by Jim Welsh
Macro Tides Weekly Technical Review 05 October 2020
The Labor Department reported on October 2 that the economy added 661,000 jobs in September and the Unemployment Rate fell to 7.9% from 8.4% in August. The unemployment rate is derived from a separate Household survey and 700,000 people left the workforce. The Labor Department said if those misclassified as “employed but not at work” were properly counted, the jobless rate would have been 8.3% and not 7.9%. Despite 5 months of record improvement there are still 10.8 million workers out of work than in February.
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The number of unemployed workers who have been out of work for more than 26 weeks continues to soar and suggests the number of permanently lost jobs will rise further.
House speaker Pelosi and Treasury Secretary Mnuchin are still working on a deal and one of the sticking points is the amount of federal enhanced weekly unemployment benefits. Speaker Pelosi is demanding $600, even though it is widely acknowledged that $600 a week is more than the majority of workers were receiving before losing their job. As discussed in the June Macro Tides:
“The University of Chicago found that the average (median) replacement rate was 134% meaning the median unemployed person is making 134% of their prior pay for not working. In 37 states the average (median) worker will make at least 41% more not working.”
Treasury Secretary Mnuchin is offering $400 a week which would lower the median replacement from 134% to near 100%, after lowering the weekly benefit by 33%. Most unemployed workers would be happy with $400 a week and can’t understand why anyone would stand in the way of helping them now.
I’m an optimist but also a cynic. Congress will pass another aid package and probably before the election. There are a number of Democratic House members up for reelection who don’t want have to answer questions why nothing was done to their help their constituents as they campaign back home. By delaying the additional assistance until October, Speaker Pelosi has made sure the economy won’t get much of a lift before the election, but showed her base that she can be a tough negotiator and is motivated by doing right for the country, since she may accept a deal worth less than $2.2 trillion.
To be fair there are some Republicans who believe the U.S. is experiencing a Vshaped recovery and are reluctant to approve more than $1.0 trillion in additional fiscal stimulus approved by the Senate on July 27, after approving $2.2 trillion in the CARES Act in March. Both the House and Senate bills include $1,200 payments to single tax filers and $2,400 for families that file a joint return. The primary difference is additional funding for state and local governments, liability protection for businesses, schools, and hospitals from lawsuits, in addition to the weekly enhanced unemployment benefits. If another bill is passed it will run through January 31, 2021 just after inauguration day on January 20.
When Disney announces that it will lay off 28,000 workers, it is a headline. But when thousands of small businesses struggle and let workers go, that news flies under the radar. As of September 13 the number of small businesses that were open was down -23.6% from January.
As time passes and past due rent piles up and revenue is either non-existent or down by half, more of these small local businesses may close their doors forever. This is already happening which is why the number of people filing for weekly unemployment claims has held above 800,000 for many weeks.
At least 620 companies filed for Chapter 11 protection in the first 25 days of September, a 48% increase over the same period last year. Bankruptcy filings in June and July were 609 and 644 respectively. Data compiled by Bloomberg shows 193 bankruptcy filings with more than $50 million in liabilities were recorded for the first nine months of the year.
If filings continue to accelerate into year end, then 2020 could rival the 271 high recorded in 2009. The economy needs more fiscal support as the country waits for a vaccine.
Dollar
In the fourth quarter of 2017 the CFTC positioning against the Dollar reached an extreme and has gotten to a comparable level in the third quarter of 2020.
The positioning in the Euro versus the Dollar is even more extreme now that in late 2017.
In late 2017 the Dollar rallied from a low of 91.00 in September to 95.14 in early November and it is clear the rally took the form of an a-b-c rebound (wave 4). Even though positioning was bullish, the Dollar subsequently dropped to a new low in February 2018.
Since bottoming on September 1 at 91.75 the Dollar moved up to 94.74 on September 25 and in the process tagged the down trend line that extends back to the March 2020 high. (Chart below) The rally from the low of 91.75 appears to be an a-b-c move up, which is a corrective counter trend move that is very similar to the a-b-c rebound in 2017. On October 5 the Dollar fell to the rising trend line connecting the low at 91.75 and the secondary low at 92.75 on September 21, which is near 93.45.
The Dollar cash index fell to an intra-day low of 93.37 before closing at 93.51, so it barely held above the trend line on October 5. The 50% retracement of the 2.99 point rally in the Dollar from 91.75 to 94.74 is 93.25.
The Dollar needs to rally soon or the risk of a decline to a new low will rise significantly. The next few days are critical for the Dollar but also the Euro, Gold, and Silver.
I recommended buying the Dollar ETF UUP at $25.20 or lower in the July 27 WTR. Increase the stop from $24.80 to a close below $25.15 and an intra-day stop of $25.08.
Euro
After the Euro broke below support, it quickly fell to 1.16 and has since rebounded to above the horizontal trend line. The key for the Euro and the Dollar is whether the Euro closes above the declining trend line. A close above this trend line would likely lead to the Euro pushing up to 1.20, which would coincide with the Dollar falling to a new low.
Gold
Gold’s chart looks very similar to Euro. Gold broke below support near $1910 and dipped below the August 12 low of $1869. After hitting a low of $1849 on September 24 Gold has reclaimed the horizontal trend line but has not broken above the down trend line which is near $1940. The 38.2% retracement of the $221 drop from $2070 is $1934. If Gold closes above $1940 a rally to above $2070 is likely. Aggressive traders can take a 50% position in IAU if Gold closes above $1940 using $1910 as a stop.
Silver
In the September 21 WTR investors were advised to
“go 50% long the Silver ETF (SLV) (whatever the normal allocation) if/when Silver trades under $23.72, and increase it to 100% if/when Silver trades under $23.00.”
Silver traded below $23.72 in the early morning hours of September 23 and in the first 5 minutes of trading SLV traded at an average price of $21.86. Silver traded below $23.00 at 11:00 am pst and SLV traded at an average price of $21.34 in the following 5 minutes. The average price of the SLV position was $21.60. As noted last week the pattern is Silver is different than Gold, since Silver was far weaker during the recent decline.
In last week’s WTR I recommended selling half of SLV at the opening of September 29 and the other half if SLV trades up to $22.46. SLV opened at $22.24 and subsequently traded up to $22.71. The average sell price as $22.35. Silver still has the potential to decline to a lower low and the jury is still out on the Dollar, so standing aside makes sense.
Gold Stocks
Investors can go 50% long GDX (whatever the normal allocation) if/when GDX trades under $37.00. (Black horizontal trend line) Increase it to 100% if/when GDX trades under $35.20. (Just above red horizontal trend line)
Stocks
The S&P 500 dropped to 3209 on September 24 and as expected has rebounded. From its high of 3588 the S&P fell 379 points before bottoming on September 24. A 50% recovery of the decline would target a rally to 3398 and the S&P 500 reached 3397 on October 1. As noted last week,
‘the wild card is whether Congress does manage to pass another stimulus bill. Since few expect it, passage of more fiscal stimulus would catch those short off guard and allow the market averages to reach the 61.8% retracement levels.”
(Those levels are S&P 500 – 3444 & Nasdaq 100 – 11,767.)
The S&P 500 rallied to 3409 and seems on its way to 3440 – 3460 on hopes that Congress and the White House will reach a compromise deal.
The decline from the high in the S&P 500 appears to be an a-b-c, which means the S&P could retrace more than the 61.8% retracement and passage of CARES-2 would provide the perfect back drop. Option traders have again been big buyers of the FAMANG stocks, requiring the dealer community to buy those stocks. Cyclical stocks have caught a bid as investors expect more stimulus helping the economy do better in 2021. In the short run it doesn’t matter if this comes to pass as institutions believe they must position themselves before 2021 if they are to take full advantage of a rotation into cyclical stocks.
The Russell 2000 is on the cusp of breaking above the down trend line which goes back to the high in January and February. Once above this trend line the Russell 2000 has the potential to rally to the red trend line (1700) that connects the all time high in August 2018 at 1742 with January’s high at 1715.
The S&P 500 has the potential to rally back to the black trend line near 3500 with a deal.
The primary purpose of this rally was to alleviate the oversold condition that developed as the stock market was recording a low just above 3200. The 21 day Advances minus Declines Oscillators for the NYSE and Nasdaq had became more oversold than at any time since April, as noted last week.
If the S&P 500 and Nasdaq 100 follow through and at least reach their 61.8% retracement levels (3444 – 11,766), the 21 day Advances minus Declines Oscillators for the NYSE and Nasdaq will become modestly over bought if they reach the red horizontal trend lines. Once the current rally runs out of gas, the S&P 500 has the potential of retesting the low near 3209 at a minimum and could fall to 2950 – 3000 in November.
Treasury yields
As I have discussed for many weeks, I have expected the 10-year Treasury yield to close above 0.75% (Green trend line), the 30-year Treasury yield to close over 1.55% (Green trend line), and TLT to drop under $161.00 (Black trend line):
“When they do it will mean something and likely provide an opportunity to short Treasury bonds.”
On October 5 the 10-year closed at 0.766%, the 30-year Treasury bond closed at 1.567%, and TLT finished the day at $159.57.
TLT’s RSI closed today at 28.7 so it is the more oversold than at the low in early June. TLT has the potential to drop to the green horizontal trend line at $154.70. A nimble trader may try a quick scalp trade, but since TLT is likely to bounce nicely from the $155.00 area I would prefer to wait for TLT to rally after it makes a low before recommending a short trade. TLT has the potential to fall to $144.00 if the Treasury bond market decides to throw a tantrum in coming weeks.
If TLT does fall to $155.00 the 30-year Treasury yield would spike up to 1.75%. It will be interesting to see if the equity market notices since stocks are expensive and many strategists have justified the market’s valuation based on low Treasury yields. The S&P 500 may rally on news of a deal, but subsequently selloff if Treasury yields jump, especially if the 10-year and 30-year yields exceed their June highs (30-year 1.761%, 10-year 0.957%)
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 expectation has been that the S&P 500 was likely to decline to 3200, which it did in September, and potentially to 2950 – 3000 in the fourth quarter.
The primary 10 sectors for the S&P 500 with the Russell 2000 and Midcap included.
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