Written by Jim Welsh
Macro Tides Weekly Technical Review 02 August 2021 – UPDATED 1:56 PM EDT to restore MISSING GRAPHICS
The August Macro Tides discussed how various markets are likely to trade in coming weeks and the outlook for inflation and the economy. Not much has changed in the last 24 hours.
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Stocks
Last week aggressive traders were urged to establish a 33% short position in the S&P 500 if it traded above 4430 using 4475 as a stop. The S&P 500 traded up to 4429.97 on July 29. Traders can establish the 33% short position if the S&P 500 trades above 4430 or closes below 4360. The inverse ETF SH is an easy way to go short without using leverage. If the S&P 500 rallies above 4430 first and then closes below 4360, traders can increase the position in SH from 33% to 66%.
Treasury Yields
Last week the Bank of Japan announced that it would lower its monthly Treasury purchases by about $5 billion. By itself this is no big deal but it does represent a very modest drop in demand.
The expectation is that Treasury yields are likely to increase in coming months as core inflation holds above 3.0%. The FOMC is expected to announce on November 3 that it will begin to taper its $120 billion in monthly purchases in January. The Treasury’s $1.6 trillion balance at the Fed allowed it in the last 4 months to roll over debt as it spent the balance, without having to issue new debt. At the end of July the balance was down to $501 billion.
In the four years ending in 2019, the Treasury maintained a balance of $350 – $400 billion. The balance is expected to fall into this range in the next two or three months.
There is a chance a trifecta of forces could come together and shake up the Treasury market and lead to higher rates. Inflation is likely to hold above 3% through the end of 2021, the FOMC will announce its plan to taper QE before the end of this year, and the size of Treasury auctions will increase in the fourth quarter.
Technical evidence of a reversal higher in yields has yet to develop. The 10-years’ RSI has yet to breakout above the green trend line, and the red 5 day moving average is still below the 13 day average.
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The 30-year yield has stayed within the channel even as the 30-year yield dropped in the last week. The RSI on the 30-year yield hasn’t broken above the black trend line and the 5 day and 13 day moving averages are still positive.
If the Delta variant results in a decline in the stock market in the next few weeks, Treasury yields could spike lower again. Ultimately, inflation, Treasury supply, and a drop in Delta cases should result in higher Treasury yields.
In recent weeks traders established a 100% position in the inverse Treasury bond ETF (TBF) at an average price of $16.68. TBF is expected to rally above $18.49, if Treasury yields exceed their March peaks
Dollar
The Dollar is expected to drop to 91.50 and possibly lower in the next few weeks. Once this pull back is complete the Dollar is expected to rally above its July high of 93.19.
Gold
As long as Gold doesn’t close below $1790 it is expected to rally to $1860 – $1880. There is a chance Gold could test $1920.
Traders are long the Gold ETF (IAU) at $34.125 and should use a stop of $34.00.
Silver
Silver traded down to $24.69 but didn’t close below $24.70. Silver nees to close above $25.76 and then $26.71 if it is going to test the August 2020 high of $29.75. Seasonality for Gold and Silver is positive in August so the next few weeks should see a solid rally.
Traders are long the Silver ETF SLV at $24.515 and use a close below $22.90 as a stop.
Gold Stocks
GDX closed above $33.85 and traded above $35.20 to but didn’t close above that level. A close above $35.20 should be followed by a move up to $36.73 to close the gap from July 16.
Traders are long GDX at $34.93 and should use a stop of $32.90. Raise the stop to $33.50 if Gold closes above $35.20. If Gold rallies as expected GDX should rally at least to $36.73 to close the gap from July 16 and potentially test the blue trend line near $37.40.
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 near term weakness in the A-D Line and the falling percent of stocks above their 200 day average from 92% in June to 71% last week, suggests the stock market could fall by 5% to 8% in the short term. The S&P 500 is expected to drop below the July 19 low of 4233 and potentially test the June 18 low of 4165. If the S&P 500 closes below 4165, a further decline to 4060 – 4080 is likely. If the Delta variant follows its pattern and peaks before the end of August, the S&P 500 could subsequently rally to a new high.
The primary 10 sectors for the S&P 500 with the Russell 2000 and Midcap included.
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