest 1.126%. On July 10 the 3-year yield fell to 1.248% before reversing. The trend lower is intact
TLT was expected to rally above 168.00 and possibly to 172.15, which was the high on April 21. TLT reached $168.21 on July 10. The trend is up unless TLT closes below $165.00.
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. If the S&P 500 pushes above 3300 and ultimately sets a new high, the resistance formed at the June 8 high of 3232 will become important support
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