More records for the major market indices, which have started off December on a strong note. The initial sales data from Black Friday and Cyber Monday were supportive. For Black Friday, online sales surged over 20%, which helped offset the sharp decline recorded for in-store sales. Even the upward move in bond yields did not deter the stock market rally last week, as the 10 Year T-Note reached its highest yield since last March.
It was another strong week for the small-cap iShares Russell 2000 (IWM)IWM, which was up 2.1% and made another new high. New highs were also recorded for most of the market averages, including the Nasdaq 100NDAQ, which was up 2.2% and is now up 43.5% year-to-date (YTD).
Even though the S&P 500 also made a new high and gained 1.7% for the week, it is only up 14.4% YTD. The 2% decline in the Dow Jones Utility Average dropped it clearly into negative territory for the year.
The SPDR Gold Shares (GLD)GLD had a nice rebound last week after the recent sharp decline. The recent increase in the yield on the 10 Year T-Note has not helped gold prices. Historically there have been a number of times when an increase in yields, after a long decline, have pressured gold, which is then viewed as a non-performing asset.
The 10 Year T-Note yield peaked in October 2018 at over 3% (line b) as gold was bottoming around $1200. For the next year, yields declined more sharply than gold rose. In June 2019, gold moved above multi-year resistance (line a).
As gold formed a short-term peak in September 2019, yields bottomed and rallied into the end of the year (section c). During this period gold had a multi-week correction and then bottomed in December and resumed its positive trend. This coincided with another move lower in yields that culminated in the March 2020 lows.
Gold prices peaked in August (line d) as yields made a low before turning higher. So was this a change in the major trend for either gold or the 10 Year Yield?
The Comex Gold futures had a low last week of $1767.20, which was just below the 38.2% Fibonacci support from the 2019 low of $1267.90. The 50% support stands at $1678.30, and the weekly chart shows a band of support between these two levels. The downtrend (line a) is currently at $1949.40.
The on-balance volume (OBV) dropped below its weighted moving average (WMA) at the end of October but held up pretty well, as it is above the support (line b). The OBV turned higher last week as the futures volume was the highest since March. There was not corresponding heavy volume in the SPDR Gold Shares (GLD).
The Herrick Payoff Index (HPI), which uses price, volume, and open interest to determine money flow, has dropped sharply in the past few weeks. The weekly HPI is now well below the zero line and its declining WMA. Typically it would take several weeks before it could turn back to positive.
The 10 Year T-Note Yield closed last week above the early June high at 0.957% (line c). I have been watching this level for the past few months. The steep downtrend (line a) has also been overcome, but given the length of the downtrend, this may not be significant. There is next strong resistance at 1.258% (line b).
Both the Moving Average Convergence Divergence (MACD) and MACD-Histogram turned positive at the end of May. The MACD and signal line have been rising sharply for a number of weeks as the downtrend (line d) was broken. The MACD-His shows a less bullish pattern as it has not made a new high for five weeks.
Of course, the central banks are still on the path to keep rates low for the foreseeable future, with the European Central Banks (ECB) scheduled to meet next Thursday. The Federal Open Market Committee next meets on December 15-16. From a technical perspective, I do not think the decline in gold prices or rise in yields signals a change in the major trend.
The consensus view of most economists is that the economic recovery is weakening and that is likely to be the trend as we head into 2021. Last week’s monthly jobs report supported this view, as 245,000 jobs were added, well below the expected 400,000.
This past week, investors again focused on encouraging news on a COVID-19 vaccine and not the worsening spread of the virus throughout the country. The market was encouraged that there finally seemed to be some movement in Congress in favor of a long-overdue stimulus package. Hopefully, the weak jobs report will spur the do-nothing Senate into action.
The NYSE Composite closed last week at 14,417, finally surpassing the high from January 2020 (line a), as it had been lagging the other major averages. The weekly starc+ band have been exceeded for the past two weeks, which is a sign of increased risk. There is monthly pivot resistance for the NYSE now at 14,673 and 15,339.
The daily chart of the S&P 500 shows the early November completion of the flag formation (lines a and b). The measured targets from this chart formations range in the 3800-3950 area. As of Friday’s close, 79.6% of the S&P 500 stocks closed above their 20-day exponential moving average (EMA) which is still well below the levels seen in June (line c). There are 83.6% of the S&P 500 stocks above their 50-day EMA. This reading was 97% in June (line d) before the market corrected. Both values dropped sharply in late November, which created a lower-risk buying opportunity.
Clearly, the bulls are in charge of the stock market rally right now, but given the increasing market risk, I am not sure that will continue into January. Over the past month, I have been looking for a sharp correction that would help keep the rally intact. This is now a more popular opinion, which may push the stock market even higher before the correction.
A stimulus bill could spur more buying into the end of the year, but alternatively, might be an opportunity for traders to sell on the news. Keeping an eye on both the technical action and the political deals in Washington over the next few weeks will be important for trading and investing wisely. Stay tuned for my analysis as the month progresses.
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