Market Timing Brief™ for the 9-13-2019 Close: “Close Enough! Large Cap Stocks Retop. Inflation Data and Ever Impending Trade Peace Send Rates Up Sharply in Reversal with Gold Testing Its Recent Trend.”

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

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

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

NOTE: ALL CHARTS REPRESENT THE 9-13-2019 FRIDAY CLOSE.  

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

Last week I detailed four requirements for a strong stock market moving to new highs, and we need to review them now…

A. “Earnings growth resuming in Q4 2019 into 2020.”  This is expected, but we first have to make it through negative Q3 earnings without enough negative revisions to drag on those future earnings.

B. “Interest rates rising or at least stabilizing.  We can give this one a temporary check mark!  At the moment, it seems there will only be two more rate cuts by April 2020 per investors for a total of 3 cuts despite this bounce in rates.

How many times the Fed will cut is still being debated in the minds of investors!  How do I know this?  Because the CME Group data says that the October cut will move to December or January, but a fourth cut has become more probable in 2020!  The Fed would not continue to cut rates if things were improving steadily in the economy, so the data shows the interest rate cut Bulls are still looking for more downside.  That means this move up in interest rates could be a false one with still more gains ahead for both Treasuries and gold/gold stocks. 

Will the U.S. Federal Reserve lower interest rates more quickly than suggested by their latest “mid-cycle adjustment” language?  Don’t count on it with the higher inflation numbers, and that’s where the debate comes in.  I am predicting a 0.25% cut this week.

CME Group says a  0.25% cut on Sept. 18th has a 79.6% probability. vs a 91.2% probability last week, and the rest of the probability distribution says the Fed will not cut at all.  That would be Cut #2 to be clear.  There is a 34% probability vs. last week a 59.6% probability they will cut again in October, and now a 54.9% probability vs. a 35.2% probability last week of a Cut #3 or more by December. Essentially that moves the expected October cut to December. (If you look at the data, remember that Cut #1 was done at the July meeting.)

By January there is a 68.3% vs. a 60.4% probability last week that rates reflect three cuts in total for the sequence of cuts.  How about 4 cuts?  March?  38.6% prob. vs. 33.8% prob. last week of 4 cuts.  April?  42.1%% vs. 19.2% probability last week of 4 cuts.

CONCLUSION: The majority of investors believe the Fed will cut TWO MORE TIMES and that is it!   This sequence of expected cuts is still what Powell called a “mid-cycle adjustment” to rates, despite the rising pessimism about 2020.  Investors may be disappointed by the number of eventual cuts if inflation numbers continue to warm. 

The good news is that we’re not yet to the ultimate stock market top in my view. 

When we are recovering, as I’ve shared here before, RATES RISE, they do not fall.  Rates rose sharply, at least from their previous low level.  A move UP of 11.2 basis points on Friday is a BIG move for one day.  The previous day they went up 5.8 basis points, which is also a strong move.

Is that sort of move a big thing?  Well, if you look at the data since the October 2018 top at 3.248%, there were only a few data points with rises of that magnitude:

1. 1-04-19 10.5 bp when rates moved off a low and stocks were moving into a strong rally.   The rate gains held up for a few months before rates stepped down once again.

2. 7-05-19 9.5 bp when SP500 Index was only about 1% below the eventual high.  The yield was coming off another temporary low that held rates up for another 18 trading days before they collapsed to the next low.

3. 9-05-19 10.6 bp on the day the yield came off its low and the SP500 Index broke to new highs.

When was the most recent big DROP in the 10 Year Yield?  On 8-01-19, there was a 12.7 bp when Trump had just stirred up things with China with new tariff threats and the SP500 Index broke immediate support the same day.

You’ll notice there are several correlations/relationships here.

1. A strong yield move up is being read as a POSITIVE for the stock market.  Rates rise when an economy improves after rates are lowered by the Fed when things are soft.  That is the dance.  I realize my loyal readers know that, but it’s good to bring the key concepts into focus for the discussion.

2. But in one case (#2), the impact of higher interest rates was short lived.  The market topped 16 trading days later and did not make it that much higher before falling.

3. The rapid up move is correlated with not only a very long move down in rates since Oct. 2018, but also with a recent collapse in rates based on a China Trade talk failure.  Market participants DO care about trade in a significant way at least on a trading basis.  They see the future of the economy differently with the trade war resolved vs. a long drawn out fight, which it obviously dislikes.  Uncertainty is poison to any stock market.

4. I’ll save my fourth point for the 10 Year Treasury Yield Chart below.  Be sure to read it!

C. U.S. China Trade War resolution.  President Trump said this week he’d consider an “interim deal” with China, and said they’d being buying a lot of agricultural goods (to make his Midwest voters a lot happier, as they’ve been suffering), and China said it would even lower some tariffs on U.S. products selectively.  Trump held off the 30% tariff raise from 25% for an additional two weeks to allow time for talks in the second week of October following China’s celebration in the 1st week of October.

D. President Trump’s re-election or (adding this week) Former VP Joe Biden’s Election.  Biden did better during this last debate and even fended off an ageist attack on him by Castro.  As long as Biden does not move up corporate tax rates dramatically in his stated tax plan (I have not seen a statement on corporate rates from his campaign), I predict the markets will not react in fear to a Biden presidency.

The worst case for the markets is having anyone close in perspective to Sanders or Warren in the White House.  The earnings of the SP500 Index would drop precipitously on their higher corporate tax rates, and that would make U.S. firms less competitive on a global basis (I think the tax rate of these companies should be adjusted based on the percentage of goods they produce in the U.S.).  At the present time, no one else in the field besides those two is even a close threat to Joe Biden.  Notice that in THREE DEBATES, there has been zero discussion of tax policy other than tangential threats to tax the ultra rich?  What is with this need to demonize the rich?  You’d think they want to be elected by any means possible.  😉

Yes, there are inequities in the system, and I believe strongly with profit sharing with loyal employees, but they don’t need to lump every successful person in with CEOs who make 50-100 Million a year as Co-CEO Mark Hurd of Oracle does (His salary was mentioned when he took a leave of absence due to a health issue – unspecified, although investors may actually want to know what the risk is to his health).

E. Impeachment dies in the House:  I’m adding this back, because the House took steps toward furthering their investigations this week.  Still, there is very little talk about it.  Do not underestimate the impact on the markets if this perks up, so it’s something we need to watch closely. 

Now since we are approaching that upper yellow trend line on the SP500 Index chart, let’s check my “Bull Market Health Score”…

What would satisfy me that the Bulls are serious?

Let’s check the list once again… The Bull Market Health Score this week = Bulls 4/Bears 1.  Last week we were at Bulls 4/Bears 1, so the market is still healthy with the exception volume behind the large cap move.  At the end of July before the pullback, we were at Bulls 2.5/Bears 2.5.

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

1. New high?  Bulls 1.0 point.  Answer: No, but progress was made to retake the all time high.  The high this week was SPX 3020.74, close of 3007.39 and SPY 302.46, a close of 301.09.

Last week: The Bulls got to SPX of 2985.86 and closed the week at 2978.71 . SPY got to 298.83 and closed at 298.05.

Where to next?  The upper channel line in yellow on the chart below would be the next target ABOVE the prior ATH.  One of my indicators shows there is room for a very “giddy” new high as we saw back in Jan. 2018, but you know what happened after that.  Sentiment does support a new high as you’ll read below.  Stay with the trend.  I have a surprising take on small caps you’ll read later.

2. VIX trend favorable?  Bulls 1.0.  Answer: Yes.  At the Friday close, the VIX was 13.74 vs. the prior week’s close at 15.00.  I reported last Saturday that the “VIX Fever” had broken with the close below prior support (15.51) AND below my “fulcrum target” (see base of report for VIX Game #s).  The VIX Game Score as I call it is Bulls 6/Bears 2 as of the close Friday.

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bulls 1.0 point.  Answer: Yes.  The close was 16,749 a new ATH.  The breakout above 16.632, the 7-31-19 high has been eclipsed for 5 trading days.

4. Volume on Up Moves?  Bears 1.0 point.  Answer: No.  Volume for the large caps did not go up on the breakout day, which was Wednesday.  There is a caveat here though.  The volume WAS SEEN in the small caps as the chart in section 2 shows!  Since this market health score refers largely to large cap stocks with a secondary role played in #5 by small and mid caps, I won’t split this point between the Bulls and Bears.

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  Bulls 1.0 point.  Answer : Yes, and although they (both small and mid caps) have reached “chart resistance” as of Friday, the volume behind this move suggests the Bulls could push further upward. 

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

We have some new earnings data this week…

Earnings Risk: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 with a skip of two weeks until the 9-06-19 data resumes the weekly data sequence (details HERE)… The arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  

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

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

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% -> -0.5% -> -0.8% -> -1.4% ->-1.9% -> -2.2% -> -3.1% -> -3.5% -> -3.6% -> -3.7%

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

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

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3% -> 4.3% -> 4.2% -> 4.0% ->4.0%-> 4.5%-> 4.0% -> 4.0% -> 4.0% -> 3.8% -> 3.7%

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

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

For Q1 2020, analysts are projecting earnings growth of 10.5% -> 10.7% -> 10.3 -> 9.9% -> 9.8% -> 9.5% ->9.2% >9.0% -> 8.5% -> 8.2% -> 8.1% -> 7.9%

and revenue growth of 6.2% -> 6.1% -> 6.0% -> 5.8% -> 5.8% -> 5.9% ->5.9% -> 5.7% -> 5.6% -> 5.7% -> 5.5% -> 5.5%

For Q2 2020, analysts are projecting earnings growth of 13.3% -> 13.3% -> 12.9% -> 13.2% -> 13.5% -> 12.0% ->12.6% ->  10.7 ->  9.9% -> 9.3% -> 9.2% -> 9.1%

and revenue growth of 6.8% -> 6.8% -> 6.6% -> 6.6% -> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4% -> 6.5% -> 6.4% -> 6.4%

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

and revenue growth of 5.6% -> 5.6%

You can see that earnings projections for Q3 2019 came down a bit more, and so did earnings into 2020, although the comparisons are going to be easier vs. the prior year in 2020. 

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

China Deal Risk: Has improved as discussed.

Fed Rate Cut Risk:  Discussed above.

U.S. Iran War Risk: UPDATE 9-16-19: Iran has been implicated in the attack on Saudi Oil facilities.  A military response is inevitable.  This will no go unanswered, because it cannot go unanswered.  That would give license to such attacks and the global disruption from this is far too great to not respond.  That is the way of the world in its current state of consciousness and its available options. The response will start and could end with air strikes, but should Iran send troops into Saudi Arabia, it will become the next Middle East War, because the Saudis would require American troops to face off Iran.  A “clean war” would quickly become messy.

No change from: “Simmering at a low boil, and not over.  Iran is reportedly already breaking the 2015 agreement on enrichment of uranium.  Trump claims they want to negotiate.”

2020 Election Risk: Discussed above. 

Trump Impeachment Risk: Discussed above.  Read my analysis in the July 26th issue HERE.

Deficit/Debt Threat: No important change.  I’ll leave this here as a monument to our monumental debt, which could threaten interest rates in the future.  The only reason we are off the hook for now is because the rest of the world is in worse shape.  When rates rise, there will be “heck to pay.” 

Now take a look at the SP500 chart.  The green line is 2940.91, the
9-21-2018 High
preceding the decline from Sept. to December 24th. The upper yellow line is the next target (now at about 3044, but rises slightly daily as it’s an up trend line).

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

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

Almost at the prior all time high (ATH).

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Positive.  July high is the next target for the Bulls to take out. 

Bank of America (BAC) Market Timing Signal: Neutral, and no, interest rates did not head lower this past week, which helps the banks greatly.  31.17 is the top of the current range that has been in place for months. 

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

Follow Me on Twitter®  Follow Me on StockTwits®.

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +1.88% vs. -10.87% last week . 

The fact that investor sentiment is still tentative  with the SP500 Index breaking to the top of the trading range is BULLISH.  Spreads of 20-30 are substantialy Bullish, and the sentiment in Jan. 2018 of a spread > 40% was off the wall Bullish)

Bulls Neutrals Bears
33.13% 35.63% 31.25%
Thurs. 12 am CT close to poll

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

Last week:A breakout in small and mid caps next week would confirm the move in large caps. ” 

Small caps did in fact not just come along with large caps this week – they outperformed them on HIGH VOLUME.  The real challenge is the combination of three major highs all around that first high of 159.50.  Above there?  It’s a clear signal of more gains for the entire market, just as the prior breakout above those August lower highs was.  Watch what I do this week on social media if/when we get that signal. 

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

Market timing the U.S Small Cap Index (IWM, RUT). Back testing near the prior high.

A breakout would mean a lot here!

 3. Gold Market Timing (GLD): 

Last week: “Be awake next week for the PPI( Weds.) and CPI (Thurs.) inflation data.  Retail sales are on Friday.

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

Right on cue, gold fell as rates rose sharply as the inflation data was on the warm side as I detailed on social media HERE and in the “markettiming room” HERE We’ve been holding these positions knowing a rate-based counter-trend move could occur.  If you traded out of at least part of your gold position near the prior highs when rates were super stretched, good for you.  But as I shared in detail last week, if you are not willing to jump back in for what could be the “next leg up in gold,” then you should not sell unless that’s the only way you can preserve a decent profit.

What’s the caveat for gold in a rising rate environment if that is what we’re moving to (unproven if that 2.06% level holds)?  The Fed is trying to maintain the expansion, so if it moves too slowly, real rates don’t expand and in fact the Fed falls behind perhaps, pushing gold higher as real rates move lower.  You can watch real Treasury rates HERE. The 10 Year Treasury last had a slightly negative real rate on Sept. 4th (-0.04%).  With the pop this week, it’s back to 0.23%, not great but better.

Look at the number of failed rallies in GLD on the first chart below (a weekly chart).  This is the SIXTH significant rally for gold since the June 2013 low.  That means this rally could fail as well.  The one that won’t fail could be 1 year or 5 years away, when the entire monetary/debt system suffers a crisis after years of these ridiculous negative rates whose purpose is to prevent natural, cyclical downturns in the economies of the world.  All the Central Banks are playing the same game, just to varying degrees, with the U.S. trailing Europe and Japan on “negative rates.”

This is why we must TRADE our trading position in gold and not seek to “Buy and Hold” it.  ( I do have a core gold “fiat currency insurance position.”)  We know what the endpoint will be for these “Frankenstein monetary experiments.”  We just have no way of knowing when investors will give up on western fiat currencies.  Why do you think Russia is selling U.S. dollars and building up its gold holdings?  China has also been a strong buyer of gold.  Do you think China may someday threaten the U.S. dollar as the reserve currency as they build their ability to innovate?  What if the world started buying yuan instead of dollars?

This is why we have to continue to bring immigrant talent into the U.S. and support our educational and research systems, which have driven the world’s best innovations for decades.  China is now pressing to lead on 5G as I discussed last week.  A win for them there would be a strong signal to the U.S. tech industry.  As I said last week, Apple is a YEAR BEHIND Huawei on 5G phones.

Finally, to be a global tech leader, China will need both access to more capital and access to U.S. technology, which it won’t get as an adversary.  And it would not deserve it.  What is our edge?  Freedom is our edge.  Captive spirits are less willing to step out and take risks, so until REAL freedom arrives in China, the U.S. will have a huge advantage.  I just hope our leaders don’t blow it on the education and research fronts!

Despite the caveat that this could become a failed gold rally, the rally has not yet failed in a meaningful way (the close was not decisively below trend – not yet anyway, and the breakout above the prior major highs shown below is still intact).  The trend is still up for gold for now.   The downside risk is to the breakout level, which is below the current trend as shown on the first chart.  137.55 is the highest of those tops.  The positive view is that GLD is still above the five previous failed rally attempts.  When that changes, gold will go back to a trading sell.   Remember that holding a core gold position like GLD in your portfolio is a form of currency insurance against the decline of the U.S. dollar, which over time, the Fed and Treasury ensure goes down.  That’s the only way they can repay our massive debt.

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

NOTE: CHART represents the 9-13-19 CLOSE!

Market timing the gold ETF (GLD). Gold in pullback, but close to trend.

Gold in pullback, but still above key breakout levels.

CHART represents the 9-13-19 CLOSE!

Market timing the gold ETF (GLD). GLD is barely below the up trend line.

GLD is barely below the up trend line.

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

The narrative around the rate rise was covered above.   But I promised to share the most important point on positioning, which is the verification of the prior major lows by the recent low and lunge upward:

Point #4. As shown in the first TNX chart below for the 10 Year Treasury Yield, the low created by this surge in rates is a higher low above the 2012 1.394% low as well as the 1.336% low of 07-2016.  That means the range was defended and the entire upside of the range is now in play.  A breach of that lowest low would indicate a dive toward zero/negative rates was in the cards, even for the U.S.   For now, the rate Bulls (those expecting interest rates to rise further) are in control until proven otherwise.  The global economy says “No” to that notion.  U.S. inflation data and slow but positive GDP growth say “Yes” to still higher rates.  

Don’t underestimate this signal.  Note that the rate rise was the greatest since the rise immediately after the 2016 Election based on the perception that Trump’s policies would stimulate economic growth, which requires higher interest rates (see 2nd chart below).  It also drew in foreign investment in the U.S. stock market no doubt as well.  This comparison tells you that the rate rise is not necessarily “bad” for stocks.

In fact, the data this week may say that the U.S. is not going to be subject to the economic drag from the rest of the world.  Of course, it’s not immune to that influence, but we COULD lead the world back out of a slowdown vs. having the rest of the world lead us into recession.  There is that possibility if we can get through Q3 earnings starting in mid-October or so without too much downward revision in the revenue and earnings numbers. 

Alternatively, the numbers suggest the Fed is moving into a period of being “cornered” between slow GDP growth and higher inflation as I discussed this week (see second link under the Gold section above).  That’s what is called “stagflation,” which was a big problem throughout the 1970’s through the start of Reagan’s first term.  It led to very high interest rates under Fed Chair Volcker, which amounted to shock therapy for inflation expectations. 

The simplest view of the chart tells you that the 9-2017 low of 2.034% could be the next upside target, before global slowing brings U.S. rates back down.  As said, we have to watch the incoming data, because that is not a given!

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): 

NOTE: Chart represents the 9-13-19 CLOSE!

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). The prior lows HELD.

The prior major lows held. This looks like a major reversal UP.

 NOTE: Chart represents the 9-13-19 CLOSE!

Largest weekly rise in rates since the 2016 election!

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

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

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

Stock Signal NEUTRAL for a further U.S. stock market rally with a Bullish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down.  The small cap trend is neutral, leaning Bullish until the current trading range is breached to the upside (discussed above).

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!)  These are the targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89.  The bonus target #8 is [12.-17-12.37].  The Bears have 6 of 8 targets at a VIX of 13.74 (Friday close).   I consider the “fulcrum” the key decision point that turns the market from Bearish to Bullish, when the VIX falls below that entire fulcrum range.

The ‘Bull Nirvana Target’ is our V*IX # of 2018: 13.31.”  (That is target #7 for the Bulls.) 

Gold Signal RED  for a further U.S. stock market rally with a BULLISH Gold Trend.   What gold does mostly as I’ve written HERE is follow real interest rates. 

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

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

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

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 54.85 vs. 55.10 last week but is starting to look more neutral in trend than Bearish.  It held the June low and has since formed higher lows in Aug. and Sept.  If it rises above 58.82 and then 60.94, oil and oil stocks will be off to the races.  The bounce in XLE has been strong off the prior low, but it’s only to the prior relative levels attained on failed rallies.

Just a reminder (not a current problem, because rates are “too low” now on a relative basis, but the rate of rise has been fast enough to be concerned should it continue): If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  The period of rising rates in early October I called #RateShockII.

The risk lately has been “Negative Rate Shocks.”  (Not negative rates in the U.S. yet!  “Negative” refers to the direction of the shock.)  First we had “Negative Rate Shock I” in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error by critics),  “Negative Rate Shock II” in May, and “Negative Rate Shock III” in August, which is on pause and awaiting the next pivot.

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I thank Worden Brothers for the charting system I use to post these charts.  If you want to know more about the charting system I use every day, contact me.  It makes it much easier to follow along with me if you can see the charts and manipulate them on your own computer.  It’s a great investment to have an excellent charting system.

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

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

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

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Market Timing Brief™ for the 9-06-2019 Close: “Will the Bulls Leap Over the Coming Q3 Earnings Slump? A Not So Dovish Powell Causes Gold to Ease With Rates Still Near Recent Low.”

A Market Timing Report based on the September 6, 2019 Close, published Saturday, September 7th, 2019…

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

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

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

My title this week is inspired by the thought that the Bulls are discounting the resolution of every possible risk ahead, well in advance of their resolution.  That can work at times, and it can fail miserably at times.  If you thought in 2008 that the Fed was on the case, and the market would turn around after the first major part of the decline, you front ran the second huge drop in the market that took stocks to a 55% discount from the prior ATH (all time high).

The market ascending to significant new highs requires:

1. Earnings growth resuming in Q4 2019 into 2020, with avoidance of a near term recession, not just in the U.S., but globally, for the most robust sort of rally.  Don’t count on Europe or Japan helping much.  Even China, which is still growing, has slowed in GDP growth rate.  This does not mean a recession could not occur after the market rises another 10-20% above the prior ATH.  This is something many have discussed this week.  The fact is an inversion of the yield curve where the 2 year yield rises above 10 year yield (and it DID so so for several days), precedes recession by 6 months to a couple of years (discussed in a prior issue HERE) and in that period the market tends to rise quite a bit, NOT fall.  The big players know this.  They also know the public is NOT yet euphoric (see sentiment below).

2. Interest rates rising or at least stabilizing.  When we are recovering, as I’ve shared here before, RATES RISE, they do not fall.  Banks and insurance companies are in deep trouble when the yield spread is too low, which is why the world has done unthinkable things like going to deeply negative interest rates to drive money out of their currency.  Switzerland’s 10 year bond is -0.919%!  Each year you give up about 1% of your money for the privilege of holding Swiss bonds.  Of course, few do this, other than Central Banks who have some sort of requirement to do so.

Realize these negative rates don’t force banks to make bad loans to businesses they believe are going to fail and leave them holding the bag, but what this does is force money into riskier areas of the market.  It keeps asset prices from falling as far as they otherwise would.

3. U.S. China Trade War resolution.  If it’s a marginal win, that would still help in the short to intermediate term, and a bigger U.S. win could help U.S. GDP growth in a much bigger way.  It definitely would resolve the lack of confidence businesses have about investing in their future that Federal Reserve Chair Powell spoke of in Zurich on Friday.  See my messages about that HERE.  And then scroll back a bit from the main message stream to read the rest.

4. President Trump’s re-election.  Without that, the entire tax rate structure (lower corporate rates are most critical for the stock market) will be reversed IF the Democrats take the Senate back.  If Biden becomes President, which I will address below, he may only opt for a partial increase in the corporate tax rate (…as I advised him!  25% is my number, vs. the current 21%), but that would immediately impact corporate earnings.

We’d need all four of those, minus impeachment of course, which does not seem to be on the front burner.  When did you last hear about it?  Exactly!

Let’s first check my “Bull Market Health Score”…

What would satisfy me that the Bulls are serious?

Let’s check the list once again… The Bull Market Health Score this week = Bulls 4/Bears 1.  Last week we were at Bulls 0/Bears 5, so there’s been good progress.  At the end of July before the pullback, we were at Bulls 2.5/Bears 2.5.

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

1. New high?  Bulls 1.0 point.  Answer: Yes, not an all time high, but a higher high as I said three weeks ago, which means the Bulls get this point. 

“Bulls must retake S*PX 2943.31 and S*PY 294.15 to be convincing that the current correction is over at least in getting us back to a test of the prior ATH (all time high).  (*’s added to throw off the ‘web crawlers’; it’s not my goal to become part of the ‘consensus.'”

The Bulls got to 2985.86 this week and closed the week at 2978.71 . SPY got to 298.83 and closed at 298.05. 

Where to next?  The market was stretched on Friday, but it can now rise to the prior all time high (ATH) and perhaps as high as the upper yellow trend line on the chart below.  That is for the large cap quality stocks.  Although the weakest stocks gained strength this week as mentioned on social media, the “high flyer club” was not expanded nearly as much.

High beta growth stocks (stocks that move much more than the market in percentage terms, up and down) have not been working of late, likely because they have been priced to perfection and any miss, even slight, during economic slowing can cause them to plummet.  There is good news for the SP500 Index Bulls though in the strength of the “lower quality” group of stocks this week, meaning lower quality in behavior.  That improves the breath and sustainability of the advance.

2. VIX trend favorable?  Bulls 1.0.  Answer: Yes.  At the Friday close, the VIX was 15.00 vs.  the prior week’s close at 18.98.  The VIX Game Score as I call it is Bulls 5/Bears 3 as of the close Friday (Game Numbers can be found at the base of this report).  The Bulls also broke a key support level on Friday at 15.51.

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bulls 1.0 point.  Answer: Yes.  The close was 16,634, which was a marginal new high above the prior high of late July of 16,632 this past Friday.  That’s pretty close to the prior high, so you could argue I should not give the Bulls the full point, but this was achieved in breadth without a new market high, which I why I’m giving it to the Bulls.

4. Volume on Up Moves?  Bulls 1.0 point.  Answer: Yes.  Volume did go up slightly on Thursday when the market broke out of the prior trading range of the three prior lower highs shown on the chart.  

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  Bears 1.0 point.  Answer : No.  The small caps are still below the series of lower August highs.  Even the midcaps are below the Aug. 8th high and just below the 50 day moving average (mav).

I said last week: “The Bulls have to come up with a better bounce soon, or we’ll descend into Wave 3 Down, the ‘Big Red Wave.'”  The rise above the series of lower highs voids Wave 3 Down for now.  A quick reversal back below the August tops would bring it back into play however. 

What are the “upside opportunities” as I call them?  Let’s ask what could cause or substantially contribute to a sustained rally (a rise of more than 2-3 days)?

1. The U.S. Federal Reserve lowers interest rates more quickly than suggested by their latest “mid-cycle adjustment” language. 

The next Fed meeting is Sept. 17-18, and it’s clear from Powell’s stance in Zurich this week that the Fed won’t act between meetings.  Still, the market has 10 days of play before their next statement and news conference.  They appear to have used the Wall Street Journal as their vehicle to warn that they may not move down rates by 0.50% at the meeting.  They may stick to a 0.25% cut.  In fact, a 50 basis point cut would surprise the markets – and propel Treasuries and gold to new highs in my view.  A 0.25% cut would still support them both in moving higher.

CME Group says a  0.25% cut in on Sept. 18th, as of Friday, has a 91.2% probability of occurring, and the rest of the probability distribution says the Fed will not cut at all.  There is a 58.5% probability they will cut again in October, but only a 32.8% probability of a 3rd cut in December.  By January there is a 60.4% probability that rates reflect three cuts.  March?  33.8% prob. of 4 cuts.  April?  19.2% prob. of 4 cuts, so the odds of continuing rate cuts beyond 3 cuts is NOT in the market at the moment. 

The jobs report Friday showed 130,000 jobs were created last month, which was weaker than expected.  Still, the market doesn’t mind “slow growth” at this point, because it lengthens the recovery period.  If unemployment starts to rise, that’s another thing, and it’s not a good sign.  That’s something we need to follow.

2. The U.S. Treasury Intervenes to Weaken the U.S. Dollar: There has been no further talk about this after some discussion two weeks ago.

3. China, Europe, and Japan provide FISCAL STIMULUS to their economies.  I detailed two weeks ago (link to upper right) that China and Japan are doing some things that could help.  I’ve heard some analysis saying that China’s efforts are not going to be nearly enough to move the needle.

4. Trump’s U.S. China Trade War Ends: Two weeks ago I said:

…”the threats are getting bigger and bigger at this point.  Perhaps that alone will force a faster solution.  Trump, after the Friday market close, now says he’ll see President #Xi and raise him 5%!  HERE are the details (Sept. 1st tariffs are going from 10 to 15% and the 25% will go to 30% on Oct. 1st.).”

That turned out to be correct.  Both sides have had it with the escalation process and cannot survive much more pain.  The agreement will not be perfect, but they’ll come to one.  Otherwise Trump won’t be re-elected.  Voters don’t care why they’re not doing well; they blame the blamable, and Trump will have a target on his back if he carries the Trade War into the election.  He won’t win.

5. Timing is everything.  This is my headline this week, because with the new somewhat higher high, the market is saying “I don’t care” about a number of things.  Three weeks ago I said the Bull view could be:

“‘Things will be better on a comparative basis in Q4 2019 and Q1 2020, so buy stocks now.’  Just the comparative improvement in earnings and revenues, IF the world does not in fact slip into a recession, would help the stock markets globally.  This is not only true in the U.S., but also is the case in Europe and China.  The issue is whether further weakness for Q3 results will drive stocks down more before they recover.”

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

We have some new earnings data this week…

Earnings Risk: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 with a skip of two weeks until the 9-06-19 data (details HERE)… The arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  

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

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

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% -> -0.5% -> -0.8% -> -1.4% ->-1.9% -> -2.2% -> -3.1% -> -3.5% -> -3.6%

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

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

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3% -> 4.3% -> 4.2% -> 4.0% ->4.0%-> 4.5%-> 4.0% -> 4.0% -> 4.0% -> 3.8%

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

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

For Q1 2020, analysts are projecting earnings growth of 10.5% -> 10.7% -> 10.3 -> 9.9% -> 9.8% -> 9.5% ->9.2% >9.0% -> 8.5% -> 8.2% -> 8.1%

and revenue growth of 6.2% -> 6.1% -> 6.0% -> 5.8% -> 5.8% -> 5.9% ->5.9% -> 5.7% -> 5.6% -> 5.7% -> 5.5%

For Q2 2020, analysts are projecting earnings growth of 13.3% -> 13.3% -> 12.9% -> 13.2% -> 13.5% -> 12.0% ->12.6% ->  10.7 ->  9.9% -> 9.3% -> 9.2%

and revenue growth of 6.8% -> 6.8% -> 6.6% -> 6.6% -> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4% -> 6.5% -> 6.4%

For CY 2020, analysts are projecting earnings growth of 10.7%

and revenue growth of 5.6%

You can see that earnings projections for Q3 2019 are coming down and so are earnings out to 2020, although the comparisons are going to be easier vs. the prior year in 2020. 

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

China Deal Risk: Has improved as discussed.

U.S. Iran War Risk: Simmering at a low boil, and not over.  Iran is reportedly already breaking the 2015 agreement on enrichment of uranium.  Trump claims they want to negotiate.

Trump Impeachment Risk: Ongoing, but so quiet, it would appear without fresh “red meat,” this effort will fade away.  Read my analysis in the July 26th issue HERE.

2020 Election Risk: No important change.  Probably the biggest risk to the markets and most Americans are oblivious to this from the markets’ point of view.  I’ll stand by this from before:  “The market will likely pull back at least 10-15% going into the election if the outcome is even unclear, meaning President Trump is NOT ahead by a wide margin (a likelihood, but not a certainty, depending on whether the Dems go for a “McGovern” candidate, as in Nixon-McGovern in 1972, a Democrat disaster.”

From RealClearPolitics numbers:  If you add Warren’s plus Sanders’ percentages of the vote, you get 4.4% more than Biden, which means the former two candidates are going to defeat their own platform in the primaries.  Biden wins from the splintering of the vote by the two leading far left liberals.

If all the rest of the candidates drop out though, both Warren and Sanders could gain enough votes to beat Biden, but that assumes one half of the remaining votes go to each of them and Biden gets few additional votes, which is not likely.  But their chances will improve significantly nevertheless.

Conclusion: Joe Biden needs to fight hard for the nomination, and he cannot lose steam in the debates through unforced errors.

Deficit/Debt Threat: No important change.  I’ll leave this here as a monument to our monumental debt, which could threaten interest rates in the future.  The only reason we are off the hook for now is because the rest of the world is in worse shape.  When rates rise, there will be “heck to pay.” 

Fed Rate Cut Risk:  I discussed this above.  Not doing enough, fast enough is the fear the stock market has. 

Now take a look at the SP500 chart.  The green line is 2940.91, the
9-21-2018 High
, preceding the decline from Sept. to December 24th.

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

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

Rising above the prior range.

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Positive.  Broke out on 9-04.  Approaching the lower July high however.  Still a big gap back to the April high.

Bank of America (BAC) Market Timing Signal: Neutral but off the prior low.  Still, it fell back from the 50 day mav.  Interest rates are still headed lower most likely, so it won’t be the place to invest (it or XLF, financials).

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

Follow Me on Twitter®  Follow Me on StockTwits®.

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -10.87% vs. -16.08% last week . 

Last week: “Sentiment [the spread] has to break to the single digits to tell us a new rally could be starting.”  It got to a 10.9% spread, which was apparently enough.

The fact that investor sentiment is still BEARISH with the SP500 Index breaking to new highs above the recent trading range is BULLISH.  What we don’t want to see, as said above, is a reversal down with a spike in Bearishness.  That would confirm a high probability of a Wave 3 down, which is the “Big Red Wave.”  For now, it’s been averted.

Bulls Neutrals Bears
28.64% 31.85% 39.51%
Thurs. 12 am CT close to poll

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

Small caps did not come along with the SP500 Index as you can see.  They are still below those lower highs.  A breakout in small and mid caps next week would confirm the move in large caps. 

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

Market timing the U.S Small Cap Index (IWM, RUT). Small caps still lagging.

Small caps still lagging.

 3. Gold Market Timing (GLD): 

I said on 7-26-18: “Still a Bull.  Add on dips.”   I said, “A China Trade War resolution could hurt gold somewhat by lowering uncertainty, but as long as the global economy is still shaky and weakening along with interest rates, gold will do well.”  This could change in a couple of quarters, so we need to remain alert.

I believe the gold/gold stock reaction Friday was related to the idea that the Fed is reluctant under Powell to lower rates meaningfully.  He’s been led BY the market, so he’ll eventually be forced to lower rates more aggressively, and gold will rise further in my view.

And this brings us to an INVESTING GEM, worth gold… This is “obvious” to most traders, and is often said, but investors do not ACT upon the truth that “To make the most money on great ideas, you need to stay with the trend to the end.”  I’ve learned this more than once, and you may have learned this one or more times the hard way.  If you allow a couple of days of volatility take you out of a position, it’s then hard to get back in.  Then the stock or index or commodity just keeps going and going.  You say you’ll buy the next pullback, but it doesn’t show up until the darn thing is 10% higher.  Now it’s “too expensive.”  Then it goes up another 20%.  And you are finished at that point in buying a pullback, because it’s really, really expensive, and then it goes up another 20%.  You “get it,” but what do you actually DO?

This is a corollary that is probably as important:  You will not have that many GREAT investment ideas over time.  (Buffett said as much about great companies, but it applies to all investment ideas.)  When you have them, you need to give them time to play out.  You need to be in the trend to allow great investment ideas to pay you off. 

If you bought Apple when it came out with the first iPhone, and then a bit of volatility threw you out, you missed out on a HUGE run that may not even be over, because guess what?  There is a 5G upgrade cycle coming.  All existing iPhones will be replaced over a period of a few years.  I’m not saying it’s a buy here or not, but I am saying it could be and to make money on what you think may happen, you will have to ride out the China slowing Apple is experiencing to get to the 5G upgrade cycle.

If you got out of gold when it went down with stocks in 2008, you missed another double in price to the current date and even greater gains to the 2011 high.  I’ll tell you why you should stick with the gold trend in the gold section below, but it’s a great example of NOT GETTING OUT TOO EARLY. 

If you do get out early?  Simple.  Get back in, hopefully on the next pullback, but perhaps even on the breakout to new highs.  Investing in stages in an idea is always preferable to slamming a big block of money in at once, but that does not mean to add too slowly when you see a trend emerge.  That’s how I made great gains when gold was at about $380 per ounce.  I doubled my position in 2003, and since then, gold is up 299%.  I could have added in quick steps though as the market rose, and I would have done nearly as well.  When it dropped to around 1370, I sold my entire principle and rode the gravy.  I added back exposure as a trading position during the current rally.   Jim Cramer just talked about this “investing in stages” strategy just last week vs. “putting it all on at once.”

Warnings I’ll keep here: “The eventual inflection point in inflation (UP) and U.S. economic growth (UP) is what we need to pay attention to.  Any sense that the Fed will end its series of interest rate cuts could trigger a gold sell-off.”

Be awake next week for the PPI( Weds.) and CPI (Thurs.) inflation data.  Retail sales are on Friday.

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

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

Market timing the gold ETF (GLD). Gold slipping a bit, but still in an uptrend.

Gold slipping a bit, but still in an uptrend.

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

There was a big jump in the 10 Year Yield of 10.6 basis points (0.106%) on Sept. 5th when a greater likelihood of a China trade deal emerged (again!).

When the data is right in front of him, Federal Reserve Chair Powell would sound better if he said “There is slowing, but we’re still going to lower rates slowly” if that’s his plan rather than say “The US economy is in a good place,” which were his words on Friday in Zurich (that I reported over social media, tuning into Fox Business, while oddly CNBC did not cover the event live).

Powell should know that U.S. manufacturing is NOT in a good place.  It is contracting despite Trump’s platform that said we were going to make more goods in America.  In the trade war, companies have simply moved their production from China to Vietnam and Thailand among other places.  They have not come back to the U.S. in large numbers.

Lowering rates will help stimulate stock prices at least!  And Treasury/Bond prices.  And gold prices.  More asset bubbles on the way is the picture before us, which means we must remain invested in these trends till the end of the party.  Keep one hand on the party room door, but be patient!  And put that “investing gem” to good use. 

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

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

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Rates will continue to fall as long as the Fed is easing.

Rates will continue to fall as long as the Fed is easing.

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

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

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

Stock Signal RED for a further U.S. stock market rally with a Bullish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down.  The small cap trend is neutral, leaning Bearish until the current trading range is breached to the upside.

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!)  These are the targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89.  The bonus target #8 is [12.-17-12.37].  The Bears have 5 of 8 targets at a VIX of 15.00 (Friday close).   I consider the “fulcrum” the key decision point that turns the market from Bearish to Bullish, when the VIX falls below that entire fulcrum range.

The ‘Bull Nirvana Target’ is our V*IX # of 2018: 13.31.”  (That is target #7 for the Bulls.) 

Gold Signal RED  for a further U.S. stock market rally with a BULLISH Gold Trend.   What gold does mostly as I’ve written HERE is follow real interest rates. 

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

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

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

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 55.10 this week vs. 54.17 last week but in a Bearish descending triangle falling toward the June and August lows.

Just a reminder (not a current problem, because rates are “too low” now on a relative basis): If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  The period of rising rates in early October I called #RateShockII.

The risk lately has been “Negative Rate Shocks.”  (Not negative rates in the U.S. yet!  “Negative” refers to the direction of the shock.)  First we had “Negative Rate Shock I” in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error by critics),  “Negative Rate Shock II” in May, and “Negative Rate Shock III” in August, which is on pause and awaiting the next pivot.

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I thank Worden Brothers for the charting system I use to post these charts.  If you want to know more about the charting system I use every day, contact me.  It makes it much easier to follow along with me if you can see the charts and manipulate them on your own computer.  It’s a great investment to have an excellent charting system.

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

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

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

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 8-30-2019 Close: “Triple Top and Down We Go, Or Will the Bulls Find New Strength? Gold Eases But Not By Much as Interest Rates Barely Rise.”

A Market Timing Report based on the August 30, 2019 Close, published Saturday, August 31th, 2019…

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

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

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

Let’s first check my “Bull Market Health Score”…

What would satisfy me that the Bulls are serious?

Let’s check the list once again… The Bull Market Health Score this week = Bulls 0/Bears 5.  Last week we were at Bulls 0/Bears 5, so there’s been no progress.  At the end of July we were at Bulls 2.5/Bears 2.5.

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

1. New high?  Bears 1.0 point.  Answer: No.  Two weeks ago I said:

“Bulls must retake S*PX 2943.31 and S*PY 294.15 to be convincing that the current correction is over at least in getting us back to a test of the prior ATH (all time high).  (*’s added to throw off the ‘web crawlers’; it’s not my goal to become part of the ‘consensus.'”

The Bulls got to 2940.43 this week and closed at 2926.46.  Close but no cigar as they say.  SPY got to 294.24 and closed at 292.45.  The number above remain the hurdles.  The test this past week proves my numbers are right.  They have been “anointed by the market” so to speak.

2. VIX below the “Bull Nirvana Number” AND my bonus number?  Bears 1.0 point.  Answer: No.  At the Friday close, the VIX was 18.98 vs. the prior week’s close at 19.87.  The VIX Game Score as I call it is Bulls 0/Bears 8 as of the close Friday (Game Numbers can be found at the base of this report).  Fear is still high.

Look at the potential for more VIX (fear) upside: The chart I shared on the VIX Volatility Index is HERE.

3. AD % Line in an Uptrend? (This is a proprietary stat; see base of report.): Bears 1.0 point.  Answer: No.  It almost reached the prior high of late July of 16,632 this past Friday, but topped out at 16,605 and closed at 16,555.  Nevertheless, the close was higher than that of the last three weeks.

The Bulls could pivot up on better news, but they’ll need something more than Trump jawboning on the ever elusive China deal.  Why do I say that?  Because the “talk about trade talks” has not won the market a high above the past two lower highs…and now we have 3 of those highs lined up.  The Bulls can point to the marginal good news in the chart, which shows the last low was higher than the prior two lows.  It’s a rough ascending triangle, which tends to resolve more often to the upside.

4. Volume on Up Moves?  Bears 1 point.  Answer: No.  Volume did go up slightly on Friday, which was an end of month trading day, but  the SP500 Index closed off its high and was up only 0.06%, so most of that small volume bump was distribution at the top of the recent range.  The most impressive volume has been DOWNSIDE volume on the down days in late July and early August. 

5. The “U.S. Index Matrix Signal” (as I call it) Positive?  Bears 1.0 point.  Answer : No.  The small caps fortunately recovered from a test below the May low, which only occurred for one day on the close of 8-27-19.   They have still lagged the large caps tremendously ever since June of 2018!

I said two weeks ago:

“The bounce that began on Friday could simply form a double 2 wave UP, meaning two bounce waves that reach the same level and lead to a larger 3rd wave down, which I call “The Big Red Wave.”  That level of correction would take us down to 2694 or -11.0% from the all time high (ATH).  Alternatively, the lower upward sloping SPX channel line (yellow in chart below) may hold.  That level is rising over time as it’s an uptrend line, but for now is at 2760 [updated for Fri. close], or a drop of 8.9% from the ATH.  The June low is in between those two numbers and is therefore a viable target as well.”

What we see now is THREE lower highs with lower lows for the small caps and slightly higher lows for the large caps.  That does not change the technical picture.  The Bulls have to come up with a better bounce soon, or we’ll descend into Wave 3 Down, the “Big Red Wave.” 

What are the “upside opportunities” as I call them?  Let’s ask what could cause or substantially contribute to a sustained rally (a rise of more than 2-3 days)?

1. The U.S. Federal Reserve lowers interest rates more quickly than suggested by their latest “mid-cycle adjustment” language. 

Last week: “Not going to happen it seems, short of financial instability of greater magnitude…. The next Fed meeting is Sept. 17-18, a long time away in market terms.  The Fed could act between meetings, yes, but Powell expressed zero urgency in his speech at Jackson Hole.”

The economic picture would have to worsen, not that the slowing in manufacturing is not already apparent to the Federal Reserve.  Even Services and Consumer Sentiment are slipping.

From August U.S. Data: “IHS Markit US Manufacturing PMI dropped to 49.9 in August 2019 from 50.4 in the previous month.” Below 50 is contractionary.  Chart is HERE. “The ISM Non-Manufacturing PMI for the United States dropped to 53.7 in July 2019 from 55.1 in the previous month.” Chart is HERE.   Still above 50, so services are expanding, but in a falling trend. 

The Consumer is not quite as happy as seen in an Aug. 30th report: “The University of Michigan’s consumer sentiment for the US was revised lower to 89.8 in August 2019 from a preliminary estimate of 92.1 and well below the previous month’s final 98.4. It was the lowest reading since October 2016.” The Chart is HERE.

Building Permits are positive (low interest rates help a lot) as shown HERE.

How much weakening it will take to move the Fed to more aggressive cuts is not known.  They did not lower rates 50 basis point the first time they lowered in July, so we’ll assess their response on Sept. 18th with the full set of Fed projections, their statement, and of course, the dog and pony show (a.k.a. news conference with Chair Powell).  Again, short of a perceived crisis before then, they will not act between meetings.

2. The U.S. Treasury Intervenes to Weaken the U.S. Dollar

As said previously: “This would be taken very badly by the EU, China, etc. and they would simply respond with their own currency manipulations.  That does not mean Trump won’t attempt it, and it could goose the market for a bounce, until the market realized the rest of the world would just print their own money in kind.  Then the market would resume its fall.  We lose buying power when the dollar falls by the way.  In the late 1970’s the stock market was going up with the dollar going down such that in real terms, stock investors were LOSING MONEY.”

3. China, Europe, and Japan provide FISCAL STIMULUS to their economies.  I detailed in last week’s issue (link to upper right) that China and Japan are doing some things that could help.

4. Trump’s U.S. China Trade War Ends: Last week I said:

…”the threats are getting bigger and bigger at this point.  Perhaps that alone will force a faster solution.  Trump, after the Friday market close, now says he’ll see President #Xi and raise him 5%!  HERE are the details (Sept. 1st tariffs are going from 10 to 15% and the 25% will go to 30% on Oct. 1st.).”

That turned out to be correct it appears from comments made this week by both sides.  They are going to meet “at a higher level” as Trump put it and will be talking this coming week.  Clothing manufacturers are going to be hit with those Sept. 1 tariffs, while other favored companies like Apple will have their tariffs delayed at least until Dec. 15th, so most of Christmas won’t be impacted. That would have been an earnings disaster. As it is, some retailers will have to lower their numbers.  If the higher tariffs go into effect, I would expect consumers to react very negatively to price increases and GDP growth to slow further.

5. Timing is everything.  Two weeks ago (and this is still a major theme I’ve been hearing) I said the Bull view could be:

“‘Things will be better on a comparative basis in Q4 2019 and Q1 2020, so buy stocks now.’  Just the comparative improvement in earnings and revenues, IF the world does not in fact slip into a recession, would help the stock markets globally.  This is not only true in the U.S., but also is the case in Europe and China.  The issue is whether further weakness for Q3 results will drive stocks down more before they recover.”

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

We have some new earnings data this week…

Earnings Risk: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 with a skip of two weeks until the 8-30-19 data (details HERE)…  The last numbers for Q2 are numbers for the current reported earnings from 99% of SP500 Index companies to date.  The arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  

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

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

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% -> -0.5% -> -0.8% -> -1.4% ->-1.9% -> -2.2% -> -3.1% -> -3.5%

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

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

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3% -> 4.3% -> 4.2% -> 4.0% ->4.0%-> 4.5%-> 4.0% -> 4.0% -> 4.0%

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

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

For Q1 2020, analysts are projecting earnings growth of 10.5% -> 10.7% -> 10.3 -> 9.9% -> 9.8% -> 9.5% ->9.2% >9.0% -> 8.5% -> 8.2%

and revenue growth of 6.2% -> 6.1% -> 6.0% -> 5.8% -> 5.8% -> 5.9% ->5.9% -> 5.7% -> 5.6% -> 5.7%

For Q2 2020, analysts are projecting earnings growth of 13.3% -> 13.3% -> 12.9% -> 13.2% -> 13.5% -> 12.0% ->12.6% ->  10.7 ->  9.9% -> 9.3%

and revenue growth of 6.8% -> 6.8% -> 6.6% -> 6.6% -> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4% -> 6.5%

You can see that earnings projections for Q3 2019 are coming down and so are earnings out to 2020, although the comparisons are going to be easier vs. the prior year in 2020. 

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

China Deal Risk: Has improved slightly, simply because the situation cannot get worse without sending China and the U.S. down the tubes together.

U.S. Iran War Risk: Simmering at a low boil, and not over. France is trying to broker a deal between Trump and the Iranian leadership. 

Mueller Report/Trump Impeachment Risk: Ongoing.  Read my analysis in the July 26th issue HERE.

2020 Election Risk: No important change.  Probably the biggest risk to the markets and most Americans are oblivious to this from the markets’ point of view.  I’ll stand by this:  “The market will likely pull back at least 10-15% going into the election if the outcome is even unclear, meaning President Trump is NOT ahead by a wide margin (a likelihood, but not a certainty, depending on whether the Dems go for a “McGovern” candidate, as in Nixon-McGovern in 1972, a Democrat disaster.”

Elizabeth Warren is the biggest threat to Biden.  She’s too liberal to win the election in my view, depending on how poorly Trump behaves going into the election of course.  If the economy does not perk up soon with the China Trade War behind Trump, he’ll have no chance in a run against Biden. 

Deficit/Debt Threat: No important change.  I’ll leave this here as a monument to our monumental debt, which could threaten interest rates in the future.  The only reason we are off the hook for now is because the rest of the world is in worse shape.

Fed Rate Cut Risk:  I discussed this above on the “upside opportunity” list.  The delay until the next meeting means more risk for the stock market.  Federal Reserve Chair Powell gave no hint he’ll either act aggressively or act between meetings.

Now take a look at the SP500 chart.  The green line is 2940.91, the
9-21-2018 High
, which preceded the decline from Sept. to December 24th.

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

Market timing the SP500 Index (SPY, SPX). Third top. Is that it for the Bulls?

Third top. Is that it for the Bulls?

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Neutral.  Would benefit from trade war resolution.  A rise with volume above the 47.60 level would be the first step in a “pop.”  Close Fri. was 47.41.  Same position as the overall market (up at a much lower high in the case of Intel).

Bank of America (BAC) Market Timing Signal: Neutral but off the prior low, as is Intel.  It has a series of higher lows going for it, but also a double top at 31.17.  Close Fri. was 27.51, so there is upside in the recent range.  The major influence on it will be interest rates. 

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,101 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -16.08% this week vs. -13.08% last week . As I’ve been saying, the pattern is similar to that of December, despite the fact that the price range has not had nearly as much downside.

Sentiment has to break to the single digits to tell us a new rally could be starting.  Unfortunately, the signal could be a week late, as sentiment is only assessed once a week.  The current sentiment level is actually a bit worse since last week, which is odd for a rising market.  Overall this level of sentiment is not very predictive, since it is not at an extreme.

Bulls Neutrals Bears
26.13% 31.66% 42.21%
Thurs. 12 am CT close to poll

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

Making lower highs and lower lows still.  Horrific relative performance vs. large caps, where investors are seeking safety.

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

Market timing the U.S Small Cap Index (IWM, RUT). Small caps making lower highs and trailing large caps in a big way.

Small caps making lower highs and trailing large caps in a big way.

 3. Gold Market Timing (GLD): 

I said on 7-26-18: “Still a Bull.  Add on dips.”   If you have no exposure, you should do your best to buy more on dips than on rips.  Interest rates have not declared yet how they will pivot, although banks are up off their June lows.  The gold and gold stock up trend is still intact and with the Federal Reserve hinting at more accommodation, even if just 3 rate cuts, gold may continue its rally.  A China Trade War resolution could hurt gold somewhat by lowering uncertainty, but as long as the global economy is still shaky and weakening along with interest rates, gold will do well.

The eventual inflection point in inflation (UP) and U.S. economic growth (UP) is what we need to pay attention to.  Any sense that the Fed will end its series of interest rate cuts could trigger a gold sell-off.

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

Market timing the gold ETF (GLD). Still an uptrend.

Still an uptrend.

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

There has been no sign of a definite bounce, so I added some one year CD exposure on Friday morning.  It’s doubtful the market will be making new highs if rates continue down.  If they stabilize at current levels, that alone could help.

The dollar went to a new high this week, because our interest rates, although low, are better than those elsewhere in the world.  Tom Lee made a good point last week on CNBC when he said the yield curve inversion this time is occurring in a context that is different from that associated with past recessions.  The Fed normally has hiked rates prior to a recession as the economy expanded, which would then eventually invert the yield curve.  The last time it hiked was in December, 2018, which was considered a policy error by critics.  It is now lowering rates, and long rates are still inverted vs. short rates.  To right the curve, the Fed would have to cut faster.

The Fed clearly has room to cut rates again without having to worry much about inflation, at least for now.  Whether that would actually help much at all beyond “calming Central Bank intervention addicts” is unclear.  Businesses are not going to make different investment decisions by and large as the Fed’s Gov. Esther George pointed out recently, with the 10 Year at 1.5% vs. 1.2%, except maybe to decide to inflate asset prices by borrowing at low rates and buying back their stock.  That is a non-productive use of capital.  It’s not the Fed’s job to inflate the stock, bond, and real estate markets.  In fact, we’ve already “been there, and done that.”  It was called “The Great Recession”!

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

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

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Rates still have not bounced appreciably.

Rates still have not bounced appreciably.

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

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

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

Stock Signal RED for a further U.S. stock market rally with a Bearish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down.  Until the SPX attains that first goal mentioned above, I’ll keep calling it Bearish.

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!)  These are the targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89.  The bonus target #8 is [12.-17-12.37].  The Bears have 8 of 8 targets at a VIX of 18.98 (Friday close).   I consider the “fulcrum” the key decision point that turns the market from Bearish to Bullish, when the VIX falls below that entire fulcrum range.

The ‘Bull Nirvana Target’ is our V*IX # of 2018: 13.31.”  (That is target #7 for the Bulls.) 

Gold Signal RED  for a further U.S. stock market rally with a BULLISH Gold Trend.   What gold does mostly as I’ve written HERE is follow real interest rates. 

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

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

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

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 55.10 this week vs. 54.17 last week but in a Bearish descending triangle falling toward the June and August lows.

Just a reminder (not a current problem, because rates are “too low” now on a relative basis): If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  The period of rising rates in early October I called #RateShockII.

The risk lately has been “Negative Rate Shocks.”  (Not negative rates in the U.S. yet!  “Negative” refers to the direction of the shock.)  First we had “Negative Rate Shock I” in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error by critics),  “Negative Rate Shock II” in May, and “Negative Rate Shock III” in August, which is on pause and awaiting the next pivot.

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

I thank Worden Brothers for the charting system I use to post these charts.  If you want to know more about the charting system I use every day, contact me.  It makes it much easier to follow along with me if you can see the charts and manipulate them on your own computer.  It’s a great investment to have an excellent charting system.

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

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

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

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

Market Timing Brief™ for the 8-23-2019 Close: “Trump Trade Tweets Tank the Market On Friday at 10:59 am. Gold and Treasuries Shine. More Upside Ahead for Both?”

A Market Timing Report based on the August 23, 2019 Close, published Saturday, August 24th, 2019…

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

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

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

At 10:59 am Friday President Trump tweeted out several tweets from his @realdonaldtrump account on Twitter, which ordered CEOs of U.S. companies to leave China to either find alternative sources for goods or better yet, bring the jobs home.  This is what he said: HERE.  These, of course, are jobs no American wants like repetitively putting cell phone components together many hours a day.  This and a few other tweets along the same lines tanked the markets.  The pressure continued for most of the day with a small lift into the close.  Trump sent the market down 2.59% for the day.

Let’s next check my “Bull Market Health Score”…

What would satisfy me that the Bulls are serious?

Let’s check the list once again… The Bull Market Health Score this week?  Bulls 0/Bears 5.  At the end of July we were at Bulls 2.5/Bears 2.5.  Last week it was Bulls 0.5/Bears 4.5

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

1. New high?  Bears 1.0 point.  Answer: No.  Last week I said:

“Bulls must retake S*PX 2943.31 and S*PY 294.15 to be convincing that the current correction is over at least in getting us back to a test of the prior ATH (all time high).  (*’s added to throw off the ‘web crawlers’; it’s not my goal to become part of the ‘consensus.'”

The Bulls never made it over those numbers and the double two wave up pattern I predicted would occur last week, in fact happened as you see in the SPX chart below… The high was 2939.08 on Thursday.  Close but no cigar!  First is the wave down to the 8-05 low, then the two UP waves ending on 8-08 and 8-22, respectively.  And now, we are in Wave 3 down, which could either be a Fibonacci multiple of Wave 1 (Wave 3 of 5) or simply a C wave in a three wave pattern.  Either one of those would break the 8-05 low.  More on the targets I’m looking for below…

2. VIX below the “Bull Nirvana Number” AND my bonus number?  Bears 1.0 point.  Answer: No.  At the Friday close, the VIX was 19.87 vs. the prior week’s close at 18.47.  The VIX Game Score as I call it is Bulls 0/Bears 8 as of the close Friday.  There is plenty of more upside as the VIX pattern starts to look very much like the pattern in 2018 when the market crashed.  It may not crash now, but don’t think it CANNOT happen (that would mean revisiting the December low as a possible target).  The chart I shared on the VIX Volatility Index is HERE.

3. AD % Line in an Uptrend (proprietary stat; see base of report about this)?: Bears 1.0 point.  Answer: No.  It’s at 16,424 as of Friday vs. 16,446 last week.  Lower highs are seen with a descending triangle, which is Bearish.  Time-wise, it could take about 10 trading days to get back to the June low and that may not backstop the market.  It could go faster if volatility spikes dramatically next week.

4. Volume on Up Moves? Bears 1 point.  Answer: No.  I said last week: “Volume also did not rise this past Friday on the rally, which makes it suspect.   The summer cannot be blamed as this assessment is relative to recent volume numbers.”  There has been NO volume confirmation of any of the up days in August.  None. 

5. The “U.S. Index Matrix Signal” (as I call it) Positive?  Bears 1.0 point.  Answer : No.  I said last week there was a chance for a several day bounce in the markets, given the bounce of small and mid caps off the prior low, but that bounce really was only one day!  The rest of it was a consolidation near the top, established on the first day.   The matrix points the direction for the large caps, which is almost surely to revisit the prior August lows at a minimum. 

As I said last week:

“The bounce that began on Friday could simply form a double 2 wave UP, meaning two bounce waves that reach the same level and lead to a larger 3rd wave down, which I call “The Big Red Wave.”  That level of correction would take us down to 2694 or -11.0% from the all time high (ATH).  Alternatively, the lower upward sloping SPX channel line (yellow in chart below) may hold.  That level is rising over time as it’s an uptrend line, but for now is at 2760 [updated for Fri. close], or a drop of 8.9% from the ATH.  The June low is in between those two numbers and is therefore a viable target as well.”

We are in “correction territory per my “New Rules.”  The SP500 Index is now at -5.98% vs. the all time high on 7-26-19.  My “New Rules” for market correction naming are HERE (scroll down to “New Rules”).  This drop could stop at one of the above mentioned levels and would then bounce to another lower high, before falling once again to the final low, which could be at the December low or lower (Dec. low is the probable worst case at this time in my opinion – a big double bottom).

My definition of a correction is much more helpful than the standard 7-10% range.  There are some drops of 3 to 5% over a few days that do NOT lead to a bigger correction or Mini Bear Market as I call them if they occur over several days. But a drop of 5% in SPX usually means more downside.

Recognize that sudden large drops are very negative however, especially when coming off a top.  The drop on 8-05 was one of those and look at where we are – back to the same low.

The market could bounce at any time including Monday, but the odds favor more downside in my view…

Let’s ask what could CAUSE a sustained rally (rise of more than 2-3 days)? What are the “upside opportunities” as I call them:

1. The U.S. Federal Reserve lowers interest rates more quickly than suggested by their latest “mid-cycle adjustment” language.  Not going to happen it seems short of financial instability of greater magnitude.  The Federal Reserve’s Chair Powell just spoke on Friday at Jackson Hole, Wyoming and said the Fed is willing to ease, but is following the data, not Trump tweets.  They see the U.S. as doing better than the rest of the world and are watching foreign markets and global economic slowing, but don’t feel it is directly threatening the U.S. I covered this in several messages Friday you should read HERE (and those above that one).  The next Fed meeting is Sept. 17-18, a long time away in market terms.  The Fed could act between meetings, yes, but Powell expressed zero urgency on Friday in his speech.

Should the Fed lower rates?  I agree that the inverted yield curve says they CAN lower rates and get away with it without causing undue inflation, but whether it will do anything to demand for loans when rates are already very low is very arguable too.  Fed Governor Esther George, a dissenting, voting FOMC member said on Thursday that rates were already near a zero real rate.  Pushing them to negative she said, would not cause businesses to invest more.  I agree.  I think the whole emphasis on the Fed is just a back door tactic to weaken the U.S. dollar, which Trump is intent upon.   Which brings me to….

2. The U.S. Treasury Intervenes to Weaken the U.S. Dollar

This would be taken very badly by the EU, China, etc. and they would simply respond with their own currency manipulations.  That does not mean Trump won’t attempt it, and it could goose the market for a bounce, until the market realized the rest of the world would just print their own money in kind.  Then the market would resume its fall.  We lose buying power when the dollar falls by the way. In the late 1970’s the stock market was going up with the dollar going down such that in real terms, stock investors were LOSING MONEY.

Please do not buy into Trump’s talk that a weak dollar is “good.”  It’s good for stock prices (Until it isn’t! Ask Argentina), not REAL, inflation adjusted wealth creation!

3. China, Europe, and Japan provide FISCAL STIMULUS to their economies.  I am not saying they “should” do this, but it would help to create demand, while their debt levels rise. The German central bank says none is needed HERE.  Japan has adopted stimulus programs while also raising tax rates as noted HERE.  China has adopted new banking measures to free up more money for economic expansion.  This is what they did: HERE.  China is growing, but at a slowing rate: “Second-quarter economic growth slowed to a near 30-year low” per CNBC.

Trump is hurting the powerhouse of growth for the global economy and that directly impacts U.S. businesses who need NEW MARKETS to expand into such as China’s in order to grow.  Look at what percentage growth China is vs. total global growth HERE.   It is a BIG number.  Hurt that and you hurt the U.S.  China needs to play fair for sure, but the manner in which one negotiates with a long term partner does matter.

4. Trump’s U.S. China Trade War Ends: Fat chance that happens soon, although the threats are getting bigger and bigger at this point.  Perhaps that alone will force a faster solution.  Trump, after the Friday market close, now says he’ll see President #Xi and raise him 5%!  HERE are the details (Sept. 1st tariffs are going from 10 to 15% and the 25% will go to 30% on Oct. 1st.). 

The massive uncertainty this brings along with the direct hit to U.S. companies doing business in China is weighing on the markets.  Ending it would result in a strong rally, which the market has been anticipating until now.  The market may decide to “give up” on its hopes for a resolution, since all of the prior hopes have been dashed.  The question for me is how much market pain Trump will endure until he decides to negotiate a deal.

Xi is facing pain as well and agreeing not to cheat is something the Chinese need to enter the world economy as a big player, which they are not in many ways.  Financially, they are far behind, despite their population size.  Creatively, they are laggards too in most areas, although they are making inroads in 5G tech, with 40 cities about to light up with 5G on Oct. 1st.  China is beating the U.S. in the 5G rollout, which could mean a competitive disadvantage for the U.S. in developing the secondary and tertiary products related to 5G.  Their cell phone companies are far ahead of the U.S. including Apple.  This may be one big reason Trump is going after Huawei.

5. Timing is everything.  Last week I said the Bull view could be:

“‘Things will be better on a comparative basis in Q4 2019 and Q1 2020, so buy stocks now.’  Just the comparative improvement in earnings and revenues, IF the world does not in fact slip into a recession, would help the stock markets globally.  This is not only true in the U.S., but also is the case in Europe and China.  The issue is whether further weakness for Q3 results will drive stocks down more before they recover.”

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

No Earnings Update this week.  No new data from FactSet.

Earnings Risk: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 (details HERE)…  The last numbers for Q2 are numbers for the current reported earnings from 90% of SP500 Index companies to date.  The arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  

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

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

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% -> -0.5% -> -0.8% -> -1.4% ->-1.9% -> -2.2% -> -3.1%

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

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% -> 6.3% -> 6.0% -> 5.4% ->4.9% -> 4.5%  -> 3.9%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3% -> 4.3% -> 4.2% -> 4.0% ->4.0%-> 4.5%-> 4.0% -> 4.0%

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

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

For Q1 2020, analysts are projecting earnings growth of 10.5% -> 10.7% -> 10.3 -> 9.9% -> 9.8% -> 9.5% ->9.2% >9.0% -> 8.5%

and revenue growth of 6.2% -> 6.1% -> 6.0% -> 5.8% -> 5.8% -> 5.9% ->5.9% -> 5.7% -> 5.6%

For Q2 2020, analysts are projecting earnings growth of 13.3% -> 13.3% -> 12.9% -> 13.2% -> 13.5% -> 12.0% ->12.6% ->  10.7 ->  9.9%

and revenue growth of 6.8% -> 6.8% -> 6.6% -> 6.6% -> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4%

I’ll leave this from 8-09:

Conclusion: It is still the case that earnings are weak (about flat) for the 2nd quarter in a row and are due to be negative for a third quarter (Q3 2019). The market is waking up to the fact that the Federal Reserve does not see the level of risk it sees!  Hence, we have crashing 10 Year Treasury yields and falling stock markets around the world, when the Fed lowering rates aggressively should cause yields to rise at the long end.  

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

China Deal Risk: Has gotten far worse this week, as discussed.  Very negative for sentiment, especially for businesses trying to plan.

U.S. Iran War Risk: Simmering at a low boil, and not over. Iran claimed to have fired “a new missile” on Thurs. without providing details. 

Mueller Report/Trump Impeachment Risk: Ongoing.  Read my analysis in the July 26th issue HERE.

2020 Election Risk: No important change.  Probably the biggest risk to the markets and most Americans are oblivious to this from the markets’ point of view.  I’ll stand by this:  “The market will likely pull back at least 10-15% going into the election if the outcome is even unclear, meaning President Trump is NOT ahead by a wide margin (a likelihood, but not a certainty, depending on whether the Dems go for a “McGovern” candidate, as in Nixon-McGovern in 1972, a Democrat disaster.”  Elizabeth Warren is the dark-horse progressive who may overrun Biden, which would be a potential gift for Trump.  She does not have the name or experience of a Clinton who served as Sec. of State, which I believe a woman needs more than a man, like that or not.  A President has the unsavory job of being a “killer” on the world stage.  You have to be willing to kill an Osama bin Laden for example.   Warren would lose to Trump in my view, even if it were a close election due to the Democrats making a huge effort to defeat Trump.

Biden is still in a much stronger position to take Trump.  Here is my advice to V.P. Biden on tax policy, which he has not yet fully fleshed out:  He’s already said he’ll raise the tax rates on those who make $500,000 to $1 M/year to the prior 39.6% (Obama rates).  He should leave the estate tax limit where it is: 11.4 M.

Wealth taxes such as those suggested by Warren are crazy.  What sense does it make for Americans to believe it is right that the government should simply take 2% of your wealth from you every year simply because you are worth over $50 M?  I believe a majority of Americans would find that creepy government confiscation of wealth beyond the pale of usual tax policy.  How in the world would you value a person’s real estate and businesses every year, when Wall Street cannot get valuation right???

Going back to V.P. Biden:  He could also easily close the hedge fund tax loophole that lowers their tax rate from usual income tax rates.  Trump and the GOP let the prior ridiculous tax rate stand despite Trump’s campaign trail talk!  Swampland there for sure!

Biden would also have to keep corporate rates reasonably low.  He could raise them from 21% back up to 25% and get away with it, but if he goes higher than that, the U.S. becomes less competitive globally.  China is at 25% for example.

The EU?  The Tax Foundation says: “Europe has the lowest regional average rate, at 18.38 percent (25.43 percent when weighted by GDP).”  There you go. I think I nailed the correct number for the Democrats to argue: 25%.

Finally, he could adopt a limited “Wall Street Tax,” such as having a small tax on all HIGH FREQUENCY trades alone (could be just pennies per trade depending on the numbers), which would help reduce volatility is my guess.  I’d want to study it first though, to be sure it would not impair liquidity excessively; I doubt it, but you’d want to prove it via study.  Joe Biden could win based on that set of tax policies by even gaining the support of independents. 

Deficit/Debt Threat: No important change.  I’ll leave this here as a monument to our monumental debt: “They all see the problem and do nothing about it.  They just keep spending.  Per the NY Times: ‘Within a decade, more than $900 billion in interest payments will be due annually, easily outpacing spending on myriad other programs’ – that includes Defense and Medicare!”

Fed Rate Cut Risk: Fed Chair Powell gave the market nothing, as I tweeted on Friday.  The delay until the next meeting means more risk for the stock market. 

Now take a look at the SP500 chart. 

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

Market timing the SP500 Index (SPY, SPX). Third wave down.

Third wave down. It could be another “Big Red Wave.”

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative.  Actually AWFUL.  Just broke the Aug. low on high volume and is headed to the May low for starters at least.  Trump has to fix the China Trade War soon, and if he did, Intel would benefit from that.  A rise with volume above the 47.60 level would be the first step in a “pop.”

Bank of America (BAC) Market Timing Signal: Negative.  Very negative, testing the June low and already below the March low on high volume. 

Last week:

“Notice both canaries are positioned for a rally?  But they must hold current support – or else.  That’s called a pivot point.” 

Pivots go up or they go down.  This one went down hard.   

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,101 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -13.08% this week vs. -21.67% last week .  From 2 weeks ago: “The low in Sentiment in December was -28% for the poll ending on 12-12-18, but the price low was on December 26th intraday.  Sentiment has room to become more extreme, but the December comparison says to me there is more room for a further decline in the SP500 Index ahead, even if sentiment does not worsen.”

ONCE AGAIN:This is the same pattern as the December pattern.  Sentiment FELL after it peaked as the price of SPX fell.  Not a big help for the Bulls.”  In December, the spread two weeks after the high negative spread of -28% was -18.8% per AAII.  This week’s value of -13.08% is close enough to say the Bulls are likely looking at more downside. 

Bulls Neutrals Bears
26.64% 33.64% 39.72%
Thurs. 12 am CT close to poll

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

Last week I said: “A trade perhaps, even if a quick one off the June low.  They are higher beta, so they’ll fall harder in a further market decline.  I’d rather stick to large caps at this point, but the small cap trade could work out.  Use a stop.  ;)”

Well, if you bought the open last Monday, you did not make much even if you sold the Mon. high or that of the next 3 days.  Stay clear of small caps unless you have some system of allocating capital that tells you otherwise.   Sure they could bounce Monday, or even for a few days, but without a strong catalyst like a “U.S. China Trade War Resolution,” they are likely to break still lower.  Note the big volume spike on Friday on the selloff in the chart below…

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

Market timing the U.S Small Cap Index (IWM, RUT). Stay out.

Stay out. That bottom may not hold.

 3. Gold Market Timing (GLD): 

I said on 7-26-18: “Still a Bull.  Add on dips.”  I bought some more gold stock exposure last week on the dips, and many of those are already off to the races.  Gold and gold stocks are not done until rates have a clear reason(s) to move higher.  Buy dips!  Try not to chase, or if you do, add much less.  Then add more on dips.  Although the extent of the price breakout was slight on Friday, raising some suspicion about what gold will do next, there was strong volume behind it.  I added a bit more on Friday as well (but walked my talk of “adding less” on breakouts).

Once you have a trend, buy the dips in the trend.  It’s that simple.  If you complicate it with “What if this?  What if that?” you’ll miss out on HUGE profits.  My GDX position just established in April and May 2019 is about +35%.   Had I exited on the shallow pullbacks in June, July, and August, that would not be the case.

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

Market timing the gold ETF (GLD). Gold has more upside.

Gold has more upside.

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

As I said Monday Aug. 5th: “The 10 Year Treasury Yield is still crashing, down 8.0 basis points just for Monday, which is a very bad sign for the stock market, and a very good sign for gold/gold stocks.  I exited TLT early, but did so knowing I still had exposure to long municipal bonds and gold/gold stocks as hedges.”

Last week: “If the economy worsens from here, there will be more upside for TLT etc.  If not and/or if Powell cuts rates aggressively, watch out below.  Long rates will rise and bonds will be hurt.  If he does it too slowly, long rates may fall further.”

In short, there has been further panic.  Things are so extreme that the TNX chart is starting to look weird!  This is a continuing rate crash, and some Bears are saying the TNX could reach zero.  I cannot rule that out, but I think that is extreme for now unless Trump enacted those huge tariffs, in which case, the rate Bulls would win big.  TNX 13.36 is the next downside target (means 1.336%).   I believe the Treasury Bulls will see that target hit.  There are upside risks for rates in the wings I have discussed above.

Of note is the dollar falling on Friday AS RATES FELL.  That’s not been the recent pattern.  The dollar has benefited until now from falling rates as money has poured into the US dollar via Treasury purchases with foreign currency as well as dollars.   The rumor via Trump tweet hinting that the U.S. Treasury could deliberately attack the USD sent the greenback down on Friday. 

By the way, late Friday, Steve Leisman @CNBC spoke to Federal Reserve Vice Chair Richard Clarida who said trying to force the yield curve into submission would likely fail due to the size of market forces driving it down.  Even if the Fed lowered rates next week by 0.50% (50 basis points), rates would likely decline over the intermediate term – after a big bounce though!  There is plenty of room for rates to bounce given any excuse in the near term.

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

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

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Yields crash further!

Yields crash further!

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

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

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

Stock Signal RED for a further U.S. stock market rally with a Bearish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down.

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!)  These are the targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89.  The bonus target #8 is [12.-17-12.37].  The Bears have 8 of 8 targets at a VIX of 19.87 (Friday close).   I consider the “fulcrum” the key decision point that turns the market from Bearish to Bullish, when the VIX falls below that entire fulcrum range.

The ‘Bull Nirvana Target’ is our V*IX # of 2018: 13.31.”  (That is target #7 for the Bulls.) 

Gold Signal RED  for a further U.S. stock market rally with a BULLISH Gold Trend.   What gold does mostly as I’ve written HERE is follow real interest rates. 

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

Rate Signal RED for a further stock market rally with a BEARISH 10 Year Yield Trend.

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

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 54.17 this week vs. 54.81 last week but in a Bearish descending triangle falling toward the June low.  I was right that oil was falling over last week. 

Just a reminder (not a current problem, because rates are “too low” now on a relative basis): If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  The period of rising rates in early October I called #RateShockII.

The risk lately has been “Negative Rate Shocks.”  (Not negative rates in the U.S. yet!  “Negative” refers to the direction of the shock.)  First we had “Negative Rate Shock I” in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error),  “Negative Rate Shock II” in May, and “Negative Rate Shock III” in August, which is continuing still!

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I thank Worden Brothers for the charting system I use to post these charts.  If you want to know more about the charting system I use every day, contact me.  It makes it much easier to follow along with me if you can see the charts and manipulate them on your own computer.  It’s a great investment to have an excellent charting system.

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

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

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Market Timing Brief™ for the 8-16-2019 Close: “Will the U.S. Stock Market Turn Up or Down from Here? Gold and Treasuries in Uptrends but Stretched.”

A Market Timing Report based on the August 16, 2019 Close, published Saturday, August 17th, 2019…

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

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

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

Up or down?  Good question!  Ahhh, what will the market do next?   The answer?  Before we get to that…

Let’s next check my “Bull Market Health Score”…

What would satisfy me that the Bulls are serious?

Let’s check the list once again… The Bull Market Health Score this week?  Bulls 0.5/Bears 4.5.  At the end of July we were at Bulls 2.5/Bears 2.5.  

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

1. New high?  Bears 1.0 point.  Answer: No.  Bulls must retake S*PX 2943.31 and S*PY 294.15 to be convincing that the current correction is over at least in getting us back to a test of the prior ATH (all time high).  (*’s added to throw off the “web crawlers”; it’s not my goal to become part of the “consensus.”  :)) 

2. VIX below the “Bull Nirvana Number” AND my bonus number?  Bears 1.0 point.  Answer: No.  At the Friday close, the VIX was 18.47.  The VIX Game Score as I call it is Bulls 0/Bears 8 as of the close Friday.  We should see the VIX fall through those targets listed at the base of this report AND the goal noted in #1 above achieved to be sure this rebound is real.

3. AD % Line in an Uptrend (proprietary stat; see base of report about this)?: Bears 1.0 point.  Answer: No.  It’s at 16,446 as of Friday.  Lower highs are seen with a descending triangle, which is Bearish.

4. Volume on Up Moves?: Bears 1 point.  Answer : No.  I said earlier this week, “Volume did not rise on the 1.88% up move in the market on Thursday, August 8th.  That was one signal to ‘sell some.'”  Volume also did not rise this past Friday on the rally, which makes it suspect.   The summer cannot be blamed as this assessment is relative to recent volume numbers.

5. The “U.S. Index Matrix Signal” (as I call it) Positive?  Bulls 0.5 point.  Answer : Split.  One day off a low is not an “all clear.”  Mid caps held a higher low than the June low, and small caps (small caps were the worst, as warned)  held the end of May low.  A breach of those levels would mean more pain for the large caps as well.  The bounce in small-mid caps indicates there is room for at least a general market bounce, perhaps of more than a few days. 

As I review the entire set of my indicators, beyond the above score, the picture is mixed.   Some say the pullback has been enough, and others say there is more downside ahead.  The worst performers have attracted new blood vs. the May 31st low – there has been a 67% rise in the number of horribly acting stocks vs. that prior low.  That means investors are dumping bad performers left and right.  The percent of stocks doing the best technically held above the May low.  In a panic out of stocks, “they sell everything.”  That’s not been quite the case yet, although it was when the 2 and 10 Year Treasury Yields inverted this week.  Everything fell.  That’s what a crash looks like.

The bounce that began on Friday could simply form a double 2 wave UP, meaning two bounce waves that reach the same level and lead to a larger 3rd wave down, which I call “The Big Red Wave.”  That level of correction would take us down to 2694 or -11.0% from the all time high (ATH).  Alternatively, the lower upward sloping SPX channel line (yellow in chart below) may hold.  That level is rising over time as it’s an uptrend line, but for now is at 2759, or a drop of 8.9% from the ATH.  The June low is in between those two numbers and is therefore a viable target as well. 

My guesstimate, therefore, is that a breakdown from the Friday close (as opposed to a continued rally, which I’ll get to next) would take us to around 2694 – 2759 for a drop of between about 9 to 11% from the ATH.  The drop to the 8-05 low was 6.8% for comparison.   That puts the drop in this leg down in “correction territory” per my “New Rules” for market correction naming HERE (scroll down to “New Rules”).  It’s already been in what I call correction territory; it will just have the chance to drop a bit deeper in correction range.

What if the market rallies from here?  First let’s ask what could CAUSE a sustained rally (rise of more than 2-3 days)? 

The market needs a bone to provide perceived “upside opportunity.”  Possible bones include:

1. The U.S. Federal Reserve lowers interest rates more quickly than suggested by their latest “mid-cycle adjustment” language.  That would be required to inflect the yield curve back to normal. The banks hate the idea of still lower rates as it impairs their profits.  Financial stocks have been a horrible investment for that reason.  BAC is just off its June low.

If the Fed acts aggressively the market may then look past what turns out to be temporary global slowing as central banks continue to attempt to stimulate their economies DESPITE the fact that Japan and Europe are both slipping toward recession WHILE interest rates are NEGATIVE!  No worries, the ECB will simply buy more debt they claim.  Real interest rates (adj. for inflation) are DEEPLY negative in these countries.  So if that does not work, just do more of it???  I’ve heard Rick Santelli rail against the dubious policy of negative interest rates.

Negative yielding global debt is now at a massive $15 Trillion (Ref. @ CNBC)  I am NOT very optimistic that this will do anything but chase more money into U.S. stocks for a last market rally before a crash.  I will admit that’s a rally you want to be a part of, although you had better have protection via cash, gold, and individual high grade bonds/Treasuries that you can hold to maturity.

There are Bulls that say that U.S. stocks are very cheap vs. the cost of money, specifically U.S. Treasuries.  But are rates low because the economy is sliding globally?  It would seem so.  So the low rates flash a buy signal to these “value investors” as the world slips into recession, which is the one time you absolutely need to have a lower exposure to stocks.  It is true that investors tend to run to stocks for yield when yields crash, but what they’ve done recently is buy bonds, because bonds rally as rates fall.  If we turn into Europe and Japan so to speak and head to negative yields, we will be in or be barrelling toward a recession.  Remember: Rates rise in a strong economy!  They at least stay flat AT HIGHER LEVELS, but they definitely don’t linger at the current historically low levels.

Decide what you believe, but this is why I am between a recessionary equity exposure and the full exposure I’d have in a strong Bull market.  We are navigating an uncertain period of weak earnings, tariff wars, and diving yields.  The market has had two 3% down days in the past 10 days.  That often leads to more downside.  It may not, but that’s the correlation. 

My Bull market exposure is what I call “100% of maximum exposure” during a strong Bull Market.  My recession exposure level is 60% of max exposure, although I reserve the right to drop it lower!  By the way, 60% does not mean being at 60% stocks in this context; it’s 60% of max exposure during a strong Bull Market.  If you are 20 years old and your exposure level is 100% normally in a strong Bull Market, then if you shifted to 50% of max exposure, you’d drop to 50% raw exposure.  That’s just an example.

I only share relative numbers, so you can adjust your numbers to taste.  I think it would be reasonable, given the current setup, to be 9% higher as a % of max. exposure than I am now (see social media on 8-14).

Read/consult with an advisor about where you should be in stock exposure risk at your age and then make your own decision.  Remember, if you have riskier stocks, that means your beta is higher than the market, and you need to lower your exposure level to compensate for that.  50% in high fliers is not equal to the risk of 50% in SPY.  My current exposure level is shared on social media (on 8-14-19).  Ray Dalio who manages $150 Billion says his team has “recession risk” for the U.S. at about 40% (@CNBC).

By the way, the yield curve just inverted as nearly everyone heard even in the mainstream press, but only for less than 1 day, so that may not even count, but let’s say the signal has been triggered and a recession is coming.  A recession could start between 6 and about 18 months from now based on the inversion event.  In 2000, it took about two years.  During that period the market typically goes on one last buying binge with very strong stock market returns.  Keep that in mind in adjusting your exposure level.  You can still have more cash than usual and participate in the last inning(s) of the Bull Market.

2. Europe and Japan provide FISCAL STIMULUS to their economies.  I am not saying they “should” do this, but it would help to create demand, while their debt levels rise. Germany has an inherited fear of debt, which has the ECB focused on inflation alone as their mandate and NOT full employment as well, as is the case in the U.S.  However, there is now talk the Germans may provide fiscal stimulus.  In the U.S. the Democrats won’t help Trump out with an infrastructure bill.  They want to pass it when they take over the Presidency and take credit for helping the economy and improving the nation’s infrastructure, something that is visible to voters as well.

3. Trump’s U.S. China Trade War Ends: A positive resolution to the impasse would encourage investment around the world.  My belief currently is that Trump knows his election chances will suffer if his trade policies lead to a recession, and he is in the process of pivoting toward a compromise solution with China (unless he’s politically suicidal, because subconsciously he just wants to build Trump Towers in Russia and Saudi Arabia).  Democrats will say he was directly responsible for the recession, if he does not change course soon and induces one.  The Democrats have an advantage numerically as proven in the last election in which Clinton won the popular vote and lost the electoral vote.  Trump cannot lose the farmers or the midwest manufacturers and win in 2020.

Much of our multinational company growth now depends on China’s growth, which Trump is impairing through tariffs.  Less uncertainty would provide a big boost to stocks, although then the Federal Reserve would be watching for inflation as things improved.  Let’s take thing one step at a time though.  On an immediate basis, the end of the trade war would boost global markets including the SP500 Index.

4. Bulls may argue: “Timing is everything.  Things will be better on a comparative basis in Q4 2019 and Q1 2020, so buy stocks now.”  Just the comparative improvement in earnings and revenues, IF the world does not in fact slip into a recession, would help the stock markets globally.  This is not only true in the U.S., but also is the case in Europe and China.  The issue is whether further weakness for Q3 results will drive stocks down more before they recover.

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

No Earnings Update this week.  The FactSet writer is on vacation, so there is no new data this week.  😉

Earnings Risk: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 (details HERE)…  The last numbers for Q2 are numbers for the current reported earnings from 90% of SP500 Index companies to date.  The arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  

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

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

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% -> -0.5% -> -0.8% -> -1.4% ->-1.9% -> -2.2% -> -3.1%

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

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% -> 6.3% -> 6.0% -> 5.4% ->4.9% -> 4.5%  -> 3.9%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3% -> 4.3% -> 4.2% -> 4.0% ->4.0%-> 4.5%-> 4.0% -> 4.0%

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

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

For Q1 2020, analysts are projecting earnings growth of 10.5% -> 10.7% -> 10.3 -> 9.9% -> 9.8% -> 9.5% ->9.2% >9.0% -> 8.5%

and revenue growth of 6.2% -> 6.1% -> 6.0% -> 5.8% -> 5.8% -> 5.9% ->5.9% -> 5.7% -> 5.6%

For Q2 2020, analysts are projecting earnings growth of 13.3% -> 13.3% -> 12.9% -> 13.2% -> 13.5% -> 12.0% ->12.6% ->  10.7 ->  9.9%

and revenue growth of 6.8% -> 6.8% -> 6.6% -> 6.6% -> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4%

I’ll leave this from last week: Conclusion: Is it still the case that earnings are weak (about flat) for the 2nd quarter in a row and are due to be negative for a third quarter (Q3 2019). The market is waking up to the fact that the Federal Reserve does not see the level of risk it sees!  Hence, we have crashing 10 Year Treasury yields and falling stock markets around the world, when the Fed lowering rates aggressively should cause yields to rise at the long end.  The market sees the Federal Reserve as being behind the curve. 

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

China Deal Risk: A deal is still promised, but the jawboning is not working at all anymore.  Trump withdrew much of the tariff threat that would have impacted U.S. consumers at Christmas.  That went beyond talking.  Without a strong Christmas, our economy would take a further BIG hit.  Q4 is the most important retail quarter of the year.

U.S. Iran War Risk: Simmering at a low boil, but not over.  A tanker was just released from Gilbralter that the U.S. had tried to prevent from leaving. 

Mueller Report/Trump Impeachment Risk: Ongoing.  Read my analysis in the July 26th issue HERE.

2020 Election Risk: No important change.  Probably the biggest risk to the markets and most Americans are oblivious to this from the markets’ point of view.  I’ll stand by this:  “The market will likely pull back at least 10-15% going into the election if the outcome is even unclear, meaning President Trump is NOT ahead by a wide margin (a likelihood, but not a certainty, depending on whether the Dems go for a “McGovern” candidate, as in Nixon-McGovern in 1972, a Democrat disaster.”  Bernie Sanders has fallen out of favor.  His message seems tired, and he appears to be very unhappy.  His campaign has attacked CNN for making negative comments about his demeanor!  He has the right to be unhappy!  😉  Warren’s ideas are actually his ideas with a more positive spin on them, and she’s taking away his support.  Same policies.  She smiles; he frowns.

Could a very left leaning self-proclaimed capitalist like Elizabeth Warren take Donald Trump in an election by promising the world to students (loan forgiveness), healthcare for all, and wealth taxes on the ultra rich, as well as higher taxes on the less than ultra-rich?  She is gaining ground on Biden who needs to strengthen his positive message vs. saying “I’ll take you back to the Obama era” with no vision of the future.  The African American vote may give Biden the edge.  Polling says that’s likely based on 1. his leadership experience 2. his being #2 to Obama, and therefore “Obama’s pick.”  This is a big barrier for Warren to overcome as she receives little support from African American voters. 

Deficit/Debt Threat: No important change.  I’ll leave this here as a monument to our monumental debt: “They all see the problem and do nothing about it.  They just keep spending.  Per the NY Times: ‘Within a decade, more than $900 billion in interest payments will be due annually, easily outpacing spending on myriad other programs.’  The 2018 defense budget was $800 B.  Medicare?  $582 B.  Think about that!  Trump and the GOP may be spending dollars meant for your future Medicare and Social Security today.”

Fed Rate Cut Risk: Fed Chair Powell talks at 10 am ET on Friday at Jackson Hole where he meets with all the other market saviors.  As said: “The decline in yields is getting worse.  The market is still leery of Federal Reserve Chair Powell’s ‘mid-cycle adjustment’ in rates statement, meaning it believes he won’t be aggressive enough in lowering the Fed Funds rate.”

Now take a look at the SP500 chart. 

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

Market timing the SP500 Index (SPY, SPX). Stocks could turn either way.

Meaningful bounce or not?

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative.  Just above the May low.  Trump has to fix the China Trade War soon, and Intel would benefit from that.  That means there is the opportunity for a pop.  A rise with volume above the 47.5 level would be the first step.

Bank of America (BAC) Market Timing Signal: Negative but up off of support. Back above the March and  May/June lows after being below both on Thursday.  May work out as a trade as rates are stretched to the downside and due for a pop.  Maybe Powell does that with his words on Friday. 

Notice both canaries are positioned for a rally?  But they must hold current support – or else.  That’s called a pivot point. 

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,101 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.

Join the Conversation in the StockTwits “MarketTiming” Room

Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -21.67% vs. -26.54% last week .  From last week: “The low in Sentiment in December was -28% for the poll ending on 12-12-18, but the price low was on December 26th intraday.  Sentiment has room to become more extreme, but the December comparison says to me there is more room for a further decline in the SP500 Index ahead, even if sentiment does not worsen.”  This is the same pattern as the December pattern.  Sentiment FELL after it peaked as the price of SPX fell.  Not a big help for the Bulls.  

Bulls Neutrals Bears
23.18% 31.97% 44.85%
Thurs. 12 am CT close to poll

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

A trade perhaps, even if a quick one off the June low.  They are higher beta, so they’ll fall harder in a further market decline.  I’d rather stick to large caps at this point, but the small cap trade could work out.  Use a stop.  😉

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

Market timing the U.S Small Cap Index (IWM, RUT). Trade the bounce?

Trade the bounce or playing with “Beta Fire”?

 3. Gold Market Timing (GLD): 

I said on 7-26-18: “Still a Bull.  Add on dips.”   I think you can still do that soon, but the risk is a rise of long rates with Powell’s comments this Friday or even just a technical bounce in rates, which would further hurt gold/gold stocks along with Treasuries.  I would rather buy more gold/gold stocks after rates move back up in a counter-trend move.

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

Market timing the gold ETF (GLD). Gold Bull run continues.

Is a pause due for gold and rates after the steep rate plunge or more panic to come?

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

As I said Monday: “The 10 Year Treasury Yield is still crashing, down 8.0 basis points just for Monday, which is a very bad sign for the stock market, and a very good sign for gold/gold stocks.  I exited TLT early, but did so knowing I still had exposure to long municipal bonds and gold/gold stocks as hedges.”

If the economy worsens from here, there will be more upside for TLT etc.  If not and/or if Powell cuts rates aggressively, watch out below.  Long rates will rise and bonds will be hurt.  If he does it too slowly, long rates may fall further.

Investors who are hiding in long bonds and running from stocks will suffer if the Fed acts aggressively.  Also, if the economy improves in late 2019/early 2020, rates will snap back UP and cause bond/Treasury losses.  Set your stops on profits on all interest rate sensitive investments.  Sell in stages perhaps to benefit from further panic.  That’s what I’ve been doing.

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

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

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). More panic ahead?

This chart is one of total panic. Will the panic continue?

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

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

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

Stock Signal RED for a further U.S. stock market rally with a Bearish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down.

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!)  These are the targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89.  The bonus target #8 is [12.-17-12.37].  The Bears have 8 of 8 targets at a VIX of 18.47 (Friday close).   I consider the “fulcrum” the key decision point that turns the market from Bearish to Bullish, when the VIX falls below that entire fulcrum range.

The ‘Bull Nirvana Target’ is our V*IX # of 2018: 13.31.”  (That is target #7 for the Bulls.) 

Gold Signal RED  for a further U.S. stock market rally with a BULLISH Gold Trend.   What gold does mostly as I’ve written HERE is follow real interest rates. 

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

Rate Signal RED for a further stock market rally with a BEARISH 10 Year Yield Trend.

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

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”    It closed at 54.81 last week and is up off the May low, but in a Bearish descending triangle.  That means it could head lower.

Just a reminder (not a current problem, because rates are “too low” now on a relative basis): If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  The period of rising rates in early October I called #RateShockII.

The risk lately has been “Negative Rate Shocks.”  (Not negative rates in the U.S. yet!  “Negative” refers to the direction of the shock.)  First we had “Negative Rate Shock I” in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error),  “Negative Rate Shock II” in May, and “Negative Rate Shock III” in August.

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

I thank Worden Brothers for the charting system I use to post these charts.  If you want to know more about the charting system I use every day, contact me.  It makes it much easier to follow along with me if you can see the charts and manipulate them on your own computer.  It’s a great investment to have an excellent charting system.

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

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

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

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Market Timing Brief™ for 8-12-2019 Intraday: “U.S. Stocks Headed for More Downside. Gold Bull Run Continues. Rates Crashing in Negative Rate Shock III.”

A Market Timing Report based on the August 12 Intraday Data, published Monday, August 12th, 2019…

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

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

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

I’ve been writing this report today as the market continues to fall.  That’s real time confirmation of the trends I refer to below! 

Earnings reports are as of last Friday in for 90% of the SP500 Index.  Per FactSet, if earnings continue to be negative for the index, though only at -0.7% (see below), Q2 will be the second of two quarters said to be negative for earnings.

Let’s next check my “Bull Market Health Score”…

What would satisfy me that the Bulls are serious?

Let’s check the list once again… The Bull Market Health Score this week?  Bulls 0/Bears 5.  At the end of July we were at Bulls 2.5/Bears 2.5.  

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

1. New high.  Bears 1.0 point. Lower high for Bears.

2. VIX below the “Bull Nirvana Number” AND my bonus number?  Bears 1.0 point.  At the moment, (8-12-19 12:38 pm) the VIX is 19.45.  The VIX Game Score as I call it is Bulls 0/Bears 8 as of the close Friday and again today, while it was Bulls 8/Bears 0 at the end of July.  For the July 26th close, I said:

” The Bulls don’t have to be finished here, but they may be.  There has been a steady fall in the VIX from the lower VIX high achieved on June 3rd.   We are past the easy part of the Bull trade now.”

3. AD % Line Uptrend (proprietary stat; see base of report about this): Bears 1.0 point.  It’s at 16,414 now (Mon. 2:23 pm) vs. 16, 465 last Friday.  It’s now back below the May 1st high.

4. Volume: Bears 1 point.  Volume did not rise on the 1.88% up move in the market on Thursday, August 8th.  That was one signal to “sell some.”  I was looking for just a 1-3 day counter trend rally, which we got.

5. The “U.S. Index Matrix Signal” as I call it:  Bears 1 point.  Large, mid, and small caps are all rolling over. 

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

Earnings Risk: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 8-09-19 (details HERE)…  The last numbers for Q2 are numbers for the current reported earnings from 90% of SP500 Index companies to date.  The arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  

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

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

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% -> -0.5% -> -0.8% -> -1.4% ->-1.9% -> -2.2% -> -3.1%

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

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% -> 6.3% -> 6.0% -> 5.4% ->4.9% -> 4.5%  -> 3.9%

and revenue growth of 4.8%  —> 4.8%  —> 4.6%  —> 4.3% -> 4.3% -> 4.2% -> 4.0% ->4.0%-> 4.5%-> 4.0% -> 4.0%

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

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

For Q1 2020, analysts are projecting earnings growth of 10.5% -> 10.7% -> 10.3 -> 9.9% -> 9.8% -> 9.5% ->9.2% >9.0% -> 8.5%

and revenue growth of 6.2% -> 6.1% -> 6.0% -> 5.8% -> 5.8% -> 5.9% ->5.9% -> 5.7% -> 5.6%

For Q2 2020, analysts are projecting earnings growth of 13.3% -> 13.3% -> 12.9% -> 13.2% -> 13.5% -> 12.0% ->12.6% ->  10.7 ->  9.9%

and revenue growth of 6.8% -> 6.8% -> 6.6% -> 6.6% -> 6.6% -> 6.7% ->6.6% -> 6.5% -> 6.4%

Conclusion: Is it still the case that earnings are weak (about flat) for the 2nd quarter in a row and are due to be negative for a third quarter (Q3 2019). The market is waking up to the fact that the Federal Reserve does not see the level of risk it sees!  Hence, we have crashing 10 Year Treasury yields and falling stock markets around the world, when the Fed lowering rates aggressively should cause yields to rise at the long end.  The market sees the Federal Reserve as being behind the curve. 

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

China Deal Risk: No important change.  A deal is still promised, but the jawboning is not working at all anymore.  Heard about the boy who cried wolf?  The lack of progress, should it lead to higher tariffs, would be a big blow to global markets.  Trump and Xi need to reach an agreement before then…or else…

U.S. Iran War Risk: Simmering at a low boil, but not over as indicated by recent statements from Iran.

Mueller Report/Trump Impeachment Risk: Ongoing.  Read my analysis in the July 26th issue HERE.

2020 Election Risk: No important change.  Probably the biggest risk to the markets and most Americans are oblivious to this from the markets’ point of view.  I’ll stand by this:  “The market will likely pull back at least 10-15% going into the election if the outcome is even unclear, meaning President Trump is NOT ahead by a wide margin (a likelihood, but not a certainty, depending on whether the Dems go for a “McGovern” candidate, as in Nixon-McGovern in 1972, a Democrat disaster.”

Deficit/Debt Threat: No important change.  I’ll leave this here as a monument to our monumental debt: “They all see the problem and do nothing about it.  They just keep spending.  Per the NY Times: ‘Within a decade, more than $900 billion in interest payments will be due annually, easily outpacing spending on myriad other programs.’  The 2018 defense budget was $800 B.  Medicare?  $582 B.  Think about that!  Trump and the GOP may be spending dollars meant for your future Medicare and Social Security today.”

Fed Rate Cut Risk: No important change.  The decline in yields is getting worse.  The market is still leery of Federal Reserve Chair Powell’s “mid-cycle adjustment” in rates statement, meaning it believes he won’t be aggressive enough in lowering the Fed Funds rate.

Now take a look at the SP500 chart. 

SP500 Large Cap Index AT 11:02 am E.T. MONDAY (click chart to enlarge; SPX, SPY):

Market timing the SP500 Index (SPY, SPX). Rolling over again.

Rolling over again.

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative.  Nearly back to the May low.  Though a U.S. China Trade War resolution will eventually cause it to rally strongly, the delay of an agreement could cause a further decline. 

Bank of America (BAC) Market Timing Signal: Negative.  Broke down badly off the May top, while rates continue to collapse, ruining banking margins.  Testing near March and June lows.

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,101 investors are following the markets with me…

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Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -26.54% vs -14.38 last week .  The low in Sentiment in December was -28% for the poll ending on 12-12-18, but the price low was on December 26th intraday.  Sentiment has room to become more extreme, but the December comparison says to me there is more room for a further decline in the SP500 Index ahead, even if sentiment does not worsen.

Bulls Neutrals Bears
21.66% 30.15% 48.20%
Thurs. 12 am CT close to poll

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

Avoid them.  They are higher beta, so they’ll fall harder in a further market decline.  They are breaking down in lockstep with large caps after a brief bounce.

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

Market timing the U.S Small Cap Index (IWM, RUT). Avoid them.

To be avoided due to higher beta/risk.

 3. Gold Market Timing (GLD): 

I said on 7-26-18: “Still a Bull.  Add on dips.” I also said the ascending triangle should lead (with higher probability) to an upside resolution, and that happened.  It’s hard to chase when gold goes vertical/exponential, so wait for a pullback, or you’ll likely be part of a pullback.  That said, the run does not appear to be over as long as the Federal Reserve is going to be cutting rates.  When they STOP cutting and long rates start rising significantly, we’ll need to close the trade and keep core gold holdings only.  

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

Market timing the gold ETF (GLD). Bull run intact.

Bull run intact, but only a buy on dips.

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

The 10 Year Treasury Yield is still crashing, down 8.0 basis points just for Monday, which is a very bad sign for the stock market, and a very good sign for gold/gold stocks.  I exited TLT early, but did so knowing I still had exposure to long municipal bonds and gold/gold stocks as hedges.

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

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

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

Rates crashing to the prior lows.

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

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

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

Stock Signal RED for a further U.S. stock market rally with a Bearish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down.

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!)  These are the targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89.  The bonus target #8 is [12.-17-12.37].  The Bears have 8 of 8 targets at a VIX of 20.52 (Monday, 2:39 pm ET).   I consider the “fulcrum” the key decision point that turns the market from Bearish to Bullish, when the VIX falls below that entire fulcrum range.

The ‘Bull Nirvana Target’ is our V*IX # of 2018: 13.31.”  (That is target #7 for the Bulls.) 

Gold Signal RED  for a further U.S. stock market rally with a BULLISH Gold Trend.   What gold does mostly as I’ve written HERE is follow real interest rates. 

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

Rate Signal RED for a further stock market rally with a BEARISH 10 Year Yield Trend.

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

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”   It is at 54.81 at 8-12-19 1:50 pm ET.  It closed at 54.50 last week after a bounce off the May low. WTI Oil is still below its 50 and 200 day moving average.  Minus a war with Iran or other disruptions, oil will move with the prospects of the global economy (Trump hates wars as he sees them as wasteful and doesn’t like the bloodshed either.  He’s right on those points!)

Just a reminder (not a current problem): If TNX bounces too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  The period of rising rates in early October I called #RateShockII.

The risk lately has been “Negative Rate Shocks.”  (Not negative rates in the U.S. yet!  “Negative” refers to the direction of the shock.)  First we had “Negative Rate Shock I” in December 2018 (because rates FELL while the Fed raised the Fed Funds rate 0.25% in mid-December, in what was perceived as a policy error),  “Negative Rate Shock II” in May, and “Negative Rate Shock III” in August.

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I thank Worden Brothers for the charting system I use to post these charts.  If you want to know more about the charting system I use every day, contact me.  It makes it much easier to follow along with me if you can see the charts and manipulate them on your own computer.  It’s a great investment to have an excellent charting system.

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

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

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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 7-26-2019 Close: “A Warning About the Fed. And I Answer: ‘What Do You Do when the Market Keeps Going Higher?’ Gold Still Bullish. Fed Cutting 0.25% Wednesday.”

A Market Timing Report based on the 07-26-2019 Close, published Saturday, July 27th, 2019…

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

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

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

Earnings reports are in for 44% of the SP500 Index.  Per FactSet, if earnings continue to be negative for the index, though only by a couple of percent (see below), this will be the second of two quarters said to be negative for earnings.  Another firm whose data I review says the earnings numbers are slightly positive (about +2%; that was on Monday, but FactSet was still reporting negative earnings growth).

Regardless, earnings are about flat, and the market appears to be discounting improving comparisons next year, which you can see below are much stronger.  Will those numbers be brought down?  That is the question!  Whether ’tis nobler to pursue a rising market despite the slings and arrows of lower earnings fortunes, or by a sleep to say this ends in heartache and the thousand natural shocks that markets are heir to?  That’s obviously what Shakespeare said about investing in an ever rising Bull market in the midst of multiple market risks!  😉

Sentiment has been the real guide to this market in my view.  Review that below.  Astoundingly, sentiment says we are nowhere near a top!  And that is why I added a bit of exposure even though the market is a bit stretched here on the new breakout to another all time high this week.  Individual investors, who are the best guide in my view, are still very skeptical of this rally.  The flow stats on investments in bonds vs. stocks are heavily skewed to bonds still despite ever lower rates.   That has worked out well in fact.  Lower rates and higher stocks.  Higher gold too by the way, because the endpoint of this is a disaster for fiat currencies.  I’ll say more about adding exposure as a market goes up, a bit later, but….

Let’s next check my “Bull Market Health Score”…

Are the Bulls serious?

What would satisfy me that the Bulls are serious about this advance?

Let’s check the list once again… The Score this week?  Bulls 2.5/Bears 2.5.  Last week it was Bulls 0.5/Bears 4.5.  Last week I erroneously said the score was neutral and no one noticed?  It was BEARISH after a minor dip off the 7-15 top.  This week we have a NEUTRAL score with a new all time high.  That means the new high is suspect.  The challenge to that statement would be that split sentiment (similar numbers of Bulls and Bears) has carried this market higher and higher and higher…  Based on the numbers below I could have foregone the last add on Friday, which I kept small.  I’ll comment further on adding to breakouts after we go over these numbers….

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

1. New high.  Bulls 1.0 point. The market is stretched to the top of the channel I pointed out last week (yellow lines in the chart below), but despite that, we have a new high.  The Bulls win this point!

2. VIX below the “Bull Nirvana Number” AND my bonus number?  Bulls 1 point.  Yes, but barely below point #8 (0.01 below the 8th Bull point).  The VIX Game Score as I call it is Bulls 8/Bears 0 as of the close Friday. Of course, being near the lows of the past two years may be a problem.  Even lower lows need to be achieved, or we’ll see a big summer spike in VIX.  I’ve grown to dislike summers for this reason.  😉  Usually between June and October, we see some turbulence.  The Bulls don’t have to be finished here, but they may be.  There has been a steady fall in the VIX from the lower VIX high achieved on June 3rd.   We are past the easy part of the Bull trade now.  

3. AD % Line (proprietary stat; see base of report about this): Bulls 0.5 point.  The close was 16,583 vs. 16, 511 last Friday.  The 6-20-19 high at a peak in SPX was 16,517, so this close was above there.  The 7-15 SPX high had an AD % of 16,615. which would be the next Bull target.  I withheld 0.5 points from the Bulls because the AD % did not go to a new high with the price of SPX.  That’s what is called a negative divergence, but so far, I’d say it’s not lethal.

4. Volume: Bears 1 point.  Volume went down vs. the day before, not up on the breakout.  Negative.   Look at the breakout volume on 6-20-19 for comparison.  THAT is what you want to see.

5. The “U.S. Index Matrix Signal” as I call it:  Bears 1 point.  The small caps and midcaps are both below their May highs.  That’s does not show broad market strength.  On social media, you’ll see me say “The U.S. Index Matrix shows strong buying.”  That means the small to mid caps are participating as they should, not following tentatively or even retreating.

I cannot vouch for the world recovering in a more robust way.  The numbers have not supported that.  U.S. GDP reported on Friday was goosed above 2% by government spending.  The SAAR GDP came in at 2.1% and the Year/Year GDP came in at 2.3%.  You can find a link to the Y/Y Chart HEREI wonder if Trump is using ammunition too early prior to the 2020 election.

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

Earnings Risk: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 7-26-19 (details HERE)…  The last numbers for Q2 are numbers for the current reported earnings from 44% of SP500 Index companies to date.  The arrows “—>” indicate 3 weeks of of omitted data in order to compress the data.  

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

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

For Q3 2019, analysts are projecting earnings growth of 1.8%  —> 0.8%  —> 0.3%  —> -0.5% -0.5% -> -0.8% -> -1.4% ->-1.9%

and revenue growth of 4.4%  —> 4.4%  —> 4.2% —> 3.8% -> 3.8% -> 3.3% -> 3.2% ->3.2%

For Q4 2019, analysts are projecting earnings growth of 8.1% —> 7.5%  —> 7.2%  —> 6.3% -> 6.3% -> 6.0% -> 5.4% ->4.9%

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

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

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

For Q1 2020, analysts are projecting earnings growth of 10.5% -> 10.7% -> 10.3 -> 9.9% -> 9.8% -> 9.5% ->9.2%

and revenue growth of 6.2% -> 6.1% -> 6.0% -> 5.8% -> 5.8% -> 5.9% ->5.9%

For Q2 2020, analysts are projecting earnings growth of 13.3% -> 13.3% -> 12.9% -> 13.2% -> 13.5% -> 12.0% ->12.6%

and revenue growth of 6.8% -> 6.8% -> 6.6% -> 6.6% -> 6.6% -> 6.7% ->6.6%

Conclusion: Earnings have been weak for the 2nd quarter in a row and are due to be negative for a third quarter.  The market is looking past this weakness to something better, based largely on a minimum of three cuts of 0.25% each from the Federal Reserve.  If the market does not get the three cuts, it will NOT be happy.

These low rates help fund the buybacks that continue by the way.  Companies wanting to goose their earnings and also able to borrow (not the new small caps for ex.) can simply buy back more of their stock.

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

China Deal Risk: No important change.  A deal is still promised.  Yet Larry Kudlow, Trump’s economic advisor, says don’t count on a big deal anytime soon.  Meanwhile, the chief negotiators are flying to China this coming week.  I have an intuitively based suspicion.   I believe that President Xi of China has threatened some “Armageddon” level of retribution against Trump should he impose 25% tariffs on China on an additional $300 B of Chinese goods.   The 10% Xi tolerated, as he fought it by debasing the yuan.  The current 25% sanctions on 250 B of goods is hurting more.  Xi hurt American farmers by taking his grocery shopping list elsewhere in the world.  Trump says he could impose those additional sanctions, but it would be suicidal, so he won’t.

What could Xi do at an “Armageddon threat” level?  Some ideas would be to madly dump long dated U.S. Treasuries into the market.  This could be coordinated between China and Russia and perhaps some of the smaller players.  Same day, same time – SELL!  If they can create a panic Rate Shock as I’ve called the big moves, it could shake the equity market badly.

Xi could also block all future sales of certain U.S. companies in China.  He does not have to seize their assets, just shut them down.  Apple has too many employees there to be attacked in my view, but others do not.  An example?  He could simply shut down all Starbucks locations.  What does he care if there are U.S. coffee/tea shops in China?  They have their own competitors now who can hire the displaced workers.  These are just some of the disruptions that could be dreamed up beyond cyber warfare, election interference etc.

Who do you think the Chinese might attack in the 2020 election cycle?  Trump is my wild guess.  China and the Russians could work together on this to hammer Trump on social media, and even seek to change digital election results.  The Russians give the appearance of liking Trump over Clinton, but my guess is they’d feel better with Biden over Trump.  P.S. that is why Trump had better see the light and make sure there is a paper trail for ALL U.S. election results.  Someone is going to pay for the lack of such an audit method.

U.S. Iran War Risk: Quieter this week.  Iran was acting out but did not escalate this past week.  Maybe they were threatened more directly.  Previously a British flagged oil tanker with Swedish ownership was seized by Iran.  Prior to that, an Iranian vessel was seized by the UK for violating the ban on oil shipments to Syria. 

Mueller Report/Impeachment Risk: Mueller stood largely by his report, which did not exonerate the president, nor did he indict him, as he chose (though he did not have to) to follow the DOJ memo stating that a sitting President cannot be indicted.

The assertion by Fox hosts that it’s all a big hoax, which is Trump’s standard message, is wrong.  Don McGhan testified he was directly ordered by President Trump to have Attorney General Sessions fire Special Counsel Robert Mueller.  That is obstruction of justice.  That we knew before the hearing occurred.  Obstruction of justice does not require the act be successful.  Intent is required to convict, but can be inferred from a series of acts by the party in question that imply corrupt intent.

The statute on removal of a Special Counsel: “The regulations further state the special counsel could be removed only “for misconduct, dereliction of duty, incapacity, conflict of interest, or for other good cause, including violation of Departmental policies.” (Ref.)   Even the attempt to remove Mueller simply because he did not like being investigated for obstruction is obstruction of justice.  Realize that Republicans under Nixon did think obstruction of justice was grounds for impeachment and removal of a President.  Nixon did not burglarize the Watergate Hotel.  He tried to cover up Watergate.  In contrast, today’s Republicans in Congress are tolerant of the crime of obstruction of justice.  And even the Democrats are afraid of turning off the public by proceeding with impeachment.

Ethics Tangent of the Week: Parenthetically, the treatment of Mueller by the GOP Congressmen was inexcusable.  The man is a decorated Marine who saved fellow marines from being killed in Vietnam under harrowing circumstances noted HERE.  He saved them while under enemy fire.  That’s no video game we’re talking about.  He risked his life. 

Here is an excerpt:
In July 1968, he was sent to South Vietnam, where he served as a rifle platoon leader as a second lieutenant with Second Platoon, H Company, 2nd Battalion, 4th Marines, 3rd Marine Division.[12][26] On December 11, 1968, during an engagement in Operation Scotland II, he earned the Bronze Star with “V” device for combat valor for rescuing a wounded Marine under enemy fire during an ambush in which he saw half of his platoon become casualties.[27][28] In April 1969, he received an enemy gunshot wound in the thigh, recovered, and returned to lead his platoon until June 1969.[29] For his service in and during the Vietnam War, his military decorations and awards include: the Bronze Star Medal with Combat “V”, Purple Heart Medal, two Navy and Marine Corps Commendation Medals with Combat “V”, Combat Action Ribbon, National Defense Service Medal, Vietnam Service Medal with four service stars, Republic of Vietnam Gallantry Cross, Republic of Vietnam Campaign Medal, and Parachutist Badge.

To me?  Mueller is a man a courage vs. President Bone Spurs Trump.  No contest.  He also served as FBI Director for 13 years after many years serving as a U.S. prosecutor.  The first time he was approved by the Senate in a 98 to 0 vote.  The second time, President Obama asked him to serve for two additional years and he was confirmed 100 to 0.  Knowing all this about the man, I watched the GOP questioning with a high degree of revulsion.  His metal capacity?  Trump, the “stable genius” [his words], made fun of him, yet the man was clear when it counted and remember, testifying and answering rapidly read questions from angry people can be disorienting, even to the young.

Another point… Leadership at his level does not require as much “quick brainpower” as it does wisdom.  He provided that wisdom to his team of investigators, and I take this honorable man at his word that his conduct was nonpartisan.  He was not born yesterday, remember.  He has spent a lifetime avoiding partisanship in his public duties.  Hence the extension of his Directorship of the FBI under Obama even though he was a Republican with a 100 to 0 vote for confirmation.

One day our brains may be less quick.  Let’s hope those around us are not making fun of us with the grotesque disrespect shown to Director Mueller by most of the Republicans.  Not a political judgment here.  This is a judgment of deeply flawed character, and my judgment is “guilty”! 

END of Ethics Tangent  😉

Here’s the problem for the impeachment path.

1. If the Democrats could not impeach Trump based on the Mueller report, without additional evidence, why would they be moved to do it now?

2. The public is not behind impeachment, and that is the litmus test House Leader Pelosi is using to proceed more formally.

Yet the investigations will continue, and the risk, should McGahn be allowed to testify, may move to moderate.   If McGhan testifies, the public will believe him is my guess.  Then Trump will find the polls shifting against him, as they did as the case against Nixon was pursued over a period of time.  McGhan would be the John Dean of the Trump era.

From last week: Remember also that the Clinton Impeachment drawdown created a Mini Bear market from which there was a fairly rapid recovery even before his Senate trial.  It was a big buying opportunity in one of the biggest Bull markets of all time.   When did the SP500 Index peak in 1998 when Bill Clinton was headed to his impeachment?  July 17th.

More risks…

2020 Election Risk: No important change.  Probably the biggest risk to the markets and most Americans are oblivious to this from the markets’ point of view.  I’ll stand by this:  “The market will likely pull back at least 10-15% going into the election if the outcome is even unclear, meaning President Trump is NOT ahead by a wide margin (a likelihood, but not a certainty, depending on whether the Dems go for a “McGovern” candidate, as in Nixon-McGovern in 1972, a Democrat disaster.”

Deficit/Debt Threat: No important change.  I’ll leave this here as a monument to our monumental debt: “They all see the problem and do nothing about it.  They just keep spending.  As mentioned last week: Per the NY Times: “Within a decade, more than $900 billion in interest payments will be due annually, easily outpacing spending on myriad other programs.”  The 2018 defense budget was $800 B.  Medicare?  $582 B.  Think about that!  Trump and the GOP may be spending dollars meant for your future Medicare and Social Security today.”

Fed Rate Cut Risk: No important change.  We are due for a 0.25% cut for July. Keep reading though…my “Fed Warning” I put under the TNX section #4 below…

As said three weeks ago, “No cut [in July] would cause the market to dive.  A cut of just 0.25% could disappoint the market as well, although the majority would be fine as they expect that cut.”  The majority are still looking for July, Sept. and Dec. cuts per CME Group Only the minority expect other cuts thru April 2020.

As I said five weeks ago, the Fed members actually don’t believe three cuts are going to be needed, as summarized HEREThey need to shift this during this meeting or three cuts just are not as likely.  The market will not like that.

GDP Risk: GDP was reported as discussed above.  It was “good enough” for now, though slowing vs. the July 2018 peak in the Y/Y number at 3.2%.   It’s been downhill to the tune of 0.9 GDP points since then. 

What do you do if the market just keeps creeping higher and higher and higher?  To someone with mostly cash, this can be like a teacher scratching her nails on the blackboard.  You want it to stop and there is no telling when it will!  Another nails on blackboard experience to avoid is going down for several years and then “never” making a new high.  Ask the Japanese about that.

Are you aware that EWJ, the Japan ETF is now at levels seen in 1991?  That is 28 years with no capital appreciation of those shares.  Can you see why it’s necessary to manage risk?  It’s easy to say “You should be 100% invested in stocks, because look at what the market has done you fool!” (that message is easy to find on social media, disguised in certain ways) and yet, if you invest in that way at a top of the market as in 2007, and suffer a 55% drawdown (2009 low), you have to make back over 100% to get back to even.  And if it the situation becomes like Japan, you may retire and never see your money move to new highs again.

Say you are 61 now.  You’ll see why I picked that age in a moment.  The average age of death for U.S. males is 78.69 years.  I know, we all believe we’ll live longer than the stats.  Yet, the average 61 year old would be dead prior the market making a new high, if our market (may God forbid it!  ;))  turned into what the Japanese market has been like for 3 decades.

There is a balance to strike between losing opportunity and losing money.  Where that falls is up to you!  Just make a conscious decision about it.

The only thing to do to manage that “lost opportunity risk” is to add slowly as the market rises if it fails to correct substantially.  As said, it DID correct in May, and that was one place to add.   I’d do it slowly in steps at this point, and leave some cash regardless unless you find specific investable stocks/other opportunities like gold.  Betting that interest rates will go SUBSTANTIALLY lower in the U.S. is now a tougher call than it was that rates would fall from 3.25% to “somewhere significantly lower.”  So Treasuries could bite us on the you-know-what.  The recovery cannot continue for too long until the Fed has to raise rates to control/prevent inflation moving above their 2% PCE Inflation Index target.  At that point, Treasuries won’t be doing well unless stocks are selling off in a big way.  Clearly that would also impact the gold/gold stock trade.  Be prepared to take profits in both.  Balance that with this thought: Taking profits too early is a mistake.  The Fed has to change direction again to void the bond/Treasury and gold trades in my view.  I’ll be patient, I promise!

As said, the time to “add more” is after pullbacks such as the one we saw in May.  I felt I had enough exposure for “what was coming,” but I did edge up my exposure on the rally back during June and again in July with my last add on this breakout.  I also had bought at the 3-08 pullback, so I would have been buying the same price point had I added at the May low.

Now take a look at the SP500 chart.  The first is the SPY chart showing the long term upward channel.  Note that the lower line of the channel ignores the out-sized volatility in December.  Ignore it for now.  It does not really matter as we’re most focused on the top channel line….

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

Market timing the SP500 Index (SPY, SPX). New all time high with neutral Market Health Signal.

New all time high with neutral Market Health Signal.

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative.  Initially the reaction was positive on the 25th after the close, but things turned negative by the 26th when the China deal was brought back into question.  The last price bar is a Bearish engulfing signal vs. the price range of the prior two days.  That means there was an attempt to attain a higher high that failed and it closed below the range of the prior two days AND on high volume by the way.  It looks like a reversal until proven otherwise (new high). 

Bank of America (BAC) Market Timing Signal:  Neutral.  Re-challenging the May high is not good enough.  And why is it rallying on supposedly a Fed that is now in a rate cutting cycle?  Hmmmm….  Someone is wrong!

Rates have gone nowhere since June 3rd, but one would think that if the Fed is lowering rates three times, TNX would fall further and drag down the banks or at least keep them from going very far.

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,055 investors are following the markets with me…

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Now let’s go on to review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of  just -0.28% vs. +7.29% the prior week.  That spread has been flattish for weeks! 

As I’ve said: “At the same time, we have not likely seen the ultimate top of this Bull market, at least for the large caps, because sentiment is just not positive enough.”  Sentiment is not high enough to say that this move up is finished.  The small and midcaps MUST now come along or this rally will fail.  Sentiment says the large caps, at least, are not at a top yet. 

Bulls Neutrals Bears
35.93% 35.43% 28.64%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM): Discussed above.  Not good enough and higher volatility, so be careful unless you know your companies inside and out.  The small cap index is not where the action is.  If it can exceed the May high, I’ll be impressed!

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

Market timing the U.S Small Cap Index (IWM, RUT). Small caps not coming along very well.

Weak still vs. large caps.

 3. Gold Market Timing (GLD): Still a Bull.  Add on dips.  The ascending triangle is Bullish and SHOULD lead to an upside resolution.  Buyers came in on the last attempt of a breakout and then sellers matched them the next day.  Gold is waiting to SEE what the Fed will do.  If the Fed cuts and does not balk on further cuts with questionable wording, gold will like it and stocks will too. 

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

Market timing the gold ETF (GLD). Failed breakout, but ascending triangle now, so Bullish still.

Ascending triangle is Bullish.

4. Interest Rate Market Timing:  The 10 Year Yield has moved sideways and closed Friday at the June 3rd close.  Same number!  The Fed will cut 0.25% this week, but no more, as GDP is good enough.  Again, if they hint at “one and done,” you’ll see selling of EVERYTHING but dollars.  Bonds, gold, and stocks will drop like rocks!  But if they do the opposite, and hint at more cuts in 2019, you’ll see the opposite.  I believe Powell will “behave” as he’s clearly been whipped into line by Trump now.  You could see the fear on his face in prior meetings when Trump’s attitude toward him and the Fed was raised.  It is not a great precedent by the way. 

I changed the trend signal to NEUTRAL below.  We’ve formed the kind of bottoming formation we saw back in January through March.  It is not impossible for rates to rise from here (see “one and done scenario” above), but after the Jan-Mar. period, TNX fell to new lows.  If Powell keeps to what the bond market wants, rates will drop to new lows off the current base.

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

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

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Rates sideways since 6-03-19.

Rates sideways since 6-03-19.

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

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

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

Stock Signal NEUTRAL for a further U.S. stock market rally with a Bullish SP500 Index trend.  The stock signal is based on small caps, as they often lead the market down.  The weakness of small caps keeps me at neutral. 

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!) See above for the close this week and other comments.  These are the targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89.  The bonus target #8 is [12.-17-12.37].  The Bulls have 8 of 8 targets this week at a 12.16 VIX close.   I consider the “fulcrum” the key decision point that turns the market from Bearish to Bullish, when the VIX falls below that entire fulcrum range.

The ‘Bull Nirvana Target’ is our V*IX # of 2018: 13.31.”  (That is target #7 for the Bulls.) 

Gold Signal RED  for a further U.S. stock market rally with a BULLISH Gold Trend.   What gold does mostly as I’ve written HERE is follow real interest rates. 

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

Rate Signal RED for a further stock market rally with a NEUTRAL 10 Year Yield Trend.  I explained why I’m neutral above (7-26-19 post).

For Reference: “Rates usually RISE slowly in a strong recovery and the stock market rally continues as they rise, as I’ve repeated multiple times on social media and here. Empirically though, rates that are “lower” (than 3.11%) and are NOT rising rapidly have allowed the market to climb back above the prior all time high (ATH).”  Rates are bouncing in a downtrend until proven otherwise.

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”  WTI  had bounced, but has started weakening again.  It closed at 56.20 vs. 55.76 last week and is still rolling over.  At least that’s what it looks like now.  There’s a lower high below both 50 and 200 day mav’s.   We now have another slightly lower low.

For 3 Weeks Now – just a reminder – I don’t think this is the path from here: If the bounce in TNX continues too quickly and too high, this will give rise to Rate Shock III… As said before: “Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.”  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.  That’s what I called ‘Rate Shock.'”  The period of rising rates in early October I called #RateShockII.  The risk lately has been the “Negative Rate Shock I” we saw in May.

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

I thank Worden Brothers for the charting system I use to post these charts.  If you want to know more about the charting system I use every day, contact me.  It makes it much easier to follow along with me if you can see the charts and manipulate them on your own computer.  It’s a great investment to have an excellent charting system.

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

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

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