Written by Jim Welsh
Macro Tides Weekly Technical Review 28 June 2021
Labor Market Improvement Key for FOMC
In May the Unemployment Rate fell to 5.8% from 6.1% in April. The median projection for the 18 members of the FOMC is for the unemployment rate to drop to 4.5% by the end of 2021. In recent months job growth has been less than expected and some of the reasons may have continued to impede growth in June.
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Notice: This article is still in final editing. It will be completed by 2:00 AM EDT.
The jobs report is always subject to large revisions and the Labor Department’s annual revision often varies from the initial print significantly. When fluctuations increase dramatically as they did during the Pandemic Plunge and subsequent rebound, the Labor Department’s seasonal adjustment factor struggles. This is one of the reasons why job growth has been below estimates and probably suppressed job growth in June. Baby Boomers retirements increased during the Pandemic and most of the 1.2 million retirees won’t be coming back immediately, which will also depress job growth in coming months. Mothers with school aged children have not returned to the labor force but will once schools reopen. In the next few months this factor will persist and be a small drag on job growth.
There are workers who are still concerned about the virus and are reluctant to go back to work. The government is making this decision easy if a concerned worker happens to work in a state that will continue to pay unemployment benefits until September 3.
Some estimates for job growth in June may be influenced by the termination of benefits in 22 states during June. Job growth will strengthen in these states but these states only comprise 23.4% of the total unemployed workers. The perception that 22 of the 50 states (44%) stopped benefits during June could lead to higher estimates by those expecting a surge in job growth in those 22 states. Potentially, job growth could exceed the 566,000 jobs created in May but come in below estimates for June and provide another disappointment. If this proves to be the case, Treasury yields could test their overnight lows on June 20 and stock prices could get a lift as investors think any change in monetary policy will be delayed. Conversely, if job growth exceeds expectations by a wide margin, yields will trend higher.
Stocks
The pullback after the FOMC meeting on June 16 was wave 4 from the May 12 low in the S&P 500 as noted in last week’s WTR:
“The S&P 500 retains the potential to rally to the wave 5 target range of 4294 – 4315. The S&P 500 is approaching a new high due to the strength in Mega Cap stocks (QQQ) which are benefitting from the decline in Treasury yields.”
The S&P 500 reached 4292 on June 28 and could briefly exceed 4315 on end of quarter buying and a softer than expected employment report. Irrespective of any short term squiggles the S&P 500 is near the upside target range is likely approaching a top prior to 7% to 10% correction. The topping process could be extended if Treasury yields approach their Jun 20 lows.
When Treasury yields rose during February and March, the Nasdaq 100 (QQQ) corrected. The Mega Cap stocks and QQQ have benefited from the decline in Treasury yields, especially after Treasury yields posted a lower peak relative to March with the 10-year Treasury yield falling from 1.70% to near 1.43%. QQQ can be expected to be strong until Treasury yields reverse higher.
As discussed last week the diverging trends in the major market averages suggest the market is becoming fragmented which is often a warning sign of an impending trend change:
“When the majority of major market averages are in sync, whether they are trending up or down, the trend is confirmed. Turning points are often signaled when some averages make new highs or lows and other averages fail to confirm. The failure of so many averages to post a new high in the last few weeks is another sign that a trend change is developing, which is expected to lead to a 7% to 10% correction.”
As the S&P 500 and QQQ have powered to new all time highs, the Dow Jones Indices have been lagging. The DJ Industrials peaked on May 7 and have been chopping lower ever since. A close below the low of 33,272 on June 18 and the blue trend line would increase the odds of a top.
The DJ Transports also peaked on May 10 and have been far weaker than the Industrials.
The S&P 500 Equal Weight ETF (RSP) has failed to make a new high and its relative strength has been fading. The S&P 500 Equal Weight ETF weights all 500 stocks the same with each stock contributing 0.2%. In contrast, Apple, Microsoft, Amazon, Facebook, and Google have a weighting of 21.60% in the S&P 500 but just 1.0% in the Equal Weight index. The S&P 500 is as expected being pulled higher by the strength in the Mega Cap stocks, but the average stock is lagging as the falling relative strength of RSP shows.
The S&P 500 is expected to decline to at least 4000 in the third quarter.
Treasury Yields
In overnight trading on Sunday June 20, Treasury yields plunged with the 10-year Treasury yield testing 1.40% and the 30-year dropping below 2.00%. If the employment report disappoints again, Treasury yields may test their June 20 lows. By the opening of the stock market on June 21 yields were higher which is why they don’t show the overnight spike lower.
In late March the 10-year Treasury yield pushed to a higher high (1.765% vs. 1.754%) while the 30-year Treasury yield remained below its mid March high (2.448% versus 2.505%. This inter market divergence was supportive of the outlook that Treasury yields were about to fall by 0.25% to 0.30% as noted in the April 5 WTR:
“The Treasury market generated an inter market divergence last week as the 10-year yield rose to a higher high (1.765% versus 1.754%), while the 30-year Treasury yield held well below its prior high (2.448% versus 2.505%). This type of inter market divergence often occurs near trend reversals, even if it is short term in nature. In this instance the 10-year could fall to 1.50% as the 30-year drops to 2.25% at a minimum.”
If either the 10-year or 30-year falls below the June 20 low in yields while the other duration doesn’t confirm, it will add to the expectation that Treasury yields will ultimately exceed their March highs. This outlook would be called into question if the 10-year Treasury yield closes below 1.30% as noted in the June 14 WTR:
“In July 2012 the 10-year Treasury yield dropped to a low of 1.394% and fell to 1.336% in July 2016. These lows represent support and it will take a lot to drive the 10-year Treasury yield below them. As the 10-year yield began to rise off a low of 0.64% on September 30, a nice trend line was formed. That trend line comes in near 1.36% which is another level of support. I don’t expect the 10-year Treasury yield to fall below 1.30%.”
Dollar
The Dollar traded down to 89.54 and didn’t fall below 89.21 as expected but the strength of the rally suggests the expected important low is in place. Additional confirmation will be provided if/when the Dollar closes above the downtrend line. The Dollar could pullback more from the recent peak if the employment report disappoints. Any dip should hold above 90.14. The initial target after this pullback is 93.43 the high on March 31 and a subsequent test of 95.00 once the Dollar closes above 93.43.
Gold
Gold failed to rally above $1915 as expected and fell below $1845.40 in the minutes after the FOMC meeting. Gold’s failure to hold above $1840 diminishes the bullish outlook somewhat. After plunging to $1762 on June 18, Gold’s RSI fell below 30 which should result in a rally as it did on November 30 and after the early March low. Gold’s seasonality is also supportive of a rally into August or September as Gold’s seasonality often tops in August or September.
The fundamental back drop of rising core inflation should be a tailwind for the precious metals and gold stocks. The expectation is that Gold will hold $1750 and then make a move up to $1835 to $1850. A softer than expected employment report would give the metals a lift as investors conclude the Fed will remain easy for longer and risk higher inflation.
Silver
Silver failed to rally above $28.61 as expected and instead dropped to $25.58 on June 21. Although Silver’s RSI didn’t fall below 30.0 it is oversold when compared to prior trading lows in September, November, and March. The favorable seasonality for Gold in August and September is expected to lift Silver as well. Silver could briefly drop below $25.58 and register an RSI divergence. A rally back to $28.00 and potentially above $28.61 could occur in August or September.
Gold Stocks
GDX failed to rally above $40.13 and failed to hold $37.40, so this correction proved deeper than expected. GDX’s RSI fell below 30, which has consistently led to a rally, even when GDX was trending lower from $45.78 to $30.64 (green arrows in RSI panel).
On June 28 GDX closed at $33.99 and below the prior closing low of $34.10, but its RSI recorded a higher low and didn’t confirm the lower close. (28.8 vs. 26.1 on June 18) This is supportive of a rally in GDX in coming weeks. GDX is expected to rally to $36.73 to close the gap created on June 17. If Gold’s seasonality performs as it has in the past, GDX can be expected to rally into August or September, and could test or exceed $40.13.
Last week traders were advised to take a 50% position in IAU, SLV, and GDX on the opening on June 23. IAU opened at $33.96, SLV $24.38, and GDX opened at $35.01. The metals and Gold stocks have to prove themselves by exhibiting more strength since the bounce off the recent low has not been impressive.
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, 2020 as the S&P 500 closed at 2800. A new bull market was confirmed on June 4, 2020 when the WTI rose above the green horizontal line. The S&P 500 is expected to push to a new high above 4238 and could rally to 4294 – 4315 before wave 5 of wave 3 is complete.
The S&P 500 is expected to decline to at least 4000 and could drop to 3725 in the third quarter if Treasury yields spike higher to 1.90% or higher as expected.
The primary 10 sectors for the S&P 500 with the Russell 2000 and Midcap included.
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