Written by Jim Welsh
Macro Tides Weekly Technical Review 31 August 2020
When the S&P 500 was trading at 3472 on August 26 I sent an email and later in the day posted a note with this message:
“The Nasdaq 100 is up 1.8%, S&P 500 up 0.83%, the equal weight S&P 500 is lower by -0.22%, and the Russell is down 0.44%. The black trend line connecting the January 2018 high with the February peak comes in just above 3500 near 3525. Should be a good place to sell.”
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With the email I included a chart of the S&P 500 highlighting the trend line connecting the high in January 2018 with the February 2020 peak.
The S&P 500 traded up to 3514 on August 31 and could push a bit higher in the next two weeks, especially if Congress passes the stimulus bill. From a risk to reward perspective the S&P 500’s upside potential seems limited, while the downside could allow it to fall at least 10% sometime in the fourth quarter.
Even as the S&P 500 and Nasdaq 100 have been recording new highs, the technical underpinnings of the market have been deteriorating since August 11. The relative strength of the Equal Weight S&P 500 topped on August 11, as did the relative strength of the Russell 2000, and the NYSE Advance-Decline line. The percentage of stocks on the NYSE making a new 52 week high has weakened. The Nasdaq 100 has powered higher, but the 21 day average of up minus down volume topped on June 8, and the Nasdaq’s Advance – Decline line effectively topped on June 8 since it closed lower today than it was then.
The weak technical picture contrasts with the Call/Put ratio which hit its highest level in the past 20 years, which shows that investors are getting more excited about a market that is weakening.
As I discuss in the September Macro Tides, which will be posted tomorrow, the labor market deteriorated during August. The estimate is that another 1.5 million jobs were created in August.
It is risky to guess what the employment report will show since the Labor Department routinely revises its data, but based on unemployment claims, hours worked, and job posting, there is a decent chance the jobs report will come in light when the August report is announced on September 4.
The end of the Federal Pandemic Unemployment Assistance program on July 31 has significantly lowered the flow of money to those who are unemployed. It appears that consumer spending has softened since July 31, which suggests most of the economic data coming for August during September may disappoint.
A top in the market may wait until Congress does pass the stimulus bill. Not much progress has been made but I’m still hopeful that Congress will do something. The risk of a second dip in the economy will increase if they fail to provide funds for the unemployed and small businesses that are barely surviving.
Dollar
The Dollar fell to a new low on August 31 after Jay Powell announced on August 27 that the Fed will remain accommodative even if core PCE inflation manages to rise above 2.0%. Since January 2012 core PCE inflation has only been above 2.0% in 12 of the 103 months since the 2012 announcement, so no one should hold their breath. The Yen comprises 13% of the Dollar Index and the Yen rallied on Friday after Japanese Prime Minister Abe announced he was retiring for health reasons.
Today’s new low in the Dollar was the third time it has posted a lower low, even as its RSI recorded a higher low. The repeated attempts to drive the Dollar down as its RSI works its way higher suggests that a degree of compression is developing in the Dollar, which could lead to a sharp rally soon.
Gold and Silver topped as the Dollar began its basing process and have consolidated, even as the Dollar has fallen to successive new lows. If the Dollar rallies as expected, Gold and Silver are likely to experience another selling wave that could approximate the length of the initial decline off their highs. Gold has the potential of dropping below $1869 with the possibility of falling to $1820. Silver is likely to drop below $24.00 and may breach $22.00 before the next significant trading forms.
Treasury yields
Treasury yields are giving more indications that the 4 year cycle may have bottomed, which will be followed by a gradual increase in Treasury yields. The 24% increase in M2 money supply is garnering a lot of attention and the expectation that inflation will be higher in 2021. This perception may lead Treasury bond holders to sell before yields rise next year. In effect this could become a self fulfilling prophecy, whether inflation really increases or not.
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 initial level of support is between 3350 – 3400 and will likely support any short term correction. 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.
If Congress does pass the next stimulus bill the S&P 500 may touch the trend line connecting the January 2018 and February 2020 near 3550. The odds of a top will increase if the S&P 500 closes below either 3350 or the low of any short term drop in the next week. Ultimately the S&P 500 has the potential of falling to 2950 – 3000. There is a real chance that the results of the election will not be clear on November 4.
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