A Market Timing Report based on the 02-15-2019 Close, published Sunday, February 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.
1. SP500 Index Market Timing (S&P 500 Index®; SPY, SPX):
If you look at the trends in the stock market since the 12-24-2018 close, the U.S. indexes are all still in strong up trends. Then look at rates, which are falling (Bonds/Treasuries rising) and gold is rising too, along with, you guessed it, the U.S. Dollar. If you “Bought Everything” on Dec. 24th at the close, meaning U.S. stocks (with by far the best return at 18.36%), Treasuries/Corporate Bonds (TLT and LQD 0.54% and 3.70%, respectively plus interest), gold (GLD 3.98% and GDX +6.35%), and even U.S. dollars (0.93%), you made money vs. the close on Friday!
Take a look at the chart (remember rates down means Bonds/Treasuries UP…
But, back on the ranch…here is what has happened to earnings and revenue projections in the past couple of weeks. The full FactSet report is HERE. These are the numbers for the Feb. 2nd close vs. the Feb. 15th close noted in parentheses…
“For Q1 2019, analysts are projecting a decline in earnings of -0.8% (-2.2%) and revenue growth of 5.7% (5.3%).
For Q2 2019, analysts are projecting earnings growth of 1.6% (1.0%) and revenue growth of5.1% (4.7%).
For Q3 2019, analysts are projecting earnings growth of 2.7% (2.4%) and revenue growth of 4.9% (4.5%).
For Q4 2019, analysts are projecting earnings growth of 9.9% (4.8%) and revenue growth of 6.0% (4.9%).”
In other words, the market has gone higher as earnings and revenues estimates for Q4 2019 have fallen by 51.5% and 18.3%, respectively. That’s the all important fourth quarter! The market is supposed to be a discounting mechanism is it not? This means investors bidding up stock prices must, if the market is not purely an emotionally driven entity, believe the U.S. economy is going to turn around fairly soon, and the earnings/revenue downturn was discounted into the December collapse, and now recovery is close at hand.
Note that the quarter over quarter numbers shown above do indicate a rise in earnings growth sequentially vs. each prior quarter in 2019. But that is not true for year over year numbers…
Recovery on a year/year basis is not expected by analysts to occur until Q4 2019, when some sectors such as materials, both consumer sectors (disc. and staples), financials, tech, and utilities are expected to a show year/year acceleration in earnings growth in the 4th quarter of 2019, although a Year/Year deceleration in earnings growth will be seen for the SP500 Index itself in Q4, as the other five sectors show earnings growth deceleration for Q4 2019. (Ray Dalio and others have discovered that earnings growth acceleration/deceleration rule stock prices, not “earnings growth.” Please review calculus 101 to understand the difference.)
The question remains, if the market is in fact being bid up against the grain of downward earnings estimates, how high can it go? My answer is back to the September 21st high or higher, although the catch is, the market could easily start discounting things like a Democratic sweep (both houses and the Presidency) in 2020, which would destroy everything and more than Trump and the GOP did to the tax code. That means the U.S. stock market could as easily start declining here, at any of the 3 prior lower highs you see on the chart below, at the lower 2017 channel line, or at the 9-21 all time high. Short term swings can be timed if the technical signals are strong (very poor or excellent buying at certain prices for example), but the longer term target cannot.
It’s a guessing game as those of us who are wise (not old, wise ;)) enough to remember from the late 1990’s Bull run and the 2000 tech crash that followed, markets can get very, very, giddy even on the way to the slaughter house. Things are not nearly as extreme, but determining how far Bulls can run in an up leg is not worth focusing upon.
The chart shows the prior three failures for SPY (SP500 Index ETF). The market is still below all three of those highs, but may not be for long…
What to do? I would continue to add stock exposure as we rise on a stock by stock basis if you are able to invest that way. If you must use index ETFs or funds, then add in steps and be willing to get out of any new index positions on a serious reversal. What is serious? It is what is serious FOR YOU. As I like to say, “It’s your money.” Set any mental stop you are comfortable with and stick to your plan. Heck, based on the technical action in the market, you could buy Intel this week, but I’d trade it, rather than holding it, at least until the current slowdown reverses abroad.
Now let’s check in on two “Canary Signals” we’ve been following:
“Intel-igent Market Timing Signal” (Intel; INTC): Very positive. I state my trading set-up just below here. We’re above there at the Friday close which was 51.66. That move came on slightly increased volume.
Here was my advice last week: “The Bull Goalpost still remains: ‘A rise above 50.60 would change the current picture of a down trend since the June high.’ Consider buying the stock on a close above there or a move through there depending on what the market looks like if you like Intel as an investment. I am using it here as a technical signal.”
Bank of America (BAC) Market Timing Signal: Negative. Rates rose just a bit on Friday, but not enough to change the trend either way really (see rate discussion in section #4 below). Despite that, BAC rallied 2.54%. It appeared that the market was beginning to rotate out of some tech exposure like FANG, and financials could be a sector that will benefit IF rates begin to rise again.
However, I will say for the umpteenth time as parents like to say, rates should be headed DOWN if in fact the Fed has “gone dovish.” Rates have gone down since Dec. 24th, yes, but they are not yet crashing to new lows. You know my take on that point from last week, so review it HERE if needed. The discussion of rates and the Fed on “financial TV,” and their view of the Fed is beyond ignorant.
If the market climbs above the three lower highs shown in the chart above, the “Mini Bear Market” will officially be over in my view (Caveat? NOT if the economy continues to slow into an actual recession; in that case, the bounce will lead to a Big Bear Market).
Some may say, we’d need a brand new high to kill the Mini Bear Market, but I would not wait for that. I still favor some sort of retest toward if not to the Dec. low, but it could be a 50% retracement instead. That may be enough to allow the Big Bull Market (Secular Bull Market) to reassert itself from what is so far, a Cyclical Bear Market (my term = Mini Bear Market).
Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 33,889 investors are following the markets with me…
SP500 Large Cap Index (click chart to enlarge; SPX, SPY):
LAST WEEK: “Notice the magenta downward sloping trend line coming down from the prior highs? It’s just above the 200 day moving average. If the market is going to fail, this looks like a good spot. If it does not fail, the Bulls could make some nice gains.” >>> I have been making suggestions as this market has risen on how to manage the bounce. Read past issues for more on that… Decide on your plan and execute it.
Survey Says! Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +10.03% vs. +17.09% last week. I listed 3 prior pullbacks at around +20% sentiment last week and indicated there could be a shallow pullback, and it was over in two days with an up day on Friday the 8th. I also said the Bulls had room to run and they did, but oddly enough Bullish sentiment FELL rather than rose as the market rose, which is very atypical for a top.
My conclusion is: We are not yet at a top. I would not trade on sentiment alone, but it’s supportive. Sentiment has plenty of room to run to the Bullish extremes, and on top of that, prior AAII study showed that a Neutral % of 40% or more (close enough at 39.82%), correlates with a higher market about 80% of the time, 6 months later. Those are two reasons sentiment can further support this bounce.
|Thurs. 12 am CT close to poll|
2. U.S. Small Caps Market Timing (IWM): Still climbing though still selling at a discount to the Sept. high (10%+ upside). If the economy is in fact not going to deteriorate any further, small caps could keep plugging along to the upside.
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold Market Timing (GLD): I bought more GLD this week. My exposure to GLD/GDX is back up to 5% of investable assets as mentioned on social media this week.
The Gold ETF (click chart to enlarge the chart; GLD):
4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX):
Rates began rising on the 11th, and I sold my TLT/IEF exposure. All of it. I’d rather make the 2.31% in a money market account or ladder short term T bills (buy some to mature for each month over the next year is one example) than guess where rates will go next. Why? Because if the market’s prior assumption is right, and the Fed expects further slowing, then rates will fall further, while if the economy is going to turn to the upside by Q4 2019, rates could start to rise again in anticipation of needed Fed action.
Rates have actually simply moved sideways since the end of January, and are triangulating now. Follow the next move out of the triangle if you want to trade it aggressively. I’ll let you know if I “get back in” on social media (links above).
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 the bounce up off the down trend line!
Now let’s review three key market timing signals together….
Do not use these signals as a trading plan. They are rough guidelines. I currently share my own moves on social media (links above).
MY MARKET SIGNAL AND TREND SUMMARY for a Further U.S. Stock Market Rally with Real GDP Growth (“Real” means above inflation):
Stock Signal GREEN for a further U.S. stock market rally with a Bullish SP500 Index trend. (signal here is based on small caps) I said last week, “I will call the trend Bullish when small caps rise above the Dec. 3rd high,” and they did, so I will. The trend could end at any point as any trend can, but it’s up for now.
The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!) closed at 14.91 vs. 15.72 last week. The Bulls have made real progress and these targets are now targets for the Bears: 15.04, 15.94-15.95, 16.09, 17.06, 17.35 and 17.98. If the VIX spikes on Tuesday and takes all those targets back, beware! The top could be in. The Bulls cannot afford to backtrack much if they want to keep the rally going.
The ‘Bull Nirvana Target’ is our V*IX # of 2018: 13.31.”
Gold Signal RED for a further U.S. stock market rally with a BULLISH Gold Trend. A further GLD rally will be subject to interest rates, which will impact the U.S. dollar as explained above.
From before: “Remember GLD is being used as an indicator for the ECONOMY here.”
Rate Signal NEUTRAL for a further stock market rally with a NEUTRAL 10 Year Yield Trend. Follow the move out of the triangle.
I said weeks ago, “Watch the oil price too. Higher oil tends to mean higher rates.” Oil was back up testing the recent high on Friday, closing near it.
I previously warned about the Fed tightening process: “This level of the 10 Year Treasury Yield, which is too high for current conditions as explained HERE, will eventually slow the economy.” I said, “2.621% was the peak back in 2017 when stocks did best. Anything below that would be an improvement.” The close on Friday? 2.666%!
As for much higher rates and their possible impact, I said previously: “All heck would break loose for equities if TNX lurches above 3.248%, particularly if the rise is rapid. Buy long dated Treasuries as close as you can to 3.248% on the 10 Year Yield TNX (IEF, TLT, etc.).” 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 was #RateShockII as I called it.
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Note: I’ve updated my criteria for the equity signal for a further U.S. stock market rally to the following: GREEN = Bullish, YELLOW = Neutral, RED = Bearish. In other words, the colors tell you whether the signal supports the stock rally or not, while the Bullish, Neutral, and Bearish designations are about the trend.
A BEARISH trend signal does not mean we should not buy. A BULLISH trend signal does not mean you cannot sell some exposure. It depends on what is going on in the economy and how oversold/overbought the market is at a given point whether the Bearish signal is to be sold, sold on the next bounce, etc. and whether a Bullish signal is to be bought or if profits should be taken. A NEUTRAL trend signal does not mean the end of the Bull or Bear. It means to wait and look for possible subsequent entry points within the existing trend, Bull or Bear, but preserve capital if the entry fails. Our strong intention is to buy low and sell high. By the way, I will keep showing the prior orange “Trigger lines” in the charts for now as reference points only; they have historical value for us from the post-2016 election period.
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