Market Timing Brief™ for the 12-13-2019 Close: “Markets Continue to Stretch UP. What the ‘Fed Locked in Neutral’ Means for Gold. Rates Slip On Friday.”

A Market Timing Report based on the December 13, 2019 Close, published Saturday, December 14th, 2019…

I deliver focused comments on market timing once a week.  These are supplemented with daily “Tweets/StockTwits” (see links below) and comments in the “markettiming” room on StockTwits.

I provide quite a bit of intraweek commentary, and if you don’t see it, you will miss out on quite a bit of context, so please click on the StockTwits link below and have a read…  Thank you as always for being loyal readers and interacting on social media with your questions and comments!

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

This week: Trump impeachment nearly 100% certain.  Trump conviction chances near zero.  Fed stays pat.  China deal soon.  USMCA passed.  Consumer weak in November.  Job losses spike.  Those last two are NEW RISKS to the market. 

Let’s turn to the state of the market…

What would satisfy me that the Bulls are serious?

The Bull Market Health Score this week is Bulls 4.0/Bears 1.0 vs. Bulls 3.5/Bears 1.5 vs.  last week.  It’s a 5 point scoring system .

For each checklist item below, I give you the points scored as Bullish or Bearish. 

1. New high? Bulls 1.0  Answer: Yes.  Price continues to rise within the channel bounded by the red lines, although it represents a degree of stretch from the prior uptrend.

2. V*IX trend favorable?  Bulls 1.0  Answer: Yes.  The VIX Game Score is back to Bulls 7/Bears 0 at a VIX of 12.63 (Friday close) vs. 13.62 the prior week, which is below my “Bull Nirvana” number, the 7th VIX Game Score point.  Now the Bulls need to retake 12.00 and hold it this time.

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bulls 1.0 point.  Answer: Yes.  The close was 16,958 vs. 16,937 last week, and was a close over the prior SPX top value of 16,954.  Just over!

4. Higher volume on Up Moves?  Lower volume on Down moves? Bulls 0.5 point.  Answer: Neutral.  Volume increased on both down then up moves.

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  (To be positive, small and mid caps must be doing as well as large caps) Bulls 0.5 point. Answer: Mixed picture.  The small caps had a new breakout this week, but the midcaps are back below their 11-27-19 high.

In the chart below, the Bull Market Health Score (BMHS) data are expressed as a multiple of 1000 (e.g., Score of 4 = 4000) per the scale shown on the y axis to the left, while the SPX values are adjusted in value to fit on the same linear plot.  The scores are the blue line and SPX the orange line.

Bull Market Health Score Chart 12-13-2019

Bull Market Health Score Chart 12-13-2019

Prior data shows the Score tends to top out when the market itself is topping out, although you can see that recent pullbacks in the BMHS to 2.5 have not disrupted the uptrend much.  So far the data says that score has to fall below 1 (1000 on the scale above) to disrupt the SP500 Index uptrend.   On 7-19-19 there was a warning dip in the BMHS before a marginally higher high and then a meaningful pullback into the 8-23-19 low.  The chart above is a weekly chart, because the score is determined from each end of market week close, so the ups and downs in August are smoothed out.

Another observation is that once the BMHS falls below 1 (1000 on chart), it may be already too late to sell, although I have not gone back to data from Big Bear Markets like that of 2008-2009 to see if there were clues from the score to “stay out” for a longer period of time.  It’s possible that the BMHS could bob along between 0.5 and 0.0 for a while before ever coming up for air.  We’ll see…

Notice also that the deeper SPX downtrends are accompanied by lower lows in the BMHS and the strong recent uptrend is accompanies by higher highs in the BMHS, which have been peaking out at 4.0 (4000 on the chart above).   Any thoughts of your own?  Please comment below.

Let’s check in on the context around the price action of the market by looking at the current Market Risks… 

We have some new earnings data this week on Q4 2019…

Earnings Risk/Opportunity: What is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 with a skip of two weeks until the 8-30-19 data resumes the weekly data sequence followed by a skip for the week of 11-29-19 (details HERE)… The larger arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.

For Q2 2019, analysts are projecting earnings growth of 0.1%  —> -1.3% ->  —> -2.1%  —> -2.6% -> -2.6% -> -3.0% -> -1.9% -> -2.6%-> -1.0% -> -0.7% -> -0.4%  DONE

and revenue growth of 4.6%  —> 4.3%  —> 4.1%  —> 3.8% -> 3.8% -> 3.7% -> 3.8% ->4.0% ->4.1% -> 4.1% -> 4.0%  DONE

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% —> -1.9%  —> -3.6% -> -3.7% -> -3.8% -> -3.7% -> -4.1% -> -4.6% -> -4.7% -> -3.7% -> -2.7% -> -2.4% -> -2.3% -> -2.2%  DONE (FactSet  did not say whether the numbers changed vs. their prior report on 11-22-19. Final number may not be accurate)

and revenue growth of 4.4%  —> 4.4%  —> 4.2% —> 3.8% —> 3.2% ->  —> 2.9% -> 2.8% -> 2.8% -> 2.8% -> 2.8% -> 2.7% -> 2.6% -> 2.8% -> 3.1% -> 3.2% -> 3.1% -> 3.1% DONE (FactSet  did not say whether the numbers changed vs. their prior report on 11-22-19. Final number may not be accurate)

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% —> 4.9%  —> 3.4% -> 3.2% ->  3.0% -> 2.9% ->2.6% -> 2.3% -> 1.5% -> 0.7% -> -0.4% -> -1.1% -> -1.4% -> -1.4% -> -1.5% -> -1.3%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3%  —> 4.0%  —> 3.8% -> 3.7% -> 3.6% -> 3.6% -> 3.6% -> 3.5% -> 3.2% -> 3.0% -> 2.6% -> 2.6% -> 2.5% -> 2.5% -> 2.6% -> 2.5%

For CY 2019, analysts are projecting earnings growth of  3.4%  —> 3.2%  —> 2.7%  —> 1.7%  —> 1.4% -> 1.3% -> 1.3% -> 1.3% -> 1.2% -> 1.1% -> 0.7% -> 0.6% -> 0.3% -> 0.1% -> 0.0% -> 0.1% -> 0.2% -> 0.3%

and revenue growth of 4.7%  —> 4.7%  —> 4.5%  —> 4.4%   —> 4.3% -> 4.2% -> 4.1% -> 4.1% -> 4.1% -> 4.1% -> 4.0% > 4.0% -> 4.0% -> 4.0% -> 3.9% -> 3.8% -> 3.8% -> 3.8%

For Q1 2020, analysts are projecting earnings growth of 10.5% —> 9.8%  —> 8.5% -> 8.2% -> 8.1% -> 7.9% -> 7.9% -> 7.8% -> 7.6% -> 7.3% -> 6.7% -> 6.0% -> 5.6% -> 5.3% -> 5.1% -> 5.3% -> 5.2% -> 5.4%

and revenue growth of 6.2%  —>5.8%  —> 5.6% -> 5.7% -> 5.5% -> 5.5% -> 5.4% -> 5.4% -> 5.5% -> 5.3% -> 4.8% -> 4.7% -> 4.5% -> 4.5% -> 4.5% -> 4.4% -> 4.4% -> 4.4%

For Q2 2020, analysts are projecting earnings growth of 13.3%  —> 13.5%   —> 9.9%  —> 9.0% -> 9.0% -> 8.7% -> 8.6% -> 7.7% -> 7.3% -> 6.7% -> 6.6% -> 6.4% -> 6.7% -> 6.7% -> 6.9%

and revenue growth of 6.8% —> 6.6%  —> 6.4% —> 6.3% -> 6.3% -> 6.3% -> 5.9% -> 5.2% -> 5.2% -> 4.9% -> 5.0% -> 4.9% -> 4.9% -> 4.9% -> 4.9%

For CY 2020, analysts are projecting earnings growth of 10.7%  —> 10.5% -> 10.6% -> 10.4% -> 9.9% -> 9.8% -> 9.7% -> 9.7% -> 9.9% -> 9.8% -> 9.7% -> 9.7%

and revenue growth of 5.6% ->  —> 5.7% -> 5.6% -> 5.3% -> 5.3% -> 5.3% -> 5.4% -> 5.5% -> 5.5% -> 5.5% -> 5.5% -> 5.5%

As noted last week, Q4 will be the 4th negative quarter of earnings growth in a row similar to what happened in 2015-2016, but without as much price action around that dip in earnings.

Here’s a Brief Review of the Other Market Risks at Hand:

China Deal Risk:  Risk has fallen substantially.  We are told in more definitive terms that the tariffs will be eased and lots and lots of soybeans will be sold to China.  However, the tariffs are not going back to zero.  What would really help is if China’s markets were opened up more to the U.S. to boost our GDP.  Then the recovery would in fact be supported further.

Fed Rate Cut/Hike Risk: There has been a continued increase in perceived risk of another RATE CUT by September 2020The odds are about 50:50 (just under) for the next Fed rate cut to occur in Sept. 2020. 

The Fed has cut three times and said it was done unless things get worse for the economy. As I’ve said previously: “THREE cuts is a mid-cycle adjustment.  Four cuts or more mean the Federal Reserve expects a recession.”  A hike in rates in the near future would tank the U.S. stock market. 

We look at the CME Group odds each week of rate cuts/hikes.  The risk of a December hike was 0.7% last week and the Fed left rates unchanged.

What about January?  The odds of cut #4 is 2.2% vs. 8.8% last week vs 67% 9 weeks ago!   The odds of a HIKE in Jan. are 0.0% vs. 0.7% last week vs. 5.8% 3 weeks ago. 

What about a March cut?  The odds are 8.7% this week vs. 20.8% last week vs. 75.1% 9 weeks ago for 4 or more cuts in total.  March hike?  0.0% vs. 5.0% 3 weeks ago.  

April Cut?  18.5% vs. 34.8% 3 weeks ago vs. 52.6% 4 weeks ago vs. 79.7% 9 weeks ago expect there to be 4 or more cuts.  April hike?  0.0% vs. 0.5% last week vs. 4.2% odds 3 weeks ago.

June cut?  33.6% vs. 40.0% last week vs. 56.7% 6 weeks ago expect four or more cuts by then.  Probability of a hike is 0.0% vs. 0.4% last week vs. 10.2% 4 weeks ago.

July?  45.4% vs. 47.9% last week vs. 60.7% 5 weeks ago expect 4 cuts or more cuts by then.  A hike? 0.0% vs. 0.4% last week vs. 9.2% 4 weeks ago.

What are the rest of the available “4 (or more) cut odds”?  Sept. 2020?  49.8% vs. 56.2% last week vs. 65.2% 6 weeks ago.  Sept. 2020 Hike?  0.0% vs. 0.0% last week vs. 8.1% 4 weeks ago.  Nov. 2020 cut: 55.0% vs. 59.2% last week vs. 69.3% 6 weeks ago.  Nov. hike? 0.0% vs. 0.0% last week vs. 7.2% 4 weeks ago.  Dec. 2020 Cut: 60.6% vs. 64.7% last week vs. 73.8% 6 weeks ago.  Dec. hike?  0.0% vs. 0.0% last week vs 6.3% 3 weeks ago.

At least among those in the interest rate futures markets, the perceived odds of a recession or at least Fed action by November continuing into December 2020 will be required to prevent a recession or make it more shallow is slightly LESS than it was last week.  The first risk above 50% occurs in November 2020 now vs. September last week.  Again, there is ZERO discounting of a recession in the stock market right now.  

The Risk of a Neutral Fed:  SAME.  The Fed is stuck now unless the data becoming more than a little compelling.  There is risk of inflation on the one hand and more slowing on the other.  Prior: “Ultimately the change by the Federal Reserve in going to “Neutral” was NOT positive for the U.S. equity market, but it ignored it.  It won’t ignore it if economic slowing does not reverse itself going into 2020.”  

U.S. Iran War Risk: SAME.  Interestingly quiet.  No change for weeks.  More stable after the leak of the “Iran Annihilation Plan HERE

2020 Election Risk: See last week’s post.  The entry of Bloomberg makes things more difficult for Joe Biden, but he’s still the favorite to win the Dem nomination.  Losing in Iowa and New Hampshire won’t look good though, and it could bring him down in the polls.

As I shared on social media last week, the other major concern I have (concern for the market!) is the possibility that Sanders and Warren join forces, because together their numbers would lead the field (34% vs. Biden at 28.4%) That could happen at the convention.  I predict they would lose to Trump with a recurrence of the Nixon/McGovern race, where Nixon won in a landslide DESPITE the Vietnam War.

Buttigieg was falling in the polls this week due to the attacks on his donor sources.  He has now given back the money he got from lobbyists, but it does not look good to the Sanders/Warren purist liberals.

Not all billionaires are created equal!  Steyer is still in the near death group at 1.6% (same Ref. as above), while Bloomberg has bought himself 5.2% in a hurry.  He’s making the mistake of not taking individual donations, which could keep him out of upcoming debates.  I have no clue why they are not accepting at least $1 donations to satisfy the debate requirements, but let me know if you’ve heard how he plans to get on the stage.

Trump Impeachment Risk: Impeachment Risk: 100% now that the articles have been passed by the House Judiciary Committee.  Conviction Risk?  Still near zero probably something like 0.00000000000001%.  The Constitution STILL does not matter to the GOP.  If it did, they would at least criticize his actions.  At least GOP Rep. Will Hurd (he’s retiring) did just that while saying he would not support impeachment. He is ex-CIA and has been disturbed by the President’s obviously bad behavior.  If you can at least recognize how Fox News would have FILLETED President Obama for doing any close to what Trump did, great.  Removal is perhaps drastic and debatable.  The wrong Trump did is NOT debatable.  I wish Republicans would find a spine and say what he did was plain wrong.

Deficit/Debt Threat: No Change: Trump is now beating Obama at something!  The size of his deficit!  It’s bigly.  Read THIS.  The deficit is up 26% to $964 Billion for fiscal 2019, the HIGHEST IN 7 YEARS!  

I’ll leave this here as a monument to our monumental debt, which could threaten interest rates in the future.  When rates rise, there will be “heck to pay.”  The U.S. dollar remains at risk and having at least 5% of your non-real estate net worth in gold exposure is a reasonable hedge in any portfolio.  Some say higher, but owning stocks is also a hedge that over time would work out for solid companies, even in the face of very high inflation (after the market came back from a deep swan dive!). 

Inflation Risk: The other risk is inflation ticking up.  Employment is high and wages are increasing, which means costs are increasing, so if the economy slows WITH rising costs, people are fired, so companies can meet their earnings goals.  Let’s see how this Christmas season turns out and in the meantime carefully watch employment, wage increases, and inflation.  The market would not enjoy either seeing or anticipating a Fed rate hike anytime in 2020.  No one expects it!  If that comes back into the picture, Houston, we’ll have a problem.  It will mean inflation has truly picked up, as hiking rates before the election in particular would be seen as endangering Trump’s re-election.

Employment Risk:  There was a big spike in jobless claims this week (see my social media stream; link to chart). 

Consumer Strength Risk: Retail sales were weak last month as reported this past week.  The consumer has been the support under GDP this year, so if that trend continues and the job loss rate continues to spike as it did this week (see my social media feed), the stock market could start losing steam.  Jobless people spend less!

Current Scenario… Unchanged this week!

Despite the extra push up above trend we are seeing (the higher channel in the chart below), the prior pattern we saw earlier in 2019 could repeat itself.  A further melt-up and then a substantial correction, which could be months away and may be poll dependent.  If Biden fails to gain traction for example, Trump might be considered a shoe in for a second term vs. anyone left on the Dem field.

A final high will be reached prior to the discounting of a recession, which brings on a ‘Big Bear Market.’  Whether the market moves up a bit more and drops, corrects immediately, OR rises now to a final (for the cycle) all time high, we are not yet at the all time high in my opinion.  There is more upside to come, if not now, then later, before the final high.

This is also very similar to January 2018 on the chart that led to a sizable, quick dive in the market of 11.78%.  We could see a similar correction between now and the end of the 1st quarter of 2020.  We do not have the Fed in the way at this point. It’s just frozen in the corner as I’ve contended.  China trade is going to be better not worse, at least at the margin, which could help U.S. GDP to grow faster.

Back to the charts….

Now take a look at the SP500 chart.  The long upper yellow line is now at about 3065 at the Friday close.  The two short upper red lines show a narrow range in a gentle up trend, rising ABOVE the prior upper yellow trend line of the longer term channel.

As I warned four weeks ago, if the market keeps pushing above that top long yellow line, there will be eventual payback.

SP500 Large Cap Index (click chart to enlarge; SPX, SPY):

Market timing the SP500 Index (SPY, SPX). Stretched but rising.

Stretched but rising.

Now let’s check in on two “Canary Signals” we’ve been following:

“Intel-igent Market Timing Signal” (Intel; I*NTC; * there to throw off the crawlers!): Neutral.  SAME: “The stock is stuck below the April ATH.  Why should it break out if the U.S. GDP is due to slide to below 1%?  The June 4 high of 57.60 has been exceeded, and the April high of 59.59 is the next test to achieve a new all time high.”

The NY Fed says GDP for Q4 will be 0.69% and the Atlanta Fed using the exact same numbers says 2.0%.  Take your pick!  Following my canaries may be more productive than following GDP predictions as the latter are usually way off!

Bank of America (B*AC) Market Timing Signal: Bullish and is back above the 33.05 breakout for 8 days now.  “It will only hold the breakout if, rates keep climbing.  Sell a reversal at least on a close or sell on a close with a reversal on higher volume IMO.”  A reversal lower with FALLING rates would be a negative prognostic sign for the economy.

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,181 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.  (real time messages are on StockTwits as always and back on Twitter)

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +11.58 vs. +2.59% last week.  Investors are becoming a bit more Bullish but it’s not an extreme spread, so more upside is possible.   Investors routinely become uber-Bullish at real tops in markets, and this is not one of those.  Bottom Line?  Even if the market corrects, it will be a buying opportunity that will lead us to an even higher high.

This is just one signal we follow, as price ultimately beats every other signal.  A future sentiment peak does not allow us to go to sleep in the Sun and Storm Investing™ World.  😉

Bulls Neutrals Bears
37.63% 36.32% 26.05%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM):

We now have a breakout, and it was sustained with a new high being reached this week.  I am skeptical of this new high holding, because midcaps have NOT come along.  At the same time, I cannot argue with a trade to the 173ish high.  Rates must keep rising for the financial component of IWM to succeed.  They’ve just turned back down in the recent range it seems.

Russell 2000 U.S. Small Cap Index  (click chart to enlarge; IWM, RUT):

Market timing the U.S Small Cap Index (IWM, RUT).Breakout maintained...so far.

.Breakout maintained…so far.

 3. Gold Market Timing (GLD): 

No change.  In fact this week, GLD is back above that upper red line in the chart below!

SAME MAJOR POINT: IF the Fed lags inflation, gold wins, but if it front runs inflation, gold loses on a relative basis.  Follow the chart though, not the noise from talking heads.  Higher inflation (absent continued slowing of GDP) is probable given the “Fed Stuck in Neutral” place we are in.  Gold wins!   If the next Fed move is a CUT, gold wins too.

SAME Technicals: If it breaks lower and GDX breaks, I’ll likely be lowering my exposure to gold.  That means holding above that 2013 lower high on the chart.

The Gold ETF (click chart to enlarge; GLD): That top red line is 137.80.  The market “has my number” as I say.  When the market changes, we change.

Market timing the gold ETF (GLD). Gold will win with a neutral Fed.

Gold will likely win with a neutral Fed.

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

Still true despite the Friday drop: The drop in rates on Friday may create a lower high, but until proven otherwise with a breach of the November lows (which would be bad for banks!), rates are in an ascending triangle on an intermediate term basis.  That is Bullish for rates.  I added TIPs (first add and the yield is not great, so I’m buying with the expectation of a capital gain in a retirement account and that I’ll trade it, not buy and hold) on the Friday pop in rates after the Fed left rates unchanged and indicated it was taking 2020 off.  😉  The dollar is weakening, which makes imports more expensive and adds to inflation. 

It could be that rates trade within a range, so if you don’t trade, you’ll just make the low coupon available, which will be less than the REAL inflation rate.  You are paying to hold treasuries/bonds in that case!

Speaking of the REAL inflation rate, I had a little back and forth discussion with former Dallas Fed analyst/advisor Danielle DiMartino Booth on Twitter this past week noted HERE.  She was a Fed advisor before she wrote her book “Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America.”

I recommend you do what I suggested to her could be a more useful calculation of inflation for an individual investor to use in financial planning, that is to calculate your personal rate of inflation (you’ll have to throw out exceptional items and consider the cost of money, if you have equity in your house, etc.), but it could give you a better idea than the CPI does or even the “UGI full measure” Danielle cited for how much of a return in percentage terms YOU will have to make to stay ahead of inflation before and in retirement.  In retirement you’ll still need money, but after retirement you won’t have to worry about money.  😉   The goal is to have enough money in life, so the only thinking you do about money is for the fun of the game and/or about how you plan to spend and share your wealth with others. 

BEFORE YOU GO… I am assessing the value of this work to my readers in a year end review.   If you find it valuable, please communicate to me WHY it is valuable to you via email through my contact page HERE (or click the “Contact Me” tab at the top).  Thank you. 

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

U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX, TLT, TBF): 

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Rates move lower again.

Rates moving lower again?

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 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 GREEN for a further U.S. stock market rally with a longer term Bullish and short term Bullish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down. The small caps have broken out and that breakout MUST be preserved and further extended.  This week was confirmation of that prior breakout, although I did not like seeing the midcaps lose ground.

Gold Signal YELLOW  for a further U.S. stock market rally longer term Bullish Trend and a short term NEUTRAL Gold Trend.  This still looks like a correction vs. a breakdown until it does not!  The chart looks like a crouching tiger!  😉

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. 

Remember, gold may be down but not yet out, because if the Fed lags inflation, gold will win.  Since I am predicting a “Federal Reserve Stuck In Neutral” into the 2020 Election, inflation will win, and gold and oil will win.

GUIDE: “Remember GLD is being used as an indicator for the ECONOMY here.”  If gold continues to rise, it means the market believes real rates will  fall, which in the current context means the global economy is slowing.  That would ultimately hurt U.S. stocks. 

Rate Signal GREEN for a further stock market rally with a longer term BEARISH and short term Bullish 10 Year Yield Trend.  (Remember: higher rates mean lower bond and Treasury prices). Whether the short term trend should be called Neutral vs. Bullish is arguable at this time, but it’s not Bearish yet. There is actually an even longer term view that says rates have been in a neutral trading pattern since 2011, but the above two views are more practical on a trading/intermediate term investing basis.

I’ll leave this reminder from 9-20-2019’s issue: “Remember, FOUR Fed cuts will NOT be a “mid-cycle adjustment” and would be taken badly by the market ironically, considering the market’s addiction to lower rates.  A fourth cut means the Federal Reserve is seeing recession risk as significantly high.”

Also for Reference:Rates usually RISE slowly in a strong recovery and the stock market rally continues as they rise, as I’ve repeated multiple times on social media and here.  Empirically though, rates that are “lower” (than 3.11%) and are NOT rising rapidly have allowed the market to rise.”

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 60.07 vs. 59.20 last week.  Still holds: If it rises above 58.82 (YES) and then 60.94 (NOT YET), oil and oil stocks will be off to the races.  63.38 would be the next target.

Just a reminder: If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  I called the period of rising rates in early October #RateShockII.

Another Reminder On Falling Rates: “The risk lately has been ‘Falling Rate Shocks.’  (I changed the term from “Negative Rate Shocks” because there are in fact negative rates in a lot of countries now.  First we had ‘Falling Rate Shock I’ in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error by critics),  ‘Falling Rate Shock II’ in May 2019, and ‘Falling Rate Shock III’ in August 2019.  The Stock Market Bulls had better hope that they don’t get more rate cuts past October. 

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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.  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.

Copyright © 2019 By Wall Street Sun and Storm Report, LLC All rights reserved.

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Market Timing Brief™ for the 12-06-2019 Close: “Market Looks Past All Risks After Shallow Dip. Gold On Notice with Interest Rates Rising.”

A Market Timing Report based on the December 06, 2019 Close, published Saturday, December 7th, 2019…

I deliver focused comments on market timing once a week.  These are supplemented with daily “Tweets/StockTwits” (see links below) and comments in the “markettiming” room on StockTwits.

I provide quite a bit of intraweek commentary, and if you don’t see it, you will miss out on quite a bit of context, so please click on the StockTwits link below and have a read…  Thank you as always for being loyal readers and interacting on social media with your questions and comments!

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

The week began with a dip as my Bull Market Health Score suggested it might.  But that dip did not turn into a correction.  A “dip” is defined in my “New Rules”  HEREThe drop was -3.81% from the high on 11-29-19.  But later in the week as the China trade deal seemed to be still in negotiation, we got a very strong employment report of 266,000 new jobs with upward revisions that drove the 3 month average job creation to 205,000 per the Bureau of Labor Statistics, which handily beat the glum +67,000 number in the often NON-correleated ADP Employment Report on Wednesday.

For those of us who remember what it was like in the melt-up years in the late 1990’s before the cascading market crash of the NASDAQ in the early 2000’s (78% drop!) there are a few things very much and some not so much in common between the two periods:

1. We have a lot of web based “software as a service” companies commanding nosebleed valuations, although they are fewer in number vs. back then.  The business models are not as ridiculous by any means.  And valuation is a tricky thing to trade.  A miss can shave 10-20% off a stock like that in a day.  A surprise can add the same in a day.  If you can sleep with that in your portfolio, good, but make sure you balance those sorts of stocks out with steady growers.

If risky (high beta vs. SPX) stocks are 10% of your portfolio, you can lose 50% and still only give up 5% of your net worth to see that rise to 20% or more (if not, it’s not worth it!).  You would obviously trim back as you went along to keep your risk level constant, and I would (and do) take out 100% profits when I have them, and then ride the gravy with a more generous stop.

2. The economy is strong and jobs reports are coming in very positive.  I remember back then how the Bears were looking for the first sign of weakness they could use to make their gains and how the Bulls could not be convinced there was ANY risk in what they owned.  I helped many people at that time of much higher valuations save their retirement accounts and their kids’ college accounts from decimation (testimonials at sunandstorminvesting.com).

3. A President is being impeached.  The case details were worse for Bill Clinton however, because they had the obstruction of justice charge fleshed out.  When Bill Clinton was impeached in 1998 the Republicans controlled both Houses of Congress.  In the Senate trial vote on “February 12, Clinton was acquitted on both counts as neither received the necessary two-thirds majority vote of the senators present for conviction and removal from office – in this instance 67.  On Article One [lying to a grand jury and witness tampering], 45 senators voted to convict while 55 voted for acquittal. On Article Two, 50 senators voted to convict while 50 voted for acquittal [67 required to convict on any one count].  Consequently, Clinton remained in office for the balance of his second term.” Ref.  Note that the first count was about his lying to a grand jury about having sex with Monica Lewinsky, but the closer vote for him (still 17 votes short of conviction) was the second count of obstruction of justice.  This is what it contained (same Ref.)…

“Article II charged Clinton with attempting to obstruct justice in the Jones case by:[28]

  1. encouraging Lewinsky to file a false affidavit
  2. encouraging Lewinsky to give false testimony if and when she was called to testify
  3. concealing gifts he had given to Lewinsky that had been subpoenaed
  4. attempting to secure a job for Lewinsky to influence her testimony
  5. permitting his lawyer to make false statements characterizing Lewinsky’s affidavit
  6. attempting to tamper with the possible testimony of his secretary Betty Currie
  7. making false and misleading statements to potential grand jury witnesses”

This is where Trump is most vulnerable, but that case has not been made convincingly without interviews of key witnesses like Trump’s former White House Counsel Don McGhan II, as well as NSA Chief Bolton, Sec. of State Pompeo, and Acting Chief of Staff Mick Mulvaney.  Trump is not as vulnerable in my view on the notion that the “ask” on the Bidens was enough, or even that holding up the military aid is enough to remove him.  On the “ask,” the Republicans are attempting to say it was OK for Trump to tie the Biden investigation announcement by Ukrainian President Zelensky to the quid pro quo of the release of military aid and a White House meeting which would bolster Zelensky’s standing vs the Russians (and there WAS a quid pro quo per multiple witnesses including both Trump’s Chief of Staff Mulvaney as well as EU Ambassador Sondland).  The Republicans are saying that asking for a SPECIFIC investigation is the same as asking Pres. Zelensky to investigate corruption in general, which it is clearly not but…

One could say that regardless of the specificity of the President’s targeted request, he had “the right” as President to ask for the investigation if there was reasonable doubt about what went on between Biden, the Ukrainian government, and his son Hunter, who did receive a ridiculous amount of money from a corrupt Ukrainian gas company, the business of which he knew little about.  That sort of money transfer to people connected to those in power, however, was not and is not now illegal.  It SHOULD be made illegal (there should ideally be a relationship between value added and the payments for those hired who have/have had a meaningful political connection “families of government officials, elected or otherwise and those officials themselves), but it isn’t and wasn’t illegal for Hunter Biden to be paid the huge sums, so the premise that Trump had probable or good cause to ask Zelensky to specifically investigate the Bidens is absurd.

That said, and I would censure Trump for his behavior, because it COULD be argued that Trump was trying to influence the election, and I personally believe and intuit directly he was attempting that, but one can argue as the Republicans are that the “ask” alone is not enough to remove a president from office.  I believe that effort will fail.  If there were a pattern of this, beyond publicly telling Russian and China to investigate his opponents, then the Democrats would have a strong case of widespread and repeated abuse of power.  At this point, they don’t have enough evidence in my view.

In sum, the House will impeach and the Senate will acquit Trump and we’ll move on to the 2020 Election barring further evidence.  If the Democrats insist on the Senate trial, which now seems likely, Trump could be less damaged than if he were censured in my view.  Acquittal implies “Trump didn’t really do anything awful.”  Be clear – what he did WAS awful.  If Obama had done the same, the GOP would have rushed to force him out.  Censure is serious and says Congress agrees that what the President did was awful and should not be repeated, or he would suffer removal from office.  P.S. Giuliani is still in very big trouble.

Last week I said, “This was the week of the small cap breakout.  If it is maintained, the entire market should continue higher.”  On the other hand, a reversal for the small caps would likely be lethal for the market’s further immediate rise.  It would accelerate a bigger correction.  Decisions, decisions…”

The market seems to have made a decision and all we need next week is another high higher in ALL CAPS than the 11-29-19 high, and the market rally should continue.  Small, mid, and large caps must come along for that ride, but small caps would benefit most as they are higher beta and are down more off their prior high.

Remember the SP500 Index is still running somewhat on borrowed time as the stretch in the market has for several weeks been similar to what happened to the market in Jan. 2018.  That ended badly in Feb. 2018 as you recall.

What about the Fed rate cuts?  I’ve seen some writing about how they are going to be helping now because their impact works on a lag.  Here are the dates (Ref.):

Jul 31 2.25% Fed lowered rate despite steady growth
Sep 18 2.0% Fed was concerned about slowing growth.
Oct 30 1.75% Slow global growth and muted inflation.

If it is true that they worked on a lag, why have interest rates been rising since the Sept. 3, 2019 low, and how long is that lag really?   The Fed says it’s 6-9 months.  I think the market has taken care of much of that lag already.  The 10 Year US Treasury Yield (TNX) was 2.061% on July 30, 2019 with a Fed Funds rate of 2.25% the next day.  That drop in TNX was on the EXPECTATION the Fed would lower rates eventually.

On January 4, 2019 Powell started hinting that the Fed would not hike further and in fact the economy was vulnerable to further slowing as noted HERE.  The bounce off the Dec. 24th closing low was dramatic and it continued until the first significant dip in early March that ended on 3-08-2019.  “Don’t fight the Fed,” an often repeated mantra generally is the truth.  When it comes to negative interest rates in the EU, I think the mantra has failed them.  Going negative still resulted in growth slowing in Germany to near zero.  (Things MAY be improving a bit now, but it’s all very tentative.)

What has been happening since the Sept. 3, 2019 interest rate low is more than a snap-back off a stretch lower; it is also a reaction to what is coming.  I laid this out over the past couple of weeks.  The Federal Reserve is now boxed in, barring extreme changes in the incoming data to being a “Fed Stuck In Neutral.”

The Federal Reserve is politically on hold, because any tightening would be attacked viciously by Trump as an attempt to throw the election, just as a former Fed governor has suggested that they do (He was a fool to suggest it!  It’s not the Fed’s job to be political.).  They won’t act in that way deliberately, because it risks the survival of the institution of the Fed.  Why do you think they raised rates on Dec.19, 2018 as the market was already falling?  They were focused on inflation, not full employment.  They felt the economy was already at full employment when it hit 5% unemployment and now we’re back at 3.5%, the Sept. 2019 low.  But they will be forced to allow inflation to rise a bit more than they would have previously.

What does this mean? 

1. Rates will continue to rise given the growing economy vs. a “Fed Stuck In Neutral,” hurting bond investors and driving more money into stocks IF rates rise slowly.  Rate shocks are a big negative, as I summarize at the base of this report.

2. That will help gold and the value of other “stuff,” like commodities and oil as long as the economy does not in fact pick up real steam from here.  If it did, gold would fall as real rates fall (see my summary on how gold pricing works HERE).   The reason gold has not broken down badly (but it’s weak as you’ll see below) I believe is because the market realizes the Fed is stuck.  When the Fed can raise rates as the economy grows, it keeps real rates positive which gold dislikes, and possibly even keeps real rates rising, which gold hates.  That’s why gold could do OK despite the economy picking up (if it does!).  But beware after the 2020 Election and also follow the inflation numbers, because the Fed has a mandate to do its job.  It can allow some excess inflation vs. what it would have allowed in Dec. 2018, but there is a limit.

Let’s turn to the state of the market…

What would satisfy me that the Bulls are serious?

The Bull Market Health Score this week is Bulls 3.5/Bears 1.5 vs. Bulls 4.0/Bears 1.0 last week.  It’s a 5 point scoring system .

For each checklist item below, I give you the points scored as Bullish or Bearish. 

1. New high? Bulls 1.0  Answer: Yes.  I’m giving it a yes here, because the price is back in the prior higher channel (red lines at top in the chart below).

2. V*IX trend favorable?  Bulls 0.5  Answer: Neutral.  The VIX Game Score is Bulls 6/Bears 1 at a VIX of 13.62 (Friday close) vs. 12.62 the prior week, which is above my “Bull Nirvana” number, the 7th VIX Game Score point.  The Bulls need to retake that 7th point next week and then take a run on 12.00ish.

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bulls 0.5 point.  Answer: Neutral.  The close was 16,937 vs. 16,909 last week.  Another new high is needed to turn the full point over to the Bulls.  It’s not unreasonable for that number to be below the prior high as the market is below its prior high.

4. Higher volume on Up Moves?  Lower volume on Down moves? Bulls 0.5 point.  Answer: Neutral.  The move up on Weds was with some increase in volume, but not impressively so.  The move on Fri. was big, but the volume did not match it.

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  (To be positive, small and mid caps must be doing as well as large caps) Bulls 1.0 point. Answer: Yes.  The small caps initially lost and then regained the breakout I’ve been following with you.

Let’s check in on the context around the price action of the market by looking at the current Market Risks… 

We have some new earnings data this week on Q4 2019…

Earnings Risk/Opportunity: What is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 with a skip of two weeks until the 8-30-19 data resumes the weekly data sequence followed by a skip for the week of 11-29-19 (details HERE)… The larger arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.

For Q2 2019, analysts are projecting earnings growth of 0.1%  —> -1.3% ->  —> -2.1%  —> -2.6% -> -2.6% -> -3.0% -> -1.9% -> -2.6%-> -1.0% -> -0.7% -> -0.4%  DONE

and revenue growth of 4.6%  —> 4.3%  —> 4.1%  —> 3.8% -> 3.8% -> 3.7% -> 3.8% ->4.0% ->4.1% -> 4.1% -> 4.0%  DONE

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% —> -1.9%  —> -3.6% -> -3.7% -> -3.8% -> -3.7% -> -4.1% -> -4.6% -> -4.7% -> -3.7% -> -2.7% -> -2.4% -> -2.3% -> -2.2%  DONE (FactSet  did not say whether the numbers changed vs. their prior report on 11-22-19. Final number may not be accurate)

and revenue growth of 4.4%  —> 4.4%  —> 4.2% —> 3.8% —> 3.2% ->  —> 2.9% -> 2.8% -> 2.8% -> 2.8% -> 2.8% -> 2.7% -> 2.6% -> 2.8% -> 3.1% -> 3.2% -> 3.1% -> 3.1% DONE (FactSet  did not say whether the numbers changed vs. their prior report on 11-22-19. Final number may not be accurate)

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% —> 4.9% -> 4.5%  -> 3.9% -> 3.5% -> 3.4% -> 3.2% ->  3.0% -> 2.9% ->2.6% -> 2.3% -> 1.5% -> 0.7% -> -0.4% -> -1.1% -> -1.4% -> -1.4% -> -1.5%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3%  —> 4.0%-> 4.0% -> 4.0% -> 4.0% -> 3.8% -> 3.7% -> 3.6% -> 3.6% -> 3.6% -> 3.5% -> 3.2% -> 3.0% -> 2.6% -> 2.6% -> 2.5% -> 2.5% -> 2.6%

For CY 2019, analysts are projecting earnings growth of  3.4%  —> 3.2%  —> 2.7%  —> 1.7%  —> 1.4% -> 1.3% -> 1.3% -> 1.3% -> 1.2% -> 1.1% -> 0.7% -> 0.6% -> 0.3% -> 0.1% -> 0.0% -> 0.1% -> 0.2%

and revenue growth of 4.7%  —> 4.7%  —> 4.5%  —> 4.4%   —> 4.3% -> 4.2% -> 4.1% -> 4.1% -> 4.1% -> 4.1% -> 4.0% -> 4.0% -> 4.0% -> 4.0% -> 3.9% -> 3.8% -> 3.8%

For Q1 2020, analysts are projecting earnings growth of 10.5% —> 9.8%  —> 8.5% -> 8.2% -> 8.1% -> 7.9% -> 7.9% -> 7.8% -> 7.6% -> 7.3% -> 6.7% -> 6.0% -> 5.6% -> 5.3% -> 5.1% -> 5.3% -> 5.2%

and revenue growth of 6.2%  —>5.8%  —> 5.6% -> 5.7% -> 5.5% -> 5.5% -> 5.4% -> 5.4% -> 5.5% -> 5.3% -> 4.8% -> 4.7% -> 4.5% -> 4.5% -> 4.5% -> 4.4% -> 4.4%

For Q2 2020, analysts are projecting earnings growth of 13.3%  —> 13.5% -> 12.0% ->12.6% -> 10.7 -> 9.9% -> 9.3% -> 9.2% -> 9.1% -> 9.0% -> 9.0% -> 8.7% -> 8.6% -> 7.7% -> 7.3% -> 6.7% -> 6.6% -> 6.4% -> 6.7% -> 6.7%

and revenue growth of 6.8% —> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4% -> 6.5% -> 6.4% -> 6.4% -> 6.3% -> 6.3% -> 6.3% -> 5.9% -> 5.2% -> 5.2% -> 4.9% -> 5.0% -> 4.9% -> 4.9% -> 4.9%

For CY 2020, analysts are projecting earnings growth of 10.7% -> 10.6% -> 10.6% -> 10.6% -> 10.5% -> 10.6% -> 10.4% -> 9.9% -> 9.8% -> 9.7% -> 9.7% -> 9.9% -> 9.8%

and revenue growth of 5.6% -> 5.6% -> 5.6% -> 5.6% -> 5.7% -> 5.6% -> 5.3% -> 5.3% -> 5.3% -> 5.4% -> 5.5% -> 5.5% -> 5.5%

In summary, Q4 will be the 4th negative quarter of earnings growth in a row similar to what happened in 2015-2016.  Back then the pullback was from the 5-2015 top to the 2-2016 low 15.2%, just above my boundary between correction and Mini Bear Market (see the link above to my “New Rules.”  This time? The worst corrections have been around -5-8% or so, the worst being in May at -7.63%.   The August decline on Trump’s comments about the China deal being delayed was -6.80%.   Those are mild corrections in my ranking of pullbacks.  They are very common in Bull markets.

Why the corrections this time are so much milder likely has to do with the more favorable tax environment under Trump.  It’s not magic.  Fiscal stimulus pulls demand ahead.  The consumer has been supporting this market for a reason – the consumer has more cash available post-tax cuts.  We pay for it later.  That’s what history tells us.  Families that use credit cards to fund vacations have a great time, until the time comes to pay for them.  Then not so much fun is had.  Same idea.

Here’s a Brief Review of the Other Market Risks at Hand:

China Deal Risk: There is some noise on both sides, but I favor the Peter Boockvar scenario he outlined with Rick Santelli this week @CNBC.  He said the Chinese have to make a decent deal now, because the two sides probably won’t negotiate anything else prior to the election.  They’d have to wait until 2021, which is why the Chinese want some tariffs lifted NOW.  The threats on Hong Kong are just threats I believe, because Xi cannot risk not making a deal with Trump now.  If Xi reacts to those bills, he’s taking his eye off the ball. 

Fed Rate Cut/Hike Risk: 

NOTE: The CME Group Data on their website Friday was in error as I had suspected they were.  The Sept. through Dec. 2020 numbers have been corrected below using data from Monday, Dec. 9, 2019 at around 9:48 am. 

There has been a continued increase in perceived risk of another RATE CUT by September 2020The odds are about 50:50 (just under) for the next Fed rate cut to occur July 29th, 2020. 

The Fed has cut three times and said it was done unless things get worse for the economy. As I’ve said previously: “THREE cuts is a mid-cycle adjustment.  Four cuts or more mean the Federal Reserve expects a recession.”  A hike in rates in the near future would tank the U.S. stock market. 

Now the probability is 0% for a 4th cut in mid-December as assessed by CME Group The risk was 22.1% 6 weeks ago.  The risk of a rate HIKE is 0.7% vs. 4.4% 3 weeks ago. 

What about January?  The odds of cut #4 is 8.8% vs. 8.5% last week vs. 12.4% 2 weeks ago vs. 35.8% 4 weeks ago vs 67% 8 weeks ago!   The odds of a HIKE in Jan. are 0.7% vs. 4.0% last week vs. 5.8% 2 weeks ago. 

What about March?  The odds are 20.8% this week vs. 16.2% last week vs. 23.3% 2 weeks ago vs. 75.1% 8 weeks ago for 4 or more cuts in total.  March hike?  0.6% vs. 3.7% last week vs. 5.0% 2 weeks ago.  

April Cut?  30.1% vs. 26.5% last week vs. 34.8% 2 weeks ago vs. 52.6% 3 weeks ago vs. 79.7% 8 weeks ago expect there to be 4 or more cuts.  April hike?  0.5% vs. 3.2% last week vs. 4.2% odds 2 weeks ago.

June cut?  40.0% vs. 36.6% last week vs. 43.5% 2 weeks ago vs. 56.7% 5 weeks ago expect four or more cuts by then.  Probability of a hike is 0.4% vs. 2.7% last week vs. 3.6% 2 weeks ago vs. 10.2% 3 weeks ago vs. 0% 4 weeks ago.

July?  47.9% vs. 46.6% last week vs. 49.4% 2 weeks ago vs. 60.7% 4 weeks ago expect 4 cuts by then.  A hike? 0.4% vs. 2.3% last week vs. 3.2% 2 weeks ago vs. 9.2% 3 weeks ago.

What are the rest of the available “4 (or more) cut odds”?  Sept. 2020?  56.2% vs. 51.7% last week vs. 58.9% 2 weeks ago vs. 53.2% 3 weeks ago vs. 38.7% 4 weeks ago vs. 65.2% 5 weeks ago.  Sept. 2020 Hike?  0.0% vs. 2.1% last week vs. 2.6% 2 weeks ago vs. 8.1% 3 weeks ago.  Nov. 2020 cut: 59.2% vs. 56.5% last week vs. 62.9% 2 weeks ago vs. 57.3% 3 weeks ago vs. 41.6% 4 weeks ago vs. 69.3% 5 weeks ago.  Nov. hike?  0.0% vs. 1.8% last week vs. 2.3% 2 weeks ago vs. 7.2% 3 weeks ago.  Dec. 2020 Cut: 64.7% vs. 62.6% last week vs. 66.5% 2 weeks ago vs. 61.7% 3 weeks ago and 73.8% 5 weeks ago.  Dec. hike?  0.0% vs. 1.6% last week vs 6.3% 2 weeks ago.

At least among those in the interest rate futures markets, the perceived odds of a recession or at least Fed action by September continuing into December 2020 will be required to prevent a recession or make it more shallow is slightly higher than it was last week. 

Either way it means the risk of a recession even if shallow in extent and duration, is possible only 9-10 months off.   Markets react early to events in the future, some say by 6 months or more.

I pointed out the increased odds of that by Sept. 2020 just last week.  The stock market is NOT discounting a recession at this point.  Not at all.  

The Risk of a Neutral Fed:  There is risk of inflation on the one hand and more slowing on the other. Prior: “Ultimately the change by the Federal Reserve in going to “Neutral” was NOT positive for the U.S. equity market, but it ignored it.  It won’t ignore it if economic slowing does not reverse itself going into 2020.”  

U.S. Iran War Risk: SAME. Interestingly quiet.  No change for weeks.  More stable after the leak of the “Iran Annihilation Plan HEREFunny how they simply seemed to shut up isn’t it?  The media has mostly missed this connection.  But that’s OK as we’ll “let sleeping dogs lie.” 

2020 Election Risk: See last week’s post.  The entry of Bloomberg makes things more difficult for Joe Biden, but he’s still the favorite to win the Dem nomination by far now.  Losing in Iowa and New Hampshire won’t look good though. 

Still, everyone else including Buttigieg is too weak at this point to win the nomination.  Things can change.  A serious Sanders challenge could shake the markets.  His health is in big question still.  He looks old and his body was acting like it wanted to die recently, which won’t encourage voters except his strongest supporters.  He also “wrote the damn bill” that intends to shove One Payer Healthcare down your throat.  Whether good or bad, Americans LOVE choice and competition.

Warren has been wounded by Buttigieg as extreme and I believe controlling (shove it down your throat healthcare vs. a public option, just as Bernie supports), while Harris is out (quite deservedly so for what was essentially her racist attack on Biden on, you guessed it, racism!  She was inauthentic in the debates, and Americans smelled it a mile away. I’m not saying she’s a bad person at her core.  I’m saying she acted badly.).

Having heard a more recent interview of Biden, I believe he can win.  He has to avoid confrontations to some extent, but then again as I’ll get to in one second, it could help him with a lot of voters.  I discussed Bloomberg last week.  He’d have to come out of his shell to win.  He won’t likely suddenly transform his personality.  America wants a fist fight in 2020: Trump vs. Biden.  Bloomberg sticks to statistics.  Biden says he’d like to take Trump behind the shed and have at him.  Not the highest energy approach for sure, but that’s what America wants at this time.  May God help us!

Trump Impeachment Risk: Little change this week after falling after the hearings.  Impeachment Risk: 100% now.  The Democrats have cornered themselves into a “fail-safe flight to the finish” (look up the movie!).  Conviction Risk?  Still near zero.  The Constitution does not matter to the GOP.

Deficit/Debt Threat: No Change: Trump is now beating Obama at something!  The size of his deficit!  It’s bigly.  Read THIS.  The deficit is up 26% to $964 Billion for fiscal 2019, the HIGHEST IN 7 YEARS!  

I’ll leave this here as a monument to our monumental debt, which could threaten interest rates in the future.  When rates rise, there will be “heck to pay.”  The U.S. dollar remains at risk and having at least 5% of your non-real estate net worth in gold exposure is a reasonable hedge in any portfolio.  Some say higher, but owning stocks is also a hedge that over time would work out for solid companies, even in the face of very high inflation (after the market came back from a deep swan dive!). 

Current Scenario…

Despite the extra push up above trend we are seeing (the higher channel in the chart below), the prior pattern we saw earlier in 2019 could repeat itself.  A further melt-up and then a substantial correction, which could be months away and may be poll dependent.  If Biden fails to gain traction for example, Trump might be considered a shoe in for a second term vs. anyone left on the Dem field. Democrats may want to consider how much they attack Biden over the next few months, because they are then working for Trump IMO.  I’ve studied these candidates enough to understand how this election can turn into a disaster for Democrats, at least at the level of the Presidency.

A final high will be reached prior to the discounting of a recession, which brings on a ‘Big Bear Market.’  Whether the market moves up a bit more and drops, corrects immediately, OR rises now to a final (for the cycle) all time high, we are not yet at the all time high in my opinion.  There is more upside to come, if not now, then later, before the final high.

Conclusion for This Section: Given the stretched status of large caps, I will likely only add small cap exposure or specific stock exposure in the U.S. and/or ETF exposure OUTSIDE the U.S. from here on out until the overbought state of the U.S. market corrects itself.  Follow social media this coming week to see what I add.  I am still overexposed to the U.S. in equities and have been since Feb. 2018 when I correctly pivoted out of foreign stocks into U.S. stocks at and near the Feb. 2018 low.

Back to the charts….

Now take a look at the SP500 chart.  The long upper yellow line is now at about 3068 at the Friday close.  The two short upper red lines show a narrow range in a gentle up trend, rising ABOVE the prior upper trend line.

As I warned three weeks ago, if the market keeps pushing above that top long yellow line, there will be eventual payback.

SP500 Large Cap Index (click chart to enlarge; SPX, SPY):

Market timing the SP500 Index (SPY, SPX). Another new high?

Another new high?

Now let’s check in on two “Canary Signals” we’ve been following:

“Intel-igent Market Timing Signal” (Intel; I*NTC; * there to throw off the crawlers!): Neutral.  SAME: “The stock is stuck below the April ATH.  Why should it break out if the U.S. GDP is due to slide to below 1%?  The June 4 high of 57.60 has been exceeded, and the April high of 59.59 is the next test to achieve a new all time high.”  The NY Fed says GDP for Q4 will be 0.58% and the Atlanta Fed using the exact same numbers says 2.0%.  Take your pick!  Following my canaries may be more productive than following GDP predictions as the latter are usually way off!

Bank of America (B*AC) Market Timing Signal: STILL TRUE -> Bullish, but needs to push higher soon.  It looked like it was breaking down on Tues., but is back above the 33.05 breakout.  “It will only hold the breakout if, rates keep climbing.  Sell a reversal at least on a close or sell on a close with a reversal on higher volume IMO.” 

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,181 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.  (real time messages are ONLY on StockTwits until Twitter reforms its policies, but we’ll have it as a backup system)

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +2.59% vs. +3.36% last week. 

Here is what I said last week: “Even more so today: Sentiment should be peaking if this is in fact a top.  It is not a top.  It could be a temporary top, but it’s not ‘The Top.’  The move down from a spread of around 15% [three] weeks ago is not enough to dislodge the Bulls.  Sentiment can wobble down and then back up without more than a dip of a few percent.”  The market did in fact wobble down and back up.  Sentiment is nowhere near a top.

Bulls Neutrals Bears
31.72% 39.16% 29.13%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM):

We now have the breakout, but it must hold.   If rates turn back down, it won’t likely hold.  It’s a buy, particularly if IWM continues higher Monday to a new recent high.

Russell 2000 U.S. Small Cap Index  (click chart to enlarge; IWM, RUT):

Market timing the U.S Small Cap Index (IWM, RUT). Breakout is recovered.

Breakout is recovered.

 3. Gold Market Timing (GLD): 

No change.  In fact this week, GLD is barely BELOW that upper red line in the chart below, and a new low was not reached!

SAME: Things are shifting…  We’ve gone from “recession risk” and “multiple cuts” as well as “don’t fight the Fed” to “Three cuts and done.” 

SAME MAJOR POINT: IF the Fed lags inflation, gold wins, but if it front runs inflation, gold loses on a relative basis.  Follow the chart though, not the noise from talking heads.

This week it’s even more likely the Fed will CUT again before it hikes (again, if the CME numbers are correct). 

SAME Technicals: If it breaks lower and GDX breaks, I’ll likely be lowering my exposure to gold.  Holding above that 2013 lower high on the chart…for now.

The Gold ETF (click chart to enlarge; GLD): That top red line is 137.80.  The market “has my number” as I say.  When the market changes, we change.

Market timing the gold ETF (GLD). Gold on the edge...

Gold on the edge…

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

Rates are in an ascending triangle on an intermediate term basis.  That is Bullish.  They did not continue breaking down.  I added some corporate bond exposure Friday (average effective maturity of just over 10 years), because rates had reached an overbought level.  But I’ll add slowly. 

SAME: As long as the Federal Reserve stays “Neutral,” rates will be rangebound barring a left field event, a.k.a. a “Black Swan event.”  Lower rates would imply the Fed medicine is not working yet/ever or that more is needed.  I believe it’s a waste of time to lower rates except as a temporary goosing of the economy, when things are truly bad, and lower rates have negative impacts on savers and on price inflation (raises inflation due to down dollar).

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

U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX, TLT, TBF): 

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Trend still up in rates.

Trend still up in rates.

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 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 GREEN for a further U.S. stock market rally with a longer term Bullish and short term Bullish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down. The small caps have now broken out and that breakout MUST be preserved and extended.

Gold Signal YELLOW  for a further U.S. stock market rally longer term Bullish Trend and a short term NEUTRAL Gold Trend.  The current pattern is a warning sign.  The longer term Bullish trend will evaporate if it breaks below the current level by much at all.  This still looks like a correction vs. a breakdown until it does not!

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. 

Remember, gold may be down but not yet out, because if the Fed lags inflation, gold will win.  Since I am predicting a “Federal Reserve Stuck In Neutral” into the 2020 Election, inflation will win, and gold and oil will win.

GUIDE: “Remember GLD is being used as an indicator for the ECONOMY here.”  If gold continues to rise, it means the market believes real rates will  fall, which in the current context means the global economy is slowing.  That would ultimately hurt U.S. stocks. 

Rate Signal GREEN for a further stock market rally with a longer term BEARISH and short term Bullish 10 Year Yield Trend.  (Remember: higher rates mean lower bond and Treasury prices). Whether the short term trend should be called Neutral vs. Bullish is arguable at this time, but it’s not Bearish yet. There is actually an even longer term view that says rates have been in a neutral trading pattern since 2011, but the above two views are more practical on a trading/intermediate term investing basis.

I’ll leave this reminder from 9-20-2019’s issue: “Remember, FOUR Fed cuts will NOT be a “mid-cycle adjustment” and would be taken badly by the market ironically, considering the market’s addiction to lower rates.  A fourth cut means the Federal Reserve is seeing recession risk as significantly high.”

Also for Reference:Rates usually RISE slowly in a strong recovery and the stock market rally continues as they rise, as I’ve repeated multiple times on social media and here.  Empirically though, rates that are “lower” (than 3.11%) and are NOT rising rapidly have allowed the market to rise.”

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 59.20 vs. 58.11 last week.  Still holds: If it rises above 58.82 (YES) and then 60.94 (NOT YET), oil and oil stocks will be off to the races.  63.38 would be the next target.  Since May, the price of oil almost appears to have been managed to stay between 50 and 59/barrel.  I wonder why?  😉  OPEC says it will cut more production than expected as of Friday, but we’ll follow the charts!

Just a reminder: If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  I called the period of rising rates in early October #RateShockII.

Another Reminder On Falling Rates: “The risk lately has been ‘Falling Rate Shocks.’  (I changed the term from “Negative Rate Shocks” because there are in fact negative rates in a lot of countries now.  First we had ‘Falling Rate Shock I’ in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error by critics),  ‘Falling Rate Shock II’ in May 2019, and ‘Falling Rate Shock III’ in August 2019.  The Stock Market Bulls had better hope that they don’t get more rate cuts past October. 

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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.  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.

Copyright © 2019 By Wall Street Sun and Storm Report, LLC All rights reserved.

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Market Timing Brief™ for the 11-29-2019 Close: “China’s Threat of ‘Strong Countermeasures’ Due to U.S. Hong Kong Bills Rattles Master Market. More Downside? Gold Still On Pause Although Interest Rates Have Slipped.”

A Market Timing Report based on the November 29, 2019 Close, published Saturday, November 30th, 2019…

I deliver focused comments on market timing once a week.  These are supplemented with daily “Tweets/StockTwits” (see links below) and comments in the “markettiming” room on StockTwits.

I provide quite a bit of intraweek commentary, and if you don’t see it, you will miss out on quite a bit of context, so please click on the StockTwits link below and have a read…  Thank you as always for being loyal readers and interacting on social media with your questions and comments!

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

The comment by President Xi through the Chinese state media of “strong countermeasures” against the U.S. for interfering with the Hong Kong sovereignty issue/protests is an immediate market risk.   Why?  Because the market has been going above the prior trend based at least in part on a Phase One China Trade War resolution.  How President Xi would dance around taking strong countermeasures and making a trade deal is very unclear, which puts mid-December tariff hikes in play for Trump, and those tariffs would add greatly to U.S. price inflation expectations and eventual higher inflation.  The market would not like that at all.  Remember that some big stocks like Intel (INTC) and even Apple (AAPL) have gone up a lot based on this resolution.  The risk of a significant correction has risen.

“Trump signed a bill into law on Wednesday that requires the State Department to certify annually that Hong Kong has sufficient autonomy to retain special U.S. trading consideration, which helps Hong Kong’s economy.” (Ref. link above)  In my view, Trump would not have signed the bills supporting Hong Kong’s sovereignty (and banning the sale of rubber bullets, tear gas to the Hong Kong police) if it were not for the fact that Congress would have overridden his veto and embarrassed him as a Communist sympathizer.  The same has happened with Russia.  He was forced into those sanctions too, despite any rhetoric to the contrary.

This was the week of the small cap breakout.  If it is maintained, the entire market should continue higher.  On the other hand, a reversal for the small caps would likely be lethal for the market’s further immediate rise.  It would accelerate a bigger correction.  Decisions, decisions…

Interest rates, which we’ve been tracking intently, have eased, but they are “down but not out.”  Remember that if the data supports some lift to the economic picture, rates will rise, not fall.  The Federal Reserve will likely take longer than before to hike rates upon seeing that lift, but will eventually hike rates again if the trend were to continue.  Fed Chair Powell is data dependent, even if it takes him a while to perceive what the data is.  Meanwhile savers have seen a drop in rates from around 2.3% in money markets back to 1.6ish%.

Let’s turn to the state of the market…

What would satisfy me that the Bulls are serious?

The Bull Market Health Score this week is Bulls 4.0/Bears 1.0 vs. Bulls 2.5/Bears 2.5 last week.  It’s a 5 point scoring system .

For each checklist item below, I give you the points scored as Bullish or Bearish. 

1. New high? Bulls 1.0  Answer: Yes.  New high with slow rise within the channel demarcated by the two red lines in the chart below.

2. V*IX trend favorable?  Bulls 0.5  Answer: Neutral.  The VIX Game Score is Bulls 7/Bears 0 at a VIX of 12.62 (Friday close) vs. 12.34 the prior week, which is below my “Bull Nirvana” number, which is the 7th Score point.  The Bulls broke 12.00 this week, and then that goal was given back.  The market dropped 0.40% on Friday.  The Bulls need to retake VIX 12.00 or there will be more downside.  Two weeks ago I pointed to the potential for further VIX downside (good for Bulls).

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bulls 0.5 point.  Answer: Neutral.  The close was 16,909 vs. 16,848 last week, but after posting a new high, the number fell below the high from 14 days ago of 16,930.

4. Higher volume on Up Moves?  Lower volume on Down moves? Bulls 1.0 point.  Answer: Yes.  It was up on the last breakout, so the Bulls score a point.

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  (To be positive, small and mid caps must be doing as well as large caps) Bulls 1.0 point. Answer: Yes.  The small caps finally broke out as the second chart shows.  If this is reversed, watch out below. 

As I showed you a few weeks ago, a Bull Market Health Score of 4 or higher can persist for a while, but indicates a degree of market stretch that can lead to a pullback.  However, if we see Bulls breakouts in the numbers above, the Bull market move will be further verified (new high, VIX back below 12 (breakout to downside), higher AD%, big up volume, and happy U.S. Index Matrix).

Let’s check in on the context around the price action of the market by looking at the current Market Risks… 

We have some new earnings data this week…

Earnings Risk/Opportunity: NO UPDATE this week due to the holiday at FactSet.  What is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 with a skip of two weeks until the 8-30-19 data resumes the weekly data sequence (details HERE)… The larger arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  NOTE: 96% of SP500 Index companies have reported.  That was just 5% more than last week.

For Q2 2019, analysts are projecting earnings growth of 0.1%  —> -1.3% ->  —> -2.1%  —> -2.6% -> -2.6% -> -3.0% -> -1.9% -> -2.6%-> -1.0% -> -0.7% -> -0.4%  DONE

and revenue growth of 4.6%  —> 4.3%  —> 4.1%  —> 3.8% -> 3.8% -> 3.7% -> 3.8% ->4.0% ->4.1% -> 4.1% -> 4.0%  DONE

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% —> -1.9%  —> -3.6% -> -3.7% -> -3.8% -> -3.7% -> -4.1% -> -4.6% -> -4.7% -> -3.7% -> -2.7% -> -2.4% -> -2.3% -> -2.2%

and revenue growth of 4.4%  —> 4.4%  —> 4.2% —> 3.8% —> 3.2% ->  —> 2.9% -> 2.8% -> 2.8% -> 2.8% -> 2.8% -> 2.7% -> 2.6% -> 2.8% -> 3.1% -> 3.2% -> 3.1% -> 3.1%

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% —> 4.9% -> 4.5%  -> 3.9% -> 3.5% -> 3.4% -> 3.2% ->  3.0% -> 2.9% ->2.6% -> 2.3% -> 1.5% -> 0.7% -> -0.4% -> -1.1% -> -1.4% -> -1.4%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3%  —> 4.0%-> 4.0% -> 4.0% -> 4.0% -> 3.8% -> 3.7% -> 3.6% -> 3.6% -> 3.6% -> 3.5% -> 3.2% -> 3.0% -> 2.6% -> 2.6% -> 2.5% -> 2.5%

For CY 2019, analysts are projecting earnings growth of  3.4%  —> 3.2%  —> 2.7%  —> 1.7%  —> 1.4% -> 1.3% -> 1.3% -> 1.3% -> 1.2% -> 1.1% -> 0.7% -> 0.6% -> 0.3% -> 0.1% -> 0.0% -> 0.1%

and revenue growth of 4.7%  —> 4.7%  —> 4.5%  —> 4.4%   —> 4.3% -> 4.2% -> 4.1% -> 4.1% -> 4.1% -> 4.1% -> 4.0% -> 4.0% -> 4.0% -> 4.0% -> 3.9% -> 3.8%

For Q1 2020, analysts are projecting earnings growth of 10.5% —> 9.8%  —> 8.5% -> 8.2% -> 8.1% -> 7.9% -> 7.9% -> 7.8% -> 7.6% -> 7.3% -> 6.7% -> 6.0% -> 5.6% -> 5.3% -> 5.1% -> 5.3%

and revenue growth of 6.2%  —>5.8%  —> 5.6% -> 5.7% -> 5.5% -> 5.5% -> 5.4% -> 5.4% -> 5.5% -> 5.3% -> 4.8% -> 4.7% -> 4.5% -> 4.5% -> 4.5% -> 4.4%

For Q2 2020, analysts are projecting earnings growth of 13.3%  —> 13.5% -> 12.0% ->12.6% -> 10.7 -> 9.9% -> 9.3% -> 9.2% -> 9.1% -> 9.0% -> 9.0% -> 8.7% -> 8.6% -> 7.7% -> 7.3% -> 6.7% -> 6.6% -> 6.4% -> 6.7%

and revenue growth of 6.8% —> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4% -> 6.5% -> 6.4% -> 6.4% -> 6.3% -> 6.3% -> 6.3% -> 5.9% -> 5.2% -> 5.2% -> 4.9% -> 5.0% -> 4.9% -> 4.9%

For CY 2020, analysts are projecting earnings growth of 10.7% -> 10.6% -> 10.6% -> 10.6% -> 10.5% -> 10.6% -> 10.4% -> 9.9% -> 9.8% -> 9.7% -> 9.7% -> 9.9%

and revenue growth of 5.6% -> 5.6% -> 5.6% -> 5.6% -> 5.7% -> 5.6% -> 5.3% -> 5.3% -> 5.3% -> 5.4% -> 5.5% -> 5.5%

The earnings and revenue data was already discussed above!

Here’s a Brief Review of the Other Market Risks at Hand:

China Deal Risk: Noted above.  Recapping briefly: Risk of failure elevated after the signing of two bills by Congress and President Trump to support the people of Hong Kong over their Mainland China oppressors.   Xi threatened retaliation, which is not a good thing at this juncture of negotiations and ahead of the threatened December tariff hikes.  The market would respond poorly to those new tariff levels.

Fed Rate Cut/Hike Risk:  The Fed has cut three times and said it was done unless things get worse for the economy.  Now the probability is 0% for a 4th cut in mid-December as assessed by CME Group The risk was 22.1% 5 weeks ago.  The risk of a rate HIKE is 4.4% now vs. 0% 2 weeks ago. 

As I’ve said previously: “THREE cuts is a mid-cycle adjustment.  Four cuts or more mean the Federal Reserve expects a recession.”  A hike in rates in the near future would tank the U.S. stock market. 

What about January?  The odds of cut #4 is 8.5% vs. 12.4% last week vs. 35.8% three weeks ago vs 67% seven weeks ago!   The odds of a HIKE in Jan. are 4.0% vs. 5.8% last week. 

What about March?  The odds are 16.2% vs. 23.3% last week vs. 75.1% seven weeks ago for 4 or more cuts in total.  March hike?  3.7% vs. 5.0% last week.  

April Cut?  26.5% vs. 34.8% last week vs. 52.6% 2 weeks ago vs. 79.7% 7 weeks ago expect there to be 4 or more cuts.  April hike?  3.2% vs. 4.2% odds last week.

June cut?  36.6% vs. 43.5% last week vs. 56.7% 4 weeks ago expect four or more cuts by then.  Probability of a hike is 2.7% vs. 3.6% last week vs. 10.2% 2 weeks ago vs. 0% 3 weeks ago.  

July?  46.6% vs. 49.4% last week vs. 60.7% 3 weeks ago expect 4 cuts by then. A hike? 2.3% vs. 3.2% last week vs. 9.2% 2 weeks ago.

What are the rest of the available “4 cut odds”?  Sept. 2020?  51.7% vs. 58.9% last week vs. 53.2% 2 weeks ago vs. 38.7% 3 weeks ago vs. 65.2% 4 weeks ago.  Sept. 2020 Hike?  2.1% vs. 2.6% last week vs. 8.1% 2 weeks ago.  Nov. 2020 cut: 56.5% vs. 62.9% last week vs. 57.3% 2 weeks ago vs. 41.6% 3 weeks ago vs. 69.3% 4 weeks ago.  Nov. hike?  1.8% vs. 2.3% last week vs. 7.2% 2 weeks ago.  Dec. 2020 Cut: 62.6% vs. 66.5% last week vs. 61.7% 2 weeks ago and 73.8% 4 weeks ago.  Dec. hike?  1.6% vs. 2.1% last week vs 6.3% 2 weeks ago.

In sum, the risk of another rate CUT (recession risk goes up) is just above 50% first in Sept. 2020 unchanged from last week in terms of the date and continues through December with the odds increasing into 2020 year end.  The risk of a HIKE is still very low all the way out to December 2020, so says Master Market!

SAME: For now, that means a majority of investors who place bets on the Fed/interest rates believe that recession is on the schedule by the Fall of 2020, or at least the conditions that will force the Federal Reserve to act to avoid recession or make it a more shallow one.  That may in fact not happen, but if the China Trade War gets worse, it could.  That means they are ultimately worried about what I call a Big Bear Market (click and scroll to definitions in blue under “New Rules”).

The Risk of a Neutral Fed:  Same. Ultimately the change by the Federal Reserve in going to “Neutral” was NOT positive for the U.S. equity market, but it ignored it. It won’t ignore it if economic slowing does not reverse itself going into 2020.  

Takeaway Point SAME and still important:  The Federal Reserve is not just “in Neutral,” it’s politically STUCK IN NEUTRAL! (or it will be perceived the Fed is political and anti-Trump – something you have not heard from the mainstream media – their narrative is that Powell is independent of Trump.)  Remember this when you consider both gold and bonds as investments (see below).

U.S. Iran War Risk: Interestingly quiet.  No change for weeks.  More stable after the leak of the “Iran Annihilation Plan HEREFunny how they simply seemed to shut up isn’t it?  The media has mostly missed this connection.  But that’s OK as we’ll “let sleeping dogs lie.” 

2020 Election Risk: The entry of Bloomberg makes things more difficult for Joe Biden, although Bloomberg is known better to Democrats in power than to Americans in general.  They’ve heard his name and seen his cable channel is about it.  He’s #9 in the world in wealth per Forbes as of March.  His wealth makes Trump’s look small.  What he may lack is the charisma needed in a national race.  Remember George W. Bush?  Not the brightest star in the sky, but he could relate to people, unlike his brother, Jeb, who could speak intelligently in English but not in “Voterese.”  Trump speaks a far right dialect of “Voterese,” which is his base.  Bloomberg must quickly prove he can relate to the larger American electorate.  Billionaire Tom Steyer is already falling in the polls and appears to have failed to ignite any real interest among Democrats.

My Call on Mike: Mike Bloomberg must be ahead of Harris by December 15th (in 5th place at least) and ahead of Buttigieg (in fourth place or better) by December 31st to appear viable.  He is not taking donations, so he can’t meet the donation requirement for the debates and must meet the polling requirements.  He’s at 2.5% behind Yang at 3.3% (in the latest poll, Bloomberg is at 3%) in national polls and slightly ahead of Amy Klobuchar.

The above discussion would make it seem that Biden should beat Bloomberg, but I looked at the social media feed under #Biden, and “it ain’t good.”  His campaign is asleep on Twitter, instead of directing the conversation or at least influencing it.  Why aren’t they?  Because Biden is the “safe choice,” not the “inspiring choice” as Obama was as the first African American candidate who was both bright and could speak “Voterese” fluently.  This nomination may still be Biden’s to lose, but he seems to be losing from the start with Buttigieg (who was attacked for being out of touch with African Americans this past week) leading in Iowa at least (a very white state demographically).  At this time, my view is still that if Biden does not face off Trump, the Democrats will lose unless Mike Bloomberg can gain serious traction fast.

Mike Bloomberg would be an important voice in the debates to face off the anti-capitalism Democrats as a middle class boy who achieved the American Dream in a big way.  I would like to see a more inclusive capitalism emerge as I’ve said here before, but not socialism.  Increased profit sharing with employees is a must, or our system will be pushed to the far left during the next big crisis.

In the meantime, the ultra-liberal Warren is dropping hard in the polls as her plan to shove one healthcare choice down the throats of the American people appears doomed.  Her response this week was apparently to say she’d phase in her forced plan slowly, which is sort of like being choked to death slowly.  It takes longer, but you still end up dead!  Bernie (who “wrote the damn bill”) is not doing that well either in large part for the same reason, although he appears to be picking up support from Warren’s decline along with Pete Buttigieg who has been rising in the polls since Oct. 14th with a recent big spurt up.  He is rising as fast as Warren is falling, although he’s still in fourth place at a mean polling percentage of 11%, and his numbers have been going up and down with each successive poll.

Trump Impeachment Risk: Little change this week after falling after the hearings.  Conviction Risk?  Still near zero.  The Constitution does not matter to the GOP any longer.  It will matter again only if Biden is elected.  Censure is still a possible out for the GOP, so they don’t appear they are trampling on the Constitution in supporting Trump.  That’s what they look like as of today.  What’s wrong is wrong.  Every president should be held accountable.  Clinton was appropriately chastised via impeachment. Trump deserves a trip to the figurative stocks as well (not those stocks, the other stocks! ; )). 

Deficit/Debt Threat: No Change: Trump is now beating Obama at something!  The size of his deficit!  It’s bigly.  Read THIS.  The deficit is up 26% to $964 Billion for fiscal 2019, the HIGHEST IN 7 YEARS!  

I’ll leave this here as a monument to our monumental debt, which could threaten interest rates in the future.  When rates rise, there will be “heck to pay.”  The U.S. dollar remains at risk and having at least 5% gold exposure is a reasonable hedge in any portfolio.  Some say higher, but owning stocks is also a hedge that over time would work out for solid companies, even in the face of very high inflation (after the market came back from a deep swan dive!). 

Current Scenario…(modified since prior issue!)

Despite the extra push up above trend we are seeing (the higher channel in the chart below), the prior pattern we saw earlier in 2019 could repeat itself (up slightly off a long consolidation and then down sharply into a mild to moderate correction [5-15%]).  The China risk has increased this week, which is why stocks dropped in both China (to a greater degree) and in the US.

A final high will be reached prior to the discounting of a recession, which brings on a ‘Big Bear Market.’  Whether the market moves up a bit and cracks back, corrects immediately, OR rises now to a final (for the cycle) all time high, we are not yet at the all time high in my opinion.

Same Bottom Line: I am holding my current exposure for now and seeking markets outside the U.S.  Why?  Because I’m overexposed to the US market at this point in allocation terms (have been since Feb. 2018, when I traded nearly all my foreign exposure for U.S. exposure, all communicated on social media), and I would favor a correction from this level before the final all time cycle high is reached.  Yes, global markets could fall too, so I’m moving in steps to “buy foreign.”  If we don’t see a U.S. market drop, there are other markets to buy without chasing a market I am already overexposed to.

Back to the charts….

Now take a look at the SP500 chart.  The green line is 2940.91, the
9-21-2018 High preceding the decline ending December 24th.  The long upper yellow line is now at about 3062 at the Friday close.  The two short upper red lines show a narrow range in a gentle up trend, rising ABOVE the prior upper trend line.

As I warned three weeks ago, if the market keeps pushing above that top yellow line (the longer one), there will be an eventual payback.

SP500 Large Cap Index (click chart to enlarge; SPX, SPY):

Market timing the SP500 Index (SPY, SPX). Wobble off the top of the higher channel.

Still in the higher channel, above trend subject to correction.

Now let’s check in on two “Canary Signals” we’ve been following:

“Intel-igent Market Timing Signal” (Intel; I*NTC; * there to throw off the crawlers!): Neutral.  SAME and China’s response to the U.S. Hong Kong bills was not helpful: “The stock is stuck below the April ATH.  Why should it break out if the U.S. GDP is due to slide to below 1%?  Think about that.  The June 4 high of 57.60 has been exceeded, and the April high of 59.59 is the next test to achieve a new all time high.”

Bank of America (B*AC) Market Timing Signal: Bullish, but needs to push higher soon.  This week there were FIVE closes above 33.05, which was the early 2018 high (I quoted a slightly lower number before as I apparently picked out a slightly lower high in that time frame), and then zero progress.   Prior holds: “That’s a negative, but this is a major breakout if it holds.  It will only hold if rates keep climbing.  Sell a reversal at least on a close or sell on a close with higher volume IMO.” 

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,181 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.  (real time messages are ONLY on StockTwits until Twitter reforms its policies, but we’ll have it as a backup system)

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +3.36% vs. +5.21% last week.  Even more so today: “Sentiment should be peaking if this is in fact a top.  It is not a top.  It could be a temporary top, but it’s not “The Top.”  The move down from a spread of around 15% two weeks ago is not enough to dislodge the Bulls.  Sentiment can wobble down and then back up without more than a dip of a few percent.

Bulls Neutrals Bears
33.64% 36.09% 30.28%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM):

We now have the breakout, but it must hold.   If rates continue back down, it won’t likely hold.  NOTE: That green arrow should be pointed to the price point ABOVE the red line… The arrow is pointing to the prior consolidation below the breakout.

Russell 2000 U.S. Small Cap Index  (click chart to enlarge; IWM, RUT):

Market timing the U.S Small Cap Index (IWM, RUT). Breakout but must hold and move higher.

Breakout but must hold and move higher.

 3. Gold Market Timing (GLD): 

No change.  In fact this week, GLD is barely back above that upper red line in the chart below!

SAME: Things are shifting…  We’ve gone from “recession risk” and “multiple cuts” as well as “don’t fight the Fed” to “Three cuts and done.” 

SAME MAJOR POINT: IF the Fed lags inflation, gold wins, but if it front runs inflation, gold loses on a relative basis.  My contention as said above is that Federal Reserve bias will now be against raising rates prior to the election, so inflation will get a boost!  Gold wins…but it must perform on the charts to prove it! 

SAME Technicals: Gold is just below that key top red line, and slightly above the 2013 lower high.   If it breaks and GDX breaks, I’ll likely be lowering my exposure to gold.  Holding above that 2013 lower high on the chart…for now.

The Gold ETF (click chart to enlarge; GLD): That top red line is 137.80.  The market “has my number” as I say.  It tested below, but the gold Bears got nowhere with it.  At least so far…  When the market changes, we change.

Market timing the gold ETF (GLD). Barely above that top red line.

Barely above that top red line.

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

Rates have been in a holding pattern all week. Follow the bouncing ball up or down.

SAME: As long as the Federal Reserve stays “Neutral,” rates will be rangebound barring a left field event, a.k.a. a “Black Swan event.”  Lower rates imply the Fed medicine is not working yet/ever.  I believe it’s a waste of time to lower rates except as a temporary goosing of the economy, and it has a negative impact on savers and on inflation (raises inflation due to down dollar).  The modern Federal Reserve has taken on the job of managing the economy, which has eventual consequences we will have to pay in real dollars.  They hurt the poor by taking away their interest on savings.  What they are really doing is helping to levitate the stock market by making rates so low, companies borrow money to buy their stock back.  It is perverse, and there will be payback. 

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

U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX, TLT, TBF): 

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Five days of "sideways" meaning consolidation.

Five days of “sideways” meaning consolidation.

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 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 GREEN for a further U.S. stock market rally with a longer term Bullish and short term Bullish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down. The small caps have now broken out and that breakout MUST be preserved and extended.

Gold Signal YELLOW  for a further U.S. stock market rally longer term Bullish Trend and a short term NEUTRAL Gold Trend.  The current pattern is a warning sign.  The longer term Bullish trend will evaporate if it breaks below the current level by much at all.

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. 

Remember, gold may be down but not yet out, because if the Fed lags inflation, gold will win.  Since I am predicting a “lagging Federal Reserve” into the 2020 Election, inflation will win, and gold and oil will win.

GUIDE: “Remember GLD is being used as an indicator for the ECONOMY here.”  If gold continues to rise, it means the market believes real rates will  fall, which in the current context means the global economy is slowing.  That would ultimately hurt U.S. stocks. 

Rate Signal YELLOW for a further stock market rally with a longer term BEARISH and short term Bullish 10 Year Yield Trend.  (Remember: higher rates mean lower bond and Treasury prices). Whether the short term trend should be called Neutral vs. Bullish is arguable at this time, but it’s not Bearish yet. There is actually an even longer term view that says rates have been in a neutral trading pattern since 2011, but the above two views are more practical on a trading/intermediate term investing basis.

I’ll leave this reminder from 9-20-2019’s issue: “Remember, FOUR Fed cuts will NOT be a “mid-cycle adjustment” and would be taken badly by the market ironically, considering the market’s addiction to lower rates.  A fourth cut means the Federal Reserve is seeing recession risk as significantly high.”

Also for Reference:Rates usually RISE slowly in a strong recovery and the stock market rally continues as they rise, as I’ve repeated multiple times on social media and here.  Empirically though, rates that are “lower” (than 3.11%) and are NOT rising rapidly have allowed the market to rise.”

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 58.11 vs. 57.77 last week.  Still holds: If it rises above 58.82 and then 60.94, oil and oil stocks will be off to the races.  63.38 would be the next target.  Since May, the price of oil almost appears to have been managed to stay between 50 and 59/barrel.  I wonder why?  😉

Just a reminder: If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  I called the period of rising rates in early October #RateShockII.

Another Reminder: “The risk lately has been ‘Falling Rate Shocks.’  (I changed the term from “Negative Rate Shocks” because there are in fact negative rates in a lot of countries now.  First we had ‘Falling Rate Shock I’ in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error by critics),  ‘Falling Rate Shock II’ in May 2019, and ‘Falling Rate Shock III’ in August 2019.  The Stock Market Bulls had better hope that they don’t get more rate cuts past October. 

Thank you for reading.  Would you please leave your comments below where it says “Leave a Reply”… or ask a question or report a typo… 

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Standard Disclaimer: It’s your money and your decision as to how to invest it.

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.  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.

Copyright © 2019 By Wall Street Sun and Storm Report, LLC All rights reserved.

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Market Timing Brief™ for the 11-22-2019 Close: “Large, Mid, and Small Caps Will Soon Make a Move. Which Way? Gold Still On Pause Even as Interest Rates Ease.”

A Market Timing Report based on the November 22, 2019 Close, published Saturday, November 23rd, 2019…

I deliver focused comments on market timing once a week.  These are supplemented with daily “Tweets/StockTwits” (see links below) and comments in the “markettiming” room on StockTwits.

I provide quite a bit of intraweek commentary, and if you don’t see it, you will miss out on quite a bit of context, so please click on the social media links below and have a read…  Thank you as always for being loyal readers and interacting on social media with your questions and comments! 

1.  SP500 Index Market Timing (S&P 500 Index®; SPY, SPX): Investors were asleep again this week despite the Trump impeachment hearings.  This weekend there is a report that one of the indicted Giuliani thugs is willing to testify that Rep. Nunes (Republican ranking member on Intel Committee) went to Europe to procure dirt on Joe Biden.  So stay tuned, but from what we know now, “Teflon Don” is safe on the Senate side as he continues to convert negative energy from the left to positive energy among his base.  Some may call his energy “positively negative,” but apparently it’s an acquired taste.  The point is he uses the attacks as an energy source for his support and re-election.  The small caps having been oscillating in a narrow range for 15 straight trading days!  But something is about to give…one way (down) or the other – that would be UP.

Rates fell a bit more this week.  They are a key that will determine which way important markets inflect, up or down.  Right now they are above the trend established since the Aug. to early Sept. low, so the 10 year Yield is still in an up trend.  At the same time, a breakout above 1.903% failed as I have reported.

The NY Fed now predicts Q4 GDP at 0.71%, the Atlanta Fed at an even more non-Trumpish 0.4%.  That is abysmal and yet, the market could care less because the Fed is lowering rates….oh wait, they are in “Neutral” I believe Dave (that would be me) said last week.

Larry Kudlow promised us 3% growth, after he promised us 4% growth or higher from the tax bill which now has the 2019 deficit 26% above 2018 as I’ve shared.  “Tinkle Down Economics” fails for the 3rd time.  What is that expression? “Fool me once shame on you; fool me twice shame on me!”  They don’t even cover the 3rd time of being fooled, so the average voter is in fact ignorant apparently, and has not a clue when they are being lied to.  To cover all bases: Both sides/All sides lie.  They just can’t help themselves, because they all want something for themselves, be it influence, power and stature for its own sake, money, or the crown of “Give Away Queen” and “Savior of Everyone,” which Elizabeth Warren will get if she wins (she won’t IMO).  You see how truly politically independent I am?  😉

Let’s turn to the state of the market…

What would satisfy me that the Bulls are serious?

The Bull Market Health Score this week is still Bulls 2.5/Bears 2.5 vs. Bulls 4.0/Bears 1.0 last week.  It’s a 5 point scoring system.

For each checklist item below, I give you the points scored as Bullish or Bearish. 

1. New high? Bulls 0.5  Answer: Neutral.  Stretched vs. trend, and also down vs. last week. But no break lower yet.

2. V*IX trend favorable?  Bulls 0.5  Answer: Neutral.  The VIX Game Score is Bulls 7/Bears 0 at a VIX of 12.34 (Friday close) vs. 12.07 the prior week, which is below my “Bull Nirvana” number, which is the 7th Score point.  The Bulls lost the “bonus” VIX point that I used to refer to in my score.  As Before: “The 2018 low was 10.17, so there is still room to fall.  It was 8.56 in 2017, but earnings were better then and lots of growth was anticipated under the Trump tax cuts.”  I said last week: “The VIX has to break 12.00 next week or else.”  It hasn’t broken below 12, though it tried last on Fri. the 15th, and the market has made no progress, falling about 10 points for the week. 

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bulls 0.5 point.  Answer: Neutral.  The close was 16,848 vs 16,888 last week.  The number is down from where it was 16 trading days ago, so there has been no progress, even as the market has edged up a bit above trend.  Last week: “It must make a new high next week or else.”  No breakdown yet, as said, but no break to the upside in this parameter makes it “Neutral.”

4. Higher volume on Up Moves?  Lower volume on Down moves? Bulls 0.5 point.  Answer: Neutral.  Volume has not been impressive on either the Bullish or Bearish side.

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  Bulls 0.5 point.  Answer : Neutral.  Now it’s been a full FIFTEEN market days, and SAME: “small caps have not broken above the longer term range while mid caps have been holding above that level for 15 days – but not by much.  The mid cap breakout did not reverse, but it also did not continue up with the large caps.”

Still true: A small cap breakout would mean the market upside is not done.  On the other hand, with small caps holding below the top of the range for fifteen days straight, I would not be shocked to see a pullback begin.  In July, the small caps traded sideways for 17 days and then rallied a bit, followed by 3 days of sharp downside (but only a small correction) on high volume.  The midcaps did about the same thing.  I doubt the market is going to rally for more than a news related pop, which could be followed by a correction (5-15% drop; scroll down to “New Rules” on my definitions HERE).

Even the impeachment hearings could not inspire either buying OR selling this week.

Let’s check in on the context around the price action of the market by looking at the current Market Risks… 

We have some new earnings data this week…

Earnings Risk/Opportunity: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 with a skip of two weeks until the 8-30-19 data resumes the weekly data sequence (details HERE)… The larger arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  NOTE: 96% of SP500 Index companies have reportedThat was just 5% more than last week. 

Hurrah!  Earnings for 2019 are now projected to grow a whopping 0.1%!  Please do not step on that green shoot!  😉  Note also though that Q2 2020 earnings growth estimates have finally stabilized by moving back up a bit this week while Q1 2020’s data has not.  The market decided (it seems thus far) to skip over the earnings weakness (an earnings shrinkage vs. the prior year) in Q2-Q4 2019 and look ahead to better times.  They had better show up!

For Q2 2019, analysts are projecting earnings growth of 0.1%  —> -1.3% ->  —> -2.1%  —> -2.6% -> -2.6% -> -3.0% -> -1.9% -> -2.6%-> -1.0% -> -0.7% -> -0.4%  DONE

and revenue growth of 4.6%  —> 4.3%  —> 4.1%  —> 3.8% -> 3.8% -> 3.7% -> 3.8% ->4.0% ->4.1% -> 4.1% -> 4.0%  DONE

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% —> -1.9%  —> -3.6% -> -3.7% -> -3.8% -> -3.7% -> -4.1% -> -4.6% -> -4.7% -> -3.7% -> -2.7% -> -2.4% -> -2.3% -> -2.2%

and revenue growth of 4.4%  —> 4.4%  —> 4.2% —> 3.8% —> 3.2% ->  —> 2.9% -> 2.8% -> 2.8% -> 2.8% -> 2.8% -> 2.7% -> 2.6% -> 2.8% -> 3.1% -> 3.2% -> 3.1% -> 3.1%

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% —> 4.9% -> 4.5%  -> 3.9% -> 3.5% -> 3.4% -> 3.2% ->  3.0% -> 2.9% ->2.6% -> 2.3% -> 1.5% -> 0.7% -> -0.4% -> -1.1% -> -1.4% -> -1.4%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3%  —> 4.0%-> 4.0% -> 4.0% -> 4.0% -> 3.8% -> 3.7% -> 3.6% -> 3.6% -> 3.6% -> 3.5% -> 3.2% -> 3.0% -> 2.6% -> 2.6% -> 2.5% -> 2.5%

For CY 2019, analysts are projecting earnings growth of  3.4%  —> 3.2%  —> 2.7%  —> 1.7%  —> 1.4% -> 1.3% -> 1.3% -> 1.3% -> 1.2% -> 1.1% -> 0.7% -> 0.6% -> 0.3% -> 0.1% -> 0.0% -> 0.1%

and revenue growth of 4.7%  —> 4.7%  —> 4.5%  —> 4.4%   —> 4.3% -> 4.2% -> 4.1% -> 4.1% -> 4.1% -> 4.1% -> 4.0% -> 4.0% -> 4.0% -> 4.0% -> 3.9% -> 3.8%

For Q1 2020, analysts are projecting earnings growth of 10.5% —> 9.8%  —> 8.5% -> 8.2% -> 8.1% -> 7.9% -> 7.9% -> 7.8% -> 7.6% -> 7.3% -> 6.7% -> 6.0% -> 5.6% -> 5.3% -> 5.1% -> 5.3%

and revenue growth of 6.2%  —>5.8%  —> 5.6% -> 5.7% -> 5.5% -> 5.5% -> 5.4% -> 5.4% -> 5.5% -> 5.3% -> 4.8% -> 4.7% -> 4.5% -> 4.5% -> 4.5% -> 4.4%

For Q2 2020, analysts are projecting earnings growth of 13.3%  —> 13.5% -> 12.0% ->12.6% -> 10.7 -> 9.9% -> 9.3% -> 9.2% -> 9.1% -> 9.0% -> 9.0% -> 8.7% -> 8.6% -> 7.7% -> 7.3% -> 6.7% -> 6.6% -> 6.4% -> 6.7%

and revenue growth of 6.8% —> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4% -> 6.5% -> 6.4% -> 6.4% -> 6.3% -> 6.3% -> 6.3% -> 5.9% -> 5.2% -> 5.2% -> 4.9% -> 5.0% -> 4.9% -> 4.9%

For CY 2020, analysts are projecting earnings growth of 10.7% -> 10.6% -> 10.6% -> 10.6% -> 10.5% -> 10.6% -> 10.4% -> 9.9% -> 9.8% -> 9.7% -> 9.7% -> 9.9%

and revenue growth of 5.6% -> 5.6% -> 5.6% -> 5.6% -> 5.7% -> 5.6% -> 5.3% -> 5.3% -> 5.3% -> 5.4% -> 5.5% -> 5.5%

The earnings and revenue data was already discussed above!

Here’s a Brief Review of the Other Market Risks at Hand:

China Deal Risk: No Change.  The overall market has ignored it.  We are told a deal is imminent, and then it is not.  The Chinese are gaming Trump, and he’s not folding, but he’s bending and says he will make a series of deals, including a first deal that may look light on results.  Xi has the edge as “Lifetime Leader.”

Fed Rate Cut/Hike Risk:  The Fed has cut three times and said it was done unless things get worse for the economy.  Now the probability is 0% for a 4th cut in mid-December as assessed by CME Group The risk was 22.1% 4 weeks ago.  The risk of a rate HIKE is 6.6% now vs. 0% last week. 

As I’ve said previously: “THREE cuts is a mid-cycle adjustment.  Four cuts or more mean the Federal Reserve expects a recession.”  A hike in rates in the near future would tank the U.S. stock market. 

What about January?  The odds of cut #4 is 12.4% vs. 13.9% last week vs. 35.8% two weeks ago vs 67% six weeks ago!   The odds of a HIKE in Jan. are 5.8%. 

What about March?  The odds are 23.3% vs. 25.3% last week vs. 75.1% six weeks ago for 4 or more cuts in total.  March hike?  5.0%.  

April Cut?  34.8% vs. 52.6% last week vs. 79.7% 6 weeks ago expect there to be 4 or more cuts.  April hike?  4.2% odds.

June cut?  43.5% vs. 43.6% last week vs. 56.7% 3 weeks ago expect four or more cuts by then.  Probability of a hike is 3.6% vs. 10.2% last week vs. 0% 2 weeks ago.  

July?  49.4% vs. 48.2% last week 60.7% 3 weeks ago expect 4 cuts by then. A hike? 3.2% vs. 9.2% last week.

What are the rest of the available “4 cut odds”?  Sept. 2020?  58.9% vs. 53.2% last week vs. 38.7% 2 weeks ago vs. 65.2% 3 weeks ago.  Sept. 2020 Hike?  2.6% vs. 8.1% last week.  Nov. 2020 cut: 62.9% vs. 57.3% last week vs. 41.6% 2 weeks ago vs. 69.3% 3 weeks ago.  Nov. hike?  2.3% vs. 7.2% last week.  Dec. 2020 Cut: 66.5% vs. 61.7% last week and 73.8% 3 weeks ago.  Dec. hike?  2.1% vs 6.3% last week.

In sum, the risk of another rate CUT (recession risk goes up) is above 50% first in Sept. 2020 vs. in April last week and continues through December with the odds increasing into 2020 year end.  The risk of a HIKE bizarrely starts in December 2019 (not happening IMO), but the probability of a hike fell for 2020 to the low single digits from last week.  Rate cuts are being pushed out while rate hikes are considered a bit less probable for the entirety of 2020.

SAME: For now, that means a majority of investors believe that recession is on the schedule for 2020, or at least the conditions that will force the Federal Reserve to act to avoid recession or make it a more shallow one.  That means they are ultimately worried about what I call a Big Bear Market (click and scroll to definitions in blue under “New Rules”).

The Risk of a Neutral Fed:  Same. Ultimately the change was NOT positive for the U.S. equity market, but it ignored it.  The market is behaving as if it does not care about the Neutral Federal Reserve despite the fact that the President is pleading for more cuts as the market moved higher and now has stalled out. 

Takeaway Point SAME:  The Federal Reserve is not just “in Neutral,” it’s politically STUCK IN NEUTRAL! (or it will be perceived the Fed is political and anti-Trump – something you have not heard from the mainstream media – their narrative is that Powell is independent of Trump.)

My Investing Scenario shifts a bit this week….

Current Scenario…(modified from prior)

Trading or even adding except doing so blindly by calendar or automated purchases here is tricky.  Even if the market pops a bit as soon as Monday, the prior pattern we saw earlier this year could repeat itself (up slightly off a long consolidation and then down sharply into a mild to moderate correction [5-15%]).  The market could continue higher however if the trade deal is better than thought and/or if the Congress moves to censure or admonish Trump vs. impeach him (he will spin ANY of that to his advantage).   A final high will be reached prior to the discounting of a recession, which brings on a ‘Big Bear Market.’  Whether the market moves up a bit and cracks back, corrects immediately, OR rises now to a final (for the cycle) all time high, we are not yet at the all time high yet.  Got it?  😉

Bottom Line: I am holding my current exposure for now and seeking markets outside the U.S. to add back exposure other than to trim off the exposure represented by my most recent adds (bought some CBRE, EWG, and XLE and sold SPY).  Why?  Because I’m overexposed to the US market at this point in allocation terms, and I would favor a correction from this level before the final all time cycle high is reached.  Yes, global markets could fall too, so I’m moving in steps to “buy foreign.”  If we don’t see a U.S. market drop, there are other markets to buy without chasing a market I am already overexposed to.

U.S. Iran War Risk: No change this week.  More stable after the leak of the “Iran Annihilation Plan HERE.  

2020 Election Risk: The Democrats were unable despite compelling testimony that Trump did something wrong (Newsbreak: He did) to move public opinion toward conviction.  Without that, impeachment may look like a game they are playing and people don’t like games, even if justified at some level.  “They are wasting our time” is the thought.

Why is this happening? Because although Trump et. al. were knee deep with Russia in 2016, they did not engage in an organized conspiracy to work with them.  They just bumbled around in a way that made it necessary for the FBI to investigate.  If you were to meet with key Russians over and over, they would investigate you as well.  The idea that they should not have been doing surveillance is ignorance of reality in my view.

Mueller showed clearly the Russians interfered substantially in our election process in 2016.  Trump doesn’t like to admit that because it hurts his “poor baby ego.”  Bottom line?  Trump can use this to assert that because they blamed him for direct collusion, which was unproven, the Ukraine “Drug Deal” as Trump’s own NSA chief Bolton called it, was all the same thing.  It wasn’t, but his illogic will persuade the poorly informed public, and he’ll have a good shot at re-election considering the disarray and far left leanings of the Democrats.

Biden still has to win the Dem nomination for the Dems to win in 2020 IMO.  Bloomberg won’t activate the Dem base as a billionaire who ran stop/frisk ops in NYC as much as it made the city safer.  The Democrats are actively weakening their best chance, because they are leaning too far left.   They make fun of Biden, who is a mostly cured, but not entirely cured stutterer, which he has shared before but not widely until a recent article came out.  So try to be kind if he has trouble getting a word out!   Unless you are perfect of course…  😉  I don’t like all his policy choices, but I do respect his work on behalf of our country. 

Warren and Sanders are too controlling for voters to fully embrace as they did Obama.  “Medicare for Everybody Who Doesn’t Want It” is their motto or shove it!  We Americans don’t like that except for the elites on the far left that do not want the private sector to compete against  Medicare.  Let them compete I say!  The winner(s) will be selected based on price and quality!  (Biden is missing this point in his defense of “Medicare for All Who Want It.”  I say it’s an “American argument.”)

Trump Impeachment Risk: Little change but possibly slightly lower.  See above.  Conviction Risk?  Near zero.

Deficit/Debt Threat: No Change: Trump is now beating Obama at something!  The size of his deficit!  Read THIS.  The deficit is up 26% to $964 Billion for fiscal 2019, the HIGHEST IN 7 YEARS!  

I’ll leave this here as a monument to our monumental debt, which could threaten interest rates in the future.  When rates rise, there will be “heck to pay.”  The U.S. dollar remains at risk and having at least 5% gold exposure is a reasonable hedge in any portfolio.  Some say higher, but owning stocks is also a hedge that over time would work out for solid companies, even in the face of very high inflation (not in the case of bankruptcies of course!). 

Back to the charts….

Now take a look at the SP500 chart.  The green line is 2940.91, the
9-21-2018 High preceding the decline ending December 24th.  The long upper yellow line is now at about 3062 at the Friday close.  The two short upper red lines show a narrow range in a gentle up trend, rising ABOVE the prior upper trend line.

As I warned two weeks ago, if the market keeps pushing above that top yellow line (the longer one), there will be an eventual payback.

SP500 Large Cap Index (click chart to enlarge; SPX, SPY):

Market timing the SP500 Index (SPY, SPX). Time for a move!

Time for a move!

Now let’s check in on two “Canary Signals” we’ve been following:

“Intel-igent Market Timing Signal” (Intel; I*NTC; * there to throw off the crawlers!): Neutral.  SAME: “The stock is stuck below the April ATH.  Why should it break out if the U.S. GDP is due to slide to below 1%?  Think about that.  The June 4 high of 57.60 has been exceeded, and the April high of 59.59 is the next test to achieve a new all time high.”

Bank of America (B*AC) Market Timing Signal: Bullish, but needs to push higher soon.  There has been 1 close above 33.05, which was the early 2018 high (I quoted a slightly lower number before as I apparently picked out a slightly lower high in that time frame). This is a major breakout if it holds.  It will only hold if rates keep climbing.  Sell a reversal at least on a close or sell on a close with higher volume IMO. 

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,144 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.  (real time messages are ONLY on StockTwits until Twitter reforms its policies, but we’ll have it as a backup system)

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +5.21% vs. +15.90%.  Sentiment should be peaking if this is in fact a top.  It is not a top.  It could be a temporary top, but it’s not “The Top.”  Follow the direction of the next move and prepare to be disappointed if it’s up (see above). 

Bulls Neutrals Bears
34.24% 36.72% 29.03%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM):

Same: But now 15 days without a breakout as noted above.  “Bad sign that IWM could not break out with the large caps continuing their climb or even match the midcap breakout.  If you see a breakout, it will be a positive sign for at least another Bullish stretch (for large and midcaps too) before the next decline.”

Russell 2000 U.S. Small Cap Index  (click chart to enlarge; IWM, RUT):

Market timing the U.S Small Cap Index (IWM, RUT). Stagnant!

Stagnant! Follow the next move.

 3. Gold Market Timing (GLD): 

No change.

SAME: Things are shifting…  We’ve gone from “recession risk” and “multiple cuts” as well as “don’t fight the Fed” to “Three cuts and done.” 

SAME MAJOR POINT: IF the Fed lags inflation, gold wins, but if it front runs inflation, gold loses on a relative basis.  My contention as said above is that Federal Reserve bias will now be against raising rates prior to the election, so inflation will get a boost!  Gold wins…but it must perform on the charts to prove it! 

Technicals: Gold is just below that key top red line, and slightly above the 2013 lower high.   If it breaks and GDX breaks, I’ll likely be lowering my exposure to gold.  Holding above that 2013 lower high on the chart…for now.

The Gold ETF (click chart to enlarge; GLD): That top red line is 137.80.

Market timing the gold ETF (GLD). Gold on the edge of a move too.

Gold on the edge of a move too.

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

SAME: As long as the Federal Reserve stays “Neutral,” rates will be rangebound barring a left field event, a.k.a. a “Black Swan event.”  Lower rates imply the Fed medicine is not working yet/ever.  I believe it’s a waste of time to lower rates except as a temporary goosing of the economy, and it has a negative impact on savers and on inflation (raises inflation due to down dollar).  I don’t like either of those.  It hurts the poor most of all as they don’t own stocks or real estate.  They don’t even get the positive feedback that it’s good to save money in the bank. 

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

U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX, TLT, TBF): 

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Rates down but in up trend at the moment.

Rates down but in short term up trend at the moment.

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 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 YELLOW for a further U.S. stock market rally with a longer term Bullish and short term Bullish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down.  SAME 11-22-19: Small caps are barely moving.  The top was established on Feb. 25th.  Above there, the Bull will be back in full swing.

The VIX Score will be shown in the context of Bull Market Health Score above to avoid redundancy. 

Gold Signal YELLOW  for a further U.S. stock market rally longer term Bullish Trend and a short term NEUTRAL Gold Trend.  The current pattern is a warning sign.  The longer term Bullish trend will evaporate if it breaks below the current level by much at all.

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. 

Remember, gold may be down but not yet out, because if the Fed lags inflation, gold will win.  Since I am predicting a “lagging Federal Reserve” into the 2020 Election, inflation will win, and gold and oil will win.

From before: “Remember GLD is being used as an indicator for the ECONOMY here.”  If gold continues to rise, it means the market believes real rates will  fall, which in the current context means the global economy is slowing.  That would ultimately hurt U.S. stocks. 

Rate Signal YELLOW for a further stock market rally with a longer term BEARISH and short term Bullish 10 Year Yield Trend.  (Remember: higher rates mean lower bond and Treasury prices). Whether the short term trend should be called Neutral vs. Bullish is arguable at this time, but it’s not Bearish yet. There is actually an even longer term view that says rates have been in a neutral trading pattern since 2011, but the above two views are more practical on a trading/intermediate term investing basis.

I’ll leave this reminder from 9-20-2019’s issue: “Remember, FOUR Fed cuts will NOT be a “mid-cycle adjustment” and would be taken badly by the market ironically, considering the market’s addiction to lower rates.  A fourth cut means the Federal Reserve is seeing recession risk as significantly high.”

Also for Reference:Rates usually RISE slowly in a strong recovery and the stock market rally continues as they rise, as I’ve repeated multiple times on social media and here.  Empirically though, rates that are “lower” (than 3.11%) and are NOT rising rapidly have allowed the market to rise.”

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 57.77 vs. 57.76 last week vs. 57.24 the week before.  Still holds: If it rises above 58.82 and then 60.94, oil and oil stocks will be off to the races.  63.38 would be the next target.  Since May, the price of oil almost appears to have been managed to stay between 50 and 59/barrel.  I wonder why?  😉

Just a reminder: If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  I called the period of rising rates in early October #RateShockII.

Another Reminder: “The risk lately has been ‘Falling Rate Shocks.’  (I changed the term from “Negative Rate Shocks” because there are in fact negative rates in a lot of countries now.  First we had ‘Falling Rate Shock I’ in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error by critics),  ‘Falling Rate Shock II’ in May, and ‘Falling Rate Shock III’ in August.  The Stock Market Bulls had better hope that they don’t get more rate cuts past October. 

Thank you for reading.  Would you please leave your comments below where it says “Leave a Reply”… or ask a question or report a typo… 

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Standard Disclaimer: It’s your money and your decision as to how to invest it.

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.  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.

Copyright © 2019 By Wall Street Sun and Storm Report, LLC All rights reserved.

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Market Timing Brief™ for the 11-15-2019 Close: “SP500 Index Stretches a Bit More to a New High with ZERO Predicted Earnings Growth for 2019. Gold Limping yet Holding the Line. Interest Rates Rangebound on Neutral Fed.”

A Market Timing Report based on the November 15, 2019 Close, published Saturday, November 16th, 2019…

I deliver focused comments on market timing once a week.  These are supplemented with daily “Tweets/StockTwits” (see links below) and comments in the “markettiming” room on StockTwits.

I provide quite a bit of intraweek commentary, and if you don’t see it, you will miss out on quite a bit of context, so please click on the social media links below and have a read…  Thank you as always for being loyal readers and interacting on social media with your questions and comments! 

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

I’m guessing two thirds of my readers focused mostly on the stock market have fallen asleep in the lull of this Bull market.  Have you noticed you attend to the market less when it is climbing steadily?  No problem, when it’s going up!  Why read about what will happen next when what is happening now is so enjoyable?  It is enjoyable.  If you are long, as I am (with some cash for the next pullback), you are also making great money from stocks.  We are still reaping the rewards of ever expanding optimism that all is well, even when it isn’t, as in the China Trade Deal.  It is set to be disappointing from the reports I’ve seen.  A lot promised and little delivered.

And yet the market doesn’t care.  The market also doesn’t care about any other number of risks I’ve been tracking with you for weeks.  Nothing after all matters until it suddenly DOES MATTER.  Then the VIX (volatility index) skyrockets and everyone says “Yeah, we should have seen that coming!”  The President forced out the U.S. Ambassador who was fighting corruption in Ukraine by having the madman Rudi Giuliani smear her – not a problem!  Heck, the market doesn’t even care about financial issues like the Fed going to Neutral, at least for now.

Wait until a sub 1% GDP number finally prints.  Then, maybe someone on Wall Street will care.  The last three pullbacks in the SP500 Index have been about 5.5-7.5%.  Not a lot to be excited about in terms of larger swings.  These moves are far smaller than what we saw back in December, when the total drop off the top was almost exactly 20%.

What is happening “Under the Hood” this week?

The “safe stuff” is still lagging though it rallied this week.  Tech (XLK) is the leader off the Oct. 2nd low this week, followed by the Financials (XLF), Industrials (XLI) and Healthcare (XLV).  Worst were utilities (XLU) and slightly better than worst was Real Estate (REITs; XLRE) .

The picture since Oct. 15th (1 month snapshot): The strongest sectors Industrials (XLI) and Healthcare (XLV) followed by Tech (XLK) and Financials (XLF).  The worst were XLRE then XLU.  Those two were the worst over both time frames.

Rates started to fall again this week, but were up a bit on Friday.  WTI Oil closed near the top of the recent range at 57.76.  I bought a bit more XLE for that reason and the tick up in inflation seen in the CPI this week.  Core CPI Y/Y was reported at 2.3% which puts pressure on the Fed to stick to being Neutral on rates, vs. lowering them.  CPI was 1.8% Y/Y.

Let’s turn to the state of the market…

What would satisfy me that the Bulls are serious?

The Bull Market Health Score this week is still Bulls 4.0/Bears 1.0 vs. Bulls 4.0/Bears 1.0 last week.  The most recent data on the Score have shown that holding at this high score for a couple of weeks in a row led to a correction.  Note my comments on what the market has to do next week to sustain the rally “or else.”

For each checklist item below, I give you the points scored as Bullish or Bearish. 

1. New high? Bulls 1.0  Answer: New all time closing high. Still stretched vs. the prior trend.

2. V*IX trend favorable?  Bulls 1.0  Answer: Yes.  The VIX Game Score is Bulls 7/Bears 0 at a VIX of 12.05 (Friday close) vs. 12.07 the prior week, which is below my “Bull Nirvana” number noted at the base of this report.  The Bulls also took the “bonus” VIX point that I used to refer to in my score.  As Before: “The 2018 low was 10.17, so there is still room to fall.  It was 8.56 in 2017, but earnings were better then and lots of growth was anticipated under the Trump tax cuts.”  The VIX has to break 12.00 next week or else.

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bulls 0.5 point.  Answer: No.  The close was 16,888 vs. 16,883 last week.  The signal has been consolidating while the market has been rising.  It must make a new high next week or else.

4. Higher volume on Up Moves?  Lower volume on Down moves? Bulls 1.0 point.  Answer: Yes.  It was not that impressive, but it was higher on Friday’s move.  The more impressive volume of late has marked the bottoms of moves on red days.  See the 8-23 and 10-02 spikes for example. 

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  Bulls 0.5 point.  Answer : Neutral.  Now it’s been a full TEN market days, and small caps have not broken above the longer term range while mid caps have been holding above that level for 10 days – but not by much.  The mid cap breakout did not reverse, but it also did not continue up with the large caps. This cannot continue for long.

Still true: A small cap breakout would mean the market upside is not done.  On the other hand, with small caps holding below the top of the range for TEN DAYS straight, I would not be shocked to see a pullback begin.  Maybe that happens with the testimony next week of those who were actually on the Ukraine call with Trump and Zelensky.  Just about anything significant among the existing risks or “other” could send this market into at least a few percent correction.  More downside via the political realm would require an increased threat to Trump’s re-electability or to his survival in his current term.

Let’s check in on the context around the price action of the market by looking at the current Market Risks… 

We have some new earnings data this week…

Earnings Risk/Opportunity: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 with a skip of two weeks until the 8-30-19 data resumes the weekly data sequence (details HERE)… The larger arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  NOTE: 91% of SP500 Index companies have reportedThat was just 2% more than last week. 

Earnings growth for 2019 is now expected to be ZERO PERCENT.  And the market is going up on that.  This cannot be sustained without a resumption of global growth.  The market can go up on “nothing” as we saw back in the late 1990’s, until it corrects or crashes 78% as the NASDAQ did in the early 2000’s.  We are not at such an extreme today, but the market is in fact stretched.  Today it’s going up on next to nothing AS AN INDEX. 

Without U.S. earnings growth, investors will eventually be drawn to specific companies in the U.S. that are growing earnings and revenues vs. the index funds, as well as to foreign equity investments and also to yield wherever they can get it, both in and outside the U.S. to come up with a real return above inflation of more than zero!  The SP500 Index could make very little progress in the meantime, despite the current advance.  Investors are being squeezed into the stock market to chase returns they hope will hold up, but which in fact are based on ZERO earnings growth.

For Q2 2019, analysts are projecting earnings growth of 0.1%  —> -1.3% ->  —> -2.1%  —> -2.6% -> -2.6% -> -3.0% -> -1.9% -> -2.6%-> -1.0% -> -0.7% -> -0.4%  DONE

and revenue growth of 4.6%  —> 4.3%  —> 4.1%  —> 3.8% -> 3.8% -> 3.7% -> 3.8% ->4.0% ->4.1% -> 4.1% -> 4.0%  DONE

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% —> -1.9%  —> -3.6% -> -3.7% -> -3.8% -> -3.7% -> -4.1% -> -4.6% -> -4.7% -> -3.7% -> -2.7% -> -2.4% -> -2.3%

and revenue growth of 4.4%  —> 4.4%  —> 4.2% —> 3.8% —> 3.2% ->  —> 2.9% -> 2.8% -> 2.8% -> 2.8% -> 2.8% -> 2.7% -> 2.6% -> 2.8% -> 3.1% -> 3.2% -> 3.1%

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% —> 4.9% -> 4.5%  -> 3.9% -> 3.5% -> 3.4% -> 3.2% ->  3.0% -> 2.9% ->2.6% -> 2.3% -> 1.5% -> 0.7% -> -0.4% -> -1.1% -> -1.4%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3%  —> 4.0%-> 4.0% -> 4.0% -> 4.0% -> 3.8% -> 3.7% -> 3.6% -> 3.6% -> 3.6% -> 3.5% -> 3.2% -> 3.0% -> 2.6% -> 2.6% -> 2.5%

For CY 2019, analysts are projecting earnings growth of  3.4%  —> 3.2%  —> 2.7%  —> 1.7%  —> 1.4% -> 1.3% -> 1.3% -> 1.3% -> 1.2% -> 1.1% -> 0.7% -> 0.6% -> 0.3% -> 0.1% -> 0.0%

and revenue growth of 4.7%  —> 4.7%  —> 4.5%  —> 4.4%   —> 4.3% -> 4.2% -> 4.1% -> 4.1% -> 4.1% -> 4.1% -> 4.0% -> 4.0% -> 4.0% -> 4.0% -> 3.9%

For Q1 2020, analysts are projecting earnings growth of 10.5% —> 9.8%  —> 8.5% -> 8.2% -> 8.1% -> 7.9% -> 7.9% -> 7.8% -> 7.6% -> 7.3% -> 6.7% -> 6.0% -> 5.6% -> 5.3% -> 5.1%

and revenue growth of 6.2%  —>5.8%  —> 5.6% -> 5.7% -> 5.5% -> 5.5% -> 5.4% -> 5.4% -> 5.5% -> 5.3% -> 4.8% -> 4.7% -> 4.5% -> 4.5% -> 4.5%

For Q2 2020, analysts are projecting earnings growth of 13.3%  —> 13.5% -> 12.0% ->12.6% -> 10.7 -> 9.9% -> 9.3% -> 9.2% -> 9.1% -> 9.0% -> 9.0% -> 8.7% -> 8.6% -> 7.7% -> 7.3% -> 6.7% -> 6.6% -> 6.4%

and revenue growth of 6.8% —> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4% -> 6.5% -> 6.4% -> 6.4% -> 6.3% -> 6.3% -> 6.3% -> 5.9% -> 5.2% -> 5.2% -> 4.9% -> 5.0% -> 4.9%

For CY 2020, analysts are projecting earnings growth of 10.7% -> 10.6% -> 10.6% -> 10.6% -> 10.5% -> 10.6% -> 10.4% -> 9.9% -> 9.8% -> 9.7% -> 9.7%

and revenue growth of 5.6% -> 5.6% -> 5.6% -> 5.6% -> 5.7% -> 5.6% -> 5.3% -> 5.3% -> 5.3% -> 5.4% -> 5.5%

The earnings and revenue data was already discussed above!

Here’s a Brief Review of the Other Market Risks at Hand:

China Deal Risk: No Change.  The overall market has ignored it.  We are told a deal is imminent, and then it is not.  The Chinese are gaming Trump, and he’s not folding, but he’s bending and says he will make a series of deals, including a first deal that may look light on results.  Xi has the edge as “Lifetime Leader.”

Fed Rate Cut Risk:  The Fed has cut three times and said it was done unless things get worse for the economy.  Now the probability is 0.7% for a 4th cut in mid-December as assessed by CME Group The risk was 3.7%  last week and and 22.1% 3 weeks ago.

As I’ve said previously: “THREE cuts is a mid-cycle adjustment.  Four cuts or more mean the Federal Reserve expects a recession.” 

What about January?  The odds of cut #4 or even #5 are 13.9% vs. 14.3% last week vs. 35.8% two weeks ago vs 67% six weeks ago! 

What about March?  The odds are 25.3% vs. 23.8% last week vs. 75.1% six weeks ago for 4 or more cuts in total.

April?  52.6% vs. 79.7% five weeks ago expect there to be 4 or more cuts.   June became more interesting, because now the probability of a hike is 10.2% vs. zero last week.  43.6% vs 32.8% last week vs. 56.7% 2 weeks ago expect four or more cuts by then.  July?  48.2% vs. 38.7% last week vs. 60.7% 2 weeks ago expect 4 cuts by then.  What are the rest of the available “4 cut odds”?  Sept. 2020?  53.2% vs. 38.7% last week vs. 65.2% two weeks ago.  Nov. 2020? 57.3% vs. 41.6% 1 week ago vs. 69.3% 2 weeks ago.  Dec. 2020?  61.7% vs. 45.2% last week vs. 73.8% 2 weeks ago.

Fed Hike Risk: What are the “Hike Risks” this week after June’s, which was noted above?  July: 9.2%  Sept.: 8.1%  Nov. 7.2%  Dec. 6.3%. 

In sum, the risk of another rate CUT (recession risk goes up) is above 50% first in April, then again above 50% in Sept. through December with the odds increasing into 2020 year end.  The risk of a HIKE ranges from 5-10% starting in June and continuing through year end 2020.

For now, that means a majority of investors believe that recession is on the schedule for 2020, or at least the conditions that will force the Federal Reserve to act to avoid recession or make it a more shallow one.  That means they are ultimately worried about what I call a Big Bear Market (click and scroll to definitions in blue).

The Risk of  a Neutral Fed:  The market is behaving as if it does not care about the Neutral Federal Reserve despite the fact that the President is pleading for more cuts as the market moves higher and higher.  His pleading and harassment of Federal Reserve Chair Powell has more to do with his re-election than the need to cut rates.  If you believe the Federal Reserves job is to run the economy and keep it from cycling to any degree, then the Fed is likely behind on rate cuts.  I think that concept is a horrible idea, because it means excesses are never wrung out of the market until the entire system caves in as it did from 2007-2009.  Creating debt as Trump is when the economy is doing well is also a horrible practice.

This is why I added to XLE this week (from last week):  “The risk is likely going to be on the side of inflation, because the Fed does not want to make a mistake by hiking too early again and kill the recovery and thereby interfere with Trump’s re-election in an obvious way.   That means inflation related assets (think oil) should do well in the coming 3-6 months or perhaps more. Gold will do well too if the Fed is slow (see below) to react...”

Takeaway Point:  The Federal Reserve is not just “in Neutral,” it’s politically STUCK IN NEUTRAL!

My Investing Scenario as stated several weeks ago is still intact…

Current Scenario…

Things improve into year end (well not really, but they’ll ignore that, right?) and at the start of 2020 (economically, but also including the failure of Trump’s conviction in Dec. or Jan. after his successful impeachment along with some sort of China trade progress despite missing elements), so the market rallies further.  A final high is reached prior to the discounting of a recession, which brings on a ‘Big Bear Market.’  Got it?  😉  Could there be some smaller bumps still?  Of course there could, perhaps as Trump’s Senate trial approaches for example.

U.S. Iran War Risk: No change this week.  More stable after the leak of the “Iran Annihilation Plan HERE.  

2020 Election Risk: The level rose this week with the impeachment testimony.  Why? Because the risk of Trump being tainted by impeachment is higher now that we see the professionalism of the foreign service members providing the Ukraine Call testimony.  Trump cann0t be re-elected without more voters than his base and that’s about all that may be left after this is done.  The calculus is NOT to convict Trump, although it’s theoretically possible.  Their goal is to show how bad he is, so he cannot win.  They don’t need a conviction at all.

Trump Impeachment Risk: No change.  Trump will be impeached.  Why? Because they have the evidence on him and the thoroughly dirty Giuliani, who once fought the sort of crimes he has been engaged in.  Sad!  Conviction is still not in sight, but that could change as the process continues.  At the moment though the risk of conviction by the Senate, controlled by Republicans appears low.

If the process were to stop today, Trump would not be convicted despite the testimony this week.  Oddly the Republicans only care about the Constitution when there is a Democrat in the White House.  Plus they are very scared of Trump’s retribution particularly in Republican primaries.  He’s the GOP party mob boss out to get them they think.  Profiles in Courage?  Nowhere in sight.

Deficit/Debt Threat: Trump is now beating Obama at something!  The size of his deficit!  Read THIS.  The deficit is up 26% to $964 Billion for fiscal 2019, the HIGHEST IN 7 YEARS!  

I’ll leave this here as a monument to our monumental debt, which could threaten interest rates in the future.  When rates rise, there will be “heck to pay.”  The U.S. dollar remains at risk and having at least 5% gold exposure is a reasonable hedge in any portfolio.  Some say higher, but owning stocks is also a hedge that over time would work out for solid companies, even in the face of very high inflation (not in the case of bankruptcies of course!). 

Back to the charts….

Now take a look at the SP500 chart.  The green line is 2940.91, the
9-21-2018 High preceding the decline ending December 24th.  The long upper yellow line is now at about 3059 at the Friday close (the extension is not shown, but that’s where it goes to).  The two short upper yellow lines show a narrow range in a gentle up trend, rising ABOVE the prior upper trend line.

This means the market is recruiting the “late coming Bulls,” who are now convinced with the market at all time highs that they should own stocks.  That’s when you start trimming exposure here and there, OR you can sell using mental stops with the intention of buying back exposure later – that’s the process that I coined as “Passive Shorting.”  As I warned last week, if the market keeps pushing above that top yellow line (the longer one), there will be an eventual payback.

SP500 Large Cap Index (click chart to enlarge; SPX, SPY):

Market timing the SP500 Index (SPY, SPX). Rising above the prior trend line.

Rising above the prior trend line.

Now let’s check in on two “Canary Signals” we’ve been following:

“Intel-igent Market Timing Signal” (Intel; I*NTC; * there to throw off the crawlers!): Neutral.  The stock is stuck below the April ATH.  Why should it break out if the U.S. GDP is due to slide to below 1%?  Think about that.  The June 4 high of 57.60 has been exceeded, and the April high of 59.59 is the next test to achieve a new all time high.   

Bank of America (B*AC) Market Timing Signal: Bullish but on pause.  There have been 3 closes above 32.77, the early 2018 high. This is a major breakout if it holds.  It will only hold if rates keep climbing. Rates did NOT keep climbing over the past week, and the stock could be stuck until they continue climbing.  Sell a reversal at least on a close or sell on a close with higher volume IMO. 

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,144 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.  (real time messages are ONLY on StockTwits until Twitter reforms its policies, but we’ll have it as a backup system)

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +15.90% vs. +16.37%.  Same as last week: “Finally, the Bulls are recruiting believers, but they’ve also reached levels of prior pullbacks on the Bullish side (see social media link).  This fits with the trend of SPX being stretched here and subject to a loss of further gains from here.”  What’s the catch?  Bullish spreads could go much higher on a melt-up of the market into December (about double or more vs. the current spread).

Bulls Neutrals Bears
40.72% 34.46% 24.82%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM):

Same: Ten days without a breakout as noted above.  “Bad sign that IWM could not break out with the large caps continuing their climb or even match the midcap breakout.  If you see a breakout, it will be a positive sign for at least another Bullish stretch (for large and midcaps too) before the next decline.”

Russell 2000 U.S. Small Cap Index  (click chart to enlarge; IWM, RUT):

Market timing the U.S Small Cap Index (IWM, RUT). Small caps just can't seem to break out!

Small caps just can’t seem to break out!

 3. Gold Market Timing (GLD): 

No change.  Gold has already slipped below first support and the only reason I did not sell the rest of my trading position is because gold stocks did not break down. 

SAME: Things are shifting…  We’ve gone from “recession risk” and “multiple cuts” as well as “don’t fight the Fed” to “Three cuts and done.” 

MAJOR POINT: IF the Fed lags inflation, gold wins, but if it front runs inflation, gold loses on a relative basis.  My contention as said above is that Federal Reserve bias will now be against raising rates prior to the election, so inflation will get a boost!  Gold wins…but it must perform on the charts to prove it! 

Gold does not do well in a growing economy, because that is when stocks outperform.  A further gold breakdown with rising rates would indicate confidence in the economy turning around.  Remember this: Price represents the sum total consciousness about what is being priced in that moment!  Many factors impact gold prices, but ultimately they all converge to create the current price.  Follow the price and avoid following theories about why the price is what it is. When we can readily explain a price, it’s nice, because we tend to have more confidence in it. 

And the catch with pricing?  Sometimes the market is completely crazy and prices in much more or much less than it should.  It’s then that we need to alternatively, be careful, or start buying!  Last December the market was irrationally pricing stocks too low vs. reality, because it believed the Federal Reserve was on a course that was wrong.

Technicals: Gold is still holding on barely above that key top red line.  If it breaks and GDX breaks, I’ll likely be lowering my exposure to gold. 

The Gold ETF (click chart to enlarge; GLD): That top red line is 137.80.

Market timing the gold ETF (GLD). Must hold the red line!

Must hold the red line!

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

As long as the Federal Reserve stays “Neutral,” rates will be rangebound barring a left field event, a.k.a. a “Black Swan event.”  Last week I said that I wanted to see 3 closes above the prior TNX high of 1.903% to confirm the breakout, and yet TNX closed 3 times above and then failed!  So much for such guidelines.  They are just guidelines of course.

Still, the trend is up definitionally until the value drops below the 11-01 low.  When the whiff of inflation is perceived in incoming data, rates will move up and when economic slowing numbers appear, rates will move back down.

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

U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX, TLT, TBF): 

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Rates failed a breakout, but the immediate trend is still up.

Rates failed a breakout, but the immediate trend is still up.

 

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 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 YELLOW for a further U.S. stock market rally with a Bullish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down.  SAME 11-15-19: Small caps are moving up within a range, the top of which was established on Feb. 25th.  Above there, the Bull will be back in full.

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!)  These are the seven targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94 to 16.09], 17.06, 17.27, and 17.89.  

The VIX Game Score is Bulls 7/Bears 0 at a VIX of 12.05 (Friday close). 

The ‘Bull Nirvana Target’ is 13.31.”  (That is target #7 for the Bulls.)  We’re below that number!

Gold Signal YELLOW  for a further U.S. stock market rally with a NEUTRAL Gold Trend.

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. 

Remember, gold may be down but not yet out, because if the Fed lags inflation, gold will win.  Since I am predicting a “lagging Federal Reserve” into the 2020 Election, inflation will win, and gold and oil will win.

From before: “Remember GLD is being used as an indicator for the ECONOMY here.”  If gold continues to rise, it means the market believes real rates will  fall, which in the current context means the global economy is slowing.  That would ultimately hurt U.S. stocks. 

Rate Signal NEUTRAL for a further stock market rally with a long term BEARISH and short term Bullish 10 Year Yield Trend.  (Remember: higher rates mean lower bond and Treasury prices).

I’ll leave this reminder from 9-20-2019’s issue: “Remember, FOUR Fed cuts will NOT be a “mid-cycle adjustment” and would be taken badly by the market ironically, considering the market’s addiction to lower rates.  ***A fourth cut means the Federal Reserve is seeing recession risk as significantly high.***”

Also for Reference:Rates usually RISE slowly in a strong recovery and the stock market rally continues as they rise, as I’ve repeated multiple times on social media and here.  Empirically though, rates that are “lower” (than 3.11%) and are NOT rising rapidly have allowed the market to rise.”

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 57.76 vs. 57.24 last week.  Still holds: If it rises above 58.82 and then 60.94, oil and oil stocks will be off to the races.  63.38 would be the next target.  Since May, the price of oil almost appears to have been managed to stay between 50 and 59/barrel.  I wonder why?  😉

Just a reminder: If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  I called the period of rising rates in early October #RateShockII.

Another Reminder: “The risk lately has been ‘Negative Rate Shocks.’  (Not negative rates in the U.S. yet!  “Negative” refers to the direction of the shock.)  First we had ‘Negative Rate Shock I’ in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error by critics),  ‘Negative Rate Shock II’ in May, and ‘Negative Rate Shock III’ in August.  The Stock Market Bulls had better hope that they don’t get more rate cuts past October. 

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Standard Disclaimer: It’s your money and your decision as to how to invest it.

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.  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.

Copyright © 2019 By Wall Street Sun and Storm Report, LLC All rights reserved.

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Market Timing Brief™ for the 11-08-2019 Close: “Any U.S. Stock Market Gains from Here Could Be Lost. Gold On the Brink and Treasuries Sliding.”

A Market Timing Report based on the November 8, 2019 Close, published Saturday, November 9th, 2019…

I deliver focused comments on market timing once a week.  These are supplemented with daily “Tweets/StockTwits” (see links below) and comments in the “markettiming” room on StockTwits.

I provide quite a bit of intraweek commentary, and if you don’t see it, you will miss out on quite a bit of context, so please click on the social media links below and have a read…  Thank you as always for being loyal readers and interacting on social media with your questions and comments! 

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

Now that 89% of companies have reported their results for Q3, the earnings growth rate improved to -2.4% this week from -2.7% per FactSet (data below).  For the year, earnings will be up a measly 0.1% vs. last year.   That’s called “flat” and with revenues up only 4% on obviously worse profit margins (that’s what eats away the earnings), and if the stock market value is ultimately determined by what companies can earn on what they sell, why is the stock market up 10.22% Year over Year (Y/Y)?

Earnings for Q1 and Q2 of 2020 also slipped again, but are 5.3% and 6.6%, respectively, for each quarter.  Not so for Q4 of 2019 which started Oct. 1st.  Earnings predictions turned more negative this week (see Earnings section below).  Is the market going to look past yet another quarter of absent to negative earnings growth?

Q3 2019 (the quarter nearly done being reported) will be the third quarter in a row reported by FactSet of NEGATIVE earnings growth.  Is there simply no place else to go but into stocks to find yield?  And when does the whole thing collapse on itself?  We know Trump has bought time with his tax cut stimulus that instead of generating higher tax revenue has increased the 2019 deficit 26% above the 2018 deficit!  This is a game being played with our future as a nation.  In the end, the world will call our bluff.

A bit later I’ll comment on why the U.S. market gains, if any are accrued from here on, could evaporate…

Speaking of the world Ex-U.S., now that the rest of the world is due to pick up in the coming quarters, money will be leaving the U.S. markets or at least not going entirely to them, and will be ending up in places like Europe, Japan, and even China.  The move has already started.  Some still see negative things happening for China, but indexes like FXI and KWEB tell a different story.  I admit the trend of FXI is more up in a longer term sideways move until proven otherwise, but at least one higher high was established for FXI and two for KWEB.  EWJ (Japan) has been trending up since early 2019.  Slowly but surely.  The trend there is stronger than for FXI.

Are you aware that since around July 19th, EWG has been tracking XLK (US Tech sector of SPX), and EWJ has been BEATING XLK?  The dividend for EWG is just over DOUBLE the yield for XLK too (2.59% vs. 1.23%), so you could have made more money in German stocks since July than in U.S. tech.  I bet you did not hear that this week on CNBC did you?

Germany’s economy has been in a slump, and continued strength in EWG will depend on improvement showing up in the next few quarters, but I have started an initial position that I will add to mostly on pullbacks within a continued up trend.  If the signals change, I’ll be out and move the money elsewhere.

Currently as said on social media (see StockTwits link below), I’m over-invested in the U.S. and under-invested everywhere else in terms of “usual maximum exposure.”  That has been a good choice to date, but as just said, things look like they are changing.  Even with the recent small EWG add, I am only 11% exposed to foreign developed countries vs. my usual maximum exposure.  Some of that is U.K. exposure.  Although EWU is off the Brexit low of 2016, it has not established a clear up trend yet.  There is only a short term up trend at the moment.  The British need to get their act together as a nation and then we could see a decent recovery.

By the way, I don’t share raw exposure levels, because you need to think for yourself and tailor what you do to your situation.  The most aggressive allocation would be 1/2 US and 1/2 Non-US, but many advisors suggest a greater weight in U.S. stocks.  “It’s your money and your decision as to how to invest it,” as I like to say.

What is happening “Under the Hood” this week?

It was obvious, but many investors don’t follow anything but stocks.  That’s a mistake.  Interest rates broke out above the prior high for TNX (10 Year Treasury Yield) this week.  And the breakout stuck on Friday.  I need another day of confirmation and so apparently does the gold market, as gold stocks are on the brink of a breakdown of the prior trend.  Yes, all this could reverse on a horrific Trump revelation etc., but we cannot invest based on potential minefields.  No one would ever go to battle, would they, if they said “Captain, I’m not going across that field if there could be mines!”?

My major insight for the week (beyond my seeing the US stock market is stretched) may seem simplistic, but it explains the market and what it is doing.  Interest rates are the main thing we should be watching to determine where to invest.  GDP and earnings growth rates have been failing to impact the market trend for many months despite material slowing of both. 

So what are the choices for rates? 

1. Rates continue to rise.  The Federal Reserve will eventually have to raise rates if the economy continues to improve vs. slow (as it has been doing lately and will be into year end 2019).  That is OK as long as the growth is there, but it’s a big negative if it is not.  Look at how the market reacted to a 0.25% hike in rates in mid-December 2018!

But hear this clearly and remember it: Slowly rising rates are the hallmark of an improving economy.  At the same time, realize that over the span of this economic cycle while rates have been kept low for a long time, distortions have appeared that can threaten the continuation of the expansion, not to mention the rising costs of employing people when companies are running out of qualified candidates.  That reduces profits and slows the growth of the economy.  The Fed has to fight inflation at the end of a cycle and raises rates.  Most new businesses depend on good economic growth to succeed, and low rates help a lot, while higher rates are an impediment.

2. Rates fall.  IF the Federal Reserve does not lower rates and change their current Neutral stance should the economy slow materially from here, and should TNX fall substantially, the stock market will fall hard.  Realize that lowering rates further from here may not even help, so a fourth cut could mean the end of the Bull market.  Could.  Maybe it’s the 5th cut that does it, but you understand the point.  If the Fed has to cut rates materially from here, it means the risk of recession has risen dramatically in their mind.  Since they seem to be erring on the side of NOT lowering rates too much, in my view, a 4th or 5th cut would mean the risk of recession will then be substantial.

3. Rates stay about the same – relatively low.  Generally nothing stays completely flat, but if rates rise and fall gently and slowly within a range of the current 1.9ish%, the stock market should be OK with that.   IF rates stop climbing, financials may not love that, but the Fed has been steepening the yield curve lately by buying lots of short term paper, which is helping them.

What are the other “Under the Hood” Revelations?

The “safe stuff” took a hit yet again this week.  Tech (XLK) has been the leader off the Aug. 5th low, followed by the Financials (XLF) just ahead of the Industrials (XLI).  Everything else ran behind the SP500 Index.  Of note, XLE has moved out of last place, which was taken over by Real Estate (REITs; XLRE) and utilities (XLU).

The picture since Oct. 2nd has changed too this week.  The strongest sectors in the past 5 weeks have been Financials followed by Tech and Industrials, and then barely better than SP500 Index were closely grouped XLV, XLB, and XLE.   Safety continues to do poorly since Oct. 24th with XLU and XLRE running close together as the worst two sectors.  Better than worst was XLP, but it was still weak, and XLY was better than XLP, but also weaker than the SPX.  XLC (Communications) was about market correlated.

I closed those XLP puts for a gain of 26% vs. money at risk this past week.  Booking profits on shorts and revisiting the trade often works better than simply riding a trade to the end.  I was running out of time on those options too, so it was best to close them.  Safety could come back into favor too, IF rates (TNX) slip and reverse course instead of making new highs from here.

Rising rates and a widening spread of interest rates helps the financials.  On cue, they have outperformed.  IF this trend does not continue, they won’t keep their current short term lead.  Bears could in fact say this would be the perfect spot for them to fail.   The 2-2-18 high was 30.33 and we’re at a Friday close of 29.84. Close enough.  If you see them break out, it means the market feels the recovery can continue/will resume despite Q4 slowing of GDP.

Still true: My stretch indicators (“Super Stretched Stocks”) say we could see another push up from here, but if the same pattern repeats from Feb., the gains will all be given back before the market resumes its climb.  

The “Badly Behaving Stocks” are rising in numbers off the recent low. That’s another sign this market may be due for a pause at least. 

Action Conclusions: 

  1. Even Jim Cramer, who seems to many to be the ultimate perma-Bull, because he is often chasing high valuation stocks higher (not bad until they blow up) was saying to take profits this week. If you are over-exposed to equities, this would be a time to rebalance by taking profits and distributing them to other pots.  That way, you can add back to stocks should we get a pullback.  Buy lower, sell higher – that is the method of lowering exposure when things are stretched to take advantage of pullbacks that I coined as “Passive Shorting.” (Google “Passive Shorting” and it should be at the top.)
  2. We are not yet at the final market top of this Bull Market. It’s not likely anyway, because sentiment is still not maxed out.

Let’s turn to the state of the market…

What would satisfy me that the Bulls are serious?

The Bull Market Health Score this week is Bulls 4.0/Bears 1.0 vs. Bulls 3.5/Bears 1.5 last week.

For each checklist item below, I give you the points scored as Bullish or Bearish. 

1. New high? Bulls 1.0  Answer: New all time closing high. But stretched vs. trend.

2. V*IX trend favorable?  Bulls 1.0  Answer: Yes.  The VIX Game Score is Bulls 7/Bears 0 at a VIX of 12.07 (Friday close), which is below my “Bull Nirvana” number noted at the base of this report.  The Bulls also took the “bonus” VIX point that I used to refer to in my score.  The 2018 low was 10.17, so there is still room to fall.  It was 8.56 in 2017, but earnings were better then and lots of growth was anticipated under the Trump tax cuts.

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bulls 1.0 point.  Answer: Yes.  The close was 16,883 vs. 16,866 last week.

4. Higher volume on Up Moves?  Lower volume on Down moves? Bears 0.5 point.  Answer: No.  The bumps up in volume have been on down days lately.  The Friday 0.26% gain came on decreased volume vs. the prior day.  That said, the weekly volume has been rising for the past two weeks as the market has risen a bit. 

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  Bulls 0.5 point.  Answer : Neutral.  Small caps have not broken above the longer term range while mid caps have for 5 days – but not by much.  The mid cap breakout could reverse itself next week.  Could.  A small cap breakout would mean the market upside is not done.

Let’s check in on the context around the price action of the market by looking at the current Market Risks… 

We have some new earnings data this week…

Earnings Risk/Opportunity: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 with a skip of two weeks until the 8-30-19 data resumes the weekly data sequence (details HERE)… The larger arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  NOTE: 89% of SP500 Index companies have reported

For Q2 2019, analysts are projecting earnings growth of 0.1%  —> -1.3% ->  —> -2.1%  —> -2.6% -> -2.6% -> -3.0% -> -1.9% -> -2.6%-> -1.0% -> -0.7% -> -0.4%  DONE

and revenue growth of 4.6%  —> 4.3%  —> 4.1%  —> 3.8% -> 3.8% -> 3.7% -> 3.8% ->4.0% ->4.1% -> 4.1% -> 4.0%  DONE

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% —> -1.9% -> -2.2% -> -3.1% -> -3.5% -> -3.6% -> -3.7% -> -3.8% -> -3.7% -> -4.1% -> -4.6% -> -4.7% -> -3.7% -> -2.7% -> -2.4%

and revenue growth of 4.4%  —> 4.4%  —> 4.2% —> 3.8% —> 3.2% -> 3.1% -> 3.0% -> 3.1% -> 2.9% -> 2.8% -> 2.8% -> 2.8% -> 2.8% -> 2.7% -> 2.6% -> 2.8% -> 3.1% -> 3.2%

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% —> 4.9% -> 4.5%  -> 3.9% -> 3.5% -> 3.4% -> 3.2% ->  3.0% -> 2.9% ->2.6% -> 2.3% -> 1.5% -> 0.7% -> -0.4% -> -1.1%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3%  —> 4.0%-> 4.0% -> 4.0% -> 4.0% -> 3.8% -> 3.7% -> 3.6% -> 3.6% -> 3.6% -> 3.5% -> 3.2% -> 3.0% -> 2.6% -> 2.6%

For CY 2019, analysts are projecting earnings growth of  3.4%  —> 3.2%  —> 2.7%  —> 1.7% -> 1.9%  -> 1.5% -> 1.5% -> 1.4% -> 1.3% -> 1.3% -> 1.3% -> 1.2% -> 1.1% -> 0.7% -> 0.6% -> 0.3% -> 0.1%

and revenue growth of 4.7%  —> 4.7%  —> 4.5%  —> 4.4% -> 4.4% -> 4.3% -> 4.4% -> 4.3% -> 4.2% -> 4.1% -> 4.1% -> 4.1% -> 4.1% -> 4.0% -> 4.0% -> 4.0% -> 4.0%

For Q1 2020, analysts are projecting earnings growth of 10.5% —> 9.8%  —> 8.5% -> 8.2% -> 8.1% -> 7.9% -> 7.9% -> 7.8% -> 7.6% -> 7.3% -> 6.7% -> 6.0% -> 5.6% -> 5.3%

and revenue growth of 6.2%  —>5.8%  —> 5.6% -> 5.7% -> 5.5% -> 5.5% -> 5.4% -> 5.4% -> 5.5% -> 5.3% -> 4.8% -> 4.7% -> 4.5% -> 4.5%

For Q2 2020, analysts are projecting earnings growth of 13.3%  —> 13.5% -> 12.0% ->12.6% -> 10.7 -> 9.9% -> 9.3% -> 9.2% -> 9.1% -> 9.0% -> 9.0% -> 8.7% -> 8.6% -> 7.7% -> 7.3% -> 6.7% -> 6.6%

and revenue growth of 6.8% -> —> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4% -> 6.5% -> 6.4% -> 6.4% -> 6.3% -> 6.3% -> 6.3% -> 5.9% -> 5.2% -> 5.2% -> 4.9% -> 5.0%

For CY 2020, analysts are projecting earnings growth of 10.7% -> 10.6% -> 10.6% -> 10.6% -> 10.5% -> 10.6% -> 10.4% -> 9.9% -> 9.8% -> 9.7%

and revenue growth of 5.6% -> 5.6% -> 5.6% -> 5.6% -> 5.7% -> 5.6% -> 5.3% -> 5.3% -> 5.3% -> 5.4%

The earnings and revenue data was already discussed above!

Here’s a Brief Review of the Other Market Risks at Hand:

China Deal Risk: No Change.  The overall market has ignored it, while the companies effected by it have been held back.  Even those are now recovering (including 5 G companies which are part of the positive narrative) as trade tensions dissipate.  They have a consensus “on principles,” and say 60% of the deal could appear in the first agreement.  

Fed Rate Cut Risk:  The Fed cut a third time and said it was done unless things get worse for the economy.  Now the probability is 3.7% for a 4th cut in mid-December as assessed by CME Group.  The risk was 12.5% last week and 22.1% 2 weeks ago.

As I’ve said previously: “THREE cuts is a mid-cycle adjustment.  Four means they expect a recession.” 

What about January?  The odds of cut #4 or even #5 are 14.3% vs. 35.8% last week vs 67% five weeks ago! 

What about March?  The odds are 23.8% vs. 45.7% last week vs. 75.1% five weeks ago for 4 or more cuts in total.  Now 1.9% vs. 8.3% last week vs 10% five weeks ago vs 35.1% six weeks ago expect 5 cuts by then.

April?  28.8% vs 52.7% last week vs. 79.7% five weeks ago expect there to be 4 or more cuts.  A small minority, now 3.4% vs. 13.2% last week vs. 43.7% five weeks ago, expects the number of cuts to exceed four by April.  June?  32.8% vs. 56.7% last week expect four or more cuts by then.  July?  38.7% vs. 60.7% expect 4 cuts by then.  What are the rest of the available “4 cut odds”?  Sept. 2020?  38.7% vs. 65.2% last week.  Nov. 2020?  41.6% vs. 69.3% last week.  Dec. 2020?  45.2% vs. 73.8% last week.

For now, that means a minority of investors believe that recession is not on the schedule for 2020.  The risk of recession is seen as rising from now as we move through 2020, but does not rise above 50%.  The minority is ultimately worried about what I call a “Big Bear Market (click and scroll to definitions in blue).”

The Risk of  a Neutral Fed:  Same.  Oddly enough, but not surprisingly, the prior mantra of “Don’t fight the Fed” at least for the moment does not matter suddenly, now that the Fed has shifted to “Neutral” as I said they would.   Trump wants more cuts to be sure he’ll be re-elected.  Whether further rate cuts would do anything except goose the stock market higher is highly debatable.

New: The risk is likely going to be on the side of inflation, because the Fed does not want to make a mistake by hiking too early again and kill the recovery and thereby interfere with Trump’s re-election in an obvious way.   That means inflation related assets (think oil) should do well in the coming 3-6 months or perhaps more. Gold will do well too if the Fed is slow (see below) to react, although gold is on the edge of a breakdown.  It must rally from here.

My Investing Scenario as stated several weeks ago is still intact…

Current Scenario…

Things improve into year end (not so much as you’ve seen, but they’ll ignore that, right?) and at the start of 2020 (economically, but also including the failure of Trump’s conviction in Dec. or Jan. after his successful impeachment along with some sort of China trade progress despite missing elements), so the market rallies further.  A final high is reached prior to the discounting of a recession, which brings on a ‘Big Bear Market.’  Got it?  😉  Could there be some smaller bumps still?  Of course there could, perhaps as Trump’s Senate trial approaches for example.

U.S. Iran War Risk: No change this week.  More stable after the leak of the “Iran Annihilation Plan HERE.  

2020 Election Risk: Falling further.  Why?  Because the risk that a moderate fails to be nominated by the Democrats has risen.  Why? Because Michael Bloomberg is going to enter the race it is said, and he’ll steal votes from Biden, who could then lose the nomination to a coalition formed by Sanders and Warren.  There is no proof of it, but think about it.  What does Bernie really want if he’s sincere?  He wants his program enacted.  He could run as Presidential candidate with Warren as VP in case he has a lethal 2nd heart attack.

Sanders and Warren together could win the nomination for Bernie and steer the Democratic Party into a liberal ditch.  After all Warren is nothing but a wannabe Bernie, more or less.  She’s been in the Senate for 6 years.  Bernie has been in Congress since the early 1990’s when I met him on a meridian in South Burlington, VT when he was running for Congress (and Bernie saved my life as the story goes – I nearly left the conversation and walked into 50 MPH traffic; he grabbed my shoulder!  Thanks Bern!  ;)).

Trump will beat them though, (unless he gets himself into even more trouble!) because the 46% of Independents won’t want a socialist state established with a massive healthcare plan without choice they want to force down our throats.  Yeah, Bern and I don’t agree on that.  That’s exactly what we were talking about on that Saturday back in 1992!  I realized this “Liberal Conquest Scenario” a while back.  One will drop out…for the Presidential slot and the other will be the VP candidate.  Maybe they can flip a coin?  😉  Don’t tell them though please, as they might actually win if the anti-Trump sentiment is too high.

Trump Impeachment Risk: No change.  Censure/Admonishment of Trump seems an unlikely path now.  Trump will be impeached.  The Dems want the man labeled.  “Impeached in the U.S.A.”  And he probably deserves it, as Clinton did for his odious behavior and lying.  Impeachment odds are easily above 95%.  Conviction risk will only rise above 5% based on new evidence as I’ve said.

The GOP line is “it was not good what he did, but we don’t believe it’s enough to kick Trump out.”  There WAS a quid-pro-quo, period, but they don’t want to kick Trump out for his antics, which may in fact have been unconstitutional.  Subverting the will of Congress has been done before, so no biggie!  Obama did it by sending blankets instead of the lethal aid that Congress approved is what the boot licking Rand Paul is saying.  The way this is headed, Trump will NOT be convicted and he’ll use that in his commericials.

Deficit/Debt Threat: Trump is now beating Obama at something!  The size of his deficit!  Read THIS.  The deficit is up 26% to $964 Billion for fiscal 2019, the HIGHEST IN 7 YEARS!  

I’ll leave this here as a monument to our monumental debt, which could threaten interest rates in the future.  When rates rise, there will be “heck to pay.”  The U.S. dollar remains at risk and having at least 5% gold exposure is a must in any portfolio.  Some say higher, but owning stocks is also a hedge that over time would work out for solid companies, even in the face of very high inflation (not in the case of bankruptcies of course!). 

Back to the charts…. See that the SP500 Index is now above that top yellow line.  AS BEFORE: The last time the SP500 Index rose well above trend was going into the January 2018 Mini-Melt-up.  If the market keeps pushing above that top yellow line, there will be an eventual payback.  Sentiment will be a guide.

Now take a look at the SP500 chart.  The green line is 2940.91, the
9-21-2018 High preceding the decline ending December 24th.  The upper yellow line is now at about 3058 at the Friday close.

SP500 Large Cap Index (click chart to enlarge; SPX, SPY):

Market timing the SP500 Index (SPY, SPX). Stretched.

Stretched.

Now let’s check in on two “Canary Signals” we’ve been following:

“Intel-igent Market Timing Signal” (Intel; I*NTC; * there to throw off the crawlers!): Bullish.  The June 4 high of 57.60 has been exceeded, and the April high of 59.59 is the next test of a new all time high.   

Bank of America (B*AC) Market Timing Signal: Bullish.  There have been 3 closes above 32.77, the early 2018 high. This is a major breakout if it holds.  It will only hold if rates keep climbing.

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,144 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.  (real time messages are ONLY on StockTwits until Twitter reforms its policies, but we’ll have it as a backup system)

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +16.37% vs. +5.55% last week. Finally, the Bulls are recruiting believers, but they’ve also reached levels of prior pullbacks on the Bullish side (see social media link).  This fits with the trend of SPX being stretched here and subject to a loss of further gains from here.

Bulls Neutrals Bears
40.30% 35.77% 23.93%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM):

Bad sign that IWM could not break out with the large caps continuing their climb or even match the midcap breakout.  If you see a breakout, it will be a positive sign for at least another Bullish stretch before the next decline. 

Russell 2000 U.S. Small Cap Index  (click chart to enlarge; IWM, RUT):

Market timing the U.S Small Cap Index (IWM, RUT). Small caps not breaking out. If they do, it would be very positive.

Small caps not breaking out. If they do, it would be very positive.

 

 3. Gold Market Timing (GLD): 

No change.  Gold has already slipped below support and the only reason I did not sell the rest of my trading position is because gold stocks did not break down. 

SAME: Things are shifting…  We’ve gone from “recession risk” and “multiple cuts” as well as “don’t fight the Fed” to “Three cuts and done.”  That raises the risk for the gold trade, because inflation is set to rise over the next few months. 

MAJOR POINT: IF the Fed lags inflation, gold wins, but if it front runs inflation, gold loses on a relative basis.  My contention is that Federal Reserve bias will now be against raising rates prior to the election, so inflation will get a boost!  Gold wins…but it must perform on the charts to prove it!

I’ve been warning you that…

“When inflation starts to rise again [and the Fed hikes rates] we MAY have to sell our trading positions in gold.”

By itself, the Fed declaring itself NEUTRAL would be negative for gold”  It WAS!

Technicals: I said 3 weeks ago: “The G*LD trend will be negative below 139.35.”  It tested 137.80 and then bounced.  The close Friday was 137.39.  If you sold the rest, I don’t blame you, but Monday will be a stronger “tell” IMO.   

Still true: GLD must rise above the 10-25-19 high now.  If it does, you may want to add to your long position.  Use mental stops on your trading GLD position. 

The Gold ETF (click chart to enlarge the chart; GLD): That top red line is 137.80.

Market timing the gold ETF (GLD). Gold is breaking down.

Gold is breaking down. Will gold stocks now follow and confirm the break?

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

Last week:
“I would still bet on somewhat higher rates over the short term with a “Neutral Fed.” 

This week we had a breakout in rates to a higher high over the 1.903% prior high.  That turns the short term trend UP.  Until it reverses, it’s up!  When and if it reverses, I’ll reverse my stance.

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

U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX, TLT, TBF):  Rates broke out vs. the Sept. high this week.  That is 2 closes above; one more would be nice.  And no quick reversal!

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Rates breaking out.

Rates breaking out.

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 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 YELLOW for a further U.S. stock market rally with a Bullish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down.  Small caps are moving up within a range, the top of which was established on Feb. 25th.  Above there, the Bull will be back in full.

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!)  These are the seven targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94 to 16.09], 17.06, 17.27, and 17.89.  

The VIX Game Score is Bulls 7/Bears 0 at a VIX of 12.07 (Friday close). 

The ‘Bull Nirvana Target’ is 13.31.”  (That is target #7 for the Bulls.)  We’re below that number!

Gold Signal YELLOW  for a further U.S. stock market rally with a NEUTRAL Gold Trend.   One could argue that I should change the trend to Bearish this week, but I’m waiting for Monday to see if gold stocks confirm this move.

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. 

Remember, gold may be down but not yet out, because if the Fed lags inflation, gold will win.

From before: “Remember GLD is being used as an indicator for the ECONOMY here.”  If gold continues to rise, it means the market believes real rates will  fall, which in the current context means the global economy is slowing.  That would ultimately hurt U.S. stocks. 

Rate Signal NEUTRAL for a further stock market rally with a long term BEARISH and short term Bullish 10 Year Yield Trend.  (Remember: higher rates mean lower bond and Treasury prices).  That’s a change of the short term trend.

I’ll leave this reminder from 9-20-2019’s issue: “Remember, FOUR Fed cuts will NOT be a “mid-cycle adjustment” and would be taken badly by the market ironically, considering the market’s addiction to lower rates.  ***A fourth cut means the Federal Reserve is seeing recession risk as significantly high.***”

Also for Reference:Rates usually RISE slowly in a strong recovery and the stock market rally continues as they rise, as I’ve repeated multiple times on social media and here.  Empirically though, rates that are “lower” (than 3.11%) and are NOT rising rapidly have allowed the market to rise.”

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 57.24 vs. 56.23 last week.  Still holds: If it rises above 58.82 and then 60.94, oil and oil stocks will be off to the races.  63.38 would be the next target.  Since May, the price of oil almost appears to have been managed to stay between 50 and 59/barrel.  I wonder why?  😉

Just a reminder: If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  The period of rising rates in early October I called #RateShockII.

Another Reminder: “The risk lately has been ‘Negative Rate Shocks.’  (Not negative rates in the U.S. yet!  “Negative” refers to the direction of the shock.)  First we had ‘Negative Rate Shock I’ in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error by critics),  ‘Negative Rate Shock II’ in May, and ‘Negative Rate Shock III’ in August.  The Stock Market Bulls had better hope that they don’t get more rate cuts past October.” 

Thank you for reading.  Would you please leave your comments below where it says “Leave a Reply”… or ask a question or report a typo… 

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Standard Disclaimer: It’s your money and your decision as to how to invest it.

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.  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.

Copyright © 2019 By Wall Street Sun and Storm Report, LLC All rights reserved.

Posted in Bonds, gold, investment, investor sentiment, large cap stocks, S&P 500 Index, small cap stocks, Treasuries | Tagged , , , , , , , , , , , , , , , , , , , , , , | 2 Comments

Market Timing Brief™ for the 11-01-2019 Close: “Fed Shifts to Neutral. Stocks Don’t Care (So Far). Buy or Wait? Gold and Treasuries Undecided.”

A Market Timing Report based on the November 1, 2019 Close, published Saturday, November 2nd, 2019…

I deliver focused comments on market timing once a week.  These are supplemented with daily “Tweets/StockTwits” (see links below) and comments in the “markettiming” room on StockTwits.

I provide quite a bit of intraweek commentary, and if you don’t see it, you will miss out on quite a bit of context, so please click on the social media links below and have a read…  Thank you as always for being loyal readers and interacting on social media with your questions and comments! 

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

Earnings improved again this week vs. expectations (which often happens as companies try to surprise to the upside), just a bit more, although they are still predicted to show negative growth for the quarter vs. Q3 of 2018.  Earnings estimates for upcoming quarters fell, with the fourth Quarter of 2019 turning negative for the first time, since the predictions started for that period (stats are below). 

Earnings for Q1 and Q2 of 2020 also slipped, although they are supposed to grow 5.6% and 6.7%, respectively against the weak 2018 data, but growth is growth. 

There was other big news this week.  The Fed went to “Neutral” as I predicted they would.  Things are just not bad enough to push them to cut a fourth time, until they see further worsening data.  I’ll get into the interest rate outlook later.

Another big data point this week was Q3 GDP, which was 1.93% at the Seasonally Adjusted Annualized Rate level (SAAR, which is the “Headline Number”; they extrapolate one quarter forward for the year).  You can see GDP peaked for Trump in the second quarter of 2018.  The tax bill was signed into law by President Trump on December 22, 2017, which means that the cuts have not kept GDP from sliding.  In part, that was because corporations were able to take repatriated funds and use it to buy back stock rather than INVEST in new businesses and new jobs.  It was a stupid way to design the bill if the GOP’s intention was to stimulate the economy. 

U.S. SAAR GDP Q3 Results in graph back to Q4 2015.

U.S. SAAR GDP Q3 Results Since Q4 2015

On an annualized basis, GDP also peaked in Q2 2018 at 3.2% and is now 2.0%.  That is a Year/Year number, which smooths out the bumps.  You can see the chart HERE.  Click on the five year time frame.  You’ll see that Y/Y GDP peaked under Obama in 2015, not under Trump. 

“Tinkle Down Economics,” as I affectionately call the policy, failed under Reagan, G.W. Bush, and now, surprise, surprise, surprise, under Trump.  Giving more money to the wealthy does not stimulate the economy enough to increase tax revenues to cover the cost.  The deficit for 2019 is 26% above that for 2018 as I shared last week.  Trump is driving up debt in a massive way through poorly directed tax cuts.

What the country needs is the widespread adoption of a strong profit sharing plan whereby loyal employees share in the profits just as shareholders do!  I’ve written about the way my father treated his workers here before, and that is the model.  You become wealthy (not gold and diamonds on the fixtures wealthy, but wealthy) AND your workers become wealthy.  You make more, but they do well with you.  Try it, you’ll like it!  You’ll also probably have a better chance of ending up in the “Good Place.”  😉

Finally, job numbers were better than expected on Friday with big revisions of prior months as well.  I covered that at StockTwits (see link below).

What is happening “Under the Hood” this week?

The “safe stuff” took a hit this week.  Tech (XLK) has been the hands down leader off the Aug. 5th low followed by Financials (XLF), Industrials (XLI), and Utilities (XLU). Healthcare (XLV) was about market correlated, while behind were Consumer Staples (stuff you have to have; XLP), Real Estate (XLRE), Consumer Discretionary (stuff you like to have; XLY), Communications (XLC), and Materials (XLB) with Energy (XLE) coming in a distant last place.

I then looked at the rise off the Oct. 2nd low, and there is a somewhat different picture:  The strongest sectors in the past month have been Financials, Tech, Healthcare and Industrials (they are very closely grouped with Financials and Tech just a hair above the other two).  Safety continues to do poorly as was the case last week with XLU the worst.  Better than worst from bottom up were XLRE and XLP, both safety plays.  Then came XLY, and just under market correlated was XLE, which has been gaining strength and XLC and XLB which are almost exactly market correlated.

My stretch indicators say we could see another push up from here, but if the same pattern repeats from Feb., the gains will all be given back before the market resumes its climb.

Action Conclusions: 

  1. Last week I said here that you could add equity exposure on a new market high, which occurred on Monday Oct. 28th.  If you did buy, you are already up from there.  Use a stop in my view.  Sometimes the market will reverse off a marginal high, and the market is already stretched as just mentioned.   I added some exposure at the last low, but still have cash to deploy on pullbacks.
  2. Safety has been “out” for a few weeks.  It’s also had a huge multiple expansion.  I am short XLP via puts.  If interest rates continue to rise slowly or stay about flat, safety will continue to do badly.
  3. XLK has just broken to new highs.  Having traded sideways for several months, the gains may not be over.  Apple is still leading the way higher.  If it reverses, watch your stops on new exposure.  Tech has led prior bubbles to the highs, and it will likely do the same again.  That’s where the growth and the margins are.  QQQ is a tech correlated proxy although it is only about 40% tech the last time I looked.
    1. Note tech valuations are getting a bit stretched.  MSFT was one example I have mentioned.  I own some of it, but have trimmed my position to 28% of my Disney position.  We all own MSFT in indexes too, don’t forget!  Stretch in valuations does not mean the market cannot go higher.  See sentiment below.
  4. We are not yet at the final market top of this Bull Market. Sentiment will help us see the top.  It always has.  Sentiment is one of the things no one can hide from us.

Let’s turn to the state of the market…

What would satisfy me that the Bulls are serious?

The Bull Market Health Score this week is Bulls 3.5/Bears 1.5 vs. Bulls 3.0/Bears 2.0 last week.

For each checklist item below, I give you the points scored as Bullish or Bearish. 

1. New high? Bulls 1.0  Answer: New all time high. But stretched vs. trend.  See the chart comments above the SPX chart.

2. V*IX trend favorable?  Bulls 1.0  Answer: Yes.  The VIX Game Score is Bulls 7/Bears 0 at a VIX of 12.30 (Friday close), which is below my “Bull Nirvana” number noted at the base of this report.

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bulls 1.0 point.  Answer: Yes.  The close was 16,866 vs. 16,825 last week.  The only hesitation for further immediate gains is the lack of a new high above the 10-24-19 high.

4. Higher volume on Up Moves?  Lower volume on Down moves? Bears 1.0 point.  Answer: No.  The down volume on Thursday was most impressive this week. 

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  Bulls 0.5 point.  Answer : Neutral.  Small caps and midcaps have to exceed the prior lower highs to confirm the further large cap move.

I looked at what the correlation is between my Bull Market Health Score and market performance here…(click the link to open the PDF; if you trust Microsoft’s WordPress, you can open it!)  I’ve manipulated the numbers to get the two scales to match. There may be an easier way to do this, but in any case, the yellow line is the course of SPX, which is measured vs. its divergence from 3000, then is multiplied by 10.  The Bull Market Health Score in blue is simply the score times 1000.

Bull Market Health Score Graph vs. SP500 Index Weekly Closes

You can see in the graph that the May low, which preceded the actual 6-03-19 low in the SPX was accompanied by a Score of 0.  The first Score peak was at 3.0 and the next market decline, which came in August after Trump slammed China during the trade negotiations led to four Score’s of near zero or zero.  The market had already bounced off a higher low on 8-29-19, but the Score was zero.  If you waited for the next Score above zero (4.0) to show up on 9-06-19, the gain was 1.45% to the Sept top.  The second Score of 4 in a row marked the Sept. high within a few points.  One score of 4.0 on Oct. 11th did NOT mark a high.  Of course, the limitation of the Score is in part due to the lack of day to day data to analyze.  That would be something to look at.

More study is needed, but the Bull Market Health Score data do indicate that when the score is near zero, we should start looking for a bottom to show up (the market can still drop for a couple of weeks while the Score is low) and if it’s 3 or above, we should look for a top to show up, although even one Score of 4 does not necessarily mark a top.  The score can be combined with other technical data perhaps and contribute to actionable entry/exit points. 

Let’s check in on the context around the price action of the market by looking at the current Market Risks… 

We have some new earnings data this week…

Earnings Risk/Opportunity: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 with a skip of two weeks until the 8-30-19 data resumes the weekly data sequence (details HERE)… The larger arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  NOTE: 71% of SP500 Index companies have reported

For Q2 2019, analysts are projecting earnings growth of 0.1%  —> -1.3% ->  —> -2.1%  —> -2.6% -> -2.6% -> -3.0% -> -1.9% -> -2.6%-> -1.0% -> -0.7% -> -0.4%  DONE

and revenue growth of 4.6%  —> 4.3%  —> 4.1%  —> 3.8% -> 3.8% -> 3.7% -> 3.8% ->4.0% ->4.1% -> 4.1% -> 4.0%  DONE

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% —> -1.9% -> -2.2% -> -3.1% -> -3.5% -> -3.6% -> -3.7% -> -3.8% -> -3.7% -> -4.1% -> -4.6% -> -4.7% -> -3.7% -> -2.7%

and revenue growth of 4.4%  —> 4.4%  —> 4.2% —> 3.8% —> 3.2% -> 3.1% -> 3.0% -> 3.1% -> 2.9% -> 2.8% -> 2.8% -> 2.8% -> 2.8% -> 2.7% -> 2.6% -> 2.8% -> 3.1%

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% —> 4.9% -> 4.5%  -> 3.9% -> 3.5% -> 3.4% -> 3.2% ->  3.0% -> 2.9% ->2.6% -> 2.3% -> 1.5% -> 0.7% -> -0.4%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3%  —> 4.0%-> 4.0% -> 4.0% -> 4.0% -> 3.8% -> 3.7% -> 3.6% -> 3.6% -> 3.6% -> 3.5% -> 3.2% -> 3.0% -> 2.6%

For CY 2019, analysts are projecting earnings growth of  3.4%  —> 3.2%  —> 2.7%  —> 1.7% -> 1.9%  -> 1.5% -> 1.5% -> 1.4% -> 1.3% -> 1.3% -> 1.3% -> 1.2% -> 1.1% -> 0.7% -> 0.6% -> 0.3%

and revenue growth of 4.7%  —> 4.7%  —> 4.5%  —> 4.4% -> 4.4% -> 4.3% -> 4.4% -> 4.3% -> 4.2% -> 4.1% -> 4.1% -> 4.1% -> 4.1% -> 4.0% -> 4.0% -> 4.0%

For Q1 2020, analysts are projecting earnings growth of 10.5% —> 9.8%  —> 8.5% -> 8.2% -> 8.1% -> 7.9% -> 7.9% -> 7.8% -> 7.6% -> 7.3% -> 6.7% -> 6.0% -> 5.6%

and revenue growth of 6.2%  —>5.8%  —> 5.6% -> 5.7% -> 5.5% -> 5.5% -> 5.4% -> 5.4% -> 5.5% -> 5.3% -> 4.8% -> 4.7% -> 4.5%

For Q2 2020, analysts are projecting earnings growth of 13.3%  —> 13.5% -> 12.0% ->12.6% -> 10.7 -> 9.9% -> 9.3% -> 9.2% -> 9.1% -> 9.0% -> 9.0% -> 8.7% -> 8.6% -> 7.7% -> 7.3% -> 6.7%

and revenue growth of 6.8% -> —> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4% -> 6.5% -> 6.4% -> 6.4% -> 6.3% -> 6.3% -> 6.3% -> 5.9% -> 5.2% -> 5.2% -> 4.9%

For CY 2020, analysts are projecting earnings growth of 10.7% -> 10.6% -> 10.6% -> 10.6% -> 10.5% -> 10.6% -> 10.4% -> 9.9% -> 9.8%

and revenue growth of 5.6% -> 5.6% -> 5.6% -> 5.6% -> 5.7% -> 5.6% -> 5.3% -> 5.3% -> 5.3%

The earnings and revenue data was already discussed above!

Here’s a Brief Review of the Other Market Risks at Hand:

China Deal Risk: They have a consensus “on principles,” and say 60% of the deal could appear in the first agreement.  We’ll have to wait and see if the market is going to like or be phased by the “Phase One Deal.”

Fed Rate Cut Risk:  The Fed cut a third time and said it was done unless things get worse for the economy.  Now the probability is 12.5% for a 4th cut in mid-December as assessed by CME Group.  The risk was 22.1% last week.

As I’ve said previously: “THREE cuts is a mid-cycle adjustment.  Four means they expect a recession.” 

What about January?  The odds of cut #4 or even #5 are 35.8% now vs 41.5% last week vs. 67% four weeks ago! 

What about March?  The odds are 45.7% vs. 46.3% last week vs. 75.1% four weeks ago for 4 or more cuts in total.  Now 8.3% vs. 9.0% last week vs 10% four weeks ago vs 35.1% five weeks ago expect 5 or 6 cuts by then.  In fact the 6 cut probability is still 0.5% (past 3 weeks).  April?  52.7% vs. 50.1% last week vs. 79.7% four weeks ago expect there to be 4 or more cuts.  A small minority, now 13.2% vs. 11.8% last week vs. 43.7% four weeks ago, expects the number of cuts to exceed four by April.  June?  56.7% expect four or more cuts by then.  July?  60.7% expect 4 cuts by then.  What are the rest of the available “4 cut odds”?  Sept. 2020?  65.2%.  Nov. 2020?  69.3%  Dec. 2020?  73.8%. 

For now, that means over half of investors are still expecting a recession next year.  The risk of recession is seen as rising as we move through 2020.  They are ultimately worried about what I call a “Big Bear Market (click and scroll to definitions in blue).”

The Risk of  a Neutral Fed:  Oddly enough, but not surprisingly, the prior mantra of “Don’t fight the Fed” at least for the moment does not matter suddenly, now that the Fed has shifted to “Neutral” as I said they would.   Trump wants more cuts to be sure he’ll be re-elected.  Whether further rate cuts would do anything except goose the stock market higher is highly debatable.

The market is clearly front-running the improvement in the earnings/revenues data, even as the numbers for Q4 earnings have just turned negative for the first time this week.

My Investing Scenario as stated last week is still intact…

Current Scenario…

Things improve into year end (not so much! but they’ll ignore that, right?) and at the start of 2020 (economically, but also including the failure of Trump’s conviction after his successful impeachment along with some sort of China trade progress despite missing elements; a truce on escalation is in place), so the market rallies further.  A final high is reached prior to the discounting of a recession, which brings on a ‘Big Bear Market.’  Got it?  😉  We may be moving into the final accent in the roller-coaster ride before you grab the bar tightly with both hands and drive all the blood out of them.  😉  Could there be some smaller bumps still?  Of course there could, perhaps as Trump’s Senate trial approaches for example.

“Punchline: As I’ve argued on sentiment terms alone (though we don’t use just one factor), we have not reached the highest high we’ll see prior to the next recession and sizeable market decline.”

U.S. Iran War Risk: More stable after the leak of the “Iran Annihilation Plan HERENo change this week.  Some say there is a 50:50 risk of war with Iran.  I don’t agree.  I think they are dumb, but not that dumb. (not Iranians, the leaders there!)  The dumb leaders should be pursuing freedom and economic improvement/success instead of terrorism and endless wars. 

2020 Election Risk: Falling further.  Why?  Because Joe Biden is not raising much money, and in Iowa, Warren, Sanders and Buttigieg have take the lead by a narrow margin.  I fully support gay right and marriage, because to me, that’s based in the Constitution.  We all have freedom, or we are not a free nation.  But I wondered if Buttigieg could succeed as a candidate in the general election.  My conclusion?  We could be surprised, as he was elected mayor in South Bend, Indiana.  There are about 101,000 in South Bend and 319,000 in the metro area.  It’s 60.5% white and 26.6% African American.  (There are more whites and fewer blacks in the U.S. population as noted in a table HERE.)  The median age is 33.3 years, which admittedly is younger than the national population at 38.1 yrs.

South Bend’s county (St. Joseph County) is split politically almost identically to our country.  The Democrats have the edge, but not by much: “Hillary Clinton garnered about 47 percent of St. Joseph County’s vote on Tuesday, down from the 51 percent that Barack Obama posted here in 2012. Overall, Clinton beat Trump by only 200 votes in the county.”  Ref.  Mayor Pete Buttigieg won by 74% and 80% of the vote, respectively in 2011 and 2015.  That’s impressive.  He’s also a Harvard educated religious man who walks his talk, served in Afghanistan, and at age 37, he’s less likely to have a health issue get in his way than a number of the 70+ year old candidates.  He speaks thoughtfully and coherently.  He came out on top in the last debate.  His performance in the first few states will either present an opportunity for him or cause his campaign to dwindle.  

Other than Biden, all  the serious Democrat candidates have tax policies that will tank corporate earnings and the market, at least for a while.  And then we’d recover off the lows…  Even Biden wants a corporate rate back up at 28%, which is too much in my view.  Ours should match China’s at 25%, as a compromise.

Trump Impeachment Risk: Censure/Admonishment of Trump seems an unlikely path now.  Trump will be impeached.  Impeachment odds are easily above 95%.  Conviction risk will only rise above 5% based on new evidence.

The GOP line is “it was not good what he did, but we don’t believe it’s enough to kick Trump out.”  If anyone thinks there was no “quid pro quo” you’ve either not seen the Godfather, or lack any idea of what it was about.   Mick Mulvaney even publicly admitted there was a “quid pro quo”!  No one spells out “quid pro quos” when shady deals are made.  They are always heavily implied just as in Trump’s case.  His denial is a baldfaced lie.  Trump lies just as Nixon and Clinton did.

Deficit/Debt Threat: Trump is now beating Obama at something!  The size of his deficit!  Read THIS.  The deficit is up 26% to $964 Billion for fiscal 2019, the HIGHEST IN 7 YEARS!  

I’ll leave this here as a monument to our monumental debt, which could threaten interest rates in the future.  When rates rise, there will be “heck to pay.”  The U.S. dollar remains at risk and having at least 5% gold exposure is a must in any portfolio.  Some say higher, but owning stocks is also a hedge that over time would work out for solid companies, even in the face of very high inflation (not in the case of bankruptcies of course!). 

Back to the charts…. See that the SP500 Index is now above that top yellow line.  The last time the SP500 Index rose well above trend was going into the January 2018 Mini-Melt-up.  Sentiment was off the roof.  And then the market crashed into a violent correction in February.  If the market keeps pushing above that top yellow line, there will be an eventual payback.

Now take a look at the SP500 chart.  The green line is 2940.91, the
9-21-2018 High
preceding the decline ending December 24th.  The upper yellow line is now at about 3060, but rises slowly over time.

SP500 Large Cap Index (click chart to enlarge; SPX, SPY):

Market timing the SP500 Index (SPY, SPX). Over the top.

Over the top…by a little.

Now let’s check in on two “Canary Signals” we’ve been following:

“Intel-igent Market Timing Signal” (Intel; I*NTC; * there to throw off the crawlers!): Bullish.  The close was 56.51 after a big breakout on earnings.  This makes the Fed look correct about being in “Neutral” on rates.  Two weeks ago: “Intel is above the prior key level of 50.50 at a 51.36 close, but a move above 53.50 failed previously, so a higher high than that is required for it to turn Bullish.”  The June 4 high of 57.60 and the April high of 59.59 are the next tests.   

Bank of America (BAC) Market Timing Signal: Bullish.  The stock retrace tested the prior breakout above the July high and won… for now.  The direction of rates will determine how far this rally goes.

Two weeks ago: “If the Fed is in fact lowering rates, it makes no sense to chase BAC.  When they stop, and the economy is accelerating, it will be a buy.  The Fed is starting to signal “one more and done,” which is what the market sees as a mid-cycle adjustment as occurred in 1995 and 1998 (max of 3 cuts).  That would help stabilize the banks/financials (XLF).”  The #Fed moved into neutral this week as predicted. 

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,144 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.  (real time messages are ONLY on StockTwits until Twitter reforms its policies, but we’ll have it as a backup system)

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +5.55% vs. +7.33% last week vs. +2.57% the week before!  Hardly any movement in sentiment even at new market highs.  THIS STILL HOLDS FROM LAST WEEK: “That is not that stretched to the Bullish side, so more upside is possible; however, I’d give the edge to the Bears here on sentiment, because the last time Bulls were at these levels was on July 17th and Sept. 18th, both very close to prior highs.  Follow the market, up or down!” But try not to buy it when stretched as it is now.  If you chase it, you must use a stop on new exposure in my view. 

Bulls Neutrals Bears
33.98% 37.59% 28.43%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM):

Still rising… IWM is getting close to the top of the range, but it’s neutral for stocks in general as noted in the summary at the base of this report.  IWM needs to break out above that aqua line.  The small caps could easily rise to the high end of the range at that aqua line before pulling back.  Above that line, the market would be expecting a full recovery of the economy’s growth trajectory.

Russell 2000 U.S. Small Cap Index  (click chart to enlarge; IWM, RUT):

Market timing the U.S Small Cap Index (IWM, RUT). Moving to the prior high.

Moving to the prior high.

 

 3. Gold Market Timing (GLD): 

Things are shifting…  We’ve gone from “recession risk” and “multiple cuts” as well as “don’t fight the Fed” to “Three cuts and done.”  That raises the risk for the gold trade, because inflation is set to rise over the next few months.  If the Fed lags inflation, gold wins, but if it front runs inflation, gold loses on a relative basis. 

I’ve been warning you that…

“When inflation starts to rise again [and the Fed hikes rates] we MAY have to sell our trading positions in gold.”

By itself, the Fed declaring itself NEUTRAL would be negative for gold”

The Federal Reserve declared itself NEUTRAL and gold has yet to make a decision.  Follow the decision! 

Technicals: I said 3 weeks ago: “The G*LD trend will be negative below 139.35.”  It tested 137.80 and then bounced.  The close Friday was 142.56. 

Summary still true: “Rate pressure on gold may not be done yet!  Buy the lows, rather than chase bounces and use stops on current profits.  As said, I keep a core GLD position at all times (do what works for you), but the trades will come and go.  When things change, we change…”  GLD must rise above the 10-25-19 high now.  If it does, you may want to add to your long position.  Use mental stops on your trading GLD position. 

I’ve taken off some gold exposure because of the crosswinds on rates over the next 3-6 months. 

The Gold ETF (click chart to enlarge the chart; GLD): 

Market timing the gold ETF (GLD). Above the triangle. More upside?

Above the triangle. More upside?

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

I would still bet on somewhat higher rates over the short term with a “Neutral Fed.”  I admit that since the market is still expecting the Federal Reserve to lean toward cutting, whether true or not, rates could just wobble around current levels for a while.  If they rise, that would be negative for bonds/Treasuries, good for the dollar, and a negative for gold and gold stocks.  That could also hurt interest rate sensitive investments like REITs and utilities, which have not been doing as well over the past month. (Gold could still work if inflation rises faster than the Fed reacts as said.)”

The initial reaction to the Fed statement was for rates to fall a bit more, although they bounced a bit on Friday.   Why fall?  Because the Fed is still behind the curve in lowering rates per the bond market. (not per me; I think rates are low enough.  I don’t believe in negative real rates.  They are a perversion of modern central banks.)

Downside for Rates:  I’ll leave this here:IF TNX skids further than it has, particularly to a new all time low, that means the bond market expects a U.S. recession, and a U.S. stock market crash (even if it happened slowly in a cascading fashion) could occur, particularly if there were a rapid ‘Negative Rate Shock’ as defined at the base of this report.  It also imply the bond market felt the Fed was doing too little, lowering rates too slowly, and was risking economic slowing and deflation.” 

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

U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX, TLT, TBF):

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Rates still have room to rise on a "Neutral Fed."

Rates still have room to rise on a “Neutral Fed.”

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 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 YELLOW for a further U.S. stock market rally with a Bullish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down.  Small caps are moving up within a range, the top of which was established on Feb. 25th.  Above there, the Bull will be back in full.

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!)  These are the seven targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94 to 16.09], 17.06, 17.27, and 17.89.   The VIX Game Score is Bulls 7/Bears 0 at a VIX of 12.30 (Friday close).  The close was in the mid-range of what I previously called the “bonus number.”  (12.17-12.37)

The ‘Bull Nirvana Target’ is 13.31.”  (That is target #7 for the Bulls.)  We’re below that number!

Gold Signal YELLOW  for a further U.S. stock market rally with a NEUTRAL Gold Trend.   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. 

From before: “Remember GLD is being used as an indicator for the ECONOMY here.”  If gold continues to rise, it means the market believes real rates will  fall, which in the current context means the global economy is slowing.  That will ultimately hurt U.S. stocks. 

Rate Signal NEUTRAL for a further stock market rally with a long term BEARISH and short term Neutral 10 Year Yield Trend.  (Remember: lower rates mean higher bond and Treasury prices)  I said last week: “Rates could rise further on a neutral Fed this week.”  In fact they have fallen a bit since the Weds Fed statement.  The bond market believes the economy is headed toward a recession in 2020.

I’ll add this reminder from 9-20-2019’s issue cited above: “Remember, FOUR Fed cuts will NOT be a “mid-cycle adjustment” and would be taken badly by the market ironically, considering the market’s addiction to lower rates.  ***A fourth cut means the Federal Reserve is seeing recession risk as significantly high.***”

Also for Reference: “Rates usually RISE slowly in a strong recovery and the stock market rally continues as they rise, as I’ve repeated multiple times on social media and here.  Empirically though, rates that are “lower” (than 3.11%) and are NOT rising rapidly have allowed the market to rise.”

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 56.23 vs. 56.66 last week.  Still holds: If it rises above 58.82 and then 60.94, oil and oil stocks will be off to the races.  63.38 would be the next target.  Since May, the price of oil almost appears to have been managed to stay between 50 and 59/barrel.  I wonder why?  😉

Just a reminder: If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  The period of rising rates in early October I called #RateShockII.

Another Reminder: “The risk lately has been ‘Negative Rate Shocks.’  (Not negative rates in the U.S. yet!  “Negative” refers to the direction of the shock.)  First we had ‘Negative Rate Shock I’ in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error by critics),  ‘Negative Rate Shock II’ in May, and ‘Negative Rate Shock III’ in August, which is on pause and awaiting the next pivot.  The Stock Market Bulls had better hope that they don’t get more rate cuts past October. 

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Standard Disclaimer: It’s your money and your decision as to how to invest it.

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.  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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