Written by Jim Welsh
Macro Tides Weekly Technical Review 11 January 2021
President Truman once proclaimed “Give me a one-handed economist. All my economists say ‘on the one hand’ and then say “but on the other hand”. If you want to read a good book about a President who is more admired now than in the years following his presidency, I would recommend ‘The Accidental President: Harry S. Truman and the Four Months That Changed the World‘.
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The majority of economists and investors correctly believe the Federal Reserve will maintain its accommodative monetary policy for years. With the Senate in control of the Democrats, additional government spending is coming that could be measured in the trillions. The vaccines will contain the Pandemic by mid-year and in the second half of 2021 the economy could BOOM, as pent up demand is unleashed. This scenario is an outcome everyone wants, seems reasonable, which is why investors believe any setbacks will prove temporary and modest relative to the big payoff coming in the back half of 2021.
On the other hand there are a number of risks that could derail and more likely delay the timing of the onset of the BOOM. The assumption is that once a person has been vaccinated they are no longer a threat to spreading the virus but that has yet to be proven as discussed in the January Macro Tides:L
“Many view vaccination as a magic bullet that will stem the spread of the virus once a majority of Americans are vaccinated since those who are vaccinated can no longer infect others. This seems a reasonable assumption but the fact is no one knows if this is true. The new vaccines were determined to be 95% effective in developing antibodies and providing at least short term protection from COVID-19 for those vaccinated, but the trials couldn’t prove whether they also prevent transmission. It may be possible for a vaccinated person to become infected again but not show any symptoms since their immune system was fortified by the vaccine. But the vaccination wouldn’t stop them from infecting others.”
Until it is known with certainty that a vaccinated person can’t spread the virus in the future, even vaccinated people will have to wear a mask and practice safe distancing. This would slow the opening up of the economy until 80% to 90% of the people in the U.S. are vaccinated.
In the 26 days since the first vaccination was injected on December 14, 6.7 million Americans have been vaccinated or less than 260,000 a day. The slow start should not come as a surprise and the coming improvement shouldn’t either. At some point before the end February, if more issues don’t crop up, the U.S. will be vaccinating close to 1 million people a day. Even at that optimistic rate, it could take another 7 to 9 months before herd immunity is reached.
And to get there President Biden or the majority of states may have to institute a vaccine mandate to achieve this goal, since 30% or more of the population is unwilling to get vaccinated. If it comes to this, the issue will find its way through the courts until the Supreme Court decides the outcome. In 1905, the U.S. Supreme Court upheld the right of state governments to make smallpox vaccination mandatory to protect the public health, despite common and sometimes severe side effects from the early versions of the vaccine, including skin lesions, muscle aches, fever and fatigue. This precedence will allow the Supreme Court to side with President Biden and the states, but it will slow the vaccination process down.
The logistical magnitude of producing, distributing, and vaccinating more than 250 million people or more (enough to get to herd immunity), not once but twice in a matter of months is daunting. Think about the challenge facing many hospitals. In recent weeks they ramped up their capacity to vaccinate a realistic number of people and have set a goal to measure their success. If hospital believes it can vaccinate 500 people a day, they have a tough decision to make since they must also plan on administering a second shot in 3 or 4 weeks depending on whether they are using Moderna’s or Pfizer’s vaccine. Knowing that the hospital will need to double its capacity in a few weeks, the hospital is almost forced to start with 250 daily vaccinations so it will have the capacity to deliver 250 first time shots and another 250 second shots every day.
In recent weeks the spread of COVID-19 has accelerated and the pace of vaccinations is nowhere near the level it needs to be to begin to turn the corner. The U.S. is in a life and death race with COVID-19 and we’re losing. With the vaccines in hand President Biden will consider a lockdown of the economy so the pace of vaccinations can begin to catch up with the spread of the virus. President Biden also believes Congress will spend a lot more money to cushion the blow to the economy another shutdown would deliver.
This news could be the trigger that leads to a sharp drop in the stock market that could shave -10% to -15% off the S&P 500 in less than two weeks.
Stocks
A top in the FAMANG stocks on September 2 ushered in a corrective period for the market with the Nasdaq 100 (QQQ) dropping -16.5% until it bottomed on September 24. During the same period the S&P 500 lost -10.5% as it was pulled down by the 25% weighting of FAMANG stocks in the S&P 500. FAMANG stocks were the leading group and once they faltered the overall market experienced a correction.
The Russell 2000 has been the strongest market average since Pfizer’s vaccine announcement on Monday November 9, gaining +27.2% since the close on November 6. In contrast the Nasdaq 100 is up +6.7% while the S&P 500 is up +8.3%. If the Russell 2000 tops and begins to correct, there is a good chance the overall market will follow suit.
After recording a low on September 24 at 1433, the Russell 2000 jumped to 1652 on October 12 (Green Wave 1). After falling to a higher low of 1526 on October 30 (Green Wave 2), the Russell 2000 embarked on an almost uninterrupted rally until reaching 2026 on December 28 (Green Wave 3). As noted in the January Macro Tides, the Russell 2000 was expected to rally above 2026:
“The rally since the September low is only three waves, suggesting the Russell 2000 is likely to exceed 2026 in wave 5.”
I thought the Russell 2000 could drop to 1800 for Wave 4, before it rallied above 2026. The Wave 4 correction proved much more shallow than expected, with the Russell 2000 only falling to a low of 1927 on January 4. (Green Wave 4).
Since the low on January 4, the Russell 2000 has exceeded the high of 2026 and has been moving up in what should be a 5 wave rally. So far it appears the Russell 2000 has completed waves 1 through 4 in black. If this pattern analysis is correct the Russell 2000 should rally above the high of 2113.88 in the next day or two.
Based on how the Russell rallied off the low in September, Wave 5 would equal Wave 1 at 2146. (219+1927) A high in the next two days would complete the 5 wave rally from the September low. At a minimum the Russell 2000 is likely to drop to the January 4 low of 1927 quickly, and could test the black trend line on the first chart near 1800 by early February.
The S&P 500 is expected to drop to 3550 (blue trend line) and could fall below 3350 (green trend line) and the Nasdaq 100 QQQ could fall to 280 (green trend line), if the Pandemic really gets out of control and the Biden administration chooses to lockdown the economy. After the coming correction, the S&P 500 is expected to rally above 4000.
Dollar
Sentiment and positioning have been indicating that a trading low in the Dollar was approaching and the price action began to confirm a low as noted last week:
“The Dollar fell to a new low today and reversed, so it’s possible it completed at least Wave 3. As noted last week,
“Any new price low is likely to be accompanied by a positive divergence on the Dollar’s RSI”,
which is exactly what occurred on January 4. The positive RSI divergence increases the odds that at least a decent bounce is coming soon.”
On January 6 the Dollar fell to a marginal lower low and has since rallied enough so that the 5-day moving average (red) will climb above the 13 day moving average for the first time since early November. The quality and strength of this rally will clarify whether the ‘low’ is in, or whether the Dollar will drop to a lower low in the first quarter to complete Wave 5 from the high on March 23.
Gold
In early November Gold popped above a trend line connecting the lower high in August with highs in September and October (first arrow), only to reverse and fall below that trend line. Last week Gold popped above the trend line connecting the high at $2070 in August with the early November peak (second arrow) . As noted last week Gold was
still expected to fall below $1766 and could trade down to $1730 before a trading low is established.
In overnight trading Gold dipped below its 200 day average just as it did in late November. Gold is likely to bounce off this longer term moving average since many traders use it as a timing device. Once the bounce is over Gold is expected to fall below the 200 day average which should generate more selling pressure. Gold could fall to the down trending line that connects the low in August, September 24, and November 30 which is near $1730.
Silver
Silver is expected to test and likely drop below $21.78 and its 200 day average in the next few weeks.
Gold Stocks
The Gold stock ETF GDX briefly climbed above the green down trend line just as it did in early November. The expectation was that GDX would fall back below the trend line in the ‘next few days’ and ultimately fall below $33.25. Today GDX fell to the trend line connecting the low on November 24 at $33.25 and the December 14 low at $34.26 and may briefly bounce off this short term support. Traders can establish a 33% position if GDX drops below $32.00.
Treasury yields
The expectation was that Treasury yields would fall as the Pandemic worsened and more lockdowns were announced, before yields would rise. Instead Treasury yields broke out on January 6 as expectations of more fiscal stimulus and technical selling kicked into gear.
The first target is the March high near 1.266% but there may be a curve ball before that level is reached. Frequently markets will revisit the level of support or resistance recently broken, before the directional move indicated by the breakout resumes. In this case 10-year and 30-year Treasury yields would fall to test the breakout level, before rising further. If the Pandemic leads to a lockdown so vaccinations can catch up to the spread and the stock market loses -10.0% or more, the 10-year Treasury yield will drop to 0.95% before climbing to 1.266%. At some point in 2021, more likely in the second half of the year, the 10-year Treasury yield could spike up to 1.75% to 1.95%.
The first target for the 30-year Treasury yield is 1.94% but it could retest the breakout at 1.75%. Longer term the 3-year has the potential to rise to 2.15% to 2.35%.
TLT broke down below the green support line and could drop to $149.00 to $150.00 (red trend line). If Treasury yields falls due to the Pandemic, TLT could retest and rally to $154.00 to $155.00.
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 in January and possibly into February. Once this correction is complete the S&P 500 is expected to rally to 4000 and potentially higher in the first half of 2021.
The primary 10 sectors for the S&P 500 with the Russell 2000 and Midcap included.
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