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 4.0 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.” 

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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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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. 

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 10-25-2019 Close: “Fed to Shift into Neutral? Will ‘Master Market’ Panic? Gold and Treasuries Poised to Make a Move from Higher Lows. The Fed Will Dictate Which Way!”

A Market Timing Report based on the October 25, 2019 Close, published Saturday, October 26th, 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 this week, although they are still predicted to show negative growth for the quarter vs. Q3 of 2018.  Earnings estimates for upcoming quarters fell, even while the market rose this week. 

I’ll preface my remarks below by saying we are headed into a period of slowly “Rising Inflation” as Ray Dalio calls it with slightly “Rising GDP growth,” which could vaporize going into 2020, especially in Q1 2020 (see the earnings stats below).  If the growth part can persist, it’s a fine backdrop for stocks as long as inflation does not get high enough to choke growth off.  Remember that 10 Year Treasury rates near 3.25% were considered negative for U.S. stocks, given the low rates in the rest of the world.

What is happening “Under the Hood” this week?

The “safe stuff” took a hit this week.  Utilities (XLU) dropped to second place (vs. the Aug. low), giving up first place to Tech (XLK).  Apple and Intel have both been on tears UP.  Consumer Staples (XLP; I’m long puts on XLP ) were -0.59% with REITs (XLRE) falling -1.23% on Friday as the market (SPX) rose 0.41%.  Third place went to the Financials (XLF; +0.49%), which did slightly better than the market . 

Over the past week, the strongest sectors were XLE (Energy), XLK, XLI, and XLF.  XLE was the real standout, which smacks of rising inflation to go along with rates creeping up some more in turn bringing along the financials.  If that plays out, the dollar will strengthen on higher rates, and the profit margins/earnings of multinationals will be pressured.

What I don’t particularly like is the fact that my stretch indicators are not expanding.  They have topped out and barely budged last week.  The market looks like it lacks the energy, at least at the moment, to fight it’s way up to significant new highs.

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 3.0/Bears 2.0 vs. Bulls 2.5/Bears 2.5 last week. The Bulls have to take out the July high quickly if the rally is to continue…

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

1. New high? Bulls 0.5  Answer: No, but the market has not sold off from the high except to pull off the ATH (all time high; I always use intraday highs NOT closing highs), which it came very close to touching (less than an SPX point!).  The SP500 Index is above the Sept. high, but below the July high.

2. V*IX trend favorable?  Bulls 1.0  Answer: Yes.  The VIX Game Score is Bulls 7/Bears 0 at a VIX of 12.65 (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 16,825 vs. 16,746 last week.  This is above the prior Sept. high of 16,796.

4. Higher volume on Up Moves?  Lower volume on Down moves? Bulls 0.5 point.  Answer: Split decision.  The volume has not been great either way, so we have a split decision here.  Volume went down a bit on Friday and the market was up.

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  Bears 1.0 point.  Answer : No.  With the large caps near record highs.  Small caps are still badly lagging the market, although they have moved up within the trading range that began last February.  Large caps have moved up in price since the small caps topped out in February. 

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.  

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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

Last week I said: “Earnings projection for Q3, which are being reported now are FALLING not rising as the data comes in.  It had better reverse by next week’s results.”  Earnings did perk up a bit this week with the earnings shortfall moving from -4.7% to -3.7%.

But the earnings for Q4 2019 dropped in the same week from 1.5% to 0.7%.  That makes it look like earnings were pulled back into Q3 from Q4, which was commented upon by some companies.  In addition, Q1 and Q2 of 2020 continued to fall.  Since estimates were first being made for Q1 of 2020 to now, earnings growth has fallen from 10.5% to 6.0%.  For Q2 2020 they’ve been slashed from 13.3% to 7.3%.  That’s not heading in the right direction for those expecting growth to pick up in 2020.  That means the market’s valuation is stretching UP now at a time when Earnings estimates are still FALLING, not rising.  In the end, all companies live and die by growth in earnings and revenues.  When earnings and revenue growth slow (decelerate), stock prices fall.

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

China Deal Risk: No movement.  All happy jawboning this week.  The Phase One Deal is not that great in actuality.  “Soybeans for tariffs not going up” sounds like the gist of it.  A Phase One Deal is still expected by mid-November.  Bottom line is that hurting China’s growth will continue to create negative feedback to U.S. companies.  It could be worth the pain in the end, but show us the money!  Show us the patent protections!  Show us “no forced tech transfers”!

Fed Rate Cut Risk:  Now the probability is 93.5% vs. 91.4% last week the Fed will cut its Fed Funds Rate on October 30th by 0.25% for the 3rd time as assessed by CME GroupAn additional 4th cut in Dec. has DROPPED in probability from 41.7% two weeks ago to 22.1% this week (about the same for the past 3 weeks).

Remember, THREE cuts is a mid-cycle adjustment.  Four means they expect recession. 

What about January?  The odds of cut #4 or even #5 are 41.5% vs. 42% last week vs. 67% three weeks ago! 

What about March?  The odds are 46.3% vs. 46.6% last week vs. 75.1% three weeks ago for 4 or more cuts in total.  Now 9.0% vs. 9.3% last week vs 10% three weeks ago vs 35.1% four weeks ago expect 5 or 6 cuts by then.  In fact the 6 cut probability is now 0.5% (past 2 weeks).  April?  50.1% vs. 52% last week vs. 79.7% three weeks ago expect there to be 4 or more cuts.  A small minority, now 11.8% vs. 13.4% last week vs. 43.7% three weeks ago, expects the number of cuts to exceed four by April.

Two weeks I said the Bulls were lucky the odds of 4 cuts by April was below 50%.  Last week, we crawled back above that 50% mark, and are barely above it now.  I would like this number to fall further to be sure a nearby recession is not in the cards.

For now, that means half of investors are still expecting a recession.  That could be interpreted as Bullish or Bearish depending on who is right and who is wrong!  The Bears will be recruited to the Buyer camp if they are wrong.  The Bulls will break down and sell if they are wrong and a recession is near. Do you see why I follow the market as the ultimate arbitrator?  Some stories matter until they don’t.  Impeachment won’t matter unless it cripples Trump’s re-election chances, but I would not count him out yet.  The stock market has not.  Remember, short term the market is a voting machine, but long term it’s a weighing machine as Ben Graham said.  The weighing machine is currently saying Trump stays for two terms. 

The Risk of  a Neutral Fed:  If the 3rd cut is the end for the Federal Reserve cutting cycle, “Master Market,” as I call the impetuous, little, tantrum-prone boy, may not like that if growth continues slowing.  The Fed will be perceived as falling behind again.  Some say it’s clearly behind now, but I disagree, only because I think the Fed powers have become an overused asset (see my comments last week; link to upper right).

While earlier stating that I thought earnings would “hit the fan,” now that 40% of companies have reported already, it does not seem likely to happen.  The market has decided to front run real improvements in the economy, even as durable goods results and the industrial economy continue down.  If the first 40% to report are an indication, the market does not care that earnings growth has been NEGATIVE for the 3rd quarter in a row (if that sticks for Q3 by the end of the season) per FactSet data.

Even some who have recently been Bearish believe the economy will look better in Q4, while Q1 and Q2 of 2020 are more iffy.  The market seems to be holding out hope that lots of things start improving including multiple risks disappearing (see below).  Ironically, as said, the panic over the Fed lowering rates just a few weeks ago, seems to be dissipating.

The narrative just two weeks ago was that the market was rising on a dovish Fed.  “Don’t fight the Fed.”  Now what??? While some Bears still see the economy as tipping over from late cycle full employment with rising wages and rising inflation with falling operating margins and earnings, others see the glass half full with:

1. Slowly rising rates helping financials earn more.

2. The lack of more Fed cuts being Bullish rather than Bearish.  It would mean our economy does not need any more cuts, while the rest of the world lives in the land of negative yields.

3. Slowly rising to stable energy prices helping energy companies to improve their earnings, while steady supplies of oil etc. keep prices stable.

4.  Continued slow GDP growth, which allows the expansion to go further than anyone thought possible, after already being the longest expansion on record.

IF we assume there is no negative earnings reaction to be had from here out for Q3, then we are in the next phase already, and should expect the market to break out to a brand new all time high.  Otherwise, the market is expecting further slowing leading eventually to recession, whether mild or otherwise.   Even mild recessions can cause 20% market haircuts.

Conclusion: It may be reasonable to add some exposure to your stock portfolio on a move to new highs (go in stages in case of reversal and be willing to sell the new exposure on a reversal as well).  I generally dislike buying “higher” in general vs. waiting for the first pullback after a breakout, but a market that can break out from here could have another decent run up in Q4 and perhaps into Q1 of 2020.

Current Scenario…

Things improve into year end and at the start of 2020 (economically, but also including the failure of Trump conviction after his successful impeachment), 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.  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.”

Caveats?  The biggest one would be a one-term Trump.  The market’s would move down by 20% or more on that.  Why?  Because all the Democrats want to dramatically reverse the Trump corporate tax cuts as well as the tax cuts on the wealthy.  The cuts on corporations matter most to stocks.

U.S. Iran War Risk: More stable after the leak of the “Iran Annihilation Plan HERENo change this week.

2020 Election Risk: Falling.  The Democrats are struggling to come up with a candidate who can win.  Biden appears wounded by the Ukraine Swamp and seems to struggle with the facts in the debates.  Sanders is vulnerable as a self-described socialist to turning off voters who matter in a general election, along with lingering questions about his health.  Patients who have stents are at risk of recurrence of myocardial ischemia, which would result in re-hospitalization (Ref.), as well as bleeding episodes from associated treatment to prevent stent stenosis (Ref.).  The risk of death after stents in a large study looking at over 25,600 patients was about 1.9% with 11% of those patients dying, or 0.2% of the total group.

Warren was shot down by Buttigieg in the last debate for having lots of plans, but little experience in implementing them.  She’s been a teacher mostly.  She lacks an even sort of personality that voters like.  She’s like your liberal aunt on cocaine (you realize Twitter could easily shut an account down for even joking in that way?  “You are spreading rumors of drug addiction!”  What a joke!  I only use Twitter as a back up system to StockTwits now.  Sorry for the inconvenience, but I don’t want to support Twitter as they are autocratic NOT Democratic!  I recommend being able to access BOTH systems though, because of occasional outages.  I will reconnect fully to Twitter if they change their policies to support free speech and when they treat small businesses the same as large businesses.)   I actually like Warren’s passion and energy and think she’s a decent person, but I don’t agree with many of her policies.  I DO like financial regulation as long as it is not over-regulation.  The big banks need to be closely regulated as they were the cause of the Great Recession. 

But Warren wants “free everything” (“free” should be reserved for those in need) and forced single payer healthcare, which even many Democrats do not want. Biden and Buttigieg both want “Medicare for All Who Want It.”

So who is left?  “Crazy Hillary”?  “Crazy” yes for seeing Russian ghosts everywhere she looks, accusing Jill Stein and Tulsi Gabbard as being “Russian assets.”  True or false, she has no access to secret information at this point to support such accusations.

Healthcare Tangent: Sanders and Warren want Medicare for all who want it and who don’t want it.  They also are afraid to find out whether the private sector can BEAT the public sector by letting them compete head to head!  No candidate has yet made that point.  Let them compete and we’ll see who wins!  Everyone will be on Medicare if it’s actually cheaper/better than private insurance.  Logistically how well do you think switching many millions of people over Medicare will go?  Some companies would instantly go bankrupt.  Private insurers and those connected to them in networks would see their stocks crash.  Thousands would lose their jobs, and could have to move to be re-employed by the government in similar jobs. 

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. What they have on him is bad, but not enough to get the Republicans in the Senate to pull the trigger so to speak.

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!). 

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 the next target (now at about 3055 a brand new ATH, but rises slowly over time).

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

Market timing the SP500 Index (SPY, SPX). Up but not yet over!

Up but not yet over!

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. Last week: “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.”  Intel has made great progress in its businesses, evolving from a PC based business to  Cloud Data Centers, the Internet of Things, 5G, and much more.  It broke out on high volume on Friday.  The June 4 high of 57.60 and the April high of 59.59 are the next tests.  The fact that Intel’s business is so strong is a warning that the Bearish notion of a nearby recession could be wrong.  Maybe this is just a mid-cycle adjustment just as Powell has claimed.  If so, he’ll look smarter than Trump in a 6 months.  

Bank of America (BAC) Market Timing Signal: Bullish. In the recent rally off the low, the stock was up ELEVEN days in a row.  That is meaningful.  Last week: “Still true:  A new high is the way for the Bulls to change the picture.  Target?  31.17.”  The stock has closed four times above that 31.17 number, so the breakout looks OK, though the volume has not been as strong as for Intel as a comparison.

Last week: “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 CME data cited supports the notion of “Three Cuts and Done” is all the market will get from the Federal Reserve, which will help the financials, and BAC will be helped along with them. 

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 +7.33% vs. +2.57%.  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!

Bulls Neutrals Bears
35.60% 36.13% 28.27%
Thurs. 12 am CT close to poll

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

IWM is mid range and though rising off the lows, it’s neutral for stocks in general as noted in the summary at the base of this report.   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):

 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”

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 141.86. 

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…”  Technically, GLD has to break up above that yellow triangle shown below.  If it fails to do so, and breaks the other way, we’ll need to exit our gold trades.

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

Market timing the gold ETF (GLD). Gold is leaning up, but faces a neutral Fed.

Gold is leaning up, but faces a neutral Fed.

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

I would bet on HIGHER rates over the short term with a “Neutral Fed.”  That is negative for bonds/Treasuries, good for the dollar, and a negative for gold and gold stocks.

Last Week: “Upside: I think the biggest risk is that the Fed says it is pretty much done with its mid-cycle adjustment of 3 cuts as I’ve been sharing.  That may mean rates keep rising for a while from here.  That could hurt interest rate sensitive investments like REITs, utilities, bonds/Treasuries, and gold.   (Gold could still work if inflation rises faster than the Fed reacts as said.)”

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 could rise further on a neutral Fed.

Rates could rise further 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.  The lag vs. large caps is still a negative. That is a negative divergence in the Index Matrix.

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 12.65 (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. 

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)  We are off a significant low, so the short term trend has changed to neutral.  There is a lower high forming though.  Rates could rise further on a neutral Fed this week. 

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 56.66 and is rising slowly again vs. 53.87 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. 

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 10-18-2019 Close: “SP500 Index Falters at Lower High. How a Neutral Fed Could Scare the Market. Gold and Treasuries at a Decision Point.”

A Market Timing Report based on the October 18, 2019 Close, published Saturday, October 19th, 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 seemed to be OK this week, and yet analysts dropped their estimates for the very earnings being reported.  That’s a negative sign.  I review the earnings and revenue numbers below.

Many companies sporting a Price to Sales ratio of 10-20 or more have entered their own private Bear markets.  VEEV, a high flyer I have picked on in prior issues, is 19.2% off its prior high of 176.90.  It closed at 142.90 on Friday.  There are many other examples.  Despite that fall, VEEV is still selling at 21.83 times sales per Yahoo Finance.  It could fall much further on that basis.  Ten times sales is considered extreme for most companies.  It has an EV/EBITDA ratio of 71.85.  Around 10 is considered a bargain and where I first bought Microsoft (MSFT).  MSFT is now at an EV/EBITDA of 18.78, although it is growing faster than it was when I bought it.  It’s PEG (PE:Growth) ratio is 1.84 while Apple’s is 2.06 (AAPL).

If you say, well VEEV is growing fast, sorry… Its PEG is 3.65.  It is not growing fast enough to justify its current price by that simple measure.  Companies can be valued above where they “should” be and below as well.  A slowing economy increases the danger of being the one holding the bag in terms of the high flying stocks like cloud stocks.   As general advice, be selective if you feel you should still be invested in them.

In chart terms we are at about 81%ish from the base to the top of the channel defined by the two yellow trend lines in the chart below.  The SP500 Index could still reach that upper yellow channel line on the chart below, but the failure of tech to lead on Friday is of concern.  Rotation into safe stocks, when they are already oversubscribed, is also not a healthy sign.

What is happening “Under the Hood” this week?

The “safe stuff” with a dividend is still winning.  Utilities (XLU) continue to outperform every other sector since the Aug. 5th low on up, except for REITs (XLRE) as of this week.  Tech lost momentum this week and is in 3rd place.  Consumer discretionary (XLY) is in 4th.  XLE (energy) is still the worst sector and healthcare (XLV) still lags, but is improving much more rapidly than is XLE.   Margins are falling as noted by FactSet (see link below), which will pressure XLP (cons. staples).  Since our reference low, it has matched the market.

Let’s turn to the state of the market, which has made a lower high vs. the top yellow line in the SP500 Index market timing chart below…

What would satisfy me that the Bulls are serious?

The Bull Market Health Score this week is Bulls 2.5/Bears 2.5 vs. Bulls 4.0/Bears 1.0 last week. The Bulls have to take out the September high quickly if the rally is to continue…

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

1. New high? Bears 1.0  Answer: No.  The market was unable to exceed the previous lower high.  The Bulls could argue for 0.5 points here, because the selling was not very impressive on Friday for the index as a whole.  The problem?  What was under the hood, which I will get to in a bit.

2. V*IX trend favorable?  Bulls 1.0  Answer: Yes.  The VIX Game Score is  Bulls 5/Bears 2 at a VIX of 14.25 (Friday close).

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bulls 1.0 point.  Answer: Yes.  The close was 16,746 vs. 16,686 last week.  Another higher high is needed now above 16.796, the prior high on 9-13-19.

4. Higher volume on Up Moves?  Lower volume on Down moves? Bulls 0.5 point.  Answer: Split decision.  The volume has not been great either way, so we have a split decision here.  Volume did go up on Friday with the selling. 

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  Bears 1.0 point.  Answer : No.  With the large caps near record highs, the smaller stocks should be doing better by now.  Negative.  

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 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% -> -2.2% -> -3.1% -> -3.5% -> -3.6% -> -3.7% -> -3.8% -> -3.7% -> -4.1% -> -4.6% -> -4.7%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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

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

Earnings projection for Q3, which are being reported now are FALLING not rising as the data comes in.  Usually, it’s the opposite.  Estimates are too low and they move up.  We need to follow this closely.  It had better reverse by next week’s results.

The series of earnings projections for Q4 2019 has fallen from the first estimates of 8.1% down to 1.5% this week.  It was 2.3% last week!  Q4 was supposed to save the year.  It’s not going to.  Q1 and Q2 of 2020 earnings estimates also fell significantly this week.

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

China Deal Risk: President Trump made a partial deal, because he needed it politically, as he faces near certain impeachment. Conviction is another thing as I’ve covered in past issues.  I reviewed the deal contents last week (link to upper right). Economic Advisor Larry Kudlow says we’ll have a deal by mid-November.

Fed Rate Cut Risk:  Now the probability is 91.4% vs. 75.4% last week the Fed cuts in October by 0.25% for the 3rd time as assessed by CME Group.  An additional 4th cut in Dec. has DROPPED in probability from 41.7% two weeks ago to 24.5% to 24.3% this week. 

Remember, THREE cuts is a mid-cycle adjustment.  Four means they expect recession. 

What about January?  The odds of cut #4 or even #5 are 42% vs. 38.2% last week vs. 67% two weeks ago! 

What about March?  The odds are 46.6% vs. 44.7% last week vs. 75.1% two weeks ago for 4 or more cuts in total.  Now 9.3% vs. 6.2% last week vs 10% two weeks ago vs 35.1% three weeks ago expect 5 or 6 cuts by then.  In fact the 6 cut probability is now 0.5%.  April?  52% vs 48.5% last week vs. 79.7% two weeks ago expect there to have been 4 or more cuts.  A small minority, now 13.4% vs. 13.0% last week vs. 43.7% two weeks ago, expects the number of cuts to exceed four by April.

Last week I said the Bulls were lucky the odds of 4 cuts by April was below 50%.  This week, we’ve crawled back above that 50% mark.  Let’s see if a trend develops in the coming weeks indicating recession risk is rising further.

The Risk of  a Neutral Fed:  If the 3rd cut is the end for the Federal Reserve cutting cycle, the stock market may not like that if growth continues slowing.  The Fed will be perceived as falling behind again.  Some say it’s clearly behind now, but I disagree, only because I think the Fed powers have become an overused asset.  By their rules they “should” drop rates faster, but is it really helpful?

Look at the stagnation in Europe despite NEGATIVE rates.  We need negative rates like we need a hole in the head.  The attempt to negate the economic cycle is only going to lead to more misery down the road.  Did we learn NOTHING from the Great Recession?  Certainly, many did not.

No change on my game plan…  I’ll stick to the “Roller-coaster Map”:

“As my loyal readers know, if there’s a recession, think of up to MORE than December’s decline TIMES TWO, or a “Big Bear Market” as I call it. 

In sum, the market goes down further as Q3 Earnings hit the fan.  Things should improve into year end and at the start of 2020, so the market then rallies.  A final high is reached prior to the discounting of a recession, which brings on a ‘Big Bear Market.’  Got it?  😉  It’s a roller-coaster we’re now on. “

“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.”

U.S. Iran War Risk: More stable after the leak of the “Iran Annihilation Plan HERE.   That would cause a lot of suffering among the people of Iran, so let’s pray that peace and diplomacy wins out. 

2020 Election Risk: Biden is doing better again in the polls after:

1. He was NOT attacked for involvement in Ukraine by his Dem primary buddies. 

2. He fought Trump back on Trump’s own swampish behavior and the actual facts of the case.

3. Warren was attacked effectively in the debate, particularly by Buttigieg who said having a bunch of plans was not useful if the plans are doomed to fail.  Medicare for All is doomed to fail in my view, because we Americans like freedom over tyranny.  She does not get that.  Bernie also does not get that.   Let them compete I say, and the winner will take massive share.  If the government is more efficient than private insurers, PROVE IT!  That is a point no candidate has used to date.  

A rich nation should make sure ALL have healthcare.  If you have never or recently felt truly sick, or perhaps watched one or both of your parents die slowly as I did, you may not realize how awful that is and how much it can devastate a person’s life.  As a physician, I also know that.  No one should be denied healthcare based on an inability to pay.  Drug and device prices must be regulated, because companies have proven unable to regulate themselves.  It hurts the public interest to have the fools charge France and Germany less than Medicare for expensive drugs.  It’s insanely stupid of our government to suck up to big pharma that way. 

There must be a plan to insure strong profits to pay for the risk of drug development as well as cost controls to prevent abuse.  BUT an accounting should be made for the public funds that LEAD TO DRUG PATENTS!  For years, the government has subsidized this immense research of which I’ve been a part.  My work and that of many others was sponsored by the government, yet private firms can use it to create drugs and pay zero to the government.   (P.S. I do not receive royalties for my work.)

Trump Impeachment Risk: Censure/Admonishment of Trump seems an unlikely path now.  Trump will be impeached.  Impeachment odds are easily above 95%.  And Trump deserves it (or at least formal censure for it; if repeated, he should be kicked out).  What he did was dead wrong.  There are still certifiably brain-dead GOP Congressmen who deny there was any wrong done, despite the fact Trump Chief of Staff Mick Mulvaney said this week there was in fact a “quid pro quo.”  That’s after the White House and GOP were saying over and over there was NO quid pro quo!  He simply declared Trump was doing what was always done in government.  Trading things.  But what he was trading was for DIRT on Biden, his political opponent, not getting Ukraine to prosecute corruption in general.  Hunter Biden being paid a ridiculous sum to lobby the Federal government was wrong, but unfortunately it’s not illegal.

Then to top that off, Trump gave his Doral property the G7 meeting to host.  Unbelievable.  He intends to stuff his pockets with cash by sending business to his properties.  And then he says Biden’s son should not have been paid for work he was not competent to do.  Really?  Give me a break.  If that is not a breach of the emoluments clause of the Constitution, they need to amend it!  Congress would have to approve use of the Doral site to permit it to happen under that clause.  It clearly won’t.

In the end, the GOP seems firm on not convicting on the now proven quid pro quo of military aide for dirt on a political opponent that was clear as day in the Ukraine transcript.  Trump will be impeached, but not convicted as it stands.  The election is now just over a year away, which puts even less pressure on the GOP to impeach Trump.

This still stands: “It will take connecting Trump to foreign campaign contributions to convict him.  The GOP would have to convict on that basis alone.  BUT if the evidence stops with the Ukraine transcript, he won’t be convicted, and he’ll use the “verdict” for his re-election campaign.  The Democrats are taking a risk.”

The market is now confirming “No Trump conviction” AND a win of a second term in 2020.  That could change, but that is the current market reading on Trump.

Deficit/Debt Threat: No important change.  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!). 

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 the next target (now at about 3053 a brand new ATH, but rises slowly over time).

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

Market timing the SP500 Index (SPY, SPX). Lower high must be exceeded by Bulls.

Lower high must be exceeded by Bulls.

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 as last week.  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.

Bank of America (BAC) Market Timing Signal: Neutral. It was up on earnings that beat expectations (which are always adjusted ahead of time and can be fudged in myriad ways)  Still true:  A new high is the way for the Bulls to change the picture.  Target?  31.17.  Still true: 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).

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®.

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 +2.57% vs. -23.65% last week.  The prior (2 weeks ago) -18.07% was good enough for a bounce. Now we’re back to a neutral sentiment spread.  Not helpful in deciding the market’s direction.  At best it tells you sentiment is not stretched.

Bulls Neutrals Bears
33.62% 35.33% 31.05%
Thurs. 12 am CT close to poll

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

It must exceed the early Aug. high to make any more progress.  It’s mid range and neutral for stocks in general as noted in the summary below.

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 still trapped within a range.

Small caps still trapped within a range.

 3. Gold Market Timing (GLD): 

I’ll stand by this for now:

“This is not yet the time to pivot out of gold trades in my view.  As long as the Federal Reserve is still lowering interest rates, gold/gold stocks will do well.  When inflation starts to rise again [and the Fed hikes rates] we MAY have to sell our trading positions in gold.”

The above actually depends on the Fed’s reaction time as inflation rises somewhat over the coming quarters as I explained last week HERE.

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

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

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, but the trades will come and go.  When things change, we change…”

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

Market timing the gold ETF (GLD). Gold set up to make a move. Follow the move!

Gold set up to make a move. Follow the move!

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

Upside: I think the biggest risk is that the Fed says in a couple of weeks it is pretty much done with its mid-cycle adjustment of 3 cuts as I’ve been sharing.  That may mean rates keep rising for a while from here.  That could hurt interest rate sensitive investments like REITs, utilities, bonds/Treasuries, and gold.   (Gold could still work if inflation rises faster than the Fed reacts as said.)

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.” 

All that is true, but it does not mean it’s good policy!  The Fed can help make credit available when tight, but it’s job should not be to manipulate the stock and real estate markets higher.  Stocks should go up when their earnings and revenues go up!  That is a free market vs. a made up one.

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 could move still higher, unless global slowing prevails.

Rates could move still higher, unless global slowing prevails.

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 NEUTRAL SP500 Index trend (I could make an argument for calling it Bullish, but I did not like the tech selling on Friday and the lower high must be taken out now.)  It certainly is not a great place to buy the market.  The stock signal is based on small caps, as they often lead the market down.  Small caps continue to move sideways within a range, the top of which was established on Feb. 25th.

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 = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89.   The VIX Game Score is Bulls 5/Bears 2 at a VIX of 14.25 (Friday close). 

The ‘Bull Nirvana Target’ is 13.31.”  (That is target #7 for the Bulls.) 

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)  We are off a significant low, so the short term trend has changed.

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 climb back above the prior all time high (ATH).”

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 53.87 vs. 54.70 last week, and is barely coming off the low of the range.  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.

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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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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Market Timing Brief™ for the 10-11-2019 Close: “Market Rallies and Falls On the Big Little China Trade Deal. What’s the Upside? Also: How to Manage the Gold Trade as Interest Rates Fluctuate.”

A Market Timing Report based on the October 11, 2019 Close, published Saturday, October 12th, 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):

We are headed into earnings season in earnest in the coming weeks starting on Tuesday.  (Monday banks are closed; equity market is open, but no earnings releases appear to be scheduled.)  The data out so far is worse than what is expected for the SP500 Index as a whole, and we will need to wait for the flood of earnings that is now upon us.  This week alone, as you’ll see in the “Earnings Risk/Opportunity” section, analyst earnings estimates for Q3 dropped 22%.  That number will be refined over and over until we get the final result for Q3.

Earnings Season will entail individual risk to some companies, which will result in sudden bursts of volatility and downside for their stocks, while others will be volatile to the upside.  That is the usual, and the violence inflicted upon the companies trading at Price:Sales of 10-20 times or more will be particularly harsh.  You had better be sure those companies will hit their numbers, and not be caught holding them if at all possible.

In chart terms we are at about 57%ish from the base to the top of the channel defined by the two yellow trend lines in the chart below.  That’s not a great place to add.  Even with the so called “Partial Trade Deal” with China, we are only 0.61% above the close of the previous Friday.

Per the prior Bull argument, the Fed is coming to the rescue of the U.S. from global GDP slowing, but the China trade issue is one thing that is making it easier for the Federal Reserve to lower rates, so what if that goes away? Does the Fed have to cut rates as much?  Probably not, BUT the global economy was already slowing before the tariffs made it all worse, so the Fed will likely continue to cut at least one more time.

What is happening “Under the Hood” this week?

1. Even this week, utilities (XLU) continued to outperform every other sector since the Aug. 5th low on up.  That is even with a significant bump up in rates since Weds.  Only Tech (XLK) is barely below the returns for utilities, with a lower yield of course (1.26% vs. 2.92% for Utilities XLU Ref.).

2.  Still true from last week: “If you believe Utilities represent a signal, then the Fed is not done lowering rates and they may lower them more than expected.  This drives more and more money into utilities until they too are overvalued, and they too fall when the entire market falls as one great sinking ship.”

Use stops on your positions. Mental stops only or set intraday stop-limit orders (set the spread wide enough to allow your sell to go off; to do that, you’ll need to see trades go off in real time.  You won’t always get your fill , which is why you should also set an alert at the sell price to make sure your shares were sold!  In my experience, if you set the spread right on a stop-limit, your trade will go off over 95% of the time.  Check up on the stock/ETF each day if the price is close to your stop and reset the stop as needed.  Limit orders that are not close to the current market price are dangerous in the case of a Flash Crash.  And the other thing is your shares sit there for market makers to pick off if you enter stops into the market, and then they guide the market back up.

3. Second place?  That is taken by XLRE (Real Estate) and XLP (Cons. staples), which are running neck and neck. Nothing else is working noticeably better than the SP500 Index.

4. Warning: (from last week) XLP: If inflation accelerates over the coming couple of quarters, consumer staples will have problems as their input costs rise.  They only work in periods like December.  Falling rates will hurt XLF, while rising rates will help them in general.

Let’s turn to the state of the market, which has made a lower high vs. the top yellow line in the SP500 Index market timing chart below…

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 2.0/Bears 3.0 last week. 

That supports my upside call for the SP500 Index of the top yellow line on the chart below at 3052ish (and rising slowly).

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

1. New high?  Bulls 0.5 point.  Answer: No.  But there is a bounce, so 0.5 pt scored by the Bulls.  Another issue is the weakness across the matrix (see below).

2. V*IX trend favorable?  Bulls 0.5  Answer: Neutral.  The VIX fell to 15.58 at the close Friday, with support at 15.51.  It needs to drop below there to move into a down trend.  However, the V*IX Game Score as I call it is Bulls 4/Bears 3 (7 point scale) as of the close Friday.  The midpoint is the “fulcrum” and the Bulls are one point over it  (details at base of 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 16,686 vs. 16,649 last week.  A higher low was formed, so the up trend has resumed for this indicator.

4. Higher volume on Up Moves?  Lower volume on Down moves? Bulls 1.0 point.  Answer: Yes.  It was OK for large caps and much stronger for small caps, although the latter gave up a lot of ground, when the limited extent of the China deal was revealed, so part of that volume was “distribution” vs. real buying. 

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  Bulls 1.0 point.  Answer : Yes.  The small and mid caps did respond as they should have, with a bit less enthusiasm than expected.   

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 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% -> -0.5% -> -0.8% -> -1.4% ->-1.9% -> -2.2% -> -3.1% -> -3.5% -> -3.6% -> -3.7% -> -3.8% -> -3.7% -> -4.1% -> -4.6%

and revenue growth of 4.4%  —> 4.4%  —> 4.2% —> 3.8% -> 3.8% -> 3.3% -> 3.2% ->3.2% -> 3.1% -> 3.0% -> 3.1% -> 2.9% -> 2.8% -> 2.8% -> 2.8% -> 2.8% -> 2.7%

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% -> 6.3% -> 6.0% -> 5.4% ->4.9% -> 4.5%  -> 3.9% -> 3.5% -> 3.4% -> 3.2% ->  3.0% -> 2.9% ->2.6% -> 2.3%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3% -> 4.3% -> 4.2% ->4.0%-> 4.0%-> 4.0% -> 4.0% -> 4.0% -> 3.8% -> 3.7% -> 3.6% -> 3.6% -> 3.6% -> 3.5%

For CY 2019, analysts are projecting earnings growth of  3.4%  —> 3.2%  —> 2.7% -> 2.6% -> 2.4% -> 2.3% -> 1.7% -> 1.9%  -> 1.5% -> 1.5% -> 1.4% -> 1.3% -> 1.3% -> 1.3% -> 1.2% -> 1.1%

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

For Q1 2020, analysts are projecting earnings growth of 10.5% -> —> 9.8% -> 9.5% ->9.2% >9.0% -> 8.5% -> 8.2% -> 8.1% -> 7.9% -> 7.9% -> 7.8% -> 7.6% -> 7.3%

and revenue growth of 6.2%  —>5.8% -> 5.9% ->5.9% -> 5.7% -> 5.6% -> 5.7% -> 5.5% -> 5.5% -> 5.4% -> 5.4% -> 5.5% -> 5.3%

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%

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%

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

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

The series of projections for Q4 2019 has fallen from the first estimates from 8.1% down to 2.3% this week.  It could turn negative as Q3 is already projected to be, and Q3 earnings fell another notch down this week from -4.1% to -4.6%, a 22% drop as said.  That’s not the directional change you want to see at the very start of earnings.  Of course, the next couple of weeks will be a far greater test.

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

China Deal Risk: President Trump is going to make a partial deal, because he needs it politically, as he faces near certain impeachment. Conviction is another thing as I’ve covered in past issues.

Some of what will be agreed to supposedly:
1. Chinese buy 40-50 Billion in ag products.

2. U.S. does not raise tariffs on 250B in Chinese imports from 25% to 30%.  Not exactly a “concession.”

3. Unspecified provisions governing intellectual property.  We’ll see…

4. The opening of China’s financial services market.  Good for our big banks. They can get even bigger!

5. A ban on using currency as a trade weapon.  Not sure how that works when on one side there are increases in tariffs to match the currency weakening of the other side.

The Big Little China Trade Deal leaves out:

1. Lots of tariffs still in place on agriculture and non-ag goods.

2. Forced tech transfer, which the Chinese deny despite the facts.  Apparently, it’s #FakeNews to them.  😉

3. Chinese subsidies to industries competing with the U.S.

Per the Washington Post: This Trump said is expected to be “papered” over “the next four weeks.”  Trump and Chinese President Xi plan to meet in Chile at an Asian-Pacific leaders summit in mid-NovemberThat’s where they would likely sign a “Part One U.S. China Trade Deal.” 

The farmers, important to Trump’s re-election, say ““This agreement seemingly does nothing to address the crippling tariffs farmers currently face. The promise of additional ag purchases is welcome news but details on timeline, price, commodities and many other questions will have to be answered,” said Brian Kuehl, of Farmers For Free Trade.”

Fed Rate Cut Risk:  Now the probability is 75.4% the Fed cuts in October by 0.25% for the 3rd time as assessed by CME Group.  An additional 4th cut in Dec. has DROPPED in probability from 41.7% to 24.5% this week vs. last week. 

Remember, THREE cuts is a mid-cycle adjustment.  Four means they expect recession. 

What about January?  The odds of cut #4 or even #5 are 38.2% vs. 67% last week!  What this means is the perceived risk of recession has fallen now that there is going to be some sort of limited trade deal and that further tariffs could be put off indefinitely. 

What about March?  The odds are 44.7% vs. 75.1% last week for 4 or more cuts.  Only 10% vs 35.1% last week expect 5 or 6 cuts by then.  April?  48.5% vs. 79.7% last week expect there to have been 4 or more cuts.  A minority, now only 13.0% vs. 43.7% last week, expect the number of cuts to exceed four by April.

Lucky for the Bulls, the expectation that a “Recession Auguring” 4 cuts will be required from now to April has fallen below 50%.  I’d say that is a sign of increasing Bullishness on the economy. 

Even clearer on this today…  I’ll stick to this game plan and “Roller-coaster Map”:

“As my loyal readers know, if there’s a recession, think of up to MORE than December’s decline TIMES TWO, or a “Big Bear Market” as I call it. 

In sum, the market goes down further as Q3 Earnings hit the fan.  Things should improve into year end and at the start of 2020, so the market then rallies.  A final high is reached prior to the discounting of a recession, which brings on a ‘Big Bear Market.’  Got it?  😉  It’s a roller-coaster we’re now on. “

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.

U.S. Iran War Risk: RISING: The Saudi’s shot missiles at an Iranian tanker.  The Iranians did not immediately react, fearing a war with Trump perhaps, but just a few hours ago it was reported that Iran intends to strike back.  We’ve sent more troops and weapons over in the meantime.  If they endanger U.S. troops, the country of Iran will be laid to waste.  That is not in anyone’s best interest.  It costs a trillion dollars or two and lot of our best men and women to do it.  Let’s pray that cooler heads prevail. 

2020 Election Risk: Things can turn from here, but Biden is now at risk due to his swampish behavior in associating himself with an official policy to route out corruption in Ukraine.  He should have recused himself, and his son should not have taken money from Ukraine for doing a job he lacked skills to do.  Still, it’s legal to be a swamp creature in our country, and Trump is yet another swamp animal.  He now has Fox News as his “State TV” station, having driven out Shepard Smith.  Only Chris Wallace is left and he has what is referred to as a “network show.”   It’s Swamp vs. Swamp!  See why I want a third party?  😉

Trump Impeachment Risk: CHANGED.  Censure/Admonishment of Trump seems an unlikely path now.  Trump will be impeached.  It’s all but certain now that the two suspicious guys connected to Ukraine with one way tickets were picked up at the airport.  They were working with Rudi Giuliani to get dirt from Ukraine on the Bidens and were also funneling campaign funds from Ukraine to Trump’s re-election campaign.  All illegal.  Rudi was working for Trump on the Bidens.  So put 2 and 2 together.

Impeachment odds are easily above 95%.  And Trump deserves it (or at least formal censure for it; if repeated, he should be kicked out).  What he did was dead wrong.  He had zero right to target his opponent, while claiming to eliminate corruption from Ukraine.  He was caught red handed and essentially on tape (on transcript), just like Richard Nixon was.  But Trump still may not be convicted. 

It will take connecting Trump to foreign campaign contributions to convict him.  The GOP would have to convict on that basis alone.  BUT if the evidence stops with the Ukraine transcript, he won’t be convicted, and he’ll use the “verdict” for his re-election campaign.  The Democrats are taking a risk.

Right now the market is saying “No Conviction of Trump.”  However, the market may go into fear for a while as the investigation goes on, as with Clinton.  

Deficit/Debt Threat: No important change.  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!). 

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 the next target (now at about 3073 a brand new ATH, but rises slowly over time).

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

Market timing the SP500 Index (SPY, SPX). Partial trade deal bounce!

Market timing the Partial trade deal bounce!

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 as last week, even after the “Mini Trade Deal” 3 day bounce. Intel is above the prior key level of 50.50 at a 52.09 close, but a move above 53.50 failed previously, so a higher high than that is required for it to turn Bullish.

Bank of America (BAC) Market Timing Signal: Neutral. It is in the middle of its range for 2019.  A new high is the way for the Bulls to change the picture.  Target?  31.17.  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. 

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®.

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 -23.65% vs -18.07% last week.  Still no extreme low, but as I said last week, it was already low enough to support a bounce at -18.07%.

Bulls Neutrals Bears
20.31% 35.73% 43.96%
Thurs. 12 am CT close to poll

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

Note the failure to hold a level above 2 of 3 of the August highs.  It could fail right here, but we’ll see.  Large caps are stronger still, and I’ll stick with them.  Specific small cap names are another thing.

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

Market timing the U.S Small Cap Index (IWM, RUT). Bounce above one of three August highs.

Bounce above one of three August highs.

 3. Gold Market Timing (GLD): 

I’ll stand by this for now:

“This is not yet the time to pivot out of gold trades in my view.  As long as the Federal Reserve is still lowering interest rates, gold/gold stocks will do well.  When inflation starts to rise again [and the Fed hikes rates] we MAY have to sell our trading positions in gold.”

The above actually depends on the Fed’s reaction time as inflation rises.  Gold should be safe as long as inflation is ticking up while the Fed is lowering rates or holding steady.   Right now “holding steady” may not be appreciated, unless inflation is rising, but if the China situation does materially improve, interest rates may start to climb and drag the Fed along, endangering the gold trade, if the Fed hikes too aggressively.  So yes, you should be on edge in regard to your gold trading position.  Your core gold position?  My decision has been to hold it as insurance.  Do what you feel is best for you.

Read last week’s post to catch up on the Gold Scenarios of stagflation (slowing GDP growth and rising inflation) and GDP growth with rising inflation, or “GrowFlation” as I’ve called it before (link to upper right).

I said two weeks ago: “The G*LD trend will be negative below 139.35.”  It tested to 137.80 and then bounced.  

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, but the trades will come and go.  When things change, we change…

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

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

Gold on pause.

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

This week, rates rose for three days in a row into Friday, because the market believes a trade deal with China means higher GDP growth, higher inflation, and fewer Fed rate cuts.  The odds cited above from CME Group on Fed rate cuts tell the same story.

I’ll leave this from last week: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 would imply the bond market felt the Fed was doing too little, lowering rates too slowly, and was risking 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). Yields jump on partial trade deal.

Yields jump on partial trade deal.

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.  The bounce is not yet enough to change the Stock Signal.

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!)  These are the targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89.  The bonus target, #8, I am no longer keeping in the main score tabulation.  The Bears have 4 of 7 targets at a VIX of 15.58 (Friday close). 

The ‘Bull Nirvana Target’ is 13.31.”  (That is target #7 for the Bulls.) 

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.

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 Bearish 10 Year Yield Trend.  (Remember: lower rates mean higher bond and Treasury prices)  There has not been enough of a rise of rates to threaten the trends over those two time periods.

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 climb back above the prior all time high (ATH).”

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 54.70 vs. 52.81 last week vs. 55.91 the week before, and is barely coming off the low of  the range.  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.

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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Market Timing Brief™ for the 10-04-2019 Close: “Investors Buy Before a U.S. China Deal is Done. The Risk Our Economic ‘Good Place’ Becomes a ‘Bad Place’ Is Rising. Gold Up a Bit as Rates Slide Back to Prior Low.”

A Market Timing Report based on the October 4, 2019 Close, published Saturday, October 5th, 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):

We are headed into earnings season with investors believing that everything companies are about to say is reasonably priced in.  Why else would they have rallied off the recent low?  I messaged on social media that my indicators had fallen enough to allow for a bounce, and sure enough, we got a bounce.  But there are nearby time periods where similar bounces failed, and this may be a redo of August for example.  There are a number of risks simultaneously facing the stock market. I will cover them one by one below…

In chart terms we are in mid-channel now, which is not the best place to add exposure.  You have about equal downside to upside.

Off the low, I did start buying an initial position in a real estate stock I’ve been tracking for a while.  I combine sound analysis with the technical view and start a position, when the entry looks good, and preferably when the overall market has hit some sort of bottom.

I believe in “Technofundamentals,” which is why “Technofundamentals.com” will take you to this blog.  Why just do an EKG on a heart patient like Bernie Sanders by the way, when you can also do an echo-cardiogram to determine whether his heart has been badly or just mildly damaged by his myocardial infarction (means part of his heart muscle died and at this point they have not said how much has died – it’s why a massive heart attack kills patients; no muscle to pump means no pump…)?  I’ll get back to the Bernie Sanders fallout in a bit.  But seriously why do loads of fundamental stock analysis and not examine the chart to see if investors are buying or selling???  And why don’t chart readers pay close attention to macro risks?  That’s precisely why I evaluate all current market risks here.  It’s because they matter!

What is happening “Under the Hood” this week?

1. The SP500 Index simply fell to and tested the prior trend line on the daily chart up from the August lows (that line is higher than the lower yellow trend line shown on the chart below…) That test succeeded.  There is often a slight overshoot as investors decide whether they’ll come in and buy or not.  They did come in.  The problem as you’ll read later, was their limited enthusiasm!  This bounce is not a healthy bounce.

2. Utilities continued to outperform every other sector since the Aug. 5th low on up.  Why?  Rates fell back to the prior lows!  It’s as simply as that.  IF rates do not make brand new lows, Utilities, REITs, and Treasuries will all suffer depending on the exact rate of acceleration/deceleration of inflation.  (A mild acceleration in inflation, while the economy is decelerating, is not bad for utilities etc. because investors are chasing any positive return they can find.)

If the Fed were to drop interest rates suddenly and by a lot, real yields would plummet, and all the above would work.  If the Fed starts raising rates ahead of inflation, they will do so because the economy is strengthening, and all of the above will be hurt.  Economic growth is the enemy of safe higher yielding investments like REITs and Utilities.  With gold, you have the roadmap of how to assess when it will work HERE.

3. There is a back and forth between those who believes long rates will rise, because the Fed is going to come to the rescue and lower rates much more, and those who don’t think that is needed.  If you believe Utilities represent a signal, then the Fed is not done lowering rates and they may lower them more than expected.  This drives more and more money into utilities until they too are overvalued, and they too fall when the entire market falls as one great sinking ship.  I covered that point last week.

4. Heath care (XLV) stocks bounced with the market, but are still lagging since the Aug. lows.  They are the easiest political target.  Prices of all health products whether appliances or drugs will FALL over the next few years as price controls are instituted.  It’s the only way the system can afford to provide healthcare to everyone.  And there is a common belief by the vast majority of Americans that doing so is the right thing.

5. XLE is the worst performer as oil is retrace testing the early Aug. low.  If inflation ticks up, it will be in part due to an oil rally, so watch the price of oil closely.

6. XLP: If inflation accelerates over the coming couple of quarters, consumer staples will have problems as their input costs rise.  They only work in periods like December.  There will now be a pivot out of this sector as soon as either growth or inflation accelerates.  Read the Ray Dalio section of Tony Robbins “Money: Master the Game” if you want to review his asset allocation model based on GDP  acceleration/deceleration and Inflation acceleration/deceleration, which comprise his “four season” model.  Others have copied his system as he founded the largest hedge fund on the planet, and that’s well worth imitating.  It’s worth a read.

Let’s turn to the state of the market, which has made a lower high vs. the top yellow line in the SP500 Index market timing chart below…

What would satisfy me that the Bulls are serious?

They are sort of serious this week, but the numbers are moving in the right direction.  The Bull Market Health Score this week is Bulls 2.0/Bears 3.0 vs. Bulls 0.5/Bears 4.5 last week.

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

1. New high?  Bulls 0.5 point.  Answer: No.  Last week: “The only ‘good news’ is that despite that lower close, the index has not broken the base of the prior 3 days.  Write down this number: 2957. 73.  If the SPX falls below there, it could do a quick test below and rise again, but it must…or else we’ll see the next leg down from the Sept. high.”

What we saw was a break of that level on Tuesday on a closing basis and then a swoop down on Wednesday, a flush on Thursday with a reversal back up.  Wednesday I pointed out that one of my “stretch indicators” had bottomed, and sure enough the market had as well.  It has predicted multiple lows this year.  But the same thing may happen now as seen in May.  There was a three day bounce and the market turned back down.  There are other holes in this bounce as you see below.

2. V*IX trend favorable?  Bulls 0.5  Answer: Neutral.  The VIX did fall from the same level as the last Aug. high, but the up trend is still intact on the daily chart.  The V*IX Game Score as I call it is barely Bulls 3/Bears 4 (7 point scale) as of the close Friday.  The midpoint is the “fulcrum.”  (details at base of report)

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bulls 0.5 point.  Answer: Neutral.  The indicator has bounced with the market, which is positive, but it did so in May as well and then collapsed to a new low.   The close was 16,649 vs. 16,683 last week, but the indicator is above its July highs.

4. Higher volume on Up Moves?  Lower volume on Down moves? Bears 1.0 point.  Answer: No.  The volume was poor for SPX and miserable for small and mid caps.   

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  Bulls 0.5 point.  Answer : Too early to tell, but off the lows. Both mid and small caps are off their lows, which is positive, but the volume on Friday was miserable.  A Bull could say the chart shows a bounce off the low end of the range that has been in force since the 6-03-2019 low.  It could be a decent trade, but the base in the small caps had better hold! 

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: 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 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% -> -0.5% -> -0.8% -> -1.4% ->-1.9% -> -2.2% -> -3.1% -> -3.5% -> -3.6% -> -3.7% -> -3.8% -> -3.7% -> -4.1%

and revenue growth of 4.4%  —> 4.4%  —> 4.2% —> 3.8% -> 3.8% -> 3.3% -> 3.2% ->3.2% -> 3.1% -> 3.0% -> 3.1% -> 2.9% -> 2.8% -> 2.8% -> 2.8% -> 2.8%

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% -> 6.3% -> 6.0% -> 5.4% ->4.9% -> 4.5%  -> 3.9% -> 3.5% -> 3.4% -> 3.2% ->  3.0% -> 2.9% ->2.6%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3% -> 4.3% -> 4.2% ->4.0%-> 4.0%-> 4.0% -> 4.0% -> 4.0% -> 3.8% -> 3.7% -> 3.6% -> 3.6% -> 3.6%

For CY 2019, analysts are projecting earnings growth of  3.4%  —> 3.2%  —> 2.7% -> 2.6% -> 2.4% -> 2.3% -> 1.7% -> 1.9%  -> 1.5% -> 1.5% -> 1.4% -> 1.3% -> 1.3% -> 1.3% -> 1.2%

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

For Q1 2020, analysts are projecting earnings growth of 10.5% -> —> 9.8% -> 9.5% ->9.2% >9.0% -> 8.5% -> 8.2% -> 8.1% -> 7.9% -> 7.9% -> 7.8% -> 7.6%

and revenue growth of 6.2%  —>5.8% -> 5.9% ->5.9% -> 5.7% -> 5.6% -> 5.7% -> 5.5% -> 5.5% -> 5.4% -> 5.4% -> 5.5%

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%

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%

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

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

The series of projections for Q4 2019 has fallen from the first estimates from 8.1% down to 2.6%.  It could turn negative as Q3 is already projected to be.  Q3 is now being reported.  Of companies with Q3 reports out, 19/21  have reported a surprise per FactSet.  Remember, they lower and then they surprise!  But in the end, what is important is whether earnings are accelerating or decelerating.  Same for revenues.

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

China Deal Risk: President Trump uttered no new threats this week, but keeps saying China is doing horribly etc.  He had better come up with a deal, because if not, the market could tank when he then imposes another 5% to a large subset of tariffs on China.  We need China to grow.  We also need them to respect our intellectual property.  If Trump faces impeachment with a collapsing stock market on “no China deal,” he is more at risk of impeachment.  He’ll make a deal if he can, unless he’s going to “shoot the moon” and tank his own presidency to escape it and build towers all over Russia (which he was considering during the 2016 campaign).  October 15th is the 5% tariff raise deadline Trump imposed on China.

Fed Rate Cut Risk:  Now the probability is 76.4% the Fed cuts in October by 0.25% for the 3rd time as assessed by CME Group. An additional 4th cut in Dec. is at only 41.7% now.  Remember, THREE cuts is a mid-cycle adjustment.  Four means they expect recession. 

What about January?  The odds of cut #4 or even #5 are 67% now.  This means the odds are even higher this week that we are going into a recession.  Is it guaranteed?  Of course not.  It’s just one data point, but be clear that 4 or 5 or more rate cuts in total are NOT a mid-cycle adjustment in an ongoing economic expansion.  It means there is considerable GDP slowing happening.  

What about March?  The odds are 75.1% for 4 or more cuts with some even expecting SIX cuts by then.  Only 35.1% expect 5 or 6 cuts by then.  Last week “44.4% expect a 4th cut by March 202o.”  April?  79.7% expect there to have been 4 or more cuts.  Last week “50.3% by April 2020 (45.2% last week).”  A minority, 43.7%, expect the number of cuts to exceed four by April.

Last week:

“Let’s hope that 4 rate cut probability drops below 50% soon, or it means investors are EXPECTING A RECESSION vs. a further recovery!”

I’ll stick to this game plan and “Roller-coaster Map”:

“As my loyal readers know, if there’s a recession, think up to MORE than December’s decline times two, or a Big Bear Market as I call it. 

In sum, the market goes down further as Q3 Earnings hit the fan.  Things should improve into year end and at the start of 2020, so the market then rallies.  A final high is reached prior to the discounting of a recession, which brings on a ‘Big Bear Market.’  Got it?  😉  It’s a roller-coaster we’re now on. “

U.S. Iran War Risk: Consensus is that Iran was responsible for the attack on Saudi oil interests.  Quiet for now, because Trump hates wars, and Iran was trying to force the U.S. to negotiate with them and end sanctions.  He is saying it’s the Saudi’s decision to react, but it’s not.  It’s ours.  We are the only ones that can save the Saudi kingdom.  If Iran attacks our troops in Saudi Arabia, a major war would begin. And Iran would lose, and we would lose great American soldiers.  Let’s pray for peace!  I think peace is actually more likely, because the alternative is so grim for both sides.  Trump would lose the 2020 Election if he starts another Middle East war based on protecting Saudi oil interests!  That thought is totally Anti-Trump.  That should be crystal clear to all. 

2020 Election Risk: True still: “Trump is purposely attacking Biden as he sees him as his top rival.  He wants to frame the election as “Capitalism vs. Socialism” as it appears Warren is now the #2 pick of the Democrats in the past two polls.” 

Bernie’s health issue is a big problem for his campaign.  I wrote about the history of illness on the campaign trail last week.  They used to hide it.  JFK was one of our sickliest presidents as he had Addison’s Disease among other problems.  Yet the public was not privy to the fact that he nearly died multiple times.  Now we’re aware of almost everything, or so we think.  If Bernie weakens further, he could drop out and cede a lot of his support to Warren, who then would be far ahead of Biden.

Trump Impeachment Risk: Trump may or may not be impeached.  It doesn’t matter (although the market may go into fear for a while over it as with Clinton).  If there is no new evidence, the market says they don’t have enough to kick him out of office. That’s all that will matter unfortunately or fortunately despite the ups and downs the process may create over the next few months.

As I said last week:

I think they have to at least “admonish” him as they did President James Buchanan as described HERECensure could make him un-electable, so they will try to avoid it, but they will censure him if the evidence is bad enough.  If the Democrats cannot get a conviction, they’ll settle for “admonishment” or formal censure.  Of course, that is a matter for negotiation and the Democrats could end up with “nothing” if they don’t agree to censure or less prior to a Senate trial, and then, if vindicated by the Senate, Trump will be able to say he was vindicated by the Senate, which we all know has it’s limitations due to partisanship.  Still, he could use it in his campaign, especially with his base of voters.”

Deficit/Debt Threat: No important change.  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.” 

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 the next target (now at about 3073 a brand new ATH, but rises slowly over time).

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

Market timing the SP500 Index (SPY, SPX). A bounce in a rally or just a counter-trend move?

A bounce in a big rally or just a counter-trend 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.  Intel is above the prior key level of 50.50 at a 50.92 close, but a move above 53.50 failed previously, so a higher high than that is required.

Bank of America (BAC) Market Timing Signal: Neutral. Off the low, but if the Fed is going to keep cutting rates, best to stay away.  Other than the dividend, it’s made no progress since the end of 2017. 

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®.

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 -18.07 vs -3.89% last week.  It reached a level low enough to be supportive of a bounce. But the -18 number is not an extreme.  That means a bottom has not been confirmed.

Bulls Neutrals Bears
21.37% 39.19% 39.44%
Thurs. 12 am CT close to poll

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

Bouncing from the low of the recent range.  If earnings season is bumpy, they could suffer further declines.  I’d say from here it could be a trade, but no more until growth in GDP accelerates again.  Then buy them.

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 bounce off low of recent range.

Small caps bounce off low of recent range.

 

 3. Gold Market Timing (GLD): 

I’ll stand by this for now:

“This is not yet the time to pivot out of gold trades in my view.  As long as the Federal Reserve is still lowering interest rates, gold/gold stocks will do well.  When inflation starts to rise again, we [MAY] have to sell our trading positions in gold.”

The above actually depends on the Fed’s reaction time as inflation rises, as I’ll get too soon.

I said last week: “The G*LD trend will be negative below 139.35.”  It tested to 137.80 and then bounced.  There is a debate in the market concerning the direction of inflation from here.  The bond market seems assured of even lower rates.  The rally in rates into mid-September has been crushed.  If inflation accelerates a bit (data supports a mild rise over the next few months vs. the prior year), and the Fed is still lowering rates, gold will do very well.  They lower rates due to GDP slowing, remember.  If that causes inflation to accelerate we have ta-da, stagflation, which gold likes. If the Fed stimulates some growth, gold will not like that, as stocks beat gold in the setting of rising GDP growth and rising inflation.

When the Fed starts raising rates again, gold will take an even bigger hit IF they get out ahead of inflation from GDP growth.  But that is for the future.  The worst condition for gold is strong GDP acceleration, because of the competition.  Stagflation?  Gold loves it.  When the Fed lets inflation run wild, as in the late 70’s, gold flies. 

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

Market timing the gold ETF (GLD). Gold has retrace tested a breakout and now must move up in a definitive way.

Gold has retrace tested a breakout and now must move up in a definitive way.

 

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

From last week: “We got to 1.903% last week and have been sliding down the 50 day mav since.   It’s unusual to see any investment slide down a mav like that and not fall further, so my money is on lower rates and higher gold/gold stocks.”  

That’s what happened.  Rates slid and gold bounced. 

Now what TNX does is key.  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 was a rapid “Negative Rate Shock” as defined at the base of this report.  It also would imply the bond market felt the Fed was doing too little, lowering rates too slowly, and was risking deflation.  Powell’s “Good Place” as he calls our economy’s state may transform in time to a “Bad Place.”  “Good” is not “Excellent”!

Answer?  Sometimes Trump is right.  The Federal Reserve per the sick game they play is “behind.”  I say that because they seek to control the economy rather than allow the economy to ebb and flow.  Excesses are built up due to their tinkering.  Lower rates will hurt the U.S. dollar, and drive up U.S. inflation for consumers.  Is that good or is it bad when your money is worth less and less?  It’s an ongoing debate, yes…

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). A brand new lower low would imply higher recession risk.

A brand new lower low would imply higher recession risk.

 

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 NEUTRAL SP500 Index trend.  More progress is needed before flipping the trend signal to Bullish for the SP500 Index.  The stock signal is based on small caps, as they often lead the market down.  They are bouncing, but only within a range.

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!)  These are the targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89.  The bonus target, #8, I am no longer keeping in the main score tabulation.  The Bears have 3 (barely) of 7 targets at a VIX of 17.04 (Friday close). 

The ‘Bull Nirvana Target’ is 13.31.”  (That is target #7 for the Bulls.) 

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. 

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 RED for a further stock market rally with a long term BEARISH and short term Bearish 10 Year Yield Trend.  (Remember: lower rates mean higher bond and Treasury prices)  We are back testing the prior low on the daily chart.  Not good if you expect a strong economy to emerge anytime soon. (See above comments.)

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 climb back above the prior all time high (ATH).”

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 52.81 vs. 55.91 last week, and is coming off the low of  the range.  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.

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.

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.  Note that rates are again FALLING.

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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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