Powell Will Provide No Taper Clues At Jackson Hole

Macro Tides Weekly Technical Review 23 August 2021

Macroeconomic Policy in an Uneven Economy

The annual Federal Reserve of Kansas City’s Jackson Hole Economic Policy Symposium started in 1978 and includes more than 100 central bankers, policymakers, academics and economists from around the world. Participants convene to discuss the economic issues, implications, and policy options pertaining to the symposium topic. The symposium proceedings include papers, commentary, and discussion.

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The list below shows you the scintillating topics that riveted participants in the last 5 years. This year’s event will kick off this Friday and the topic is “Macroeconomic Policy in an Uneven Economy“, and is sure to spark lively debate and keep participants awake for hours.

At last year’s event Jerome Powell used the symposium to announce that going forward the FOMC would use Average Inflation Targeting (AIT) to guide monetary policy. This was a big deal since it signaled the FOMC wouldn’t tighten policy in anticipation of inflation but would wait until higher inflation was realized. Rather than aiming for 2.0% annual inflation, AIT aims for inflation to average 2.0% over a complete business cycle. In practice this means the FOMC would tolerate inflation modestly above 2.0% during an expansion since inflation was expected to fall below 2.0% during a recession. Last year’s announcement is why many have thought Powell would use the Jackson Hole symposium to announce the FOMC’s plan for tapering.

Financial markets have no interest in “Macroeconomic Policy in an Uneven Economy“. They are holding their breath however at what clues Chair Powell will provide about the timing and size of tapering. Spoiler alert: Powell won’t provide anything in terms of the timing or the size of tapering. He will note the progress that has been made toward achieving FOMC’s twin mandates of stable prices and full employment, but also note they are still short of reaching those goals. He will also say that the Delta variant poses a downside risk to the economy that the FOMC will have to monitor to access how much it weighs on economic growth. With a touch of humor Powell will acknowledge that the FOMC has moved beyond the ‘FOMC is not even talking about talking about tapering‘ and is now talking about tapering.

Congress saddled the Federal Reserve with the stable price mandate in 1977. This is what stable prices looks like to the Fed. The astonishing part is that the FOMC considers the past decade as a failure since Core PCE inflation has been running below its 2.0% target even after the recent inflation surge

In 1977 the Core PCE was 31.8 and in June 2021 had reached 117.3. What cost $1.00 in January 1977 now costs $3.69, 44 years later.

The FOMC formally set its 2.0% inflation target in January 2012 when the Core PCE was 99.3. The Core PCE is only up 18.1% compared to the 20.7% increase had the FOMC been ‘successful’ in holding the Core PCE 2.0% since 2012. How many economists can fit on the tip of a needle? How many economists will attend the Jackson Hole Symposium?

Stocks

As been discussed for many weeks, the NYSE and Nasdaq Advance – Decline Lines have been lagging the strength in the Mega Cap stocks and the S&P 500. One aspect of the weakness in the majority of stocks has been the how narrow recent highs have been as measured by the 21 day Advances minus Decline Oscillators on the NYSE and Nasdaq. In a healthy market this Ocillator is usually at +400 or higher, but on August 13, August 14, and August 16 the NYSE Oscillator was +122, +97, and +1. On the Nasdaq the 21 day Oscillator levels were -127, -227, and -359 on August 16. These are extraordinarily weak numbers with the S&P 500 and Nasdaq 100 recording new all time highs.

The other aspect of such weak breadth at new highs is that it doesn’t take much additional selling pressure to quickly create oversold readings on the 21 day Oscillators. On the NYSE the Oscillator fell from +1 on August 16 to -361 on August 19 and that was after the S&P 500 had recovered from an intra-day low of 4368 and closing at 4406. The 21 day Oscillator on the Nasdaq dropped from -359 to -648 on August 19. A reading of -400 is considered oversold for the NYSE and Nasdaq, so the NYSE was almost oversold and the Nasdaq was extremely oversold on August 19.

The quick reversal on August 19 left the S&P 500 up 6 points after being down by 32 points at the low. The QQQ’s rebounded from a loss of -0.62% to have a gain of 0.48% on the close. A large portion of the reversal on August 19 and additional gains on August 20 was due to option positioning going to the Options Expiration on August 20. Large notional option values often pull the S&P 500 up when big positions are above current prices and down if they are below. Last week there were very large positions on the S&P 500 at 4480 and 4500. Once the selling dried up after the down opening on August 19, these large notional option values effectively pulled the S&P 500 up like a magnet.

Pfizer’s vaccine was approved today, Barrons’ cover story this weekend was very positive on Mega Cap stocks, and the 21 Day Oscillators were still below 0 on Friday for the NYSE (-199) and -475 on the Nasdaq. The S&P 500 and QQQ’s each made new highs today but the majority of other major averages did not, so the divergence with the major market averages is still a problem.

As the S&P 500 and QQQ’s recorded new highs today, the Advance – Decline Lines for the NYSE and Nasdaq failed by an even wider margin in confirming. The number of stocks making a new 52 week high are still making lower lows even as the S&P 500 and QQQ’s reach new heights.

The issues that have been warning of a correction are flashing the same message even though the S&P 500 and QQQ’s suggest everything is OK. This is why analyzing cyclical sectors holds the key. (Below) If the majority of cyclical sectors are able to break out, it would indicate that the risk of a correction had vastly diminished. At today’s close every cyclical sector is comfortably below where it was trading on August 12 and August 13.

The depth of corrections in the S&P 500 have become progressively smaller since April 2020, as call options buyers and buy the dippers jump in.

These shallow corrections have a time tempo with the last 4 dips each lasting 3 days. (May, June, July, August) A clue that a correction is going to be different will be provided when a correction is deeper than -3% and lasts more than 3 days.

Further evidence of just how unusual and extended the S&P 500 has become is how long the S&P 500 has stayed 8% or more above its 200 day average. The chart below is 5 days old so the streak is now up to 195 days.

To end the streak the S&P 500 would have to decline to 4342. If the S&P 500 doesn’t decline sharply in the next 10 sessions, the streak will become the longest since 1959. Contrast the S&P 500 with the percent of NYSE stocks above their 200 day average, which has dropped from 92% to 59% on Friday August 20. Many stocks are enough off their highs to bring them down below their 200 day average, which doesn’t jive with a new high in the S&P 500.

Treasury yields

As long as the 10-year Treasury yield remains in the down sloping channel, there is the potential that the yield could fall back to the low of 1.129%. The first indication would be a close below of 1.22% which has been tested in 3 of the last 5 days. The 30-year Treasury yield is holding above the upper channel trend line at 1.83%. As long as the 30-year doesn’t close below the upper trend line, the trend is neutral to up.

A decline in Treasury yields below their intra-day lows on July 19 would likely occur as a response to negative economic news and a deeper than 5% correction in the S&P 500. The Delta variant could also be a trigger if it doesn’t top before the end of August.

Congress is not likely to raise the debt ceiling any time soon so the Treasury’s balance at the Fed will continue to drop sharply, and could reach 0 by late October. The failure to increase the Debt Ceiling will handcuff the Treasury and allow FOMC purchases to exceed issuance.

The Fed has absorbed almost all of the T-bond supply for the past 3 months. This could limit any increase in yields until the Debt ceiling is raised, and could enable Treasury yields to fall below the lows on August 19.

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 as expected. Use a stop of $15.90 on half of the position.

Dollar

The Dollar traded above 93.19 and quickly popped to 93.73 on August 20. The Dollar appears to have completed 5 waves up from the last May low. A pullback to 91.80 – 92.00 is likely.

The symmetry of the rally of the January low and May low must also be acknowledged. Both lasted the same of amount of time (99 days to 102 days) and were virtually the same length. (4.22 points vs. 4.19 points) This pattern suggests the Dollar will be much weaker in coming months. The Delta variant has dented economic activity in August so economic reports that come out in September for August are likely to come in under estimates and could dampen prospects of a Taper announcement at the September 22 meeting.

I don’t think the Dollar has rallied based on when the FOMC decides to taper, but has instead responded to the realization that monetary policy is going become less accommodative and well before any move by the ECB. This more bearish pattern will become more viable if the Dollar gives back more than 61.8% of the 4.19 point rally. (below 91.10)

Gold

Additional Dollar weakness should provide a lift for Gold as it did on August 23. Gold closed above $1793 and the first area of resistance today as the Dollar fell. The next hurdle, which is more important, are the highs just above $1830 which capped Gold on 5 separate trading days. Gold’s chart will look much better if Gold closes above $1840.

After peaking in early June Gold traded down after the FOMC meeting on June 16. This suggests that Gold is likely to trade poorly as the FOMC moves toward tapering. It is likely that while the FOMC doesn’t announce tapering at the September 22 meeting, it does tee up the announcement at the November 3 meeting.

The stop on IAU was triggered after the overnight smash on August 9, when an order to sell 24,000 contracts in less liquid trading during Asian trading. This large order triggered stops under $1750 and drove Gold down from $1763 to $1693 in a few minutes. Lowering exposure to Gold if it trades up to $1825 is worth considering.

Silver

Silver needs to close above $24.50 and then hold above $23.90.

Gold Stocks

Gold closed at $1779 on August 13 and $1781 on August 20, but GDX fell 6.0% from $32.82 to $30.85 last week. GDX’s RSI dropped to 30.3 on August 20, and after such weakness was primed for a rally. On August 23 Gold gained 1.2% and GDX jumped 4.1% so its Relative Strength to Gold improved. It has a long way to go to become positive. GDX needs to close above $33.30 to confirm it has the potential to rally more, $33.70, and possibly up to $34.50.

The concern is that the decline from the high of $45.68 in August 2020 to the March low of $30.64 may have been Wave A of a larger A-B-C correction. The June peak at $40.13 would represent Wave B. If Wave C is equal to Wave A, GDX could decline to $25.09. (45.68-30.64 = 15.04 subtracted form 40.13) A drop to near $25.00 would complete the A-B-C correction and likely be followed by a significant rally. In the fall of 2019 GDX spent a lot of time trading between $26.00 and $28.50, so GDX may not fall all the way to $25.09.

Consider reducing exposure if GDX rallies to $33.20 and $33.70.

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. With the MTI holding well above the green horizontal line, the risk of a bear market is low based on economic fundamentals.

Geo-political risk always has the potential to result in a larger than 10% correction. The U.S. economy will not be affected directly by the events unfolding in Afghanistan. That could change if the unraveling in Afghanistan leads Iran to enrich more uranium.

Until the majority of cyclical sector provide an all clear signal by breaking above the trend lines connecting previous 2021 highs, the potential of a 5% to 7% correction remains the likely outcome.