Market Timing Brief for the 10-09-2015 Close: Stock Market Rally Still Strong. Will Earnings Ruin the Party? Gold Rallies On Weak U.S. Dollar as Rates Rise.

A Market Timing Report based on the 10-09-2015 Close, published Sunday Oct. 10th, 2015

I deliver focused comments on the markets.  These are supplemented with “Tweets/StockTwits” (see links below).

This week I’ll answer the question of “What would make this correction turn into a big bad Bear market?”

FIRST a GOLD UPDATE 10-12-2015: Gold is Really Following the US Dollar More Closely Than Interest Rates: This is why you must trade gold to make money in the near term in my opinion (IMO).

This chart is pretty revealing:

uup-us-dollar-vs-tnx-us-10-year-treasury-yield-vs-gld-gold-market-timing-chart-2015-10-12-1116am

Gold is following the US dollar more than US interest rates of late.

Do you see how gold is moving in synch with the US dollar (inversely; dollar up = gold down) and that the dollar has been in a tight range since about 4-23-2015?  I believe that the dollar will continue to determine gold’s next move and since the dollar is near the bottom of its range, gold could start to ease soon.  There seems to be an upspoken standoff between Dr. Draghi of the ECB and Dr. Yellen of our Fed. 

Both the US dollar and the Euro cannot win the race to the bottom.  The compromise is this unspoken range.  If Dr. Draghi strengthens Euro QE again, the dollar will strengthen.  If the Fed does not raise rates in December, the dollar will weaken.  I think gold is OK as a hold, but protect your trading gains within this range IMO.  Of course, if you disagree, do the opposite!  😉  We all think for ourselves around here.

What changes all that?  A violation of the range to the upside, so watch for it, because it will be a true game changer for gold Bulls.

And now, back to the critical question of “What Will Blow the Stock Market Up?”….

1.  SP500 Index: Our 2011 Scenario continues to unfold, now popular in the mainstream financial press, now that it’s clearly happening.  So far, this looks like 2011, not 2008 when the Great Recession began and stocks fell about 58% from top to bottom.

There is a big caveat that I’ll get to in a moment. First, have a look at the current chart.

SP500 Index (SPX SPY; click to enlarge):

sp500-market-timing-chart-2015-10-09-close

The rally continues…but will earnings stop it?

The Bulls made it through the 50 day moving average which is not exactly a secret check point, but some technical investors refer to it, and it can cause the market to pause, but not necessarily stop.  At times, the market will slightly exceed the more obvious checkpoints and then fail.  I was wrong to take off exposure early to the tune of about 12% (from 97% of maximum usual equity exposure worldwide to 85%), but still managed to capture 85% of the gains.  Capture at least so far.  The reason I took off some exposure early is that I expect earnings to disappoint the market to some extent and allow for a better buying opportunity.

By being exposed at the level of 85%, I’m still saying that I believe the market will muddle through a rough patch and move higher.  If you don’t believe that, you should be less invested than I am.  Decide for yourself and take responsibility for your decision.  Around here, we make our own individual investment decisions.  😉  If you or I end up being wrong, we need to recognize the error and make the necessary corrections in what we are doing.

The issue is whether this earnings season, which starts in earnest on Tuesday, will bring the stock market rally to an end.  The first company that reported at the start of the traditional earnings season so to speak was Alcoa which is now down 6.81% after a dismal report and forecast.  Before that it was YUM down 15.78% and Adobe (ADBE), initially down 7.20%, is now only down 1.56%.   The entire market cannot keep rallying unless this initial weakness is reversed by rising expectations for other stocks in the index.  With  growth slowing worldwide, where increased expectations will come from is the unresolved question.

I now need to answer the question I posed on social media on Friday: “What would turn this “2011 market” into a “2008 market”?  A recession is the answer.  Recessions are Bear market creators.  When the economy slows dramatically, earnings fall, and the stock market tends to discount the weak economy and lower earnings that accompany it out about 6 months.   This means that when earnings fall, stocks must fall, and this occurs before the low in the earnings cycle.  What defines a recession?  Negative growth in GDP for 2 consecutive quarters.  This is why some of those who monitor the slowing of growth are starting to predict a recession.  It doesn’t happen all at once.

Keep up to date at Twitter and StockTwits: See my messages on Twitter® Follow Me on Twitter®.   Follow Me on StockTwits®).

2. Small caps continued their bounce as well.  The risk is higher for them, because when the market falls they usually fall up to twice as much or more.  That is why we are steering clear of them for now.  Their earnings multiples are much higher than the SP500 Index stocks, so they have much further to fall should earnings continue to weaken.

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

rut-small-cap-index-market-timing-chart-2015-10-09-close

Small cap rally continues as well.

3. Gold: Gold is looking good as discussed in an update, when it broke up and out of a triangle shown below (orange lines).  More details: Here.  Continue buying on shallow pullbacks, but protect profits.  If the Fed tightens in December, gold will not shine.   The falling dollar turned out to be more important than the rise in rates this week (see update chart at top!).  Rates cannot continue higher if the economy is slowing.   Recognize that if the rate trend does not reverse here, which I bet it would by buying Treasuries on Friday [update: sold those shares on Monday – see Twitter/ StockTwits for more], gold will not maintain the current rally, because the dollar’s fall will eventually be reversed by higher interest rates.  Money flows to where it is treated best.

Gold ETF (GLD):

gld-etf-market-timing-chart-2015-10-09-close

Gold bounce continues since the Fed decision not to hike rates.

4. 10 Year Treasury Note Yield: As just mentioned, rates cannot continue rising if the economy is slowing.  The Federal Reserve will have no choice but to stand pat.  And if recession rears its head, they may even come back with QE4.  They are addicted to the Bernanke policy slights of hand that have blown up the Fed’s balance sheet to massive proportions.  It’s all theoretically OK if rates don’t rise, but if they do as China and the rest of the world grows tired of buying U.S. debt and perhaps starts buying Chinese yuan as a new reserve currency at some point, the U.S. government will be forced into a default with resulting skyrocketing rates.  Think it cannot happen?  Realize that what the Fed has done has also never been attempted before.

U.S. 10 Year Treasury Note Yield (TNX,TYX,TLT,TBF):

tnx-10-year-treasury-note-market-timing-chart-2015-10-09-close

Yields climbed a bit since the Fed decision.

Be sure to visit the website at: Sun and Storm Investing™

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

I thank Worden Brothers for the charting system I use to post these charts.  If you want to know more about the charting system I use every day, go to my “Other Resources” page here:  Other Resources   It makes it much easier to follow along with me if you can see the charts and manipulate them on your own computer.  It’s a great investment to have an excellent charting system.  Check it out with a free trial at the link above.

Note that the newsletter is now CLOSED to new subscriptions: Join the Wait List to Join the Newsletter as a Loyal Subscriber, Opening again for the January 3rd issue. If you join and don’t read the newsletter, you will be deleted. Why? I don’t publish to non-readers as other newsletters do. I surround myself with committed people who value what we are doing. Stay tuned here in the meantime and follow all the action via the Twitter® and StockTwits® links above.

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