Written by Jim Welsh
Macro Tides Weekly Technical Review 17 August 2020 – Update of earlier post.
Every parent who has ever taken a car trip with small children has been asked this question, “Are we there yet?” Depending on the age of the youngster the question often arrives within 30 minutes from the start of a multi-hour drive if the kid has patience. During the Dog Days of Summer and after a big move higher since the low in March, investors may begin to wonder if the stock market is nearing a peak. Just as I told our daughters during a car trip, I would say “Not yet.” This routine was usually repeated several times before I could announce “We’re here!”
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Market participants expect Congress to pass another stimulus bill and as long as that carrot is out there selling pressure has and will continue to remain muted. While the risk that there is no deal is up from less than 1%, the odds still favor a Kumbaya moment when both parties proclaim they put the interests of the American people ahead of any political agenda. The hard reality is that there are good reasons for more fiscal stimulus. Based on Oxford Economics’ Recovery Tracker, the rebound in the U.S. economy has stalled since mid June.
Despite historic support for businesses from Congress’s CARES Act, the Treasury, and the Federal Reserve, the number of corporate bankruptcies through August 9 is the highest since 2010.
Even if Congress does pass another stimulus bill, it will be less than what was provided in the CARES Act and the difference could amount to a drop of up to 4% in GDP. The longer this goes on more small and medium sized businesses will be sucked into the COVID-19 vortex and there will be more bankruptcies. Yelp’s latest data on business activity thru July 25 shows more than 80,000 companies have permanently closed from March 1.
What’s concerning is that 60,000 of these closings were small firms. The National Federation of Independent Business’s Optimism Index bounced as hopes for a reopened economy lifted the spirits of small business owners. That optimism sagged as openings were rolled back and business owners realized they are now facing the daunting challenge that revenue may remain -10% to -30% below preCOVID-19 levels for many months.
For the majority of businesses it’s the last 10% to 15% of revenue that provides most of the profits.
Unemployment claims fell to 963,000 and below 1,000,000 for the first time in 21 weeks in the week ending August 8. Continuing claims dropped to 15.486 million and the total number of Americans receiving unemployment benefits fell to 28.26 million as of July 25, 3 million less than the prior week.
The weekly $600 of Federal Bonus unemployment payments ended on July 31, but the cutoff date for some states was July 25. The big drop of 3 million in a single week suggests that some workers may have been more motivated to go back to work knowing the $600 Bonus check was ending, and they would no longer be making more money for not working.
Hopefully the decline in unemployment claims is an accurate reflection of labor market strength as the July employment report contained a worrisome trend. The number of those who have been unemployed for more than 15 weeks increased from 4.6 million to 6.5 million and represented 5.0% of the labor force. This is the second highest percent since the end of World War II and not far under the 5.9% reached in March 2010. As discussed in the June Macro Tides, research by
“the Becker Friedman Institute at the University of Chicago, entitled COVID-19 Is Also a Reallocation Shock, found that many of the laid off workers who expect their unemployment status to be temporary will actually become permanent.”
According to Nicholas Bloom, an economics professor at Stanford University and one of the co-authors of the white paper:
“Looking through history at previous recessions, often these temporary layoffs unfortunately turn out to be permanent. Our best guess is something like 60% of the employment reduction is going to be temporary, and 40% is going to be permanent.”
As I noted:
“These findings suggest that 10 million workers or more won’t be rehired in a timely manner.”
Although the percent of workers unemployed for more than 15 weeks garners far less attention than the monthly unemployment rate, it may provide more insight into the strength and sustainability of the recovery.
In terms of the recovery, ‘Are we there yet?’
Not yet.
Stocks
As noted in the July 27 WTR the prospect of a new stimulus deal is going to keep selling pressure low and enable the S&P 500 to rally to 3350 and potentially the February high of 3393. It’s been a grinding process but the S&P 500 has rallied to just below 3388. As noted last week:
“The S&P 500 is approaching two important trend lines just below the all time high of 3393, so resistance is not far above the close of 3360 on August 10.”
The S&P 500 has been testing these trend lines and is likely to pop above the all time high of 3393 before a top is completed.
Sentiment is a bit like the tides. When investors are becoming more bullish the tide is coming in as money flows into the market. When investors become less bullish the tide of money begins to flow out. The Call/Put ratio peaked on August 10 and has been trending lower. This usually signals that at least a short term high is close.
The level of exposure in the weekly National Association of Active Investment Managers (NAAIM) survey is a good contrarian indicator when it reaches an extreme. Readings below 40 usually precede a trading low, and tops are nearby when it exceeds 90.0. Readings above 90 preceded the sharp decline in late 2018, three corrections in the S&P 500 of 5% or more in 2019, and the large COVID-19 drop this year.
The NYSE Advance-Decline has registered a new high which is positive. However, the percent of stocks making a new 52 high has been softening so that the 5 day average (green) has fallen below the 21 day average (black). This also occurred in late June but that was after the S&P 500 had been correcting for 14 trading days and after falling -7.0%. This negative crossover is happening as the S&P 500 is pushing its highs.
The Nasdaq 100 posted a new high on August 17 but the number of new highs is lagging. In January 6.4% of Nasdaq stocks were reaching a new 52 week high but only 3.4% were at a new high on August 17 (not shown in chart). The 21 average of net up minus down volume looks sick. Selling pressure has been coming into the Nasdaq stocks even as Apple and other FAMANG stocks are strong enough to lift the Nasdaq 100 to a new high.
In January 2018 the Nasdaq 100 made a new all time and the weekly RSI reached 83.7. After a correction in Febuary and into late March, the Nasdaq 100 rebounded to a new high in August 9.2% above the January peak. Despite the new high the Nasdaq 100’s RSI was 70.7 and well below the January level. The Nasdaq 100 made a new high in January 2020 and its RSI was 82.4 and on August 17 was 72.7, even though the Nasdaq 100 is 23.3% above the January 17, 2020 peak. After the negative divergence in August 2018 the Nasdaq 100 dropped -23.4%.
The daily chart of the Nasdaq 100 highlights the negative RSI divergences that have been forming since June 10. The Nasdaq 100 is 11.8% above its June 10 high but its RSI 64.4 compared to 76.8. This is the fourth non confirmation for those counting and well below 70.
Sentiment and a number of key momentum gauges are flashing clear warning signals that the market is vulnerable to a correction. My guess is that a stimulus deal will elicit a sell on the news response since everyone is waiting for this expected outcome. After the dip caused by the ‘sell on the news’ knee jerk reaction, the S&P 500 is likely rally again as investors buy the dip. It is this secondary rally that could mark a more sustainable top. Are we at a high? Not yet.
Dollar
The Dollar topped on March 23 and has been trending lower ever since. The decline in the Dollar is not the major reason why stocks have gone up, Gold and Silver have rocketed, and why Treasury yields have fallen to their mid April lows. But the weakness in the Dollar has been a tailwind for these markets. Should the Dollar bottom and begin to rally as expected, it will provide an excuse for corrections to develop in these other markets.
I thought the bottoming process could take some time since so many traders were bearish as noted in the August 3 WTR.
“With so many traders so bearish the Dollar the bottoming process in the Dollar could take some time.”
The bottoming process took 8 weeks in the first quarter of 2018, although I don’t think it will take that long this time. The Dollar is likely to undercut the intra-day low of 92.52 this week and record a RSI divergence on the daily chart. The weekly chart below shows that the Dollar is almost as oversold as it was in February 2018, and is the most oversold in the past 40 years based on its 1 year Zscore.
Positioning is about as extreme as it can get, so a trading low is not far away.
The Dollar bottomed at 92.52 after dropping 10.47 from its March high of 102.99.
A 50% retracement of the decline would lift the Dollar to 97.76 and near the wave 4 of lesser degree high of 97.80 on June 30. A weak 38.2% retracement would allow the Dollar to rally to 96.53 which is thus the minimum expectation. Three weeks ago I recommended buying the Dollar ETF UUP at $25.20 or lower. Keep the stop at $24.80 on a closing basis. After the initial low of 92.54, the Dollar popped to 93.99 so additional confirmation of a low would be a move above 93.99.
Gold
In the August 3 WTR I discussed that Gold had become extended and was ripe for a correction:
“Bullishness toward Gold is so high in large part because Gold has rallied for 8 consecutive weeks a rare event. Since 1975 Gold has rallied for 8 consecutive weeks only 4 times in 2372 weeks or 0.17% of the possible occurrences. The median decline in the following month was -3.3% and -9.0% three months later. If Gold repeats this pattern it will drop $65 by the end of August and fall to $1800 after falling $180 before the end of October.”
Gold topped on August 7 at $2070 and plunged to $1869 in overnight trading on August 12. In the process of that decline Gold tagged the rising trend line as expected last week:
“There is a good chance that Gold will approach and potentially test the rising trend line off the low in March before the next rally begins.”
I certainly didn’t expect the test to happen within hours of the August 10 WTR.
If the Dollar has a bit more weakness, Gold can try to rebound more. Once the Dollar closes above 93.99, Gold and Silver are likely to experience another correction, and Gold could briefly fall below the trend line shaking out the weak hands.
Silver
As discussed in the August 3 WTR:
“Silver has rallied for 8 consecutive weeks for only the 6th time since 1975 or 0.25% of the possible outcomes. The median decline in the prior 5 occurrences was -3.8% in the following month and -10.1% over the next three months.”
Silver has outperformed Gold by a wide margin in recent weeks, and if the Dollar makes a lower low before bottoming, Silver may retest its August 7 high of $29.75 before a high is in place. A trading low in the Dollar will be confirmed if/when it closes above 93.99 and lead to a deeper correction in Silver. Longer term the expectation is that Gold and Silver will rally to new highs after they correct during the Dollar’s rally. If the Dollar subsequently falls to 88.00 – 89.00, after rallying to 97.0 – 97.75, Gold and Silver will experience another leg higher that could prove dynamic.
Treasury Yields
This quote from last week’s WTR may prove timely:
“The 30-year Treasury yield has established a high or low every four years since 2000. In 2000 and 2004 a high in yield was recorded while an important low was reached in 2008, 2012, and 2016. This suggests it is wise to be on the lookout for a potential low in the 30-year Treasury sometime in 2020. Even if a low develops, the initial uptick may be modest.”
Last week the Producer Price Index (PPI) and Consumer Price Index (CPI) posted larger than expected increases for July that increased talk about the coming wave of inflation. As discussed in the August Macro Tides a sustained increase in inflation is not likely unless there is a vaccine or therapeutics that allows a return to normal even for those over 55 years old. There is a lot of money sitting on the sidelines that consumers have saved and potential credit card buying power since consumers have paid off $108 billion in credit card debt since March. A large part of the increases in the PPI and CPI were merely bounces in prices that had been crunched in prior months as the economy was shut down.
The inflation news did spook the Treasury bond market and Treasury yields ticked higher with the 10-year Treasury yield breaking above an important down trend line. However, the 10-year German bund did not break out of its bottoming formation and the 30-year Treasury yield failed to breakout above its down trend line.
TLT held above the red trend line and its RSI is nearing 30 and modestly oversold, so a rally is likely which will bring yields down in the short term. TLT was expected to rally above the mid April intra-day 10 high of $172.15 This new price high on August 6 may have completed the rally from the March low, which is why the mid April price level was a target. This suggests that the risk of a protracted selloff in the Treasury market is the highest it’s been in a very long time.
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 3350 or sets a new high, the resistance formed near the June 8 high of 3200 will become critical support. The next level of support is 2950 – 3000 which could be tested if the expectation of a 7% to 10% correction after Labor Day materializes.
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