Sun and Storm Investing Market Timing Blog™

A Market Timing Report based on the April 29, 2022 close…

The Fed usually explains that it has two mandates, “Full employment and price stability.”  What they don’t tell you is that they favor price stability over employment when push comes to shove.  By employing the last person needing a job, you drive up inflation, which defeats the purpose as it degrades the well being of even more people who are bordering on poverty.

They have ONE mandate now: Get Inflation Lower.  They must, because the political damage from inflation in the midterm elections is likely to be great, and it will take time to bring inflation down.

I now expect the GOP to take back both the House, which was assumed, as well as the Senate, because of the level of inflation, and from the economic slowing that is likely as a post-Fed party and Congressional Stimulus hangover.  BOTH parties are responsible for sending checks to many who did not really need them.

I am not saying the checks were not deserved by some, particularly poor savers who have gotten nearly ZERO on their cash for many of the years since 2009.  I’m focused here on the fact that the extra funds, first from Trump/GOP and then from Biden/Dems, fueled inflation, as did the shift from services spending to spending on goods during COVID, the fault of no one. 

Trump’s tax cuts, which were unpaid for from the start, continue to add to inflation as well.  We did not have the money to decrease the top marginal rates on very wealthy people, like it or not politically.  That was the 3rd failure by the third U.S. president of what I call “Tinkledown Economics.”

The “Tinkledown” GOP Tax Cut policy failed to create tax revenue to pay for the tax cuts THREE times, under Reagan (he left us with a 3 Trillion dollar national debt), G.W. Bush, and Trump.  I wish the upper middle class on down would stop buying into that GOP lie.  (I’m a fiscal conservative and a registered Independent as my loyal readers know.).  Bad fiscal decision making is a bipartisan illness.

The big COVID Retirement also hurt goods production and drove up inflation.  Spot shortages have even hit Florida, although they are inconveniences, not deprivations that others must endure.

Many like staying home vs. going to work apparently!  The stock market decline may end up driving some of those retirees and Bull market traders back to work, but the big retirement wave has made it tough for many businesses to find workers, which has driven unemployment back down to 3.6% last month (it reached 3.5% under Trump) and wages up about 6%. 

While there’s inflation, there has also been wage inflation, just not enough to make up for inflation.  As of Jan. 2022, “Real wages fell by 2.4 percent over the last year and are now 1.2 percent lower than they were in December 2019.  If real pay had kept pace with its pre-pandemic trend, it should have risen by 2.1 percent over the period.”  Ref. Wage Chart. Where wages should be and where they are. (see chart at that link)

Inflation has continued higher since, although Bloomberg data says that the inflation rate will be falling through the end of 2022 from its peak.  As of March, the Consumer Price Index (CPI) “rose 8.5 percent over the last 12 months, not seasonally adjusted.”  Ref. BLS – US Inflation Update

If there was one thing that killed President Jimmy Carter’s chance of a second term, it was the off-the-wall inflation rate back then of 14.4% at the peak in the late 1970s, just before the 1980 Election.   

The probable election losses (the Senate loss is not written in stone quite yet although the loss of the House is highly probable per recent stats and historic results for a midterm elections) mean there will be no major programs passed by Congress through 2024.  Sen.s Joe Manchin and Krysten Sinema can take a rest most likely from being the center of attention.

Although POTUS Biden’s approval rating is climbing again, back to 42% from 37% in part due to approval of his Ukraine War leadership, a Biden re-election may be imperiled by

1. Continuing inflation along with loss of stock market gains since he took office, which we know is largely due to factors beyond his control, just as the initial market decline under Trump during COVID was not Trump’s fault (his objectively weak leadership around the COVID pandemic was unhelpful, however).

2. Biden’s age, especially if things deteriorate for him.  Biden is now 79 yrs old.  Once a person gets that old, there is a chance of simply dropping dead unexpectedly.  The average risk of death for 75-84 year olds is 5.0% per the CDC. (That would also apply to Trump by 2024 as he’s 75 yrs old now. The GOP would do better with a younger candidate who could also serve two terms.)

All this means the Fed has to get inflation off the table as a political risk before 2024, or they run the risk of looking partisan.  There will be no other excuses for inflation EXCEPT the Fed by then. 

Recently I posted a link to a chart showing that oil production had INCREASED under Biden.  It probably will increase even more simply due to the high pricing.  You make hay while the sun shines.  The Europeans’ oil problem is worse, given their dependence on Russian oil and natural gas, but the global nature of energy markets could prevent US prices from dropping by very much without a substantial increase in production.

The key is this – the Fed has said out loud that it will need to SLOW the economy to get inflation down.  Since inflation is its SOLE MANDATE for now, that will increase unemployment and bring down wages over time.  Less GDP growth means lower revenues for companies, which means lower stock prices.  It will take the Fed multiple hikes to get inflation down. They still want to move stepwise in 50 basis point hikes (0.50%), but they will be steady until the markets react so negatively that they are moved to pause.

The Treasury trade game is (when the Fed really gets going with their hiking!):

1. Short rates up (by the Fed)…

2. Economic slowing foreseen (inflation expectations falling) or GDP growth slowing actually happening…

3. Long rates down.  Long bonds and Treasuries up.  The latter is NOT yet happening.  Interest rates have yet to change to a downtrend.  When they do, there will be an investment opportunity for a trade.

Where Among Stocks Can You Hide from the Tech Re-Valuation Crash?

IF the major indexes all break lower with IWM, even the places investors have been “hiding,” like XLP, Consumer Staples Sector of SPX, won’t work. Here is why…

XLP went up because 1. The staples companies can pass on much of the inflation, because they sell “staples,” or necessary, non-optional products and 2. The long only traders have to shift from stocks that aren’t working into something else that is cheaper on a PE basis as rates rise and kill off the high PE Tech stocks.

Either way they are vulnerable because 1. If the market bounces, that means tech will be bouncing and the rotation back into tech and consumer discretionary works against XLP. 2. IF the indexes crash to new lows (IWM already testing below the prior lows), valuation is relative and XLP will sell off too, just not quite as much percentagewise, but all sectors will be losers.

The same goes for other sectors that are supposed to work on a relative basis during a period of economic slowing and declining inflation such as healthcare, utilities and REITs (if we see that; current projections are that inflation will drop into year end; remember inflation rates are RELATIVE to the prior year’s pricing).

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1.  SP500 Index Market Timing (S&P 500 Index®; SPY, SPX):

How has my method of “Passive Shorting™” worked?

All exposure levels are “percentage of usual maximum Bull market exposure.”  If you are normally at 80% stocks and I move to 50% of usual max., you would go to 40% exposure to equities if you agree with my decision.  Numbers over 100% indicate use of cash, NOT leverage, which works during a Bull market and then punishes during a Bear market.

TOP 11-08-2021 106.75%   (I round to the nearest 0.25%)

1-11-22  107.50%

1-14-22  98.50% (broken trend)

1-19-22  85.25% (took off more exposure on further break lower)

1-26-22  90.25% (indicators pointed to a bottom)  Added 1-24 and 1-26.

2-02-22  80.50% (sold exposure close to the lower high on 2-01-22 and 2-02-22)

2-25-22  80.40% (added back exposure to the level of 2-02 near the low in Feb. on 2-02-22 and on 2-24-22, the actual low).

4-01-22 72.00% (sold a chunk of exposure near the last lower high on 03-30-22, the day after the actual high day of 03-29-22, and on 03-31-22, and 4-01-22, days 2 and 3 off the high).

I have not bought back exposure at this retest of the lows yet.  I have sold some individual stock exposure as individual stocks have broken down to new lower levels to protect profits.

Why not?  Because there is a risk that we break down further.  Sometimes multiple tests of lows fail after several attempts to hold them.  Some may believe the Fed is going to be a bit dovish at the edges to take some pressure off of stocks, but I have already stated on social media that such a move is impossible.

Although as I said on social media late this week (links above), my indicators favor a bounce from here, some of the strength I saw on Thursday, was weakened on Friday, and NO ONE can tell you if the current levels will hold.

I’ll say more about that in the next part on Small Caps (IWM)…

If you don’t know my market naming “Rules,” they are HERE (scroll to “New Rules” in blue type).

Click the chart to see the details…

Will it hold?

Now let’s review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -42.9%, which has not been seen for 32 YEARS!  I need to be brief to get this issue out but here are the key numbers and dates:

US Recession 7-1990 through March 1991.

Gulf War: 8-02-90 to 2-28-91

8-16-90 -41.0% Bull Bear Spread

8-30-90 -38 .0%

9-20-90 -43.0%

9-27-90 SPX 295.98.

10-11-90 Low in the SP500 Index at 294.46.

Mid-October 1990 Oil up 119% due to the war.  

10-18-90 -54%

Desert Storm (U.S. war to free Kuwait) 1-17-91 to 2-28-91

Note that the Gulf War was also an oil related event.  Oil went from $21/barrel to $28 by Aug. 6, 1990 and then to $46/barrel by mid-October 1990.  

Note there is room for sentiment to get even worse, although that would come from a recruitment of more Bears rather than loss of many Bulls.  On 10-18-90, Bulls were 13.0% and Bears were 67.0% vs. 16.4% and 59.4% today.  Even the current numbers are extreme as noted, which is ONE factor that suggests the market could hold either at these levels or somewhat below them.  Could…

Note that in 1990, the S&P500 Index reached a point barely above the ultimate low in October, just one week after the -43.0% reading on 9-20-90.  In other words, at least back then, a further deterioration of sentiment did not add to the drawdown significantly.  

This is not to say we can conclude what will happen today will match what happened in 1990, as the context is VERY different.  It could get worse, due to the Fed.  In 1990, the Fed was in the process of lowering interest rates, NOT raising them. 

The prospect of significantly higher rates added to the oil stress could certainly lead to at least a mild recession and a 1990’s level (also a mild recession) pullback in stocks.  That would be -20% for the SPX which would mean -30% or more for Tech and small caps IMO.  (The COVID Crash lows were SPX -35%.  IJH and IWM -45%.  QQQ bottomed at -30.55%, but given rising interest rates, Tech would probably match IWM on a further drawdown in the “Big Red Wave.”)

Now let’s look at the small caps, gold, and interest rates…

2.  U.S. Small Caps Market Timing – Russell 2000 U.S. Small Cap Index  (click chart to enlarge; IWM, RUT)   

Small caps have failed to hold the prior 2022 lows.  Though sometimes small caps overshoot vs. the large caps at bottoms, they need to reverse quickly from the breach (within 1-2 days optimally). 

Look at what happened to small caps when they violated the long consolidation range low that held throughout 2021.  It got us to these levels.

Small caps have broken the prior lows of 2022.

Gold is next…

3. Gold Market Timing (click chart to enlarge; GLD): 

I started my comment for the last post on gold with “Gold was caught up in the Friday ‘Sell Everything’ pattern.” Deja vu.  Friday was a “Sell to Cash” day.  

Gold moved up out of the triangle I pointed out in the prior issue, which was a great trade.

This time gold is coming off a top and has breached a similar triangle to the downside.  They work both ways!

To recover, GLD must rise back above the 6-01-22 high of 178.85.  If it does not, that orange line may prove to be a level of interest.  We only know if and when we get there!  They are “Levels, not Targets” as I like to say.

The March lows COULD yet save GLD from that sort of fall, but I believe it will sell off with everything else if the stock indexes break down further…

Gold could be sold off in a move to higher liquidity. That may have started.

Check out the “Market Signal Summary” below – after you review the following chart…

4. Interest Rate Market Timing (10 Year Treasury Yield; click chart to enlarge; TNX, IEF, TLT):  

My prior suggestion of lower levels of interest rates holding were not borne out.  Not even close.  That’s why I simply examine the behavior of the market vs. predicting the future.  I do consider potential levels using different methods, but in the end none of them count as predictions.  They are possibilities. 

In my early buys of TLT recently, I violated that principle to attempt an early entry.  Bad idea.  My failure, for now, with that trade, which was fortunately not a large one, because I kept the position size small as an early trade, was that there were many sources/voices that were suggesting the Fed could not raise rates much without taking down the economy. 

I take 100% responsibility for buying into bad inputs though, as we all should.  To be fair, the Fed did surprise the market by doing a pile on with both rate hikes and balance sheet reduction going on simultaneously.  Perhaps they could have just let their balance sheet run off had they raised rates early enough.  “They are lagging” is the common refrain about the Fed now…

I’ve gone over the interest rate game in the top section, but the key is to wait for the trend to change…

And now to the WEEKLY chart…  

Note that on high magnification you would see the current 10 Year Yield is ABOVE the top yellow line, which means it’s back to being STRETCHED to the upside and vulnerable to correction.  The trend is still UP for now however….

Rate trend has not yet reversed.

Now let’s review three key market timing signals together…. 

Do not use these signals as a trading plan.  They are rough guidelines.  I currently share my actual BUYS and SELLS in as timely a way as possible on social media (links above).

MY MARKET SIGNAL AND TREND SUMMARY for a Further U.S. Stock Market Rally with Real GDP Growth (“Real” means above inflation):

Stock Signal Bearish for a further U.S. stock market rally with a short term Bearish and longer term Bearish SP500 Index trend.  The small caps determine the stock signal in this section of the report. 

My longer term view of SPX could change if it holds the Oct. low and bounces.

Gold Signal NEUTRAL for a further U.S. stock market rally.  The Gold Trend is  short term NEUTRAL and longer term Bullish (on an intermediate term, it won’t be below the March lows).  As said before, “If real rates rise as the Fed acts, gold will be hurt, but in the short term, the Fed is hiking into economic slowing Y/Y, so that means rising short rates can LOWER long rates, which could help gold by depressing long term real rates.”  

Kept for Reference: “Gold can RISE with stocks when real rates are FALLING, and the dollar is falling.  The dollar has been stronger of late, due to the Fed’s planned pivot.  Gold could rise WITH the dollar if the economy slows and real long rates fall. 

These are thing gold doesn’t like:  1. Rising real rates (bonds/Treasuries become a threat to gold which pays nothing; banks and other companies make more money with rising rates) and 2. Economic recovery with higher corporate earnings. Earnings drive stock prices higher. Stocks pay dividends that compete with bonds, and companies use cash to buy back stock, which drives up stock prices, while gold pays nothing.

In liquidity crunches (which the Fed is supposed to prevent) gold can drop with everything else but the US dollar.”  As it did on Friday, the 21st of Jan.

What gold does mostly as I’ve written HERE is follow real interest rates around the world (if you own “gold in dollar terms” you care about U.S. rates most of all).  The rest of the world does matter however, including massive buying by central banks.  Real interest rates have been rising around the globe.  Bad for gold.  

GUIDE: “Remember GLD is being used as an indicator for the ECONOMY here.”  If gold continues to rise again, it means the market believes real rates are going to fall or stay negative for a period of time.  

Rate Signal: At this point Bearish for a further U.S. stock market rally, as rates have risen too quickly.  The 10 Year Yield trend is short term Bullish, and intermediate term Bullish.

(Remember: higher rates mean lower bond and Treasury prices and vice versa).  We want slowly rising rates in a recovering economy.  That’s what happens normally.  The Fed raises rates slowly as the economy continues to grow until it doesn’t.  What we don’t want is rapidly rising OR rapidly falling rates, both of which I call “Rate Shocks.”  We are currently experiencing a “Rate Shock” due to the Fed 1. Hiking Fed Funds rates and 2. Reducing the Balance Sheet.     

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Note: I’ve updated my criteria for the equity signal for a further U.S. stock market rally to the following: GREEN = Bullish, YELLOW = Neutral, RED = Bearish.  In other words, the colors tell you whether the signal supports the stock rally or not, while the Bullish, Neutral, and Bearish designations are about the trend. 

A BEARISH trend signal does not mean we should not buy.  A BULLISH trend signal does not mean you cannot sell some exposure.  It depends on what is going on in the economy and how oversold/overbought the market is at a given point whether the Bearish signal is to be sold or bought, sold on the next bounce, etc. and whether a Bullish signal is to be bought or if profits should be taken.  A NEUTRAL trend signal does not mean the end of the Bull or Bear. It means to wait and look for possible subsequent entry points within the existing trend, Bull or Bear, but preserve capital if the entry fails.  Our strong intention is to buy low and sell high.  By the way, I will keep showing the prior orange “Trigger lines” in the IWM and GLD charts for now as reference points only; they have historical value for us from the post-2016 election period.

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A Market Timing Report based on the January 21, 2022 close…

3-25-2022 UPDATE

This morning, the SP500 Index challenged the market timing reversal I posted about on 3-22-22.  A “Reversal of the Reversal” will not or would not be taken lightly by the market if it occurs.  I am talking about a reversal of SP500 Index below it’s December low.  It went UP through there the other day and should it reverse, it would be a bad prognostic sign.

Earlier today SPX got to about 6 pts from the reversal level.  SPX could even go to the Feb. high from here and reverse and still be within the bounds of an early Bear Market.

At this point we are talking about the risk of a “Mini Bear Market,” by my “New Rules” definitions (see Oct. 26, 2018 issue for the rules; directory is to the right), because recession is not in the picture at this time.  Some big firms say the risk of recession is increasing, which would mean even greater losses depending on the degree of GDP slowing.

The next wave down, if the Bulls do lose this fight, is the big one…the “Big Red Wave.”  That would wipe out all the gains going back to the day after the 2020 Presidential Election.

My prior “Big Red Wave” warning of this kind was covered by Market Watch in 2018.  We reached 88.2% of the way toward the 3rd Wave target in December 2018.  Regardless of whether SPX reaches the precise number, it’s a long way down.

In brief, the 3rd Wave Down in this case for the SP500 Index appears in this sequence…
First Wave down was from the SP500 Index all time high (ATH) of 4,818.62 to 4,222.62, the Jan. 24th low.

2nd Wave up occurring as a doublet: The first of these was a bounce to a high of 4595.31 on 2-02-2022.  That wave fell back to 4114.65, the Feb. 24th low and gave rise to the 2nd Wave 2 Up that rose to 4,543.06 as of the Friday, 3-25-2022 close.  To see this, you do have to look past some noise in between these points.  The Wave 2 lows are not perfectly aligned.

The next wave, if the prior pattern in fact breaks lower, would be the largest wave of the Fibonacci series, the 3rd Wave Down, which assuming the current Up wave ends at the same level as the prior wave of the doublet, would bring the SP500 Index to about 3,461.  That, as said above, falls within the price range of the day after the 2020 Election, 11-04-2020. 

We’ll deal with the 4th Wave Up and 5th wave Down at another time, if this one pans out.

Where is that Feb. high, if SPX moves up just a bit more?  It’s only 4.64% off the ATH of the SP500 Index. That’s practically a re-topping of the market!

This is not to predict where the market will go.  No one can tell you that.  Many have guesses.  What I’m indicating is that if the market breaks here or a bit higher, the downside could be considerable, and you may not want to keep the same exposure level you’ve had on the way down.

I will post my exposure level on social media today (links below).  It’s down significantly already from my prior exposure when things were clearly Bullish, but I’ll take it even lower if I see the signals I mentioned, and I may trade out of some exposure on the way up with the risk of missing out on some upside.

That carries some “opportunity risk” as I call it, so only make those moves if you intend to buy back exposure after selling it, should you be proven wrong.  Notice I said “should you.”  Taking 100% responsibility for all our investing and trading decisions is the only path to real success.  If you do that, you’ll just keep getting better and better.  Use the information you gather to make up your own mind and then take the corresponding actions.  That’s the adult version of this game..

In the meantime, please stay in touch via StockTwits and Twitter…

2-25-2022 Market Timing Update

What will Happen with Inflation Going Forward? Is the Tech Stock Wreckage Due to Inflation and Rising Rates Over for Now?

The answer I believe is NO. You will have to be in stocks representing what I am calling #UnqualifiedGrowth IF you choose to buy growth.

We need to use market timing of our stock selection to navigate inflation and be careful about what stocks we buy as inflation continues.

The inflation consensus among people who know what they are talking about (multiple sources) is that inflation has peaked and is likely to come down over time. But it’s likely to remain elevated, despite falling to around a CPI of 3.9% Y/Y by Q3. That’s still well above the Fed target and some say it will remain higher than 4%.

So inflation is stickin’ around.  That’s what they mean by “sticky inflation.”  It’s continuous high inflation vs. the less than 2% headline CPI  we were used to.

==> That means the Fed will be raising rates to some extent even if it slows growth somewhat, because they have to per their mandate as long as the economy does not start to slow too much and as long as unemployment remains low.

==> That means “short rates” will still be rising slowly but steadily (e.g. 2 Year Treasury Notes) but steadily as the Fed actually begins raising rates. That will bring down growth a bit or a lot depending on how fast the Fed hikes, which will cause long rates to fall (e.g. 10 year Treasuries, the yield for which is represented by TNX).

==> That means that any growth stock that has no earnings with even a whiff of revenue slowing will be punished even further as rates rise.  Yes, some stocks that are at -30% vs. their prior all time highs (ATHs) will drop to -50%.  Those at -50% can drop to -75%.

==> It also means stocks with higher valuations depending on growth will be watched closely.  If they miss and their earnings and revenue become questionable in their growth, their prices will also be slashed as well.

==> It also means Value stocks may enjoy a period of outperformance as rates rise.  None of the high valuation tech stocks for example should be in the value indexes.

==> Low debt is better as rates rise, so larger companies with better balance sheets will do better.  Those are generally larger companies (higher mid to large to mega caps).

CONCLUSION: Larger (large mid to mega) Value stocks and #UnqualifiedGrowth Stocks will outperform the SP500 Index as the Fed raises rates slowly.  Lower valuation higher growth stocks will do better than the more expensive ones obviously.  When I add to these position, you’ll see it first on social media (links below), and you’ll see me label the trades as “Large Value” or “#UnqualifiedGrowth.”

There are never any guarantees, but this will be my near term to intermediate term internal guidance on picking both stocks and index exposure…  Thanks for reading.  Click “Like” below if you benefited.  Thanks!

…Back to the January Issue….

Back in October 2021, I wrote, “We are getting through COVID-19 one way or another.  The easy way is vaccination.”  The other way is natural infection, and as I predicted before the press caught on, the Omicron variant may help us create a lull of some length in the pandemic much faster than would have otherwise occurred, by infecting nearly all of the unvaccinated people.

Sadly, with many still unvaccinated, the 7-day moving average (mav) of deaths is up to 1,924.  Despite that, the 7-day mav of daily new cases peaked in the U.S. on Jan. 14th per the data at Worldometer.com.  Hospitalizations and deaths will peak a bit later.  This is not unlike the pattern back in Jan. 2021, when the peak occurred on Jan. 11th.  This is Bullish for the U.S. economy as warmer temperatures start to occur in a wave from south to north.

How are earnings going for the SP500 Index companies?  FactSet reported on 1-18-2022 “Of the 20 S&P 500 companies that have reported actual earnings for Q4 2021 to date, 76% have reported actual EPS above the mean EPS estimate. In aggregate, actual earnings reported by these 20 companies have exceeded estimated earnings by 7.5%. Therefore, at this very early stage of the Q4 earnings season…the magnitude of the positive surprises are trending closer to the five-year average. Since December 31, the earnings growth rate for the S&P 500 [Q4] has increased by 0.4 percentage points (to 21.8% from 21.4%).”  Read more HERE.

You’ll also note there that in Year Over Year earnings growth results going forward in 2022, the setup is completely different from last year, when the comparisons were easy due to the earnings recession at the start of the pandemic.  Earnings growth was actually NEGATIVE for three quarters in a row from Q1 to Q3 2020.  See the graph at the prior link.

U.S. companies are now reporting Q4 calendar earnings, all with easy comparisons.  Starting with the next quarter, there will be tough comparisons in Q1 and even tougher comparisons in Q2, which could pressure the equity markets.  That will particularly be the case if the Omicron impact on numerous SP500 companies lowers earnings and revenue results for Q1.  As said, the Q2 comparison will be even tougher and that is even without any “Omicron slowing” added on.  Make sure you are checking regularly for updates on the earnings of the companies you own.

Now let’s consider the technicals of the large caps…

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Keep up-to-date and read my comments on the current setup during the week at Twitter and StockTwits (links below) where a combined 35,452 investors are following the markets with me…

1.  SP500 Index Market Timing (S&P 500 Index®; SPY, SPX):

Back in October, the SP500 Index had already tested below the lower channel line (magenta) in what amounted to a correction by my “New Rules” summarized previously on this blog.  If you don’t know my market naming “Rules,” they are HERE (scroll to “New Rules” in blue type).  The SP500 Index is solidly back in correction mode at -8.73% as of Friday’s close.

I follow a Market Indicator Panel™ of 20 indicators that flashed some warnings signs on Friday.  Two of my indicators stood out as flagging not only the COVID Crash in March 2020, but also the lesser crash in December 2018.  There are some caveats to interpreting any signals including those two, however.  First, the Bull Stock signal implicated has not reached the level of the Oct. 2020 pre-election low, nor has it reached the extreme level seen at the Jan. 2018 low, and yet it has broken definitively to new recent lows.  “Could get worse, but already flashing red” is the summary for that indicator. 

The second warning signal is from a Bear Stock indicator, but it’s a marginal one, barely above the recent extremes.  Are these signals early warnings or simply too sensitive?  They could be confirmed on Monday by having a number of my other indicators chime in with similar crash readings.   Two other signals of the 10 are flashing red, but they both gave false positive signals back in the Sept. 2020 correction that lasted several days before reversing, so I can’t use those for confirmation…yet.

What else don’t I like that I’m observing?  The midcaps represented by the ETF IJH broke the May 2021 low in a big way on Friday.  Will the July low provide support (chart not shown, but you can dial it up on Yahoo Finance etc.)?  Perhaps, but it’s not substantial, as it was only one down day below the prior consolidation band.  IF we see an UPSIDE reversal back up into the consolidation of midcap US stocks back above that May low, that could indicate the end of the selling.

Another crash signal we got on Friday was the 3rd day small caps have been below the low of their entire consolidation going back to Feb. 2021.  Small caps are now just above their 12-31-2020 close of 196.06 at 196.99.  That is a loss of 19.42% off the ATH (all time high).  They are in a Mini Bear Market all of their own.  Remember my terms technically apply only to large caps.  In relative terms, when the SP500 Index was down 35% during the COVID Crash, small and midcaps were both down about 45%.  

Note that this is the SECOND trend break for the SP500 Index.  The first was the lower magenta line.  The second is the rising yellow line…

The Two Choices are clear: The market indexes must stop falling very soon, possibly by Monday up to Wednesday, which is Fed day, or the large cap correction will join the small cap crash. 

Do not act out of fear; act out of understanding and in steps unless you must immediately protect certain assets such as college funds, money you will need over the nearer term…

Click the chart to see the details…

Correction or beginning of a crash?

You can see a couple of levels of interest on the chart above – the August low is closest, and then the October low, which was reached for the QQQ on Friday (just over a point away).  (Ignore the lowest red line.)  Often key levels pull the market to them in rapid selling periods like these.  That’s why I suspect the October low is the first best chance for SPX to catch a bounce.  The August level is of interest, because another system of analysis, Fibonacci levels, arrives at at similar conclusion as noted HERE.  Even Fibonacci levels are “just levels.” Some work, some don’t!

“Levels” is a term I use very specifically to indicate that I don’t believe in ANY predetermined “targets,” because what I do at them is determined by what I see if/when we get to them.  They are just POSSIBLE places to buy or sell for that matter.  I’ll let you know on the social media feeds (links above), when I am a buyer.

Now let’s review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -25.7%, which is sizable, but not at an extreme of negativity.  The Bearish percent number is the most negative it’s been since the Dec. 1, 2021 low, when Bears were at 42.4%, but the Bull – Bear % spread was a more optimistic -15.7%.

Although there is room for it to go lower, it doesn’t have to do so.  There is also room for it to the upside.

The poll for this week ends the day of the Fed meeting on Weds.  That is a big risk for the markets IN BOTH DIRECTIONS, because if the stock market is still crashing by then, the Fed through Powell may provide some dovish talk to reverse the recent selling to some extent.  Or if he/they provide no reassurance, the markets could crash.  There has been talk of up to 5 rate hikes this year, and doing that at a time when earnings will be slowing down on a Y/Y basis, would be overdoing it, most likely.  If the Fed doesn’t indicate they may go slower than 4-5 hikes this year, stocks may pay for it. 

Whatever I do PRIOR to the Fed statement and press conference, I won’t complete until AFTER, because the Fed news could push the U.S. stock market in either direction.  If I get a buy signal before the meeting, I’ll only do part of the buying.  For a sell signal, I’ll only do part of the additional selling.  I’ve documented my equity exposure reduction on social media.  I’ll be updating it this evening…

Now let’s look at the small caps, gold, and interest rates…

2.  U.S. Small Caps Market Timing – Russell 2000 U.S. Small Cap Index  (click chart to enlarge; IWM, RUT)   

Small caps are crashing on high volume.  I own close to zero small cap or mid cap exposure with a couple of individual stock exceptions.  So much for “following the Wall Street diversification rules.”  Diversity in owning crashes is not my cup of tea.

The volume spike on Friday was partially due to options expiration, but it was impressive.  It was the most volume recorded for a single day going back to 2017 at least, and more than the peak selling volume in the COVID Crash of 2020.  That sends us a message about the seriousness of this selling in my view.

I wrote above about the small cap “3rd day below” a key level, which is part of the trader’s handbook.  You sometimes wait up to 3 days to confirm a market move.  Friday was day 3 of a bad breakdown for small caps.

Small caps are crashing.

Let’s get to gold…

3. Gold Market Timing (click chart to enlarge; GLD): 

Gold was caught up in the Friday “Sell Everything” pattern.  Trade in the direction of the move above the triangle if we see it, but try to buy pullbacks even if you add to your long position on a breakout.  But don’t chase it too far to the upside.  Buying the dips is a better idea, but without a breakout above that top magenta line, I’ll wait.  The recent action is promising, but I’ll wait to see the Bulls eyes up close…

The risk to gold is actually that the Fed moves in a concerted way to control inflation.  Rates have been going up while the Fed fell behind.  That raises real rates and hurts gold in general.  I am concerned now that they cannot pivot away from pursing inflation as their prime goal.  They failed to control it, and they are being correctly blamed. They should have raised rates when things were improving in Q3, but the pandemic and wanting employment to return to the prior levels was their focus.  So inflation started winning.  Rates still rose with inflation, which hurt gold as gold hates rising real rates.

Again, I’ll wait for the breakout…

Gold is coming off the top of the triangle. It was dragged into a “sell everything” pattern on Friday.

Check out the “Market Signal Summary” below – after you review the following chart…

4. Interest Rate Market Timing (10 Year Treasury Yield; click chart to enlarge; TNX, IEF, TLT):  

Rates may have topped at that 1.765% line.  Inflation should ease as the economic growth slows a bit.  Not an economy killing slowing, just a relative slowing.  No recession in earnings growth or GDP, but Y/Y slowing in the percentage of growth.  When the Fed raises rates into that, there will be even more slowing and inflation will ease.  Bottlenecks go away if COVID turns from pandemic to endemic.  Even less inflation.  Fed rates up, long rates down…unless they stop short!

Rates have peaked for now perhaps.

Let’s Check back on my previous list of risks…

What Downside Risks Are There?

1. They are tapering now.  “The Federal Reserve will start as early as the next meeting to taper the size of their balance sheet, but the Treasury and mortgage backed security buying is not going to be done for a while.  Then and likely only then, will they raise the Fed Funds rate.”

Some believe they’ll raise rates before the taper has ended.  Some say this Weds.  After this week, I would not be so sure of that.  March is still a given for one 0.25% rate hike.  0.50% only if inflation is not coming down by then.

2. Still on again:  “Still on: The drag on reopening will lengthen the rally of the stock market.  A slower reopening abroad will help our multinationals show increasing sales over time, as will the economies and stock markets of the slower to recover countries.”  This is why having some money in European stocks may be a good idea, at least once this selling period is over.  That may apply to some emerging markets as well.

3. Sentiment I covered above: “Check: Sentiment has not peaked yet.  It will before this is over.  There is plenty of cash sitting and making nothing with increasing inflation.  Those investors are losing buying power as they sit in too much cash.”

I still don’t believe the Bull market is over, so the max drawdown I’m looking for is a “Mini Bear Market.”  It’s an interruption of of a Bull vs. a “Big Bear Market,” such as the COVID Crash.  That one was shorter in time than the market reaction was deep, because the economy was turned off like a hose under a car tire.  See my “New Rules” if you don’t know what the percentage range is for various dips to corrections to Bears.

4. Last time I said, “Check: Valuations ARE high, but they often go higher than anyone expects before the bell rings on Wall Street.”

That’s done.  Buy quality earnings and revenue growth, not high Price/Sales companies.  Cathie Woods’ ARKK etc. have been slaughtered.  ARKK is down about 50% (last I looked and it dove on Friday once again).

A time will come when ARKK will be so oversold it is again a buy of course, so follow that one down… Buy in steps if you buy early!  It could go lower than low…

I post my exposure level on social media and will post the update tonight.  In October I said, “I remain at just over 100% of my usual maximum exposure for a Bull market for those reasons.

NOTE: I change my exposure when things change, led first and foremost by stock market signals. 

Don’t be surprised if I drop my exposure from 100% to 80% or less, in one day at some point.  I don’t share my raw exposure to stocks for a reason.  Your allocation should depend on your net worth, your age, and your need for cash in the next 4 years among other things. Find the number that suits you. 

I had about 107.00% of my max. Bull exposure near the market top (I go over 100% of my max using cash, NOT leverage).  Now my exposure is lower!  

My Fed prediction.  The Fed did lag.  I said, “I believe the Fed will lag behind on inflation, and the 10 Year Treasury will rise further, but how much higher and how fast remain questions…” 

The 10 Year rose a lot to above that 1.765% level, and is now just below it.

Now let’s review three key market timing signals together…. 

Do not use these signals as a trading plan.  They are rough guidelines.  I currently share my actual BUYS and SELLS in as timely a way as possible on social media (links above).

MY MARKET SIGNAL AND TREND SUMMARY for a Further U.S. Stock Market Rally with Real GDP Growth (“Real” means above inflation):

Stock Signal Bearish for a further U.S. stock market rally with a short term Bearish and longer term Bearish SP500 Index trend.  The small caps determine the stock signal in this section of the report. 

My longer term view of SPX could change if it holds the Oct. low and bounces.

Gold Signal NEUTRAL for a further U.S. stock market rally.  The Gold Trend is  short term NEUTRAL and longer term NEUTRAL.  If real rates rise as the Fed acts, gold will be hurt, but in the short term, the Fed is hiking into economic slowing Y/Y, so that means rising short rates can LOWER long rates, which could help gold by depressing long term real rates.  

Kept for Reference: “Gold can RISE with stocks when real rates are FALLING, and the dollar is falling.  The dollar has been stronger of late, due to the Fed’s planned pivot.  Gold could rise WITH the dollar if the economy slows and real long rates fall. 

These are thing gold doesn’t like:  1. Rising real rates (bonds/Treasuries become a threat to gold which pays nothing; banks and other companies make more money with rising rates) and 2. Economic recovery with higher corporate earnings. Earnings drive stock prices higher. Stocks pay dividends that compete with bonds, and companies use cash to buy back stock, which drives up stock prices, while gold pays nothing.

In liquidity crunches (which the Fed is supposed to prevent) gold can drop with everything else but the US dollar.”  As it did on Friday, the 21st of Jan.

What gold does mostly as I’ve written HERE is follow real interest rates around the world (if you own “gold in dollar terms” you care about U.S. rates most of all).  The rest of the world does matter however, including massive buying by central banks.  Real interest rates have been rising around the globe.  Bad for gold.  

GUIDE: “Remember GLD is being used as an indicator for the ECONOMY here.”  If gold continues to rise again, it means the market believes real rates are going to fall or stay negative for a period of time.  

Rate Signal: Bullish for a further U.S. stock market rally, but ONLY if rates continue up SLOWLY.  The 10 Year Yield trend  is short term Bullish, and intermediate term Bullish, again, as long as rates have NOT topped, which they may have done!

(Remember: higher rates mean lower bond and Treasury prices and vice versa).  We want slowly rising rates in a recovering economy.  That’s what happens normally.  The Fed raises rates slowly as the economy continues to grow until it doesn’t.  What we don’t want is rapidly rising OR rapidly falling rates, both of which I call “Rate Shocks.”  

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I thank Worden Brothers for the charting system I use to post these charts.  If you want to know more about the charting system I use every day, contact me for any questions, or click HERE.  Please use that link when you sign up as I am an affiliate (I don’t make much, but it may help to pay for some of my website expenses).  It makes it much easier to follow along with me if you can see the charts and manipulate them on your own computer.  It’s a great investment to have an excellent charting system.

Note: I’ve updated my criteria for the equity signal for a further U.S. stock market rally to the following: GREEN = Bullish, YELLOW = Neutral, RED = Bearish.  In other words, the colors tell you whether the signal supports the stock rally or not, while the Bullish, Neutral, and Bearish designations are about the trend. 

A BEARISH trend signal does not mean we should not buy.  A BULLISH trend signal does not mean you cannot sell some exposure.  It depends on what is going on in the economy and how oversold/overbought the market is at a given point whether the Bearish signal is to be sold or bought, sold on the next bounce, etc. and whether a Bullish signal is to be bought or if profits should be taken.  A NEUTRAL trend signal does not mean the end of the Bull or Bear. It means to wait and look for possible subsequent entry points within the existing trend, Bull or Bear, but preserve capital if the entry fails.  Our strong intention is to buy low and sell high.  By the way, I will keep showing the prior orange “Trigger lines” in the IWM and GLD charts for now as reference points only; they have historical value for us from the post-2016 election period.

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