Written by Jim Welsh
Macro Tides Weekly Technical Review 28 December 2020
The Federal Reserve committed to providing all the liquidity needed to restore stability in the financial markets in March and April, and Congress provided $2.1 trillion of support for unemployed workers, small businesses, and protection from evictions from landlords. The Fed and Congress effectively built a bridge over the abyss the economy had fallen into until a vaccine arrived.
Please share this article – Go to very top of page, right hand side, for social media buttons.
The actions by the Fed and Congress didn’t remove the concerns of how long a vaccine would take, whether Congress would pass more support when the initial CARES Act expired on July 31, and who would win the election. As investors waited for these concerns to be resolved, they held on to hope that a positive solution would be forthcoming, which kept selling pressure muted. One by one these concerns gave way.
Pfizer and Moderna provided updates as they progressed through the Phases of the development of their vaccines. Each step forward toward a vaccine during the summer propelled the market higher, although a successful outcome remained unknown. After the first CARES Act expired on July 31, investors believed Congress would surely act and pass more support before the election. When Congress failed to act in August, September, and October investors believed Congress would eventually do the right thing, despite the failure to act.
The Presidential election was another source of uncertainty and November 3 came and passed, but the election wasn’t clearly decided. On November 9 Pfizer announced it had developed an effective vaccine, and Moderna followed on November 16. The FDA approved Pfizer’s vaccine for distribution on December 11. The presidential election wasn’t ‘officially’ decided until the Electoral College certified that Joe Biden won on December 14. Moderna received FDA approval for its vaccine on December 21. The long awaited stimulus program was finally signed into law by President Trump on December 27.
With the exception of the Georgia Senate races on January 5, everything investors have been worrying about and waiting for since March has been realized and has arrived. There are pluses and minuses no matter which party control the Senate, and I’ll discuss them after the election. My guess is that the Republicans will win at least one Senate race and retain control of the Senate. Since that represents status quo, a bigger reaction would be expected if the Democrats win both Georgia seats and control of the Senate.
In the next few weeks the number of hospitalizations could soar due to family gatherings for Hanukkuh, Christmas, and New Year’s Eve celebrations and overwhelm many hospitals around the country. This could lead many states to enforce more restrictive lockdowns that could approach the lockdowns that basically shut the economy down in March. The mutated strain that is running rampant in Britain is likely already in the U.S. and could further accelerate the spread in January and into February.
The passage of another stimulus plan will soften the impact for those who are unemployed and small businesses, but GDP and corporate earnings could take a bigger hit in the first quarter than is currently expected. With Congress finally acting, many economists increased their estimates for GDP in Q1 and Q2 on December 28.
Last spring Dr. Fauci stated that herd immunity could be achieved if 60% of Americans were vaccinated or developed antibodies after being infected. In an interview with the New York Times on December 23, Dr. Fauci said that the vaccination rate to achieve herd immunity against COVID-19 may have to be as high as 90%:
“We need to have some humility here. We really don’t know what the real number is. I think the real range is somewhere between 70 to 90 percent. But, I’m not going to say 90 percent. When polls said only about half of all Americans would take a vaccine, I was saying herd immunity would take 70 to 75 percent. Then, when newer surveys said 60% or more would take it, I thought, ‘I can nudge this up a bit,’ so I went to 80, 85%.”
If Dr. Fauci is correct and a vaccination rate north of 80% will be required, the odds of that occurring voluntarily are low. In the last nine flu seasons the percent of adults getting a flu shot ranged from a low of 38.8% in the 2011-2012 to 45.3% in 2018-2019. If the vaccine adoption rate is less than 60% of the initial targeted groups at the end of March (health care workers and those older than 75), there is a chance that the Biden administration will attempt to make getting the vaccine mandatory. That action would surely lead to court challenges and delays.
In the January 2021 Macro Tides (to be published) I discuss other reasons why COVID-19 may prove more difficult to eradicate and achieve herd immunity as quickly as many expect. Economists and investors expect the economy to be on a ‘normal’ footing by the second half of 2021 and that may prove unrealistic.
If a Perfect COVID-19 Storm develops in early 2021, there is nothing investors can anticipate to address the problem. If the pace of vaccinations can’t slow the spread now, there is nothing else that can be done to mitigate the harsh reality that could last beyond January. The CDC expected to have 20 million vaccinations done by the end of December. As of December 26 less than 3 million have been administered, and that’s just the first injection. No doubt the pace will quicken in January, but the risk that vaccinations will trail the rate of the spread is high.
Investors truly believe that markets are a discounting mechanism and that the stock market is now telling them that 2021 is going to be a good year for the economy. This conclusion is easy to reach if one believes vaccinations will proceed without a hiccup and herd immunity will be achieved by mid 2021.
But the majority of investors are wrong at important turning points, which is why the majority of investors are bullish as the market peaks and bearish when it bottoms. Measures of investment sentiment show that investors are currently wildly bullish, so the risk is that they are too complacent about the near term risk of a Perfect COVID-19 Storm and how smoothly the vaccines will be distributed in coming months.
If this assessment is accurate, the stock market could be vulnerable to a quick sharp correction as investors are confronted with a less rosy perspective. If the stock market experiences a correction in January, Treasury yields will fall as bond prices rise, Gold, Silver, and Gold stocks will decline, and the Dollar will bounce.
Stocks
The upward momentum in market breadth for the NYSE and Nasdaq, as measured by the 21 day Advances-Declines Oscillator, are beginning to diverge by posting lower highs as the market averages make new highs. This is usually an advance warning of an impending correction.
Seasonality remains positive going into the end of the year, so the major averages can grind a bit higher. The first few days of a new quarter are also generally positive as pension funds invest new money. If the S&P 500 rallies to begin the year and then reverses and falls below the close on December 31, the odds that a top will increase. Further confirmation will come when the 5 day moving average (red) falls below the 13 day average (green) on the S&P 500, Nasdaq 100, DJ Transports, DJ Industrials, and the NYSE Composite.
On November 11 the S&P 500 had an intra-day low of 3633 and the intra-day low on December 21 was 3636. The expectation is that the S&P 500 will close below 3630, which should lead to an additional drop to 3500-3550. A close below 3500 would open the door for a drop to near the late October low of 3300. (Green trend line S&P 500 chart above) A close below 12,474 on the Nasdaq 100, which is the December 21 low, would be negative and could precede a decline to 11,500.
Dollar
Not much has changed as sentiment and positioning are supportive of a bottom forming in the Dollar in the first quarter of 2021. The price pattern in the Dollar suggests it is near an important low as it has almost completed 5 waves down from the high in March. Wave 5 began after the Dollar traded up to 94.30 in late September to complete Wave 4 from March. The Dollar appears to have completed 3 waves of wave 5 on December 17.
All that’s needed is a short term bounce for wave 4 of Wave 5, and then another lower low to complete the whole move down from the high in March. Any new price low is likely to be accompanied by a positive divergence on the Dollar’s RSI.
Treasury yields
There are two vaccines and Congress has passed another stimulus bill but Treasury yields have not broken out as many have projected. The 10-year Treasury yield is moving into the apex of a triangle so a big move is coming and my guess is the 10-year Treasury yield will fall in the next few weeks and close below the rising trend line
The 30-year Treasury yield has been holding up better than the 10-year. This positive divergence suggests yields are likely to fall rather than rise which is the consensus. Positioning reflects the consensus that expects Treasury yields to rise. That’s likely to happen in 2021 but only after yields fall if the Perfect COVID-19 Storm develops in January.
TLT has continued to hold above the green horizontal trend line on December 4. TLT could rally to $160.50 to $161.50, although a move to $165.00 is possible if the Pandemic overwhelms hospital resources in many cities across the country.
Gold
Gold is still expected to fall below $1766 and could trade down to $1730 before a trading low is established. If a selling wave envelops the financial markets due to more lockdowns around the world, Gold could get hit as other assets fall just like last March. The next decline is expected to be a good buying opportunity for a rally above the August 2020 high of $2070.
Silver
Silver is expected to drop below $21.78 and may test its 200 day average at $21.44. By the end of December the 200 day average could be up to $21.55 and not much below the September 24 low of $21.78. The coming low is expected to establish a good buying opportunity that could be followed by a rally above $30.00 in the first half of next year.
Gold Stocks
The relative strength of Gold stocks (top panel) to Gold has been weakening which supports the outlook of lower prices for GDX. GDX continues to make lower highs and lower lows since its peak in August. GDX is expected to fall below $33.25. Traders can establish a 33% position if GDX drops below $32.00.
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.
The S&P 500 is expected to fall to 3550 and potentially as low as 3350 if the Pandemic overwhelms hospitals and more restrictions are enacted that extend well into January. Once this correction is complete the S&P 500 is expected to rally to 4000 and potentially higher in the first half of next year.
The primary 10 sectors for the S&P 500 with the Russell 2000 and Midcap included.
.
include(“/home/aleta/public_html/files/ad_openx.htm”); ?>
