Written by Jim Welsh

Treasury Bond Yields

The March employment report was not nearly as weak as the headline increase of 98,000 new jobs suggested, which is why Treasury bond yields initially plunged and then rebounded on Friday. At the low the 10-year Treasury yield touched 2.271%, before closing at the high of the day at 2.373%. A ten basis point range is large. However, Friday’s reversal does not change the intermediate outlook for Treasury yields to fall further.

As discussed in the April issue of Macro Tides, GDP growth in Q1 was probably below 1.5%, and second quarter GDP is not likely to improve much. If correct, the assumption that the Fed will raise rates again at the June meeting may be called into question at some point, which would help inspire more short covering in the Treasury bond futures. Over the last month, the Commercials have lowered their long positions from +72,235 to +43,529 in the 30-year Treasury bond futures. But those numbers pale when compared to the -124,000 short positions Commercials were holding when Treasury yields were at their lows last July.

Large speculators were long +103,854 contracts last summer when bond prices were topping. Although Large speculators have lowered their short positions from -62,248 in mid March to -23,058, the rally won’t likely end until the Commercials have a net short position and the Large Speculators are net long. The yield on the 10-year Treasury bond still has the potential to drop under 2.2%.

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From the low of $116.49, TLT rallied in a 5 wave pattern up to $121.97. This 5 wave rally indicates another rally is very likely after any pullback. (Chart below) TLT corrected the rally from $116.49 to $121.97 in three waves (a-b-c), which reinforces the expectation of more upside. A close above $121.97 could be followed by another 5 wave rally to $126.69, if the next rally is equal to the $5.48 rally from the low at $116.49. From its high of $143.62 last July, TLT declined $27.13. A 38.2% retracement would lead to a rally to $126.85. When 2 measurement techniques target a similar price target, the odds are higher that the targets may act as a magnet.

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Stocks

The main point from the last two WTR’s was that the correction that began after the high on March 1 was not over. Last week I said a close above 2370 would open the door for the S&P to rally to a modest new high above 2401. But a marginal new high would likely generate many technical divergences and lead to another pullback.

Intra-day on Wednesday April 5, the S&P traded as high as 2378.36 but closed at 2356, and has closed within 3 points of that level in the following 3 trading days. As I have noted, the S&P left three gaps as it marched higher during February. Traditional charting indicates that the gaps will be filled sooner or later. The S&P has filled the gap at 2371.54, and 2351.90. I expect the remaining gap at 2311.08 from February 9 to be filled.

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The S&P fell 79 points from its high of 2401 on March 1 to last Monday’s low of 2322. An equal decline from last week’s high at 2378 would close the gap at 2311 and test 2300, and potentially complete the wave 4 correction I’ve discussed since March 1. I think the S&P is in Wave (5) of the bull market that began in March 2009, after wave (4) ended in February 2016 (labels on S&P chart above). The current correction is wave 4 of (5) and should be followed by a sizeable rally to above 2401 before Labor Day.

The NYSE advance / decline line has been making new highs, but that apparent strength may be a bit deceiving since it includes so many bond funds, preferred stocks, and other interest sensitive issues. As Treasury yields have fallen, bond funds have rebounded which has added to the number of advancing issues on the NYSE.

In situations like this, it can be instructive to see if the Nasdaq advance / decline line is showing the same strength or negatively diverging. The Nasdaq advance / decline line actually peaked on February 21, and made a secondary high on March 31 as the Nasdaq 100 was making a new high. As noted previously, the Nasdaq Composite and Nasdaq 100 each recorded Negative Weekly Key reversals for the week ending March 31. Both averages posted a new high above the prior week, a lower low, and then closed lower on the week. Last week both averages recorded negative daily key reversals on April 3 and on Wednesday April 5.

The technical weakness in the Nasdaq Composite, Nasdaq 100, and Nasdaq advance / decline line suggests the lows last week in each index will be broken.

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Gold and Gold Stocks

Last week I said a close by Gold above the high on February 27 at $1268.10 (June futures) would turn the short term trend positive and probably rule out the decline below $1200 I have been expecting. After the bombing of Syria on Thursday night, June Gold posted a high of $1,273.30 before closing at $1,257.3. It has not traded above $1,260 since. In the short term, I expect gold to trade under the recent low of $1,241.50 on March 31 and probably below $1,235.

There are a number of reasons why a decline below $1,200 is still possible in coming weeks. As Gold was making a new high on Thursday night above the prior high of $1,264.20 on March 27, Silver failed to better its February 27 high of $18.54, as it topped out at $18.49. In Friday’s trading, which includes Thursday night’s trade, silver recorded a negative weekly reversal for the week ending April 7, and a daily key reversal that encompassed the prior 8 trading days.

This sets up an inter-market divergence between Gold and Silver, somewhat similar to when the DJ Industrials and Transports diverge, with one making a new high and the other failing to do so. Divergences are a sign of stress below the surface, and in this case, the stress suggests Silver may lead Gold lower in coming weeks.

It is also interesting that a similar inter-market divergence has formed between the Gold Stock ETF (GDX) and the Junior Gold Stock ETF (GDXJ). On March 22, GDX traded up to $23.56, and was +1.95% higher on Friday April 7 when it traded up to $24.02, before closing at $23.50. In comparison, on April 7 GDXJ traded up to $37.54, which was -2.67% below the high it recorded on March 16 at $38.57.

As the gold stocks were coming off their intermediate low in December, GDXJ led the way and outperformed until the gold stocks topped in the first week of February. GDXJ’s underperformance since March 16 may again be leading the way, but this time lower.

As noted previously, there is a gap on GDX from December 28 at $19.43 that I expect to be filled. After peaking on February 8 at $25.71, GDX declined $4.57. An equal decline from Friday’s high of $24.02 would bring GDX down to $19.45. If GDX gets that low, I would think the odds of closing the gap are $19.43 are pretty good! GDXJ also has a gap from December 28 at $30.66.

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The Dollar Continues to Act Well

As I thought likely, the Dollar bottomed on March 27, and the trading action since then has been constructive. At a minimum I expected a rally in the Dollar back up to 101.50 - 102.20. Today, the Dollar cash index traded up to 101.34, before closing at 101.01.

Support comes in at 100.30 - 100.50, so a close below that range, which I don’t expect, would be short term negative. A close above 102.25 would shift the odds in favor of a new high above 103.82 posted on January 3.

A close below the March 27 low 98.85 (cash) and 99.33 (June futures) would be negative and pretty much eliminate the potential for a new high.

Emerging Markets

Not much has changed. Two weeks ago, the RSI on the Emerging Market ETF (EEM) registered a lower high even as EEM was making a new high. The last two times an RSI divergence developed, EEM corrected 6.35% and 10.3%. The first target is the March 9 low of $37.39, but there is the potential of a decline to $36.50.

Longer term, EEM could experience a rally to $44.00 - $45.00, testing the highs of 2015, 2014, and 2013. A close above $45.00 would open the door for a move to the 2011 high near $50.00.

Tactical S&P Sector Rotation Portfolio Model: Relative Strength Ranking

Technology stocks took over the leadership of the rally after the financial sector and small caps began to falter after peaking on March 1. Based on the weakening technical indicators of the Nasdaq 100 and Nasdaq Composite, I expect technology stocks to correct more in coming weeks along with the overall market.

If bond yields continue to fall as I expect, the Financials could correct more than they have. From its high of $25.29, the Financials ETF (XLF) dropped in 5 waves, which suggests any bounce is likely to be followed by another decline. An equal decline from its recent high at $23.99 would bring XLF down to $21.67, just below a gap from November 11 at $21.70.

As discussed in the April issue of Macro Tides, Commercial and Industrial loans have been growing at a much slower rate compared to a year ago. The combination of lower yields on Treasury bonds, less lending, and a more distant lifting of regulations on large banks doesn’t bode well. Plus, everybody and their brother fell in love with banks after the election, so some disappointed investors may choose to lighten up on their positions in bank stocks. A close below $22.85 on XLF should open the trap door. (Black support line)

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The Technology ETF (XLK) made a new high two weeks ago, but its RSI posted a lower high, which represented a negative momentum warning. The same pattern is also evident in Consumer Staples, Health Care, and Consumer Discretionary. These sectors represent almost 70% of the S&P 500. If they correct as the negative divergences suggest, along with more weakness in Financials, the S&P can close the gap at 2311 and potentially trade lower.