Written by Jim Welsh
Weekly Technical Review 30 November 2020
In an interview over the weekend on “This Week“, Dr. Fauci said that the terrible increase in COVID-19 cases and hospitalizations in the past month would not “all of a sudden turn around“. In fact he warned that in the next few weeks the spread of the virus could worsen.
“So clearly in the next few weeks, we’re going to have the same sort of thing. And perhaps two or three weeks down the line we may see a surge upon a surge.”
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If his concerns become a reality the medical resources in many cities may become overwhelmed and necessitate an increase in restrictions and lockdowns. Any mandated restriction will come on top of the behavioral changes that are already occurring as more people become careful. As noted last week, Thanksgiving could become a Pandemic perfect storm:
“Thanksgiving has the potential to be the perfect storm since the Pandemic is more widespread, just as millions of people travel to different parts of the country.”
After the initial COVID-19 outbreak in the spring, European countries aggressively enacted lockdowns which appeared to succeed in bending the curve. The number of cases fell to almost zero before beginning a gradual but persistent increase in August and September. From the end of September the number of cases more than quadrupled by early November.
European researchers believe the huge increase was fueled by tourists returning from vacations in Spain, which had quietly experienced a resurgence COVID-19 cases that spread to its major cities. With millions of Americans traveling by air and by road to different parts of the U.S., a similar explosion in COVID-19 cases could be evident just before Christmas.
European countries responded with a sharp increase in Pandemic rules that may have begun to slow and reverse the increase in cases after mid November.
The voluntary behavioral changes people made and the increase in restrictions have led to slowing in the Purchasing Managers Indexes (PMIs) for Germany, France, United Kingdom, and the overall Eurozone.
There are increasing signs the recent surge in cases in the U.S. is already slowing the pace of the rebound in the U.S. The number of unemployment claims has increased the last two weeks, the PMI indexes for Chicago and other cities dipped in November, and pending home sales fell for the second month in a row on October.
The November employment report will be released on Friday December 4 and will show that job growth slowed from October’s increase of 638,000. Pronounced weakness in the labor market may prove to be a wake-up call for the financial markets, which have been hypnotized by the prospect of vaccines and oblivious to the scary numbers that seem to make a new record every day.
Stocks
Robin Hood traders have been driving the bus for months and are more influenced by the momentum of individual stocks and the overall market than any negative news. As long as Mega Cap stocks hold up and the new found momentum in cyclically sensitive stocks persists, Robin Hood traders have continued to buy every dip no matter how shallow. That pattern is not likely to change until there is more price weakness. Since fundamentals have taken a back seat for these ‘investors’, a detailed look at the technical underpinnings could provide an insight as to when the market may be vulnerable to a 5% to 7% correction.
Sentiment has become even more ebullient.
The 10-day average as of Call / Put ratio was 186 calls or every 100 puts on November 27. This is higher than in Jan & Feb 2020 due to much higher individual stock option volume.
Tops in Jan – Sept 2018 (not shown) C/P ratio just above black horizontal line at 1.40 – Now 1.86
Option Premium Ratio (OPR) Vertical lines – OPR 3 day MA below 0.35% Low level of the OPR is because demand for calls has lifted Call premiums relative to Put premiums.
The CNN Fear & Greed Index reached 92 on Friday November 27. The only time it has been higher in the past three years was in February 2020.
It fell short of +80 in January and September 2018, which were followed by quick corrections. In February 2018 the bond market got spooked when the January 2018 employment report showed wage growth accelerating sparking worries that the Fed would raise rates.
In the fourth quarter of 2018 the stock market unraveled as concerns the Fed would raise rates aggressively in 2019 led to a drop in December of almost -20.0% in the S&P 500. During 2019 the S&P 500 experienced pullbacks of more than -5% in May and August after the Fear & Greed Index exceeded 70. Concerns about the trade war led to an increase in selling pressure.
The stock market doesn’t experience a correction just because there is too much optimism. The market corrects since it is usually overbought (which is why there is so much optimism), and then a reason for profit taking / selling materializes. The most obvious reason now for an increase in selling pressure is additional lockdowns that cause economists to lower their estimates for GDP growth in the fourth quarter but also the first quarter in Q1 of 2021.
Sentiment is clearly overdone but the internal strength of the market is strong, which suggests the market may experience a pullback and subsequent weaker rally before a deeper correction unfolds.
The NYSE Advance – Decline Line recorded a new high on November 27, which suggests that any correction is likely to be shallow until a negative divergence in the A-D line appears.
The percent of stocks above their 200 day average hit 89% on November 27. This is a really high number, which confirms that the market is overbought but is also a reflection of strength. The percent (black line) is above all of the MA’s – green, blue, and red.
For most of 2020 the Equal Weight S&P 500 has lagged behind the S&P 500, which was lifted by its 25% weighting of the Mega Cap stocks. There was a brief 2 week spurt at the end of May which was followed by 5 months of underperformance. That changed after the low on October 30 and especially on November 9 after Pfizer’s vaccine announcement. The Equal Weight S&P 500 gapped higher on November 9 and the relative strength has been moving up ever since.
Mega Cap stocks comprise 47% of the Nasdaq 100 which topped on September 1. Since then the relative strength of the Nasdaq 100 to the S&P 500 has flagged the improvement in the broad market as measured by the Equal Weight S&P 500.
The Russell 2000 and its Relative strength to S&P 500 broke out (above blue line) on the November 9 Pfizer vaccine news. It has continued to rally as financials rallied which make up 20% of the Russell 2000.
The Value Line Geometric is an un-weighted average of 1700 stocks and like the Russell 2000 broke out (above blue line) on the Pfizer news. It is still about 2% below its January 2020 high of 563.72 and more than -9.0% under its all time high of 594.35 in August 2018.
On November 27 the NYSE 21 Day Advances minus Declines Oscillator and the NASDAQ 21 Day Advances minus Declines Oscillator reached a new overbought level. Normally, these Oscillators will drop (which they did today), and then rebound to a lower high. The lower peak is what presages a deeper pullback. In the short term the market may dip a bit more before another rally kicks in. If the next rally is weaker, which is the expectation, the S&P 500 could be expected to drop to 3520. A close below 3520 would open the door for a drop to 3400.
As discussed last week U.S. and global pension funds use a 60-40 investment allocation. Since the end of September stocks have outperformed bonds by a wide margin, which could lead to rebalancing selling as pension funds sell stocks. According to Goldman Sachs and J.P. Morgan these large pension funds may have to sell stocks before the end of the year to achieve their 60/40 allocation. It’s possible that the U.S. stock market may have to absorb as much as $100 billion of selling, while global sales could approach $160 billion.
Any rebalancing selling could exacerbate selling due to more lockdowns and contribute to a sharp correction. The S&P 500 has the potential to pull back to 3400 with a lower 8 probability that a decline to 3300 develops. In the first half of 2021 the S&P 500 could rally to 4000. Although the S&P 500 made a new all time high last week, its RSI has recorded two negative divergences. This is another sign that a pullback is coming.
Gold
Gold has been expected to close below $1849 and on November 23 it did. Based on an analysis of the pattern, Gold has the potential to fall to $1753. On November 27 Gold closed below its 200 day average (1802) for the first time since March 23 just after Gold bottomed. The close below the 200 day average should lead to more selling as more Gold bulls toss in the towel. It is noteworthy that the decline in Gold has occurred against the back drop of a decline in the Dollar. Investors can establish a 33% position in Gold ETFs (via IAU or GLD) if Gold drops below $1760.
Silver
On November 23 Silver broke below its trend line of support from the low in April. The pattern in Silver is similar to Gold, with the decline from $29.75 to $21.78 representing Wave A, and the rebound to $25.75 being Wave B. If Wave C is equal to Wave A (-$7.97), Silver could drop to $17.98. Silver’s 200 day average is $20.56, which would be expected to provide support, so Silver may not fall to $17.98.
Gold Stocks
The Gold tock ETF GDX’s RSI fell to 30.5 on November 24 when GDX dropped to $33.25, after topping at $41.81 on November 6. A rally to relieve the oversold condition is developing, but GDX is expected to fall to a lower low in coming weeks. GDX’s decline from the high at $47.78 on August 5 to $37.08 was a 3 wave move, as was the rally from $37.08 to the high on November 6 at $41.81. The initial decline from $47.78 to $37.08 is Wave A, and the rebound from $37.08 to $41.81 is Wave B. If Wave C is equal to Wave A ($47.78-$37.08 = $10.70), GDX could fall $10.70 from the high of $41.81 to $31.11. Traders can establish a 33% position if GDX drops below $32.50.
Dollar
The Dollar traded down to a new low of 91.50 this morning and then bounced to 91.96. It is possible that the rally from the low of 91.75 on September 1 to the high on September 24 at 94.74 was Wave a of a larger correction. Today’s low represents Wave b of the larger correction and should be followed by a rally above 94.74 for Wave c. If this occurs it would complete Wave 4 from the high in March and be followed by another drop to a lower low in the first half of 2021.
If the Dollar does manage to rally in coming weeks, Gold could be pressured and spike below $1753 before year end. Gold would likely benefit if the Dollar subsequently falls from 95.00 – 96.00 to a new low in 2021.
TLT
In the November 2 WTR I recommended taking a position in TLT on weakness, and the recommendations were filled at an average price of $155.48. Raise the stop to $157.80 and sell half of the position if TLT trades up to $163.00.
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. In late August the expectation was that the S&P 500 was likely to decline to 3200, (it fell to 3209 on September 24) and then rally to 3550 (it rallied to 3550 on October 12).
What wasn’t expected was the development of not one but two vaccines before the end of 2020, with both showing an efficacy of more than 90%. As a result a decline below 3209 is no longer likely, although a drop to 3450 or lower is possible. As expected COVID cases have increased and could result in even more restrictions than we’ve seen, especially if Thanksgiving turns out to be a super spreader event. The market has been able to look over valleys and the prospect of a vaccine could limit the downside. This is why a drop to 3200 is unlikely, even if lockdowns are worse than expected.
The primary 10 sectors for the S&P 500 with the Russell 2000 and Midcap included.
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