Market Timing Brief™ for the 11-09-2018 Close: Stocks Falling from a Lower High. Five “Must Nots.” Gold Slips. Rates Re-Top and Fall.

A Market Timing Report based on the 11-09-2018 Close, published Saturday, November 10th, 2018…

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

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

I called for a bounce, but at the end of this week, I called for a trounce, which began subtly on Thursday when I sold a chuck of stock exposure.  On Friday, the market started to fall again in earnest.  I’ll get to “how low will it go” after sharing some insights.

The market does not always immediately do what I say it will do as my long time readers know.  This time, I was right on time.  Sometimes I am early.  Sometimes I’m late.  The market loves to make fools of us all, so I assume each call I make is tentative/to be proven, and so should you.  Decide for yourself what actions you will take if any.  IF the thesis is right that the market will continue to correct further, but not drop more than 25% (which is the upper limit of my “Mini Bear Market” definition), and then recover, do you really have to sell?  Not really. But you may preserve more capital if you sell the tops and buy the lows, even if you are off a day or two.

But how can we be completely sure an earnings slowdown with growth slowing globally will not turn into a recession?  For a recovery from this correction and avoidance of what I term a “Big Bear Market” (terms defined HERE), these things must NOT happen…

1. The interest rate on the U.S. 10 Year Treasury (TNX) must not move over 3.248%.  It especially cannot do that quickly, or we’ll see RateShockIII.  Read past posts on the #RateShock principle to catch up (top section of 10-05-18 post).  The big mistake many make is using prior U.S. rate history to make their arguments without considering the global rate context!  That’s just plain dumb.

2. Earnings and revenues cannot continue to deteriorate.  The market must be able to see the reversal of this global slowdown coming to reverse the decline confidently.  The test is to see analyst estimates of both E and Rev improving over time.

3. The President must not be impeached.  That alone won’t create a “Big Bear Market” per my terminology, but could take us to a maximum “Mini Bear” as I call a decline that can go as high as 25%.  Since the GOP controls the Senate, conviction will only happen if the President has done something egregious such as directly collude with the Russian government in a direct way to undermine Clinton in the 2016 election, something we have no hard evidence for to date.  Not reporting a payoff to a porn star could be overlooked by the Senate, like it or not.  Clinton paid off Paula Jones to keep her quiet about the sex she had with him. Was that a failure to report a campaign contribution, because it made him more electable? That’s not what the Senate decided.  They acquitted him after his House impeachment.

Most of the charges by Mueller relate to tax issues and lying to the FBI etc.  on the part of Trump associates.

The catch would be obstruction of justice.  Nixon was kicked out on the basis of obstruction of justice, NOT his participation in the Watergate break-in.  However, there would have to be hard evidence against Trump for the Senate to give him the boot.

I’ve written before on the impact of the Clinton impeachment HERE.  The drawdown would likely be similar if Trump is impeached, but not convicted.

4. The China Trade War must not be continued.  It must be ended or the trajectory altered prior to 25% tariffs being imposed in January.  Companies are already complaining about cost increases due to the tariffs, and this does not help the Fed keep interest rates low.  Trump has chastised the Fed for raising rates, while he contributes to inflation by: 1. Tax cuts that are inflationary and raise the cost of debt by raising the national debt level and 2. Imposition of tariffs that impact company manufacturing input costs, some of which are passed on to consumers.

The Fed has a Congressional mandate to contain inflation as well as seek maximum employment.  The latter goal has been accomplished in their view, so the whole game in controlling inflation now.  That is the Fed’s ONLY job for now.  And Trump is making that job much harder. 

Trump is slated to meet with China’s Xi at the Nov. 30-Dec. 1 2018 G20 meeting in ArgentinaIf a deal is made then, it could goose the market once again. Trump was able to directly manipulate the market upward with his comments just before the election, although Larry Kudlow, the Director of the National Economic Council, tamped down expectations shortly after Trump tweeted.

5. Oil must not spike higher than 75ish, a prior high.  Since oil is now in a Bear market, that is not a problem we face currently.  Trump is allowing Iran to “cheat” by selling to certain countries. What the point of a “non-embargo embargo” is, is not clear.  Oil below a certain price carries with it some financial danger, as oil companies go belly up when they can no longer service their debts.  The oil price needs to be “just right.”  I would say below $40/barrel, the caution lights start flashing.  Oil has been in a decline since the high of October 3rd.  The SP500 re-topped (just below the all time high) on October 3rd as well. Coincidence?  Remember that growth slowing means less oil demand, so my answer is “I highly doubt it!”

Getting back to the deterioration of earnings for U.S. companies…

Below is an update of last week’s analysis comparing the FactSet published analyst projections into Q2 2019 made back in my 7-22-2018 issue which referenced their 7-20-2018 data to the current projections as of Nov. 9th.  This week, I compare them to last week’s data. 

Guess what?  Earnings projections are even LOWER than before from the current Q4 quarter all the way out to Q2 2019 which will be reported starting in July 2019.  They could continue to get worse, if global slowing continues to percolate through the U.S. economy.

Here is the data (latest FactSet PDF  for the Nov. 9 data below will open directly HERE):

7-20-18: Prior Quarter (Q3): For Q3 2018, analysts are projecting earnings growth of 21.6% and revenue growth of 7.5%.
Actual: companies are reporting earnings growth of 25.2% (vs. 24.9% last week) and revenue growth of 9.4% (8.5% last week).
Relative performance: Earnings Growth = 16.7% HIGHER (ALL vs. July predictions).  Rev. Growth = 25.3% higher.

7-20-18: For Q4 2018, analysts are projecting earnings growth of 18.0% and revenue growth of 5.7%.
Now: For Q4 2018, analysts are projecting earnings growth of 15.0% and revenue growth of 6.8%.  11/09/18:  E 14.2%/Rev 6.7%.
Relative performance: Earnings Growth = was 16.7% LOWER, now 21.1% LOWER.  Rev. Growth = was 19.3% higher, now 17.5% higher.

7-20-18: For Q1 2019, analysts are projecting earnings growth of 7.1% and revenue growth of 5.5%.
Now: For Q1 2019, analysts are projecting earnings growth of 6.0% and revenue growth of 6.6%.  11/09/17:  E 5.6%/Rev. 6.6%
Relative performance: Earnings Growth = was 15.5% LOWER, now 21.1% lower.  Rev. Growth = was 20.0% higher, now still 20% lower.

7-20-18: For Q2 2019, analysts are projecting earnings growth of 10.4% and revenue growth of 4.7%.
Now: For Q2 2019, analysts are projecting earnings growth of 6.5% and revenue growth of 5.1%.  11/09.18: E 6.2%/Rev 5.3%.
Relative performance: Earnings Growth = was 37.5% LOWER, now 40.4% lower. Rev. Growth = was 8.5% higher, now 12.8% higher.

As I said last week: “…earnings growth expectations between that 7-20-18 report and the 11-02-18 report have fallen considerably, which means stock prices have to adjust.”  How much stock prices adjust will depend on the factors noted in my above list of 5 trouble spots. 

Last Saturday I wrote: “We are not out of the woods yet.”

I told you two weeks ago: “I am OK with my exposure level being between 75 and 85% roughly as I trade in and out of the bounces and trounces to come.  This is not going to be a straight line.  Manage your exposure level to a point you are comfortable with…”  My current exposure level is noted on social media. 

The exposures I bought last week were working this week.  A REIT I bought as a “Happy Floater” (floating above the falling market) was still going up on Friday with the market down almost 1%.  My utility position is up 3.5% since the buy on 11-02-18.

Realize however that if a market drawdown accelerates, it can easily bring EVERY sector down.  The relative performance may be better in utilities and REITS at certain times, but the absolute return can still be negative.

Selling exposure and raising cash at the market’s lower highs or shorting the market (which most investors won’t ever do) are the only ways to protect/increase capital on an absolute basis during drawdowns like this.

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative.  The stock is now retracing to test the upper line of the down channel it is in.  It is below the October high and more selling on Monday would like define the last bounce up as a failed rally in a downtrend.  It would be significant if Intel could break up and out above the Oct. high instead! (Reminder: INTC is our “tell” on 2nd half earnings in tech as noted HERE.)

Bank of America (BAC) Market Timing Signal: Negative.  I said it would likely fail from the 50 day moving average (mav), and it did not quite get there before turning down.  Breaking UP through the 50 day then 200 day mav’s would be very positive should it happen.

The 2017 channel line is in orange on the chart below…speaking of which, the SP500 Index stopped almost exactly on that line as well as testing barely above the 200 day mav.  These levels are not sacred, but they are watched.  They only have significance when we observe the market’s behavior as they are tested to PROVE their significance, which is why my ability to communicate with you virtually real time on social media is so important.  My first prime target to examine will be that lower yellow line in the chart below.  Ultimately, could the market fall to retest the May low again or even go to the April or Feb. low?  Of course, but the first opportunity for a reversal in my opinion comes at that yellow line.  

Could the market simply bounce UP from here?  Yes, but it would take a tangible important catalyst to do that such as a real resolution of the trade war with China. With the elections over as predicted (plus or minus), there is no election catalyst to be had.  Infrastructure could become a catalyst especially for certain stocks, but it won’t come this year.  Without a catalyst, the market will most likely move to a lower retest as outlined above.

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 33,722 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.

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

sp500-index-spx-market-timing-chart-2018-11-09-close

Failed at a bounce to a lower high.

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of 10.09% vs. +3.45% last week.  The poll closed on the day of the double top in the SP500 Index.  Sentiment is not particularly helpful other than to say that at the lower top, investors were not all that Bullish.  There is plenty of room for downside in sentiment.

AAII.Com Individual Investor Sentiment Poll
Bulls Neutrals Bears
41.28% 27.52% 31.19%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM):  They led on the way up, but they are also leading on the way down.  Liquidity is an issue for small caps, so when there are too many sellers, small caps stocks go down 10-20% in a day.  Facebook fell 19% in a day based on a big, bad surprise for the market, so this liquidity issue is not entirely restricted to small caps, although it’s generally more of an issue.  You can see that 151.89 target is an easy one to reach from here.  IWM should hit that top red line on Monday in my view.

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

iwm-russell-2000-market-timing-chart-2018-11-09-close

Small caps sold off hard on Friday.

3. Gold Market Timing (GLD):  GLD slipped on the Friday PPI data, which was warm in inflation terms.  Yet gold fell as rates fell, despite that data, which is not a good response.  GLD ended at 0.01 below the 50 day mav and back below 114.87, which was the top of the prior range preceding the now failed breakout.  None of that is constructive, although falling rates should eventually support gold.

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

gld-gold-etf-market-timing-chart-2018-11-09-close

Gold slipping. Falling rates will help.

4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX):

The interpretation of interest rates is muddied a bit by the fall in the stock market this Friday.  Risk off means Treasuries are bought with cash raised by selling stocks.  Taken by itself, it looks like rates have peaked, but this must now be confirmed by November reports of LOWER inflationary pressures.  It must also be confirmed by a further fall in the 10 Year Yield shown in the chart below.   That hurt’s financials like BAC, by the way.  See my advice on how to play this fall in rates below the chart…

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):

tnx-10-year-treasury-note-market-timing-chart-2018-11-09-close

Retested top? Or will there be more inflation scares?

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 own moves 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 RED for a further U.S. stock market rally with a BEARISH SP500 Index trend.

The trend is Bearish particularly because the SP500 Index is falling off a lower double top.  The VIX (which relates to SPX volatility) closed at 17.36 above the low of 17.06 set at the 10-17 intraday market top.  It was below last Friday’s 19.51 close.

The Bulls must retake the 8-15 high of 16.86 (break down below it). The ‘Bull Nirvana Target’ is our VIX # of the Year: 13.31.  As I said 2 wks ago, ‘Super Bull Nirvana would be VIX below 11.22, but I have the feeling it will take a while to get back there.'” VIX 17.06 is the immediate Bull target. Then the nearby 16.86 etc.

Last week: “The Bears need to take out the 26ish top that was tested once again this week for the market to  go into another leg of  decline.  If they do it soon, it COULD still just last a day or two.”  It lasted a day and then the market bounced.  VIX 28.84 is the Bear target for Armageddon (another big chunk of losses driving SPX down to the May lows or worse).

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

From before: “Remember GLD is being used as an indicator for the ECONOMY here.  The trend is neutral due to the loss of a breakout.

Rate Signal  RED  for a further stock market rally with a BEARISH 10 Year Yield Trend.  The up trend is still broken until the lower high is exceeded (see above).  All heck would breaks loose for equities if TNX lurches above 3.248%, particularly if the rise is rapid.

For now, this is where you buy long dated Treasuries as close as you can to 3.248% (IEF, TLT, etc.)

I’m leaving this important statement here until things change: “This level of the 10 Year Treasury Yield, which is too high for current conditions as explained HERE, will eventually slow the economy.”

Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.”  That’s what I call “Rate Shock.”  This period of rising rates is #RateShockII.”

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, 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 charts for now as reference points only; they have historical value for us from the post-2016 election period.

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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, go to my “Other Resources” page here:  Other Resources   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.  Check it out with a free trial at the link above.

Finally: Please excuse and report all typos if you are so moved.  I do my best to pick up most of them, but have not always found them all.  Shoot me a comment (I don’t have to post your typo report as I filter them before publication, but I’ll be grateful to you!)

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Market Timing Brief™ for the 11-02-2018 Close: Are Stocks Out of the Woods? Post-Election Tremors Expected? Small Caps Lead the Bounce. Gold Pausing on Rate Bounce to a Lower High.

A Market Timing Report based on the 11-02-2018 Close, published Saturday, November 3rd, 2018…

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

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

Last week I asked, “Will the May Low Hold?”

It did, and a bounce began from it.  Realize that tests sometimes go a bit farther than the original lows that are tested.  A breach intraday does not mean the same thing as a closing breach, which is why many traders use only closes to determine whether they will sell.  Before getting deeper into the charts, let’s review the major current market challenges and their importance:

1. The 2018 Midterm Elections: The Democrats are currently expected to win the House back and the Republicans are expected to make some gains in the Senate or at least hold on to a majority.  This scenarios should be OK with the market, although given committee control, the Dems would initiate further investigations into Trump’s election activities, his tax returns, and Kavanaugh.

They may even impeach him in the House, but I think that is hardly a given as these things come back to haunt when reasonable standards are overstepped.  Impeachment would make a Mini Bear more likely as defined last week.  The Senate, under GOP control will of course not convict him unless he has done something they cannot overlook.  I think the Mueller investigation will dead end before it reaches Trump – if he was in fact smart and kept “out of it,” also not a guarantee, given his ego issues.

The best scenario for the market, but not necessarily for people on Medicare and Social Security, and for those with pre-existing health conditions, would be an all GOP win scenario. 

A double Dem win in both Houses of Congress, would be a threat to the market and could lead to much more turmoil and uncertainty for the markets.    Such a win is not predicted at this time by Real Clear Politics. So for now, and we’ll have our answer Tuesday, the election should leave the country with a standoff between Trump and the House. 

In the currently favored scenario, Trump will get nothing that he does not negotiate with the Dems in the House.  The markets won’t react positively or negatively based on that in my view, UNLESS the Democrats impeach Trump (impeachment is done by the House; trial by Senate).  The downside of that would be 20-25%, if it compares to the Clinton December 19, 1988 impeachment. 

2. China Trade War:  This is the biggest ongoing trade war obviously.  President Trump likely lied about the degree of progress that had been made with China on trade in order to goose the stock market directly, and make voters feel better.   I say this because Larry Kudlow denied any real progress had been made just hours before Trump contradicted him.  Larry is a pretty straight shooter.  I’ve watched him since he was on Louis Rukeyser’s Wall Street Week, so I know what he’s about.

I believe the market is seriously worried about continued cost pressures on the U.S. economy secondary to the China Trade War and wants it resolved ASAP.  It is an overhang, but it cannot be seen as an unsolvable impediment to market progress.  Rather, it will cause some volatility, both UP as on Friday as well as DOWN as on Friday!   But the trade war is NOT the top issue.

3. Earnings Growth Slowing: As I said last week: “The central reason the market is heading lower is because of the weak earnings and revenues expected for the SP500 Index companies in Q4 2018 to some extent, then accelerating into Q1 and Q2 of 2019.”  This is still my answer and it has gotten worse!  Here is why….

I just compared the FactSet published analyst projections into Q2 2019 made back in my 7-22-2018 issue which referenced their 7-20-2018 data to the current projections as of Nov. 2nd.  Guess what?  They are now WORSE than before.  And they are likely to become even worse, unless there are upside surprises because global economic growth is slowing.

Here is the data (latest FactSet PDF  for the Nov. 2 data below will open directly HERE):

7-20-18: For Q3 2018, analysts are projecting earnings growth of 21.6% and revenue growth of 7.5%.
Actual: companies are reporting earnings growth of 24.9% and revenue growth of 8.5%.
Relative performance: Earnings Growth = 15.3% HIGHER.  Rev. Growth = 13.3% higher.

7-20-18: For Q4 2018, analysts are projecting earnings growth of 18.0% and revenue growth of 5.7%.
Now: For Q4 2018, analysts are projecting earnings growth of 15.0% and revenue growth of 6.8%.
Relative performance: Earnings Growth = 16.7% LOWER.  Rev. Growth = 19.3% higher.

7-20-18: For Q1 2019, analysts are projecting earnings growth of 7.1% and revenue growth of 5.5%.
Now: For Q1 2019, analysts are projecting earnings growth of 6.0% and revenue growth of 6.6%.
Relative performance: Earnings Growth = 15.5% LOWER. Rev. Growth = 20.0% higher.

7-20-18: For Q2 2019, analysts are projecting earnings growth of 10.4% and revenue growth of 4.7%.
Now: For Q2 2019, analysts are projecting earnings growth of 6.5% and revenue growth of 5.1%.
Relative performance: Earnings Growth = 37.5% LOWER. Rev. Growth = 8.5% higher.

As you can see, earnings growth expectations between that 7-20-18 report and the 11-02-18 report have fallen considerably, which means stock prices have to adjust.

Some of that adjustment is accounted for in the fall to date of 7.41% from the all time high for the SP500 Index.  But how much?  No one can tell you, but realize that if the expectations have declined, they may continue to decline, because you’ll note that revenue expectations are HIGHER now than they were in July.

Why are revenue growth rates higher while there is global slowing?  Is higher pricing on goods expected or more unit sales?  The former creates inflation.

Can companies grow unit sales when global economic growth is slowing?  I believe the SP500 Index revenue numbers will have to be lowered, and then earnings estimates will also be lowered, further lowering the earnings growth rate of the SP500 Index.  Lower E’s, mean PE’s are higher than they should be, and stock prices fall.  

What about oil?  Oil is now in a downtrend and is only a problem for energy stocks.   I pointed that out last week and oil broke to a brand new low, with gas prices falling just before the election!  Well done! 

There is one more lurking threat to the market:  Last week I said: “The 4th reason for a bad break [in the market]: ‘A rate spike of the 10 Year Treasury Yield above 3.248% (without the oil spike) for ANY REASON would induce a further leg down in the SP500 Index and in mid caps and small caps as well of course.’

This week’s reports showed wage inflation was a bit hotter than expected at 3.1% vs. the 3.0% expected and employment was warm too at 250K vs. the 190K expected, but the latter numbers are very volatile from month to month.  The 10 Year Yield finished the week higher however at 3.214% close to the lower high of 3.215%.   I still believe a spike above 3.248% would be taken badly by the stock market.

By the way, I bought some 7 month Treasuries on Friday after the spike, exactly because I believe the 3.25%ish rate top will hold.  They were paying 2.52% annualized yield to maturity.  Not great, but better than a savings account for cash holdings (close to cash at least).  They can be readily sold if I want to deploy more cash into stocks.

Last week I said: “If Apple fails to please investors, ‘Master Market’ [the five year old boy the market truly is] will likely throw a big fit, especially the NASDAQ and QQQs.  I also said, “Apple is a stock that has not come off its top by much.  They had better hit their numbers when they report on Nov. 1st.  The market is saying they WILL hit their numbers.  The mess in China (a big part of their growth is in China), India and elsewhere says they actually may miss their numbers.” 

Apple in fact reported weaker numbers than expected in unit sales terms especially in the emerging markets and fell 6.63% on Friday.  When Luca (CFO) said they no longer would report unit sale numbers, I immediately messaged that this would be taken badly.  They say they are focused on their “ecosystem,” which is a nice way of saying, “We are going to squeeze revenue out of our existing customers, but not increase our device sales numbers by much.”  Apple did not wreck the market, but the QQQ’s were down 1.56% while SPY was down a much more sedate 0.59% after the Trump tweet bounce on the China situation.

I shared how I have adjusted my equity exposure over this period of turmoil in last week’s issue.  Please read it if you have not, because at the least, it will make you think about your risk management process. 

Here’s My Bottom Line and you should reflect on whether it is going to be YOUR bottom line as well, or if you believe something different: (I hope you have data to back up your view, even if it starts with an intuition.)

We are not out of the woods yet. Given the growth slowing backdrop, I am not going to stay fully invested with the exposure I have in a full fledged up trending Bull market, which I call “100% of my max. exposure for a Bull market.” 

I told you last week: “I am OK with my exposure level being between 75 and 85% roughly as I trade in and out of the bounces and trounces to come.  This is not going to be a straight line.  Manage your exposure level to a point you are comfortable with…”

So this week I moved UP my exposure as noted HERE based on the success of the current bounce to a higher level.   I raised it because the election jitters will pass IF the GOP keeps the Senate, which looks probable.  I also believe the China thing will pass, but Trump could make things much worse if he drags his feet.  The “earnings thing” could limit gains to a bounce followed by a trounce.  Bounces can be big however…

How high will the bounce go?  As I’ve said before, I examine the market as it moves higher or lower.  Levels and mav’s (moving averages) don’t mean anything except as rough guides.  It’s how the market looks at these levels that matters to me.  I bought more exposure on Friday, because:

  1. I am adding to SPY (Friday and two buys on 10-22) because that yellow line (chart below) held on a retracement test (and the market was behaving well).  So far, so good. That sets up the market for a possible bounce to the 50 day moving average or so.
  2.  I bought a REIT Friday (starter position, revealed in my room HERE).  Do your own homework on the fundamentals.  I do not claim to be a stock analyst.  I focus mainly on market analysis looking at both technicals and fundamentals.  I look for themes and then look for corroboration from various sources before buying individual stocks.  I also listen to one or more earnings report calls and review the company fundamentals.  In this case my main focus is on the behavior of the stock as a “Happy Floater” (beating the market nicely of late) IN THE CONTEXT OF rates falling from this level.  I may ditch it summarily if it does not perform per my view of it now.  It MUST beat the market in other words, or it’s OUT.  If the 10 yr. yield move to 3.5%, I’ll be out of it most likely.
  3. I bought utilities XLU Friday, near the Friday low, as I believe rates are close to a peak, and utilities rally when yields fall.
  4. Earlier I added to both SPY and Disney, which is a “Happy Floater” too.

For those who missed my “New Rules” last week they are :

New Rules:  Market Drawdown Levels of Note

“Dip” >3%-5%.  “Correction” >5% to 15%.  “Mini Bear” >15% to 25%.  “Big Bears” are >25% (often rising to 50% or more for some markets). 

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative.  Still a down trend.  Look for a higher high to change that.  Bounces in Bear markets (Bear for this stock) occur commonly back to key levels and then the stocks move down again.  Short the rips, and cover on the dips.  Or play the bounces long if you have the will to do it.  (Reminder: INTC is our “tell” on 2nd half earnings in tech as noted HERE.)

Bank of America (BAC) Market Timing Signal: Negative.  All you have is a tentative reversal above the July low.  That’s a start, but as I believe rates are near a top, I also believe BAC will fall again, even if from the 50 or 200 day mav.

The 2017 channel line is in orange on the chart below…

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 33,722 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.

SP500 Large Cap Index (click chart to enlarge; SPX, SPY): Broke above the down trend line in magenta…

sp500-index-spx-market-timing-chart-2018-11-02-close

Bounce but to where?

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +3.45% vs. -13.03%.  This does not help much because the poll closed AFTER the bounce off the May low, so they were somewhat reassured.  The prior low achieved was not low enough to call it a washout.

AAII.Com Individual Investor Sentiment Poll
Bulls Neutrals Bears
37.93% 27.59% 34.48%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM):  Last week I said: “The February low (-3.38% away) is an easy target from here, but they’ll probably bounce when the large caps do if not lead the large caps up.”  They fell to the higher of the two lowest days in February and bounced.  And they led the SP500 Index, which is positive.  They were up for the 4th day on Friday, while SPX was lower.  The risk?  They are the most volatile stocks and will do the worst if growth slows further than expected.

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

iwm-russell-2000-market-timing-chart-2018-11-02-close

Tested one of two lowest days in Feb. and bounced.

3. Gold Market Timing (GLD):  GLD pulled back and tested the prior breakout and passed the test.  I had sold it just off the top, because I was anticipating a more negative reaction to the Friday data, which has not come yet. 

If rates press up to 3.25%ish, gold will fall.  Falling rates, which are on their way, will help gold.  I think the market if front running that fall in rates and hence a fall in real rates.  The problem is if Ex-US does worse than we do and there are more crises that pop up, the dollar will rally, which hurts gold UNLESS there is financial panic as I’ve said repeatedly.  Google “When does gold shine and when does it decline?”  Read that post please.  Many of you have!

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

gld-gold-etf-market-timing-chart-2018-11-02-close

Gold passed a test this week, and the market may be front running the fall in rates I expect.

4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX):

You can see why I did NOT buy more Treasuries as TNX went down through 3.115%.  It was on the basis of “Risk Off,” not rates falling under their own power to to speak.  Rates are re-peaking now (that’s the hypotheis!).  And rates must fall soon, or the rising rates will hurt stocks badly.  The rest of the world DOES matter more than the Federal Reserve yet understands. Rates in the U.S. effect the entire globe, and have to be taken in the context of global rates, which are mostly very low to negative in most Ex-US developed countries.

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):

tnx-10-year-treasury-note-market-timing-chart-2018-11-02-close

Trouble for stocks lies above 3.248%.

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 own moves 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 RED for a further U.S. stock market rally with a BEARISH SP500 Index trend.

The VIX (which relates to SPX volatility) closed at 19.51 Friday vs. 24.16 the previous week.

 I said two weeks ago: “Above 19.55, the VIX level is BEARISH for the SP500 Index, but rising to the 26ish level and then falling could be Bullish short term.  The Bulls must retake the 8-15 high of 16.86 (break down below it). The ‘Bull Nirvana Target’ is our VIX # of the Year: 13.31.  As I said 2 wks ago, ‘Super Bull Nirvana would be VIX below 11.22, but I have the feeling it will take a while to get back there.'” VIX 17.06 is the immediate Bull target. Then the nearby 16.86 etc.

Last week: “The Bears need to take out the 26ish top that was tested once again this week for the market to  go into another leg of  decline.  If they do it soon, it COULD still just last a day or two.”  It lasted a day and then the market bounced.  VIX 28.84 is the Bear target for Armageddon (another big chunk of losses driving SPX down another 6.99% from the Friday close.

Gold Signal  RED for a further U.S. stock market rally with a BULLISH Gold Trend.

From before: “Remember GLD is being used as an indicator for the ECONOMY here.  I am calling it a BULLISH trend, because of both 1) the breakout above the prior trading range and 2) the stability in the face of rising dollar.  GLD needs to break above 117.40 soon.”  Still applies. 

Rate Signal  RED  for a further stock market rally with a BEARISH 10 Year Yield Trend.  The up trend is still broken until the lower high is exceeded (see above).  Then all heck breaks loose for equities if TNX lurches above 3.248%, particularly if the rise is rapid. 

I’m leaving this important statement here until things change: “This level of the 10 Year Treasury Yield, which is too high for current conditions as explained HERE, will eventually slow the economy.”

 Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.”  That’s what I call “Rate Shock.”  This period of rising rates is #RateShockII.”

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, 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 charts for now as reference points only; they have historical value for us from the post-2016 election period.

Thank you for reading.  Would you please leave your comments below where it says “Leave a Reply”… or ask a question…  Pay it forward too by sending the link to MarketTiming.Blog (that link will immediately connect them to this webpage) to a relative or friend.  Thanks for doing that.

Be sure to visit the website for more general investing knowledge at:

Sun and Storm Investing™

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, go to my “Other Resources” page here:  Other Resources   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.  Check it out with a free trial at the link above.

Finally: Please excuse and report all typos if you are so moved.  I do my best to pick up most of them, but have not always found them all.  Shoot me a comment (I don’t have to post your typo report as I filter them before publication, but I’ll be grateful to you!)

Copyright © 2018 By Wall Street Sun and Storm Report, LLC All rights reserved.

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

Market Timing Brief™ for the 10-26-2018 Close: Will the May Low Hold for the S&P 500 Index? Gold Treading Water but Up. Rates Falling Again.

A Market Timing Report based on the 10-26-2018 Close, published Saturday, October 27th, 2018…

I deliver focused comments on market timing once or twice a week.  These are supplemented with daily “Tweets/StockTwits” (see links below).

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

Last week I asked, “WILL THE 2017 CHANNEL and 200 DAY MAV HOLD AGAIN THIS TIME?”

Neither did.  I also said: “If ‘it’ holds, what will hold is NOT the 200 day in my view, or even the slightly lower 2017 channel line, but the low set intraday on 10-11” which was 2710.51.  On Tuesday it appeared it could hold, but on Wednesday the 24th, Master Market, as I call the emotional 5 year old, became even more volatile, falling below that target to a spot just above the May low.

The central reason the market is heading lower is because of the weak earnings and revenues expected for the SP500 Index companies in Q4 2018 to some extent, then accelerating into Q1 and Q2 of 2019.  I went back to see when I first wrote about this, and it was in the 7-20-18 issue HERE.   The data is updated for this week on the FactSet PDF which will open HERE.  Weeks ago, I covered the fact of US growth slowing due to an “infection” from foreign sources.  This data alone is the central risk now.  Tariffs are providing some pressure on corporate earnings in Trump’s self-inflicted wound.  It would have been better to negotiate this more quickly to avoid inflationary pressure of this kind, although yields are moving DOWN not up at the present time.  I’ll get to more on rates later.

To be fair, the technological theft issue in China cannot be overlooked as we seek to do more and more business both in China and as we allow more Chinese investment in the U.S.  We are not privy to the negotiations, so it’s impossible to say whether Trump is being appropriately stubborn or too stubborn.  The Chinese clearly have the will to wait him out, particularly until after he is weakened in the midterm elections by having the Democrats likely take the House, while the GOP keeps the Senate.  In the larger scheme of things, the trade issues will be worked out before the SP500 Index is down 25% in my view!  Great consolation I know.  Send a little Twitter note to our Tweeter-In-Chief to urge him to wrap up the trade war.

Last week I asked: What favors the SP500 Index breaking (at least in time) in a significant way? 

1. I made the point about E and Rev slowing into 2019 and said I thought the Feb. low would be the next target if the 200 day moving average and 2017 up channel lines (orange lines) failed to hold.  

2. I also said “investor sentiment (AAII reviewed for this week below) did not reach any sort of wash out level.  In fact, as I said last week, investors were complacent on 10-10-18, after a very big down day of 3.29%. ” 

Sentiment is just one thing I look at, but expecting a bigger fear spike is reasonable.  See my review of this week’s data below…

3. The 3rd reason for trouble: “A surprise run by oil much higher, with an associated spike in rates to a new high.  Inflation and oil spikes move together despite what the Fed may say. ”   This is not happening.  Oil is falling in price despite the Iran sanctions and the Saudi killing of an American resident reporter, but we should keep an eye on it.  

4. The 4th reason for a bad break: “A rate spike of the 10 Year Treasury Yield above 3.248% (without the oil spike) for ANY REASON would induce a further leg down in the SP500 Index and in mid caps and small caps as well of course.”

This is not happening, at least for now.  If wage inflation is too hot in the Monday BEA Personal Income and Outlays Report at 8:30 am ET (where the PCE Inflation Index number the Fed follows is revealed) OR in the jobs report next Friday, Nov. 2nd, the 10 Year Yield could spike up one more time, before turning back down.  Any surprise move to a new high would be unwelcome.

5.  The fifth reason for a further market meltdown: “A bad break in the small and mid caps to new lows leading the SP500 Index down.”

This is what happened, perhaps due to reason number one above, but remember valuation is always relative, so stocks that had not sold off like Amazon, were becoming vulnerable.  In drawdowns, first they shoot the easy targets with the worst prospects and small capitalizations. Then they shoot the generals.  Amazon is a general, and he’s quiet wounded down just 0.11% away from that 20% Bear market mark.  As of Friday 10-26-18, 43% of stocks were trading at discounts off their highs of 20% or more per Mike Santoli on CNBC, and therefore in their own “Bear markets.”  The SPX is down “only” 9.62% so far.

A Catalyst for More Downside or Upside: 

If Apple fails to please investors, “Master Market” will likely throw a big fit, especially the NASDAQ and QQQs. 

Apple is a stock that has not come off its top by much.  They had better hit their numbers when they report on Nov. 1st.  The market is saying they WILL hit their numbers.  The mess in China (a big part of their growth is in China), India and elsewhere says they actually may miss their numbers.  Investors were skeptical about the expensive iPhone X, and the Chinese still bought them, but that was in the last iPhone cycle when their markets were not down over 30%.  On the other hand, the new cheaper XR series iPhones may get investors excited about making more inroads in China, so the picture is mixed.  Buffett’s professor, Ben Graham taught him, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”   This week investors will be weighing the pluses and minuses and coming up with a NEW price for Apple stock, up or down.  If you own the stock, have a plan.

What have I done along the way in terms of overall exposure to equities? 

I share my “percent exposure vs. my usual maximum exposure for a Bull market,” so you can consider it and adjust your exposure to taste if you like.  If your normal exposure to stocks is 90% because you are 25 yrs old for example, you would now be at 78.25% of that or 70.425% with the rest in short term Treasuries or cash, so it can be moved back into stocks.  The following is not an exhaustive list of my moves which are all noted on social media, but it gives you a feel for how I’ve handled my exposure level this year.

At the market peak in January, I was at 102.32% exposure (exp.).  Appropriate for a strong Bull market, but aggressive considering my mid-Jan. warning about the super high degree of individual investor Bullishness.

At the Feb. 8th low I was at 94.2% exp.  I disposed of almost all foreign exposure then and rotated into QQQ, specific tech names like INTC and MSFT that were bouncing hard, and SPY exp.  That worked out beautifully as the US market climbed and foreign markets failed badly subsequently.  As an example, had I held DXGE to Friday’s close, my position would now be at a loss of 11.6%.  Better to take gains of 1.2% and 1.6% plus several % in dividends along the way than to ride the pony back down the hill.  The ego says “a few % is not enough, so wait!”  Ignore your ego and risk manage your positions.  Europe was already set to head into a slowing of growth, so I left the party.  I then made good money as INTC and MSFT  bounced from the Feb. low.

At the 5-04 low, I was at about 80.75% exp. 

At the 7-10-2018 high, I was at 90.75% exp. 

I sold most of my small cap exposure “early” thankfully on 7-16-18 and went down to 86.0% exp. 

I sold some SPY exp. 10-04 on the first drop off the top, going to 83.5% exp.  In retrospect, I could have sold more of course.  That day had the first notable bump in volatility over what the market had been experiencing for a while and volatility did pick up from there.

At the lower high on 10-16 to 10-17: I told my followers on social media I would be selling any bounce in stocks, and I did.  Hope you did too, if your exposure was still too high.  On the 10-16 to 10-17 bounce to the lower high, I sold some growth exp. and on 10-17 I sold more SPY and all VNQ exp. going down to 73.5% exp. 

My recent low exp. was on 10-22 after the further market drop and sell of an individual stock, at which point I was at 71.5% exp. 

I added back SPY exposure on 10-22 moving up to 76.25% exp from 71.5%. 

I bought more SPY exposure on 10-23 moving to 78.5% exp.  

On 10-24 I bought and sold SPYs bringing my exp. to 74.5%. The sell was based on the failure of small and mid caps to hold the prior lows.

On 10-26 I added SPY exp. prior to the GDP release with the market already down, which was a buy very close to the closing price for the day.  I also bought some speculative stocks (please always size them smaller than large cap stalwarts) and a bit more Disney to bring my exp. to 78.25% by Friday’s close. I have added exposure as a test of this level for stocks.  I am testing the waters, not jerking my exposure back up to 100% with a hope and a prayer. 

There is no magic about the May low.  That’s about where the market closed on Friday, and it may or may not hold.  No one can tell you if it will!  Gurus cannot help you.  The market’s behavior is at times the only honest guide.  If you are fully exposed to this level, you are likely overexposed.  If you read that someone says the SP500 Index is “worth X,” don’t rely on it, as markets often overshoot to the upside (as they have done!) as well as to the downside. 

Valuation won’t help you here.   There are some investors who were sold a bill of goods about China being a “cheap market and it’s a great, modern country. Oh, and it’s being included in the MSCI indexes, so it just has to go up!” 

How did that vague story nonsense work for them?  Not well.  It has fallen over 30% deep in Bear territory.  That drop does lay out some possible risk to U.S. stocks, as valuations are eventually compared.  There is a level of Chinese stocks that will draw assets away from U.S. stocks, although a low in Chinese stocks may not occur until the Chinese economy starts showing signs of increasing rather than decreasing growth.  Remember DECREASING GROWTH is now being served up in the U.S. especially for Q1 and Q2 of 2019.

As I said in several prior issues, there is a risk of returning to the February SP500 Index low which many investors are eyeing no doubt. 

I am OK with my exposure level being between 75 and 85% roughly as I trade in and out of the bounces and trounces to come.  This is not going to be a straight line.  Manage your exposure level to a point you are comfortable with, considering the probable downside of up to 25% over a longer period.

“Up to” does not mean the market will reach the 25% mark.  It is a risk assessment.  Be willing to add back to the market if YOU are wrong.  As I say, it’s you who decide, not me, not the “machines,” not Cramer, YOU.  Take responsibility and never whine about the Fed or Trump or….whatever, you name it.   Be done with that total crap!  The market is what the market is.  Deal with it as it is or don’t play. Your choice.  But never, ever, ever whine!  Rant complete!  😉

Why not lower exposure even more?  I may decide to do that, but I’m unlikely to cut it below 70% of usual maximum exposure during this growth slowing period, unless signs of a recession or a worse sell off creep up on us.   I am not going too much lower in exposure, because I do not believe a recession is around the corner.  Coming yes, but that does not help us.  Not coming within a few quarters is the operating view I’m adopting.  Non-recessionary pullbacks are typically 13% per a figure CNBC was sharing Friday.  We’re at -9.62% now.  There is 4.74% to the Feb. low (just a target, not a guaranteed low!).  The total drawdown to there from the top would be 13.88%. 

What are the outside risks that could lead to a Mini Bear Market?

Remember a Trump impeachment if Democrats decide to go after him (unlikely with current evidence), could cost us a Clinton sized 22.5% or so.  Let’s round it to 25%.  A GOP Senate won’t convict him in any case.  Any non-recessionary “Mini Bear” (as term I coined for a cyclical market decline), can be 20-25% in magnitude.  Really I should probably call a drawdown of 15-25% a Mini Bear.  Let’s do that.  The 20% mark is very arbitrary, so let’s be arbitrary in our own way here.

New Rules (thank you Bill Maher):  Market Drawdown Levels of Note

“Dip” >3%-5%.  Correction >5% to 15%.  “Mini Bear” >15% to 25%.  “Big Bears” are >25% (often rising to 50% or more for some markets). 

There you have it.  Dip – Correction – Mini Bear – Big Bear market levels. Remember I renamed “Cyclical Bear” and “Secular Bear” Markets “Mini Bear” and “Big Bear,” because the terms cyclical and secular are often confuse by investors.  The terms just fly over their heads.

“Big Bears” are related to recessions and typically mean a drawdown of over 25% and up to 50% or so for the SP500 Index, and even more for certain indexes.   The drawdown of the NASDAQ in 2000 was 78%.  That’s not in the cards this time, because we’re just not at comparable levels, and there is no recession in sight.   If things change, we change our minds.

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative.  It bounced on stronger earnings than their forecasts and rose above two prior lows.  Nevertheless, the stock is still below the 50 day moving average, and the news for semiconductors just gets worse with every report.  Texas Instruments is now in a steep decline after saying almost all of their markets around the world were slowing.   I warned you here long ago about the global slowing infection of U.S. growth.  Now it’s arriving.  (Reminder: INTC is our “tell” on 2nd half earnings in tech as noted HERE.)

Bank of America (BAC) Market Timing Signal: Negative and it broke down to a brand new low where it is again seeking support.  Stay away IMO. 

The 2017 channel line is in orange on the chart below…

Keep up-to-date during the week at Twitter and StockTwits (links below)…

Follow Me on Twitter®  Follow Me on StockTwits®.

SP500 Large Cap Index (click chart to enlarge; SPX, SPY): Stopped for Friday at the May low.  Feb. low next or a bounce? 

sp500-index-spx-market-timing-chart-2018-10-26-close

SP500 Index. Will in continue down to the Feb. low?

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -13.03% vs. -1.11% last week.  The spread is not Bearish enough to help us spot a bottom.  It does say to me that investors are complacent about this decline however.  This survey took the Weds. decline into account as the poll closes Weds. night.

AAII.Com Individual Investor Sentiment Poll
Bulls Neutrals Bears
27.97% 31.03% 41.00%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM):  The February low (-3.38% away) is an easy target from here, but they’ll probably bounce when the large caps do if not lead the large caps up.   Either could happen on a bounce.  They “told me” early on the market was sick, and I’ll be watching their behavior even intraday to find clues to when the market is really bouncing in a meaningful way.

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

iwm-russell-2000-market-timing-chart-2018-10-26-close

Small caps broke down earlier than large caps.

3. Gold Market Timing (GLD):  Since 10-16-18, gold has risen with the dollar.  Often they have an inverse relationship.  Dollar down, gold up and vice versa.  In states of financial panic, gold can rise with the dollar.  On Friday, gold was up a bit and the dollar was down a bit and rates were down substantially, which pushes real rates toward a minus sign, which gold loves.  Read prior gold comments for the link to my educational gold article if you have not read it yet.

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

gld-gold-etf-market-timing-chart-2018-10-26-close

Gold holding up but failed a breakout despite lower rates on Friday with a down dollar.

4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX):

Read my comments above.  Next Friday will be the short term key.  Intermediate term rates should fall as growth slows.  Longer term they’ll rise once again, so our Treasury trade is a trade not a buy and hold!

There was a confounding factor with the stock market volatility this past week.  In “risk off,” investors buy Treasuries temporarily, but then may dump them for stocks as stocks bounce.  Wages plus a stock market bounce would give the 10 Year Yield two reasons to climb this next week.  If the U.S. stock market drops further, the yield will of course drop even more and send Treasury and bond prices up.

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):

tnx-10-year-treasury-note-market-timing-chart-2018-10-26-close

A rise on wages next week and then a fall on slowing growth.

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 own moves 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 RED for a further U.S. stock market rally with a BEARISH SP500 Index trend.

Three weeks ago week I said: “The small caps broke down badly, so the SP500 Index could follow them down (as I said, about 6% from the high to start).  The small caps are a better indicator of the health of the economy, as they are most vulnerable to economic changes, and hence, are the basis for this signal.”

The VIX (which relates to SPX volatility) closed at 24.16 on Friday vs. 19.89 the previous week.  By itself, it’s Bearish, but if it trends down from here on Monday, we have a lower high in volatility established and stocks can bounce hard  

Last week I said: “Above 19.55, the VIX level is BEARISH for the SP500 Index, but rising to the 26ish level and then falling could be Bullish short term.  The Bulls must retake the 8-15 high of 16.86 (break down below it). The ‘Bull Nirvana Target’ is our VIX # of the Year: 13.31.  As I said 2 wks ago, ‘Super Bull Nirvana would be VIX below 11.22, but I have the feeling it will take a while to get back there.'”

The Bears need to take out the 26ish top that was tested once again this week for the market to  go into another leg of  decline.  If they do it soon, it COULD still just last a day or two.

Gold Signal  RED for a further U.S. stock market rally with a BULLISH Gold Trend.   I changed it from YELLOW to RED, because GLD has been holding up since the breakout from the prior trading range.  Higher gold is NOT what you see in a strong economy, so it augers poorly for the U.S. stock market. 

Remember GLD is being used as an indicator for the ECONOMY here.  I am calling it a BULLISH trend, because of both 1) the breakout above the prior trading range and 2) the stability in the face of rising dollar.  GLD needs to break above 117.40 soon.

Rate Signal  RED  for a further stock market rally with a BEARISH 10 Year Yield Trend.  The up trend is now broken.

I’m leaving this important statement here until things change: “This level of the 10 Year Treasury Yield, which is too high for current conditions as explained HERE, will eventually slow the economy.”

I’ll keep this here as a reminder from prior issues: The market seems to have adjusted to rates of up to 3% or so as said in the signal summary HERE” but NOT above there.  Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.”  That’s what I call “Rate Shock.”  This period of rising rates is #RateShockII.”

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, 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 charts for now as reference points only; they have historical value for us from the post-2016 election period.

Thank you for reading.  Would you please leave your comments below where it says “Leave a Reply”… or ask a question…  Pay it forward too by sending the link to MarketTiming.Blog (that link will immediately connect them to this webpage) to a relative or friend.  Thanks for doing that.

Be sure to visit the website for more general investing knowledge at:

Sun and Storm Investing™

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, go to my “Other Resources” page here:  Other Resources   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.  Check it out with a free trial at the link above.

Finally: Please excuse and report all typos if you are so moved.  I do my best to pick up most of them, but have not always found them all.  Shoot me a comment (I don’t have to post your typo report as I filter them before publication, but I’ll be grateful to you!)

Copyright © 2018 By Wall Street Sun and Storm Report, LLC All rights reserved.

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

Market Timing Brief™ for the 10-19-2018 Close: My Favored Scenario and the Risks. Small Caps May Underperform. Gold Just a Tease or for Real? Rate Top In?

A Market Timing Report based on the 10-19-2018 Close, published Saturday, October 20th, 2018…

I deliver focused comments on market timing once or twice a week.  These are supplemented with daily “Tweets/StockTwits” (see links below).

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

Two weeks ago I said there could be “About a 6% fall for the SP500 Index to test the 200 day moving average.”  Guess where we are trading?  The Friday close was 2767.78 with the 200 day moving average at 2768.24, so we’re just 0.46 points below that moving average (mav).

I teach people how to become more conscious in all areas of life.  It turns out, when you do it for investing, you are doing it for every other area of your life, which will allow you to act less like a monkey swinging from the branch of attachment, which means over-exuberance  in investing terms to the branch of aversion or fear and selling stocks at lows.  Contact me if you are tired of being a monkey emotionally via the contact tab above.  Let’s talk about your path to a conscious life including investing, and if it’s a fit, I’ll work with you…

How does this apply to the market?  The market represents the sum total consciousness of all participating investors.  It is useful to think about the market as a single individual to understand him.  Yes, it’s a boy.  😉  Women are generally more advanced spiritually (a fact) and therefore more mature than he is.  Investors have been falsely calling him “Mr. Market,” but he’s really more like “Master Market.”  Master Market is like a 5 year old and just like the monkey described, swings from attachment to aversion and back again.  Simply put, the market is like an emotional child.

What is Master Market (hereafter MM) thinking these days?  MM got really, really excited about stocks back in January, which as I warned here in mid-January, had driven individual investor sentiment to the sky.  You can even see it in the chart.  The SP500 Index was going up in parabolic fashion, which always leads to crashes back to reality in virtually every market.  The only justified parabolas in investing are those based on buyouts.  Otherwise they are bets for suckers.

What has MM been thinking since the February 9th intraday low?  MM believes the 200 day mav is a useful guide for him, along with the lower orange line representing the lower up trend line of the 2017 channel.   Once he got more comfortable with the up trend, he began using the 2017 up channel (orange lines on the chart below) as a guide for the high end and the 50 day mav as a rough guide for the low end (touching it twice on the way up), and then ignored even the 50 day mav and shot above the 2017 channel.  That was when we could have known things had gone too far.

There were a couple of pullbacks off the upper channel line and then it was ignored on several thrusts to the upside as everyone rushed to buy tech stocks like Square (SQ) again and again and again.  That does not make Square a bad company, just one that was overvalued, because MM was getting overly excited as if the trend could only end at the price of infinity. 

Now that MM is back at the same 200 day mav and the same lower 2017 channel line, using it for support for the FOURTH time now, already with two tests of it just in the past 7 trading days, a good question to ask is…

“WILL THE 2017 CHANNEL and 200 DAY MAV HOLD AGAIN THIS TIME?”

“It could” is the initial answer. 

What favors them holding?

  1. They held before.
  2. The market was very oversold at the low on 10-11-18.
  3. Earnings are coming in strongly, even a bit better than expected.
  4. Earnings projections are not as strong as they were last quarter, but they are decent.

What favors the market breaking at all?

If “it” holds, what will hold is NOT the 200 day in my view, or even the slightly lower 2017 channel line, but the low set intraday on 10-11.  Because the market is no longer as oversold as it was then, it can easily do a full retracement of the gains back to the 10-11 low.  That’s what it did earlier in the year.  That is a loss of 2.07% from here.  Not that big of a deal, IF it holds as a temporary low.  We could even call such an event something like “the 200 day mav roughly holding.”

What favors it breaking (at least in time) in a significant way? 

1. The current earnings season could allow the market to hold up for another quarter, but after that, reality kicks in.  I’ve documented in detail back in early August (remember to read carefully!) how much revenues and earnings are due to slide, not so much in Q4 2018, but in a bigger way in Q1 and Q2 of 2019 and for 2019 as a whole.  Factset has just updated the data HERE for the current quarter’s earnings, but read my explanation of how markets track deceleration of E by dropping stock Prices (lower E, means lower P): HERE (it’s in the top SP500 Index section).

This means that a rally from this level won’t prevent the market from ultimately testing a lower low. The 3 horizontal red lines in the chart below are all possible targets.  My sense is the February low will be a magnet for the market if one of the higher levels is reached. 

That means, if the market breaks the recent low, expect the Feb. low to be reached at a minimum. 

2. Investor sentiment (AAII as shown below) did not reach any sort of wash out level.  In fact, as I said last week, investors were complacent on 10-10-18, after a very big down day of 3.29%.  I believe with the deceleration of revenue and earnings coming in 2019 especially (GDP falling obviously), investor sentiment will eventually hit a reasonable washout level.

This meager low in sentiment does not preclude a bounce from this level.  In fact, even back after the huge fall in February, AAII sentiment was not washed out, and a bounce occurred driving sentiment straight back to sanguine levels which marked the top of a FAILED BOUNCE. Then down the market went…

What COULD favor a significant break lower from this level?

1. A surprise run by oil much higher, with an associated spike in rates to a new high.  Inflation and oil spikes move together despite what the Fed may say. 

2. A rate spike of the 10 Year Treasury Yield above 3.248% (without the oil spike) for ANY REASON would induce a further leg down in the SP500 Index and in midcaps and small caps as well of course.  The reason for this is I believe Master Market, MM, has decided interest rates have stopped going up for now, even though he doesn’t know it yet!  Yes, it must be proven by a fall back through 3.115% as I explained last week.  If rates misbehave by moving still higher, it will be taken badly by MM.  He’ll throw another tantrum being the unruly 5 yr old emotional child he is!  😉

3.  A bad break in the small and mid caps to new lows leading the SP500 Index down.  There is already some risk there. Look at where small caps (IWM) closed on Friday.  This was the second “MUST” I outlined last week HERE.  Last week’s issue was one of the most important issues I’ve ever written, so please read it if you haven’t.  It will prepare you for the coming continuing market swings…

What to Do?

If you’ve been ignoring me since early August and instead have been chasing tech stocks to the stratospheres, read last week’s issue (link just above) and learn something.  My situation may be very different from yours, so I cannot possibly tell you what to do.  With my exposure level now, the market can do whatever the heck it wants, and I’ll be fine.  Can you say that?  I’m not bragging.  I’m saying you NEEDED to have a plan.  You didn’t?  Then get one now.  WRITE IT DOWN or it’s NOT a plan.  It’s never too late to “get it right.”  I work at eliminating my own errors in investing every single day.  I suggest you do the same.

Keep improving by tracking your results, noting your victories and admitting your errors, and fixing the latter with improved processes you apply with discipline.

This is a pivot point, which means if the market rises, you may want to sell into bounces.  They can go farther than you think, so sell in stages and sell MORE on a break from a lower high that is of note (follow me on social media to spot the better times to buy/sell).

My Favored Scenario

As a pivot, the market could now go straight down from here.  That’s NOT the “Favored Scenario” which in my view is now…

1. FIRST a Bounce to suck investors back in, lasting even to Christmas and

2. THEN a Trounce to take it all back again. 

But if the market does break down directly from here, I’ll be selling even more exposure to an even lower 65-70% of “usual maximum exposure for a Bull market” as I say.  Adjust that to your circumstances if you like.  Remember the risk of lost opportunity by SELLING low and having to chase higher, so be willing to re-buy your exposure if the market does not do what YOU thought it would do.  Yes, YOU.  You, as I say every week in some fashion, are responsible for YOUR results, not me.  I cannot be, as I don’t know your circumstances or your risk tolerance.  If you cannot sleep at night, guess what?  YOUR EXPOSURE IS TOO HIGH!  😉

AGAIN: DO NOT SELL exposure you are not willing to buy it back if your SELL is wrong! 

And SELL exposure when your BUY is wrong by the way!

What am I going to do?  I’ll share that on social media as I do it.  Do me a favor by the way.  If you follow me on StockTwits, follow me on Twitter as well (link is above).  Thanks for doing that!  I appreciate my loyal readers, their retweets, comments, and interaction.  You and I both get better when we exchange ideas and views. 

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative. It closed at 44.00 at a new recent closing low,  though barely below the September low.  The stock has to bounce above the 200 day mav to be back in recovery mode in rough terms.   (Reminder: INTC is our “tell” on 2nd half earnings in tech as noted HERE.)  Earnings are out Thursday after the close.

Bank of America (BAC) Market Timing Signal: Negative but now seeking support at the July low, so it’s not a sell in my view, unless it breaks again.  Their earnings were out Monday the 15th and the stock is up slightly from then.  Be careful if the stock rises to the 50 day mav and fails – it could be the time to sell again.

Note on the chart below that the 2017 channel line (in orange) served as closer support most recently, not the 200 day mav (white line on the chart).

Keep up-to-date during the week at Twitter and StockTwits (links below)…

Follow Me on Twitter®  Follow Me on StockTwits®.

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

sp500-index-spx-market-timing-chart-2018-10-19-close

Bounce then back down?

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -1.11% vs. -4.84% last week.  I explained what this lack of Bearishness may mean above…

AAII.Com Individual Investor Sentiment Poll
Bulls Neutrals Bears
33.94% 31.05% 35.02%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM): I believe the scenario I’ve outlined raises the risk for small (highest risk) and mid (medium risk) caps in particular.  If they behave as they did in the bounce between the 2015 and 2016 lows, they won’t bounce as much as the SP500 Index, and could fall much further in the second big wave down.

For tax and other reasons, I’m still holding midcaps long term, but I’m out of small caps for now with the exception of very small positions in speculative stocks (mainly biotechs).  Mid caps may also underperform large caps however if we see a bounce/trounce scenario to new lows.  When growth slows, small caps and to a lesser extent mid caps do not perform as well.  (And large cap growth suffers too!)  These are normally the faster growing companies in good times.

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

iwm-russell-2000-market-timing-chart-2018-10-19-close

Will small caps bounce as much as large?

3. Gold Market Timing (GLD):  Gold is perking up despite the dollar retesting the prior October high and rates moving UP, not down.  This is Bullish for gold, but we’re going to trade this one, not consider it a long term position (our gold insurance IS a long term position remember – see last week’s post HERE. Scroll down to the Gold section).

I left this trading view from last week: “If you buy here, you should consider using the lower red line, the 111.06 level, as your stop, or more aggressively and perhaps better, you could stop out below the 114.87 level (upper red line it [was] testing) to protect your capital.”  GLD is now above that test level in consolidation. 

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

gld-gold-etf-market-timing-chart-2018-10-19-close

Gold consolidates despite rates rising with the dollar. Positive.

4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX):

Rates are edging up along the critical trend line, so there is no top in rates yet!  Remember that as you position yourself.  If you expect the 10 Year Yield and other U.S. rates to break lower as I do, you can buy earlier, but get out if there is an upside surprise.  The yield could certainly retest the prior high, even if it does not exceed that level and then falls.  Read last week’s post for rates in “Section 4” for more detail.

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):

tnx-10-year-treasury-note-market-timing-chart-2018-10-19-close

Rate top NOT certain yet. Edging up along trend line.

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 own moves 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 RED for a further U.S. stock market rally with a BEARISH SP500 Index trend.

Two weeks ago week I said: “The small caps broke down badly, so the SP500 Index could follow them down (as I said, about 6% from the high to start).  The small caps are a better indicator of the health of the economy, as they are most vulnerable to economic changes, and hence, are the basis for this signal.”

Last week I said (still applies): “One could argue about the SPX trend.  If it stays above the lower orange line shown, it is still in the 2017 upward channel; however, it clearly has broken the prior up trend, so let’s call it Bearish with a caveat.  In other words, one could say the prior trend was unrealistic, and this one is realistic.

The VIX (which relates to SPX volatility) closed at 19.89 on Friday vs. 21.31 the previous week.  Above 19.55, the VIX level is BEARISH for the SP500 Index, but rising to the 26ish level and then falling could be Bullish short term.  The Bulls must retake the 8-15 high of 16.86 (break down below it). The “Bull Nirvana Target” is our VIX # of the Year: 13.31.  As I said 2 wks ago, “Super Bull Nirvana would be VIX below 11.22, but I have the feeling it will take a while to get back there.” 

The Bears need to take out the 26ish top that was tested this week for the market to  go into another big decline.  If they do it soon, it COULD still just last a day or two.

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

Remember GLD is being used as an indicator for the ECONOMY here.  I am calling it a BULLISH trend, because of both 1) the breakout above the recent trading range and 2) the stability in the face of rising dollar and rates.  It must hold above that upper red line discussed above however.

Rate Signal  BEARISH  for a further stock market rally with a BULLISH 10 Year Yield Trend.  Until the trend breaks down again, the current rate level can be seen as Bearish, in my opinion.  It is too high for current conditions, and yes, the Fed is likely wrong about their plans to raise rates as many times as they say they intend to through 2019.  I have my opinion, but I don’t blame them for the market’s condition.  Slowing growth can explain it all.  Raising rates is simply revealing how sick market dependence is on accommodation.

I’m leaving this important statement here until things change: “This level of the 10 Year Treasury Yield, which is too high for current conditions as explained HERE, will eventually slow the economy.”

I’ll keep this here as a reminder from prior issues: The market seems to have adjusted to rates of up to 3% or so as said in the signal summary HERE” but NOT above there.  Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.”  That’s what I call “Rate Shock.”  This period of rising rates is #RateShockII.”

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, 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 charts for now as reference points only; they have historical value for us from the post-2016 election period.

Thank you for reading.  Would you please leave your comments below where it says “Leave a Reply”… or ask a question…  Pay it forward too by sending the link to MarketTiming.Blog (that link will immediately connect them to this webpage) to a relative or friend.  Thanks for doing that.

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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, go to my “Other Resources” page here:  Other Resources   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.  Check it out with a free trial at the link above.

Finally: Please excuse and report all typos if you are so moved.  I do my best to pick up most of them, but have not always found them all.  Shoot me a comment (I don’t have to post your typo report as I filter them before publication, but I’ll be grateful to you!)

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Market Timing Brief™ for the 10-12-2018 Close: Is There More Downside? Four Actions to Consider. What “MUST” happen now? Small Caps at a Decision Point. Gold Glimmering? Rates Ease a Bit.

A Market Timing Report based on the 10-12-2018 Close, published Sunday, October 14th, 2018…

I deliver focused comments on market timing once or twice a week.  These are supplemented with daily “Tweets/StockTwits” (see links below).

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

Last week I said: “As I also warned you, small caps were saying investors were seeing rising risk in owning small cap, higher beta and higher momentum stocks…and they came crashing down this week.”

I also said, “The key to understanding ‘what is really going on’ is interest rates.  They have been ramping up since the August low, and this week the rise accelerated, and went past the prior May high of 3.115%.”  This rate shock is what I called “#RateShockII.” It happened before at the end of January.

And I said: “The next logical target if rates don’t simmer down or earnings projections sour (big banks start reporting next Friday Oct. 12)?  About a 6% fall for the SP500 Index to test the 200 day moving average.”

Now that has actually taken place with the SP500 Index less than one point above its 200 day moving average (mav), these are two of the critical MUST signals that I will be watching with you over the next several days to weeks… 

What MUST ideally happen to “save this market” from another possibly greater decline:

MUST #1. Small (IWM) and Midcap (IJH) stocks cannot reach significantly lower lows from here or the SP500 Index will follow them down to at least test the February low in my view.  The higher lows achieved in April and May serve as higher targets, but I’d put my money on the Feb. low, and be prepared to add at those two higher lows (April/May) if the market ends up looking good for a bounce from there.

The SP500 Index closed at less than a point above the 200 day mav as said, so this is a decision point for many investors who follow it.  Being there of course does NOT tell you whether it will hold, but it must hold is what I’m saying.

The next SP500 Index target to the downside is 8.35% lower if these levels do not hold. 

I do not intend to ride my entire exposure down that low, but you can do what you feel is best.  I will likely lower my exposure from the current level (stated at the social media links below) to 70% of my usual maximum exposure for a Bull market at least.  (someone asked me what this meant on Friday and you can find the answer on my Twitter or StockTwits feeds). 

Remember I started at 100% of maximum exposure at the January high and have sold enough exposure already to make a difference.  The idea of “Passive Shorting,” a term I coined, is to SELL high and buy LOW, instead of riding the big waves down.  Read about it HERE.

MUST #2 A. The second thing that must happen is rates must ease further and slice down through that prior high I’ve been following with you at 3.115%.  The close Friday was at 3.141%.  That means the test of the breakout is only 2.6 basis points lower from the close on 10-12-18.  (1 percent = 100 basis points, or bp abbreviated). 

This week rates eased a bit, which is helpful as #RateShock was a major issue for the market in the current sell-off.  I went over my concept of “#RateShock” in the 2-09-18 issue: HERE (see section 3 on gold)Rates WERE rising too fast for the current context of Ex-US slowing with extremely low rates still in both the EU and in Japan and accommodative currency games being played by China.  Even at current levels, this means that this rise in U.S. rates is actually contractionary rather than accommodative in relative terms.

We must watch oil with the 10 Year Treasury Yield, because it is a major driver of inflation, despite what the Fed tells you about oil costs being transient. 

“MUST #2 B.”  Oil must keep coming down or at least stay below the lower high formed on the WTI Oil chart I posted last Friday on social media. 

I realize it is hard for many of you to trade quickly if you have assets tied up in mutual funds.  Even if this level of the market were to hold, it is unlikely it will hold on a single V shaped bounce.  IF the market breaks further to the Feb. lows, that could provide the impetus for a strong bounce as well, especially if it happens quickly.

If the whole move down is 8.35%, then selling on a 4% down day may not be fruitful if the next day the target is hit and the market reverses.  You’ll have to make your own judgment on when and how much to sell based on your cash needs in the next couple of years, and certainly, you will also have to get back in if your timing is wrong.  “Your timing” you notice, not mine.  I provide the guidelines to help you look at the market the way the mainstream media often fails to (more on that another time…), but YOU have to live with your decisions.  

That comment about the media is of course with the exception of MarketWatch, which in a Monday morning market preview by Barbara Kollmeyer at 9:38 a.m., included a link to my Sunday 10-08-2018 post HERE.  😉   I wonder if anyone read it and sold stocks on Monday?  If you did, please comment below.  

Over the past several weeks, I told you to “sell some.”  I repeated my lower exposure levels numerous times on social media.   I sold SP500 exposure before the last fall.  I’ve been switching some SPY (SP500 ETF) exposure for XLV Healthcare exposure that has been doing a bit better than the SPY.  I told you to sell high risk stocks and ETFs etc. before the latest fall.  Many of you may have ignored what I said, but I said it.

Learn to read and be present with what you are reading and decide based on your understanding of what was said what you yourself believe and most importantly ask yourself this:

“WHAT ACTIONS AM I GOING TO TAKE OR NOT TAKE BASED ON WHAT I JUST READ?”  Inaction is an action.

The above will help you enormously going forward.  Read it three times and sit with that question after reading this blog each week and for whatthat matter, anything about investment. On the buy side, how does it help you to read about the “next Microsoft or next Apple” and not invest anything in it if you believe the statement?

I realize you cannot change what  you did NOT do, but there are a few other things you CAN do if you decide they are right for you:

Four Actions to Consider…A through D of Managing Market Declines

A. Sell the Bounces.  Follow me on social media to learn where the better spots are.  THIS IS NOT a good spot to sell unless you need to protect college assets in an SPX fund for example.  After the Fri. bounce we are only 6.13% from the top, so you could sell some right here if your cash need is coming up soon.  You may be sucked in by the crowd that is already buying high risk stocks back off this week’s lows.  Avoid that, unless you know something about the company that convinces you it can “float above the market” (read below about this point).  If you’ve been overexposed, this is a chance for you to “sell the bounces,” rather than buy them.

Markets, once they break like this, very often take time to heal (2-3 months at least), and the upcoming slowing of U.S. growth is going to start to take its toll on the market from whatever level investors take it to before digesting that news.  Be careful not to ANCHOR on the past.  That means believing what you believed before, thinking all is the same.  It’s not going to be…in my view.

Growth is NOT enough.  I told you in early August, U.S. growth was going to slow.  Not below zero growth, which is a recession, but slow.  INCREASING growth is what the market pays for, at least at these prices.  SLOWING growth is what markets sell.  That’s why prices have gotten to these levels in the U.S.  Growth WAS on the increase.  But you see, once we reach peak GDP and turn down, all the numbers are “less good.”  That drives stock prices down.

It’s not complicated, but many investors don’t get it.  They think as long as GDP is rising at 2%, all is well.  It’s the increase from 2% to 3% that is built into stock prices.  And it’s about to turn the other way.  The Fed has even predicted the coming GDP decline, as I discussed here previously.

B. Sell Higher Beta, Higher Momentum Stocks and Funds on the Bounces.  Replace the exposure sold with SP500 market exposure in part or completely if you do not want your exposure level to fall to the level it otherwise would. 

Sell SP500 Index exposure on the bounce too, if you decide your exposure is too high to ride down, should the market step down to the next level as discussed.

I made this a separate point, because I have not just sold some market exposure.  I have also lowered risk.  You may want to consider doing that on any bounce or perhaps on a further trounce if the bounce is killed off in its infancy.

Decide what exposure level you want here and sell risk, but buy back SPY or the equivalent with PART of the funds to do that.  Say you have 50% high risk stocks and 50% SPY now.  Sell the 50% high risk (or 25%, if you so decide to hedge your bet) and use half of it to buy SPY, and you’re back to a lower risk at 75% exposure, which is a lower exposure.  That’s just one example.  Perhaps you want to keep some growth stocks you believe in or even QQQ for example.  Your choice.  Keep stocks that can continue to hit their targets (more on that later).  Few will stay levitated above the market, but some may.

Yes, you may have had more gains if the market goes to brand new all time highs from here, but I am positioning believing that is not the case.  At least you won’t miss out entirely on those gains if you switch from high risk to medium risk exposures.  If the market goes straight down, the switches won’t MAKE you money to be clear, but you’ll lose less.  Cash or short term Treasuries (individual Treasuries, not funds unless they cannot be avoided in a retirement account with your company for ex.) are a good place to wait for the turn.

C.   Long Term Treasuries: If interest rates do break down through my target as stated above, buying long term TREASURIES (not corporate debt; corporate debt may work out, but the risk is higher) can provide great returns.  This is a TRADE, I want you to realize, because after a fall in rates with falling growth globally, rates will climb again based on a variety of factors including government and corporate debt loads.

You’ll have to move in and then move out at the right time.  If rates go straight up and we end up with “Stagflation,” or slower growth and higher inflation, TLT and the like will be punished badly.  Then only cash works and very short term debt, where you can reinvest it rapidly as rates rise.

If you do keep corporate bonds, choose those of solid AAA companies, not corporate bond funds if you can help it.  When investors leave bond funds, they drag down prices as bonds are not as liquid as stocks.  Go back and look at what happened in 2008 if you don’t understand the risk bond funds represent in general.

D. Buy/Hold Companies that Can Sustain Growth Through a Lower Growth Economy:  I just pointed out that most growth companies don’t do well in a slower economy.  Also, investors often sell an entire sector these days, not individual stocks, so any stock caught up in the selling is less likely to continue its up trend.  It could, but that would take a strong investor belief in the company.

That means this a tough task, but an example would be a biotech company with a promising product in phase 3 testing with very positive phase 2 results.  A new product like that has demand no matter what.  It also entails high risk of course, but that’s what speculations are about.  Use a very small percentage of your capital for such speculations.  Some say use a half sized position vs. large cap positions you buy.  That could be too much.  I say use a quarter or an eighth size or less, and spread out your bets, as many fail badly.  If you can find companies that will grow whether we are at 1.5% or 3% GDP, great.  But watch their charts.  They must be outperforming the market.  If they don’t, there could be something amiss.  Sell speculative stocks that are breaking down in price performance terms.

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative. It closed at 44.88 near the prior September low AFTER a failed rally attempt.  I said previously: “46.19 is now the reversal point to watch,” but now it is the 200 day moving average that is the target.  It traded up to the 200 day mav and declined.  That’s classic behavior for a stock in a Bear market of its own.  (Reminder: INTC is our “tell” on 2nd half earnings in tech as noted HERE.)

Bank of America (BAC) Market Timing Signal: Negative.  As said, “Similarly BAC has failed to rise above both its 50 and 200 day mav’s, DESPITE the ramp in rates.”  Bank earnings were out Friday, and BAC was up far less than the SP500 Index.  Even XLF went up ONLY 0.11% vs. 1.42% for SPY!  BAC reports on Monday before the open.  They had better have good things to say…

Note on the chart below that the 2017 channel line (in orange) served as support, not the 200 day mav (white line on the chart).

Keep up-to-date during the week at Twitter and StockTwits (links below)…

Follow Me on Twitter®  Follow Me on StockTwits®.

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

sp500-index-spx-market-timing-chart-2018-10-12-close

More bounce? Watch the reaction to earnings and rates.

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -4.84% vs. +20.55% last week. 

Last week I noted Sentiment was duplicating past tops: “Sentiment peaked at about 20% at both the June 13th and August 29th near highs in the SP500 Index.  The pullbacks were very shallow however, only 1.42% in August and only 3.63%.  The catch?  Interest rates were much lower at those times.  Interesting that sentiment made this lower high RIGHT NEAR THE TOP. So that fits with the last high being somewhat significant in sentiment terms.  Sentiment is no where near where it got at (actually a couple of weeks BEFORE to be precise) the Jan. 26th, 2018 high however.

I also said, “The Big Bull market is not likely to die here, but that does not preclude a correction of 6% or even a ‘Mini Bear Market’ as I’ve coined the term HERE of up to a -25% drop.” Read last week’s post if you have not for what would turn this into a “Big Bear Market.”

What does this level of sentiment spread mean?  Sentiment after this fall is not a wash out level at all.  We can expect far higher numbers at the ultimate low.  Still, after a long period of Bullishness, the first fall, which this is, often is met by smaller drops in sentiment as we see here.  Conclusion: A bounce can occur, but the selling is not over in my view, based on sentiment alone, which is only one thing we look at.  Still, it’s an important clue to add to the rest…

AAII.Com Individual Investor Sentiment Poll
Bulls Neutrals Bears
30.61% 33.94% 35.45%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM): Small caps I’ve already discussed for this week.  They are “high risk.”  They and midcaps will also lead the SPX by the nose in the near term, UP or DOWN.  

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

iwm-russell-2000-market-timing-chart-2018-10-12-close

Small caps told me the market was shaky in advance and will be the key clue on whether the entire market moves lower.

3. Gold Market Timing (GLD):  Gold is perking up as the markets around the world started to panic together AND U.S. rates FELL at week end.   I’ll leave this warning here: REMEMBER THIS from my last Sept. issue: “As rates fall again, gold may perk up a bit, but the dollar could rally at the same time, blunting the gains from falling rates.”  Gold will be tricky to trade, but will do best if a global panic occurs, say around Italy falling apart as previously said. 

Read my last few posts to catch up on gold.  The move this week says “maybe buy some GLD” as rates are falling.  If the dollar rallies too, gold can rise less, so I like Treasuries (provided there is no new high!) better than gold at this point.  I own GLD as insurance, so if you own none, you could buy some here (most say up to 5% of investable assets – actually they never say whether they are talking about investable assets or ALL assets including your house, but I’ll say up to 5% investable assets, because that is what I do!) and use a stop below the recent lows.  In the gold Bull market, I went to 12% max. of investable assets.

Newcomers should Google: “When does gold shine and when does it decline?”  Read the article I wrote, and you’ll know more than most people about how to avoid being a perma gold bug and actually make money on gold.  I doubled my gold position at around $380 when Barbra Streisand was shorting it!  I sold my entire principle at 1370ish, off the top, yes, but the rest is gravy now.

If gold breaks back down below that red line it’s now testing on a retracement of the breakout, wait for the next breakout above that line to buy it, in my view. 

If you buy here, you should consider using the lower red line, the 111.06 level, as your stop, or more aggressively and perhaps better, you could stop out below the 114.87 level (upper red line it is testing) to protect your capital.

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

gld-gold-etf-market-timing-chart-2018-10-12-close

Gold perks up.

4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX):

Buy some TLT for leverage on duration if you wish, but that has not been my choice yet (20+ years; longer term Treasuries).  I am using IEF  for now (7-10 yr Treasuries), which moves less up and less down until I see the break below my “MUST #2,” the key number of the month or a break of that trend line shown in yellow if you want to buy a bit earlier.  I won’t be buying more (likely TLT this time) until my “MUST #2” level is taken out.  I may buy some intraday, but I want to move in stages and add on confirmation of a close below it and again on a second close below the number.

SELL if the 10 Year Yield breaks out at least 2 days above the prior high.  If the move is fast, you may decide not to wait more than one day.  Sometimes markets…change that…OFTEN markets subconsciously seek to fake us all out.  Just consider the head fake of the new 2018 high in stocks!!!  Yes, the market has a consciousness that is the collective consciousness of all market participants (heavily machine weighted, but the humans program them, so they are human surrogates!). 

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):

tnx-10-year-treasury-note-market-timing-chart-2018-10-12-close

Time to buy Treasuries. Sell if the 10 Year Yield breaks out again.

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

Do not use these signals as a trading plan.  They are rough guidelines.  I currently share my own moves 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 RED for a further U.S. stock market rally with a BEARISH SP500 Index trend.

Last week I said: “The small caps broke down badly, so the SP500 Index could follow them down (as I said, about 6% from the high to start).  The small caps are a better indicator of the health of the economy, as they are most vulnerable to economic changes, and hence, are the basis for this signal.”

One could argue about the SPX trend.  If it stays above the lower orange line shown, it is still in the 2017 upward channel; however, it clearly has broken the prior up trend, so let’s call it Bearish with a caveat.  In other words, one could say the prior trend was unrealistic, and this one is realistic.  If I were Bullish on INCREASING growth going forward, I’d say the market could be fine here.  It’s not going to do that it seems.  Growth will very likely slow into Q2 of 2019 at least.  That’s why I’m selling the bounces instead of buying the lows at my current level of exposure.

The VIX (which relates to SPX volatility) closed at 21.31 Friday vs. 14.82 the previous week.  This is BEARISH for the SP500 Index, but rising to the 26ish level and then falling could ironically be Bullish short term.  The Bulls must retake the 8-15 high of 16.86. The “Bull Nirvana Target” is our VIX # of the Year: 13.31.  As I said last week, “Super Bull Nirvana would be VIX below 11.22, but I have the feeling it will take a while to get back there.” 

The Bears need to take out the 26ish top that was tested this week for the market to  go into another big decline.  If they do it soon, it could last just a day or two.

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

Remember GLD is being used as an indicator for the ECONOMY here.  I am calling it a NEUTRAL trend, because there is another higher low in now and a breakout above the recent trading range.  It must hold above that red line discussed however.

Rate Signal  BEARISH  for a further stock market rally with a BULLISH 10 Year Yield Trend.  Until the trend breaks down again, the current  rate level can be seen as Bearish, in my opinion.

I said last week: “In fact, a legitimate Bullish signal would be rising rates with rising financials such as XLF and BAC as part of that.  Minus that second part, you can forgetaboutit.  The rate increase is NOT Bullish when the two don’t move up together.  Big banks like global stability.  Furthermore, high rates ARE normally good for banks, but NOT out of context.  WHY NOT?  Because this level of the 10 Year Treasury Yield, which is too high for current conditions as explained HERE, will eventually slow the economy.”

I’ll keep this here as a reminder from prior issues: The market seems to have adjusted to rates of up to 3% or so as said in the signal summary HERE” but NOT above there.  Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.”

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, 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 charts for now as reference points only; they have historical value for us from the post-2016 election period.

Thank you for reading.  Would you please leave your comments below where it says “Leave a Reply”… or ask a question…  Pay it forward too by sending the link to MarketTiming.Blog (that link will immediately connect them to this webpage) to a relative or friend.  Thanks for doing that.

Be sure to visit the website for more general investing knowledge at:

Sun and Storm Investing™

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, go to my “Other Resources” page here:  Other Resources   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.  Check it out with a free trial at the link above.

Finally: Please excuse and report all typos if you are so moved.  I do my best to pick up most of them, but have not always found them all.  Shoot me a comment (I don’t have to post your typo report as I filter them before publication, but I’ll be grateful to you!)

Copyright © 2018 By Wall Street Sun and Storm Report, LLC All rights reserved.

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

Market Timing Brief™ for the 10-05-2018 Close: Rate Shock II. SP500 Index Mid-Dip. Small Caps Hit 200 Day Mav. Gold Stirring.

A Market Timing Report based on the 10-05-2018 Close, published Saturday, October 6th, 2018…

I deliver focused comments on market timing once or twice a week.  These are supplemented with daily “Tweets/StockTwits” (see links below).

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

Last week I warned: “Cracks in the Bull thesis are showing up now.  No big trend changes yet, but cracks, which could lead to more.  The SP500 Index made a new high and then pulled back below the prior breakout.”

I also said last week: “My concern is that the small caps are flirting with significantly more danger now, by slicing through their lower channel line noted in purple on the 2nd chart below.”

As I also warned you, small caps were saying investors were seeing rising risk in owning small cap, higher beta and higher momentum stocks…and they came crashing down this week.  The down trend in small caps was the clue I shared.  They began selling off on 9-04-18.  If you sold the breach of the purple line on the small cap stock chart on 9-24, you were ahead of the game.

The key to understanding “what is really going on” is interest rates.  They have been ramping up since the August low, and this week the rise accelerated, and went past the prior May high of 3.115%. 

I went over my concept of “#RateShock” in the 2-09-18 issue: HERE (see section 3 on gold)Rates are rising too fast for the current context of Ex-US slowing with extremely low rates still in both the EU and in Japan.  In addition, China has devalued its currency to counteract #Trump’s #TradeWar impact.  This means that this rise in U.S. rates is actually contractionary rather than accomodative in relative terms.

Now Chair Powell of the Fed openly says that rates should no longer remain “accomodative,” so this hawkishness has bond/Treasury investors all leaning to one side of the boat and there may have been some capitulation going on at the end of the week on the new breakout shown in the 4th chart below.  That just pushes rates higher even faster.

My sense is this: If the rise in rates continues at the steep rate of the past few days, continuing to trend upward quickly, the stock market will head into a much more significant correction.  Small caps have been hit the hardest, down about 6.48%, while the SP500 Index is down just 2.09% to Friday’s close off their highs, meaning small caps have fallen more than 3 times as far compared to the large cap decline off its top.

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative. Even though INTC closed Friday at 47.03, which is above the reversal number, the stock hit the 200 day moving average and turned back down, which indicates, the bounce may be over. I said previously: “46.19 is now the reversal point to watch.”  (Reminder: INTC is our “tell” on 2nd half earnings in tech as noted HERE. 47.42 was the second “checkpoint” we were following, and it has closed below that.

Bank of America (BAC) Market Timing Signal: Negative.  Similarly BAC has failed to rise above both its 50 and 200 day moving averages, DESPITE the huge ramp in rates.  The 10 minus 2 year spread in rates is still only 0.25 points vs. a spread of 0.23 on 9-27-18, so the spread has widened only a little despite the big move in the 10 year Treasury yield of 0.169.

Bank earnings are based on the spreads. The market was down 0.66% Friday (SPX), while BAC was down 0.55%.  That difference is not enough to say the market is confident in the ability of banks to withstand this rapid increase in rates.  The positive for the week for BAC?  It was up for the week, while the SP500 Index was down.

The next logical target if rates don’t simmer down or earnings projections sour (big banks start reporting next Friday Oct. 12)?  About a 6% fall for the SP500 Index to test the 200 day moving average.  As many of you know, we never know how a stock or index will behave at a “level” like that until we get there, so stay connected on social media during the week….

Keep up-to-date during the week at Twitter and StockTwits (links below)…

Follow Me on Twitter®  Follow Me on StockTwits®.

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

sp500-index-spx-market-timing-chart-2018-10-05-close

More downside ahead? Watch the 10 Year Treasury Yield.

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +20.55% vs. +5.12% last week. 

Sentiment peaked at about 20% at both the June 13th and August 29th near highs in the SP500 Index.  The pullbacks were very shallow however, only 1.42% in August and only 3.63%.  The catch?  Interest rates were much lower at those times.  Interesting that sentiment made this lower high RIGHT NEAR THE TOP. So that fits with the last high being somewhat significant in sentiment terms.  Sentiment is no where near where it got at the Jan. 26th, 2018 high however.

The Big Bull market is not likely to die here, but that does not preclude a correction of 6% or even a Mini Bear market as I’ve coined the term HERE of up to a -25% drop.  The impetus for the bigger fall that I call a Big Bear Market, a drop of up to 50% or even more is not clear unless it is simply rates ramping relentlessly toward 3.5% then 4% from here. That would do it, as it would induce a recession in my view.  China tariffs ramping to 25% early next year could also do that as rates would be further pushed to the upside.

AAII.Com Individual Investor Sentiment Poll
Bulls Neutrals Bears
45.66% 29.22% 25.11%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM): Small caps could certainly bounce to a lower high, but I don’t believe the water is safe until the 10 Year Treasury Yield slows its rise and reverses.

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

iwm-russell-2000-market-timing-chart-2018-10-05-close

Small cap danger still as they do poorly when growth slows.

3. Gold Market Timing (GLD):  Review the issues a few weeks back for an explanation for the abysmal performance of gold.  REMEMBER THIS from my last Sept. issue: “As rates fall again, gold may perk up a bit, but the dollar could rally at the same time, blunting the gains from falling rates.”  Gold will be tricky to trade,  but will do best if a global panic occurs, say around Italy falling apart (its market already has fallen apart; the Italy ETF EWI is down 21.4% in its very own Bear market).  

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

gld-gold-etf-market-timing-chart-2018-10-05-close

Gold is pressing the top end of the recent narrow range.

4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX):

Rates are accelerating too fast as detailed above.  This chart is a big key to following the stock market in the coming weeks.

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):

tnx-10-year-treasury-note-market-timing-chart-2018-10-05-close

Rates are rising too fast.

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 own moves 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 RED for a further U.S. stock market rally with a NEUTRAL SP500 Index trend.

The small caps broke down badly, so the SP500 Index could follow them down (as I said, about 6% from the high to start).  The small caps are a better indicator of the health of the economy, as they are most vulnerable to economic changes, and hence, are the basis for this signal.  

The VIX (which relates to SPX volatility) closed at 14.82 on Friday vs. 12.12 the previous week.  This is BEARISH for the SP500 Index.  Volatility spiked to 17.36 intraday, above the 8-15 high of 16.86, which is the Bear target to watch. The Bull target remains the same: our VIX # of the Year: 13.31.  Super Bull Nirvana would be VIX below 11.22, but I have the feeling it will take a while to get back there.  

Gold Signal  GREEN for a further U.S. stock market rally with a BEARISH Gold Trend. 

Remember GLD is being used as an indicator for the ECONOMY here.  Scroll up and read the blurb above the gold chart please.

Rate Signal  ??????  for a further stock market rally with a BULLISH 10 Year Yield Trend.  Why the  “??????”?  It is because things have become more complicated with rates in an ACCELERATED break to new highs, and the financials turning down at week’s end. 

In fact, a legitimate Bullish signal would be rising rates with rising financials such as XLF and BAC as part of that.  Minus that second part, you can forgetaboutit.  The rate increase is NOT Bullish when the two don’t move up together.  Big banks like global stability.  Furthermore, high rates ARE normally good for banks, but NOT out of context.  WHY NOT?  Because this level of the 10 Year Treasury Yield, which is too high for current conditions as explained HERE, will eventually slow the economy. 

The market seems to have adjusted to rates of up to 3% or so as said in the signal summary HERE” but NOT above there.  Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.”

Welcome to #RateShock II.”  Scary in RED isn’t it? 

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. 

NOTE: 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, 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 charts for now as reference points only; they have historical value for us from the post-2016 election period.

Thank you for reading.  Would you please leave your comments below where it says “Leave a Reply”… or ask a question…  Pay it forward too by sending the link to MarketTiming.Blog (that link will immediately connect them to this webpage) to a relative or friend.  Thanks for doing that.

Be sure to visit the website for more general investing knowledge at:

Sun and Storm Investing™

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, go to my “Other Resources” page here:  Other Resources   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.  Check it out with a free trial at the link above.

Finally: Please excuse and report all typos if you are so moved.  I do my best to pick up most of them, but have not always found them all.  Shoot me a comment (I don’t have to post your typo report as I filter them before publication, but I’ll be grateful to you!)

Copyright © 2018 By Wall Street Sun and Storm Report, LLC All rights reserved.

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

Market Timing Brief™ for the 9-28-2018 Close: Cracks Showing Up. SP500 Index Testing Below the Last Breakout. Small Caps Slipping. Gold Still Weak After Fed. Rates Falling Again?

A Market Timing Report based on the 09-28-2018 Close, published Saturday, September 29th, 2018…

I deliver focused comments on market timing once or twice a week.  These are supplemented with daily “Tweets/StockTwits” (see links below).

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

Cracks in the Bull thesis are showing up now.  No big trend changes yet, but cracks, which could lead to more.  The SP500 Index made a new high and then pulled back below the prior breakout.  Since around July 10th, the SP500 has been tracking the upper 2017 channel line noted in orange on the chart below.  It is still above that upper channel line, so there is no way I can consider the index to be significantly weak yet.

Still, we are also below the prior green up trend line, so the market has weakened just a bit from the prior rapid incline.  My concern is that the small caps are flirting with significantly more danger now, by slicing through their lower channel line noted in purple on the 2nd chart below.  Small caps need to confirm the large cap move as the market rises, or the underlying health of the rally is called into question. 

This early weakness in small caps, which in terms of capital gains have lost people money since the 6-20-2018 high over 3 months ago, may be an indicator that if growth is in fact going to slow, investors want to lower their exposure to higher beta small cap stocks now vs. later, ahead of the Q4 slowing and even more dramatic Q1 and Q2 2019 U.S. slowing of earnings and revenue growth outlined last week and in early August on this blog. 

Pay some attention to the blow ups happening outside the U.S.  Italy fell 3.72% on Friday.  This is a bad sign about EU growth slowing that has started in advance of U.S. growth slowing.  This is a global economy.  We don’t grow as fast when growth is slowing in the EU, Japan, and China!   Meanwhile the canary is at least warming up its voice in the U.S. as there has been a big increase in negative pre-announcements for Q3, as discussed last week. 

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative, but on Friday there was an upside reversal that still kept INTC below its 50 day moving average.  I said previously: “46.19 is now the reversal point to watch.”  (Reminder: INTC is our “tell” on 2nd half earnings in tech as noted HERE. Micron (MU) is another tech stock to watch as it just gave negative guidance this past week.)  INTC closed at 47.29 Friday ABOVE the prior low of 46.19.  Moving up further and closing above 47.42 would add a higher high to the picture and strengthen the trading position of INTC.

Bank of America (BAC) Market Timing Signal: Negative.  No, actually “miserable.”  Friday’s action brought the stock back to 29.46 in a big sell off on Friday that was the 6th down day of 6.  Rates were falling again after the Fed FOMC statement that they would raise rates, and so were financials (XLF and BAC).  We’d expect the opposite in an economy the market expected to remain strong.  Rates above the prior high shown on the TNX chart below would be required to spark a strong financial sector rally.  That doesn’t look probable right now.

Keep up-to-date during the week at Twitter and StockTwits (links below)…

Follow Me on Twitter®  Follow Me on StockTwits®.

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

sp500-index-spx-market-timing-chart-2018-09-28-close

Still making higher highs though below the prior breakout.

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +5.12% vs. 0.00% last week.  Sentiment is not very helpful in this range of spreads.  It says investors are only mildly Bullish just shy of an all time high.  If anything, that is somewhat Bullish for the 6 month outlook, which the survey assesses. 

AAII.Com Individual Investor Sentiment Poll
Bulls Neutrals Bears
36.22% 32.68% 31.10%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM): Small caps are weakening as discussed above.  A fall below the two converging yellow lines would not work out well.  The channel has already been broken to the downside.

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

iwm-russell-2000-market-timing-chart-2018-09-28-close

Small caps weakening.

3. Gold Market Timing (GLD):  Review the issues a few weeks back for an explanation for the abysmal performance of gold. As rates fall again, gold may perk up a bit, but the dollar could rally at the same time, blunting the gains from falling rates.  If financial panic ensues, both can rally together.  Last week I cited my prior article on gold: “When does gold shine and when does it decline?…Google that phrase and you’ll find it.  Read it serveral times, and you’ll know what makes gold move.

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

gld-gold-etf-market-timing-chart-2018-09-28-close

Gold still limping. Waiting for rates to fall more.

4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX):

Rates are falling again having tapped the top of the recent trading range.  The trade is now back in the favor of the bond/Treasury Bulls.  The speculators looking for rising rates are going to be hurting in my view…

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):

tnx-10-year-treasury-note-market-timing-chart-2018-09-28-close

Not complicated. Rates topped out at the top of the range and are now falling again.

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

Do not use these signals as a trading plan.  They are rough guidelines.  I currently share my own moves on social media (links above).

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

Stock Signal GREEN for a further U.S. stock market rally with a Bullish SP500 Index trend.

I will change my mind on the trend when the small caps move definitively below the lower yellow line in the small cap IWM chart above.  The small caps are a better indicator of the health of the economy, as they are most vulnerable to economic changes, and hence, are the basis for this signal.   The VIX (which relates to SPX volatility) closed at 12.12 on Friday vs. 12.07 the previous week.  This is still Bullish for the SP500 Index.

Same as last week: What must the VIX do this week?  As I said previously: “Any move back above VIX 13.31 again may indicate a developing Bearish trend.  A ‘test’ doesn’t count.   The last bigger spike was to 16.86, below the two previous spikes in volatility.”  The Bears must get through VIX 16.86 to spark a bigger correction.  The last little dip to the Sept. 7th low was only 1.73% which is more of a blip than a dip.  The Bulls need to take out the lowest VIX targets in the 11’s I shared on social media (links above) to keep the momentum going.

Gold Signal  GREEN for a further U.S. stock market rally with a BEARISH Gold Trend. 

Remember GLD is being used as an indicator for the ECONOMY here. 

Rate Signal NEUTRAL for a further stock market rally with a  NEUTRAL 10 Year Yield Trend. I said, “I would be surprised to see a sustained new recent TNX high above 3.115%.”  It got to 3.110% and turned down.  TNX must fall back below 3.035% to turn Bearish again. 

This level of the 10 Year Treasury Yield, which is too high for current conditions as explained HERE, could eventually slow the economy.  The market seems to have adjusted to rates of up to 3% or so as said in the signal summary HERE.”  A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  

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. 

NOTE: 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, 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 charts for now as reference points only; they have historical value for us from the post-2016 election period.

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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, go to my “Other Resources” page here:  Other Resources   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.  Check it out with a free trial at the link above.

Finally: Please excuse and report all typos if you are so moved.  I do my best to pick up most of them, but have not always found them all.  Shoot me a comment (I don’t have to post your typo report as I filter them before publication, but I’ll be grateful to you!)

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