Written by Jim Welsh
Macro Tides Weekly Technical Review 29 March 2021
In the initial rally off the low on March 23, 2020 just about every sector participated until a short term high was recorded on optimism about vaccines on June 8, 2020. Since June 8 the stock market has been playing a game of Leap Frog with one theme dominating (growth) only to be replaced by a different theme (reopening).
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On June 8 the Russell 2000 reached 1537 but then consolidated until September 24 when it fell to 1433, after hitting a high of 1601 on September 2. Between June 8 and September 2 the Russell 2000 was up +4.2%. The Russell 2000 was effectively treading water until a vaccine made it possible for a full blown reopening of the economy.
As investors waited for a vaccine the emphasis remained on growth stocks since they were still expected to show growth far in excess of GDP growth as they had for years. Growth stocks as measured by the Nasdaq 100 ETF (QQQ) gained +25.6% between June 8 and September 2. The Russell 2000 and QQQ growth stocks corrected into late September, bounced into mid October, before falling again into a low on October 30.
When Pfizer announced the successful testing of its vaccine on November 9, the reopening stocks were off to the races while growth stocks consolidated. The Russell 2000 and the QQQ’s peaked in the first half of February and then fell sharply into a low on March 5. Between September 2 and March 5, the QQQ’s lost -2.0%, while the Russell 2000 soared +36.9%.
After topping in the first half of February QQQ fell -12.1% on an intra-day basis, while the Russell 2000 shed -9.4%. As the market recovered from this hiccup, the Russell 2000 rallied to a new high on March 15 +1.8% above its high in February. The QQQ however only rallied enough to retrace 65% of its decline and topped on March 16 -4.1% below its February high. Since the mid March highs in the Russell 2000 and QQQ, the Russell has dropped -8.5% while QQQ has only dipped by -2.6%.
The QQQ led the way into this corrective period after topping in February, bouncing to a lower peak in mid March, but is now is showing better relative strength. The Russell 2000 didn’t hit its high until mid March, but is now showing more weakness after displaying strength by rallying to a new high in mid March. Since QQQ led the way into this corrective period, the improving relative strength of QQQ suggests the correction may end once the weakness in the Russell 2000 runs its course.
There are key price levels on the Nasdaq 100 QQQ and the Russell 2000 that must be monitored. The Russell posted an intra-day low of 2085 on March 5 and 2100 on March 25. A close below 2085 would likely lead to a drop to 1975. A close above 2225 would likely be followed by a new high above 2360.
The QQQ has a clearly defined level of support and resistance, with support at 310 and resistance at 324.50. A close below 308 would likely lead to a test of 297 and a close above 324.50 would indicate a test of the February high of 338 was coming.
There are a number of technical reasons why a quick shakeout is possible until the Russell 2000 and QQQ climb above their respective resistance levels.
The DJIA, DJ Transports, and S&P 500 made new all time highs on March 29, but many other averages are below their respective highs. As the DJIA recorded a new closing high, the Russell 2000 closed -8.5% below its high. The QQQ closed -6.6% under its high and the un-weighted Value Line Composite is -4.5% below its high. The NYSE Advance – Decline Line failed to confirm the new high in the DJIA and S&P 500 for the first time since the rally began in March 2020.
The Nasdaq Advance – Decline Line peaked in February and has been weakening ever since, which is an early warning indication of a larger problem.
A more worrisome indication of underlying weakness is the collapse in the number of stocks making new 52 week highs on the NYSE and Nasdaq. After tracking the pattern of higher highs in the S&P 500, the number of stocks making a new high on the NYSE has plunged. It is unusual for the S&P 500 to make a new all time high, while the 21 day average percent of stocks at a new high is the lowest since December 4 when the S&P 500 was 3699.
The new high minus new low data for the Nasdaq has deteriorated even more than on the NYSE.
The High-Low data for the NYSE and Nasdaq will remain negative until the black line (current 21-day average percent) crosses above its 5-day moving average (red line).
The Intermediate Trend Indicator (IT) for the NYSE and Nasdaq could help identify when the next rally attempt is beginning. The IT (black line) is the sum of the difference between the 5-day average and 21-day average of net advances minus declines, highs minus lows, and up volume minus down volume. A buy signal is generated when the IT crosses above the red moving average. Waiting for the RSI on the IT to drop below 30 (not shown) helps reduce whipsaw trades. The last 5 buy signals after the RSI fell below 30 where: September 28, 2020, November 3, 2020, January 6, 2021, February 3, and March 8.
If the Russell 2000 closes below 2085 and QQQ closes below 308, the S&P 500 could drop to 3700 – 3800. If the S&P 500 does correct in the next two weeks, it is expected to rally above 4000.
Treasury Yields
The recent decline in Treasury bonds is the largest of any in the past 25 years, including the Taper Tantrum in 2013. In the March 1 WTR I noted that the weekly RSI for the Treasury bond ETF (TLT) had fallen below 30 for only the fourth time in the past decade:
“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.”
Sentiment toward Treasury bonds is about as sour as it can be. The percent of bond Bulls fell to just 20% last week, according to the weekly survey of bond traders by Consensus. This is in the bottom 1.7% of all surveys during the past 34 years. The green dots highlight the prior instances when the percent of bulls dropped below 30%. In the majority of occurrences, a low in Treasury bonds was coincidental with the low in bullish sentiment.
There were instances in which Treasury bond prices fell to a lower low after bouncing. In early 2018 bullish sentiment fell below 30% and TLT entered a trading range between 116.50 and 122.90 from February until July. TLT then dropped to 111.90 in November 2018.
A lower low is expected in the next few months.
On March 18 TLT traded down to $133.19 before closing at $133.92. TLT’s RSI recorded a significant positive divergence suggesting that TLT has bottomed and Treasury yields have topped. TLT has the potential to rise to $142.00 in coming months before falling to a lower low.
Dollar
The unwinding of the large short position in the Dollar was expected to spur a rally in the Dollar.
As noted last week:
“In the short term the Dollar has the opportunity to rally above its recent high of 92.50 in large due to weakness in the Euro.”
The Dollar rallied to 92.96 last week so it has fulfilled the minimum expectation. The aggregate short position in the Dollar has been coming down but it’s still significant. In 2018 the Dollar didn’t stop going up until Noncommercial traders had established a sizable net long position. Given this positioning the Dollar could rally up to 94.00, especially if the Euro weakens further as COVID cases rise and the pace of vaccinations in the EU lag.
Gold
The biggest risk to the near term outlook for Gold and Silver is additional strength in the Dollar. If the Dollar tops near 93.00, Gold and Silver will bottom and begin to rally as expected. As discussed last week:
“Gold is likely to hold above the recent low even if the Dollar does rally modestly above 92.50.”
After topping at $1754 Gold fell to $1707 on March 29 comfortably above the recent low of $1677, even as the Dollar rallied above 92.50. Gold is expected to rally to $1950 and possibly above $2070 this summer. The only caveat is if the Dollar manages to rally above 94.00 in the next few months. This is not expected.
Gold has been correcting since it topped at $2070 last August so the correction has already lasted 7 months which has dampened bullish sentiment. After buying the initial 50% in IAU at $17.23 on February 23 and the second 50% position at $16.09, the cost basis is $16.66.
Silver
Silver was expected to drop below $24.90 and possibly test $24.50. On March 25 Silver fell to $24.48. Additional Dollar strength could push Silver down to $23.75. Silver is expected to rally above $30.00 by mid-year. Traders took a 50% position in the Silver ETF (SLV) when SLV dropped to $23.25 on March 23.
Gold Stocks
Traders were recommended to take a 33% long position if GDX closed below $32.00, and on February 26 GDX closed at $31.13. Last week traders were advised to add 33% to the GDX position on a pullback to $32.75. GDX fell below $32.75 on March 23. If the Dollar pushes up to 94.00, GDX could retest the March lows under $31.00. A close below the upper declining black trend line would represent a breakout and suggest a rally to $38.00 was starting.
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 still has the potential to revisit 3700 – 3800, if the Russell 2000 closes below 2085 and QQQ closes below 308. 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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