Written by Jim Welsh
Weekly Technical Review 24 August 2020
I’ve lost count of the number of times there has been an announcement by a company or the White House touting the potential of a treatment or vaccine for COVID-19. I do know that the timing has often been impeccable in terms of giving the stock market a boost just as it appeared to be ready to roll over. In the case of Sunday August 23 the President touted convalescent plasma as a “very historic breakthrough” the day before the opening of the Republican Convention.
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President Trump can Tweet that the stock market is at a new all time high. According to the World Health Organization, convalescent plasma therapy is actually something that’s been used for over 100 years for various infectious diseases, and it’s been effective in some and not so effective in others. Convalescent plasma is derived from the blood of those who have had and recovered from a virus. It uses antibodies created by the immune system to help a recipient’s body learn to fight off a virus on its own. A study of 20,000 patients conducted by the Mayo Clinic in June found mortality rates declined among those who received convalescent plasma. The Mayo Clinic cautioned their study was not a clinical trial and that the declining mortality rate may have come because those receiving the plasma were less severely ill than the group to whom they were compared. Also, Benjamin Corb, director of public affairs at the American Society for Biochemistry and Molecular Biology, said:
“Blood plasma transfusions are not without risks, including death, and scientists should be afforded the opportunity to prove the benefits outweigh the risks.”
The success of convalescent plasma is dependent on survivors of COVID-19 retaining antibodies in their blood so they can donate blood and the willingness of those survivors to assume the risk. Based on research COVID-19 antibodies may not remain in a survivors’ blood for long as referenced in the August Macro Tides:
“Researchers at Kings College London in the U.K. have found that antibody responses to the coronavirus tend to peak three weeks after the initial onset of symptoms, but then begin to decline after as little as two or three months afterwards. While 60% of the people in the study had a “potent” level of antibodies on average 23 days after the first onset of symptoms, that figure dropped to 16.7% of those tested 65 days after the first signs of symptoms.”
Convalescent plasma is given to those who have become sick enough to be hospitalized so it provides no benefit in preventing people from being infected. Convalescent plasma is not going to help open the economy or allow children to receive in classroom instruction. Obviously, any treatment that increases the survival rate is good but convalescent plasma is not a game changer and its overall effectiveness is yet to be determined.
The timing of President Trump’s announcement is interesting. On Wednesday August 19 The New York Times published a story entitled “F.D.A.’s Emergency Approval of Blood Plasma Is Now on Hold” which indicated that health officials within the Administration were not convinced of its effectiveness:
“Last 2 week, just as the Food and Drug Administration was preparing to issue an emergency authorization for blood plasma as a Covid-19 treatment, a group of top federal health officials including Dr. Francis S. Collins and Dr. Anthony S. Fauci intervened, arguing that emerging data on the treatment was too weak, according to two senior administration officials.”
Whether prompted by the NYT’s story or the beginning of the Republican convention, President Trump Tweeted the following statement on Saturday August 22:
“The deep state, or whoever, over at the FDA is making it very difficult for drug companies to get people in order to test the vaccines and therapeutics. Obviously, they are hoping to delay the answer until after November 3rd. Must focus on speed, and saving lives!”
Either the NYT’s story was inaccurate (which is possible) or pressure from President Trump, the FDA issued an emergency use authorization for convalescent plasma, allowing it to be administered to those hospitalized with COVID-19. In a letter, FDA chief scientist Denise Hinton said the agency had concluded
“that it is reasonable to believe that COVID-19 convalescent plasma may be effective for the treatment” of those in the hospital.”
The Special Update on August 21 highlighted how the broad market was weak even as the S&P 500 rallied to a new high:
“Short term the broad market is getting modestly oversold so if the FAMANG stocks experience a bit of weakness early next week a bounce in the broad market may follow.”
The news about the “very historic breakthrough” in treatment for COVID-19 patients led to a gap higher on Monday August 24 and a new all time high in the S&P 500 and Nasdaq 100. Market breadth, which has been weak, improved on the hope that any improvement in the treatment of COVID-19 will be good for cyclical stocks. Energy stocks as measured by XLE rose +2.75%, Financials +2.39%, Industrials +1.81%, Basic Materials +1.76%, and there were 2171 stocks up and just 841 stocks falling.
Not much has changed since last week:
“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 is showing more signs that it is forming a bottom and about to rally. As noted previously 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 and Gold and Silver zoomed higher. The weakness in the Dollar has been a tailwind for these markets. Should the Dollar bottom and begin to rally as expected, it will become a headwind and provide an excuse for corrections to develop in these other markets.
The Dollar fell to lower lows in recent weeks but its RSI recorded higher lows. This is what happens as selling pressure lessens and is typically an early warning sign that a change in trend is developing. In addition the down trend line connecting the declining tops in the Dollar’s RSI was broken to the upside on Friday and is another sign that the trend in the Dollar is turning higher.
Changes in RSI often preceded changes in prices. The 5-day moving average (red) dropped well below the 13-day moving average (green) as the Dollar fell sharply in July. As the price decline slowed the 5-day average is modestly under the 13-day average and it won’t take much for the 5-day to cross above the 13-day moving average.
Finally, as noted previously a rally above 94.00 would take out the last two highs and effectively seal the deal that a bottom has formed.
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.
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 and Silver
Gold is expected to drop below the August 12 low of $1869 and could fall under $1820 before the next trading low is in place.
Silver is expected to fall to $24.00 or lower during this correction as the Dollar rallies.
If the Dollar subsequently falls to 88.00 – 89.00 next year, after rallying to 97.0 – 97.75, Gold and Silver will experience another leg higher that could prove dynamic. Longer term the expectation is that Gold and Silver will rally to higher highs after they correct during the Dollar’s rally.
Treasury Yields
Treasury yields have receded after popping in response to higher CPI and PPI inflation. 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.
Despite the dip in yields the 4 year cycle in Treasury bonds suggests the risk of a protracted selloff in the Treasury market is the highest it’s been in a very long time. Any increase in Treasury yields will be met by strong forward guidance by the Federal Reserve and ultimately yield curve control if the bond market misbehaves.
With Treasury yields so low and the risk of higher yields rising, the benefit of having bonds in a portfolio to offset equity losses has been greatly reduced.
TLT was expected to rally above the mid April intra-day high of $172.15, so the new price high of $172.25 on August 6 may have completed the rally from the March low. This is why the mid April price level was the target.
The attainment of a modest new high suggests that the risk of a protracted selloff in the Treasury market is the highest it’s been in a very long time. In last week’s WTR I noted that TLT had held above the red trend line and that its RSI was nearing 30 and modestly oversold, so a rally was likely which will bring yields down in the short term. So far that’s what’s occurred. It’s too soon to short Treasury bonds as they could rally a bit more if the equity market corrects.
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. The resistance formed near the June 8 high of 3200 will become critical support should a correction takes hold as expected. The next level of support is 2950 – 3000 if 3200 doesn’t hold.
I thought Congress would pass the next stimulus bill during August and not long after July 31. What I failed to account for was that neither party would want to achieve a deal before the other party’s convention. It would be sacrilegious to give the other party something to crow about during their convention than actually acting quickly to help 13 million unemployed workers and a legion of small businesses hanging on by a thread. If Congress dallies into the first part of September, the S&P 500 may not top until mid September or so before the expectation of a 7% to 10% correction materializes.
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