A Market Timing Report based on the 6-10-2016 Close, published Sunday June 4th, 2016
I deliver focused comments on the markets. These are supplemented with “Tweets/StockTwits” (see links below).
1. SP500 Index: The sluggish recovery we’ve had since 2009 is becoming even more sluggish. In the wake of a big U.S. unit labor cost increase as well as a reduction in productivity recorded in this week’s economic statistics and a decent 94.3 Consumer Confidence number, the SP500 Index may be headed into a test. Economic productivity is falling, which cannot support wage increases, yet labor costs are rising quickly due to lower unemployment. Businesses cannot hire workers from the general pool, when that pool does not have the required skills. There is a big mismatch that has to be made up for through education. High consumer confidence is certainly good, but may also indicate that the economic cycle is about to turn. Despite these pressures, the index remains above the yellow trend line shown below.
Perhaps the “muddle through” slow growth levels we’re witnessing around the world can sustain the U.S. rally a bit further; however, the big declines in the rest of the world’s stock markets on Friday are not what you want to see in the backdrop and are a cautionary sign. They were certainly a big drag for the US markets on Friday.
SP500 Large Cap Index (click chart to enlarge; SPX, SPY):
Testing a top.
Survey Says! Sentiment still supports the Bulls. We are near a high and the sentiment spread is a big ZERO. Sentiment this week among individual investors (AAII.com) showed a Bull minus Bear percentage spread at +0.0% this past Wednesday (Bulls 27.8% and Bears 27.8% with Neutrals a Bullish 44.3%; Neutral Scores > 40 are Bullish for markets rising 6 months out.).
Sentiment alone suggests that this rally is not over. Sure there could be another correction, but big Bull markets don’t end with flat sentiment near tops, unless it’s different this time, which it rarely is.
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2. U.S. Small caps are STILL above the 1040.47 level that for me defines a Bear market transition point. See last week’s post on the larger view of things. The trend is still up. So far, this is just a back-test, which enables rallies to continue. Remember that if this turns into a deeper correction, the losses among small caps will be much greater than for large (small caps are higher beta stocks).
Russell 2000 U.S. Small Cap Index (click chart to enlarge; RUT, IWM):
Small caps made a higher low and a higher high. Only a lower low would shift the trend.
3. Gold: Gold is reviving and was even up WITH the U.S. dollar at the end of the week, which is one of the defining features of financial panic. Something to watch closely if it continues. The panic resulted with rates crashed further in Germany and Japan last week dragging U.S. Treasuries down with them. A further breakout will add lots of fuel to the gold rally if it happens. It will also tell you that the market believes that Fed rate hikes are a dream for now.
Gold ETF (click chart to enlarge the chart; GLD):
Gold revives and rises even as the US dollar strengthens, a sign of panic.
4. U.S. 10 Year Treasury Note Yield (TNX): Rates broke lower still with the crash of yields abroad. Will U.S. yields follow the rest of the world into the negative? I personally hope not, as the implications of that would not be good.
U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX,TYX,TLT,TBF):
Rates crash.
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