Written by Jim Welsh
Macro Tides Weekly Technical Review 01 March 2021
J&J Delayed Reaction
On Friday February 26 the Vaccines and Related Biological Products Advisory Committee (VRBPAC) recommended by a 22-0 vote the Food and Drug Administration grant an emergency use authorization for Johnson & Johnson’s Covid-19 vaccine. Despite this good news on Friday Johnson & Johnson’s stock fell to $158.46 from Thursday’s close of $162.76 a loss of -2.6%. The S&P 500 shed -0.47% and closed below the rising trend line connecting the low on October 30 and January 29 low.
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The inability of the stock market to rally on the J&J news and close below a multi-month trend line suggested the correction would carry into today at a minimum.
The FDA relies on the VRBPAC for recommendations so it would certainly follow the unanimous recommendation to approve the J&J vaccine, especially given the urgency of getting more Americans vaccinated with an effective vaccine. On Saturday the FDA approved J&J’s vaccine for emergency use which shouldn’t have surprised anyone who follows this stuff. One can only infer from today’s stock market reaction that few expected to FDA to approve J&J’s vaccine, so the approval was a big surprise. This suggests many investors are either dense or capable of being surprised by the obvious.
Congress is expected to pass the “American Rescue Plan Act of 2021” in March and may get it done by March 14 when the extended unemployment benefits expire. The bill includes another round of $1400 checks for many Americans who are working from home and have become stock market traders since the Cares Act was passed in March 2020. As noted in the March Macro Tides:
“A record 10 million new brokerage accounts were opened in 2020′, with millions of these new investors gravitating toward trading Call options. Call option volume has soared from 10 million contracts a day in early 2020 to almost 30 million. I have no doubt that when Robinhood traders receive their next stimulus check of $1400 they will be aggressively buying Call options. The surge in Call buying by this cohort is likely to lift the S&P 500 comfortably above 4000 by mid-year, but has little to do with expected 2022 earnings growth for the stocks in the S&P 500 or the economy as a whole.
These folks are merely trading whatever is moving.
Stock Sectors
Once the next stimulus package is voted into law, the focus will shift to infrastructure spending which has had a measure of bi-partisan support for years. Based on comments by Treasury Secretary Janet Yellen on February 17 the infrastructure bill will include tax increases which will at least pay for a portion of the spending:
“Certainly part of the package, the parts that are permanent, will be paid for in order to not raise long-term deficits, but we’re still working on the details of the package.”
This aspect may delay the actual legislation until the second half of 2021, when the economy is stronger and less susceptible to the prospect of higher taxes. Investors will be anticipating the increase in spending and happy to buy the sectors likely to benefit before the news is realized. This is why I recommended in the February 22 WTR 4 sectors that have the potential of benefiting from an increase in infrastructure spending even if Treasury yields rise further.
Industrials – As noted last week:
“The relative strength of XLI broke above the down trend that had been in place since mid November. XLI is on the verge of breaking out above the recent highs. This is a sector that can be bought on weakness should the market correct further.”
After pulling back late last week to $90.36 on February 26, XLI has confirmed the breakout with today’s strength.
Financials –
“The Financial ETF has closed above the high it made in 2007 and 2018 as illustrated on the monthly chart below. This breakout suggests it should move higher in coming months. ”
Financials – Daily
“The Financials ETF XLF broke out above its early 2020 high and January 2021 high as Treasury yields rose and the yield curve widened. Loan demand may increase if the economy strengthens as forecast in coming months. This is a sector that can be bought on weakness should the market correct further.”
After pulling back late last week to $32.19 on February 26, XLF has resumed the uptrend with today’s strength.
Basic Materials –
“XLB has the potential of testing the higher trend line near $80.00.”
On February 26 XLB dipped to $73.07 and just above the trend line connecting the October 30 and January 29 lows.
Materials XME –
“Would wait for a pullback after such a big up day on February 22.”
XME quickly pulled back to $35.27 on February 26 from $39.86 on February 24. Getting back above the black trend above the current price will be positive.
Today’s enthusiasm was similar to November 9 after Pfizer announced its vaccine results. After a big up day the S&P 500 pulled back from an intra-day high of 3646 on November 9 to 3512 on November 10. After today’s big move the market is overdone so a modest pullback can be expected. As long as the S&P 500 holds above last week’s low of 3789, the trend is up even in the short term.
Treasury Yields
There is a risk that the S&P 500 could fall below 3788 if another rise in Treasury yields leads to another selling wave in the Mega Cap growth stocks and profit taking in the cyclically sensitive stocks. Despite today’s big rally the Nasdaq 100 ETF (QQQ) is still below the trend line connecting the October 30 and January 29 lows. As long as QQQ remains below this trend line the FAMANG stocks could experience another bout of weakness, if Treasury yields rise above the intra-day highs reached on February 25.
The Treasury bond ETF (TLT) is correlated to changes in the 30-year Treasury yield. Since 2012 the Weekly RSI for TLT has dropped to 30 on four occasions (green arrows). In June 2013 after the Taper Tantrum, December 2016 after President Trump won the election and bond holders were worried about his promised tax cut. TLT’s RSI fell below 30 in October 2018 after the bond market was distressed about rate increases by the Federal Reserve. The fourth time is last week.
After Treasury bonds had become so oversold in the three prior instances, Treasury yields fell for a period of time before rising again, which caused TLT to record a lower price. After the secondary low TLT rallied as the 30-year Treasury yield declined. The smallest rally in TLT was from $116.49 to $129.56 in 2017.
The spike high on February 25 has all the earmarks of a wave 3 crescendo. The sharp reversal lower in the 30-year Treasury yield on February 25 from a high of 2.402% to a low of 2.177% on February 26 is consistent with the end of a wave 3. The yield decline to date would be considered wave 4 which could stretch out for a bit before wave 5 lifts the 30-year Treasury yield above its February 25 intra-day spike high.
TLT would be expected to fall below its intra-day low of $136.61, possibly approach the green trend line near $134.00, and record a positive RSI divergence. Once wave 5 is complete TLT would have the potential to rally to $146.00 (black trend line).
If Treasury yields set a higher high in wave 5, technology stocks could get hit again. On March 19 there is a quadruple expiration of options and futures that could accelerate any decline if the S&P 500 drops below last weeks’ low of 3789. The huge increase in Call option volume during the past year has given the stock market a boost as dealers were forced to hedge the Call options they sold by buying stocks. The need for dealer hedges on stocks and market averages disappear if the individual stocks and the S&P 500 fall below significant price strike levels. Another rip higher in Treasury yields could provide the reason for another wave of selling.
Gold
As discussed last week:
“Gold had been expected to fall below $1766 and potentially drop to the down trending line that connects the low in August, September 24, and November 30 which is near $1700. On February 19 Gold fell to $1761.70, failed to close below the middle trend line, and on February 22 Gold rallied to $1811. By falling below $1766, Gold fulfilled the minimum expectation.”
Based on this minimum objective being met and subsequent strength, I recommended taking a 50% position in IAU on the opening of February 23 ($17.23). As it turned out the push below the prior trading low at $1766 and subsequent rally above $1810 was a head fake. Gold has broken convincingly below $1766 as had long been expected. In the process Gold has closed below the middle trend line and looks poised for a drop below $1700.
Although Gold could fall to the lower trend line, I don’t think it will and it would be positive if Gold bottomed without tagging the lower trend line. Increase the position in IAU from 50% to 100% if IAU trades below $16.10. Gold is expected to rally to $1950 and possibly above $2070 this summer.
Silver
The next leg down in Gold may be initiated by Silver if it breaks below the trend line connecting the November 30 (21.92) and January 18 (24.31) lows near $26.30. A close below $26.30 could lead to a quick drop to $24.60.
Gold Stocks
GDX was expected to fall below the February 18 low of $32.54 for a long time, and traders were recommended to take a 33% long position if GDX closed below $32.00. On February 26 GDX closed at $31.13. GDX could still drop below $29.00 if Gold sinks to under $1700. Traders can increase the GDX position from 33% to 66% if GDX trades under $27.75.
Crypto traders
Robinhood ‘investors’ have become famous for buying call options on the FAMANG stocks last summer, gunning the stocks with a high short interest like GameStop, and piling into Bitcoin and the other crypto currencies. The average number of Robbinhood crypto traders in 2020 was 200,000 accounts. In January and February the number of accounts trading the crypto currencies soared to more than 3,000,000.
If inflation surges in the next few months as expected, there is a chance Robinhood traders could become infatuated with Gold, Silver, and Gold stocks. It would be helpful if the volatility of crypto currencies diminishes and even better if Bitcoin traded under 46,000 and then falls under 40,000 in the next few months. Some of the money that has been directed toward the crypto currencies could be expected to rotate into the traditional inflation hedges. Robinhood traders could barrel into Call options on gold stocks and GDX with the goal of seeing GDX move above its high of $45.78.
Dollar
The move above $1810 in Gold and dip below 90.00 in the Dollar proved to be head fakes. The Dollar had been expected to rally above 92.00 and that potential is back on track. It may provide another reason for Gold and Silver to correct more in the next few weeks.
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 has been expected to fall to 3550, but the willingness to buy the dip has precluded any meaningful correction. The S&P 500 still has the potential to revisit 3694, if the S&P 500 drops below last week’s low of 3789. Once this correction is complete (should it materialize), 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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