A Market Timing Report based on the 7-22-2016 Close, published Sunday July 24th, 2016

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

UPDATE 7-27-20126 #2: Here is what the Federal Reserve was really saying and what they were REALLY thinking:

“The US labor market is stronger with increased labor utilization, which could raise wages and force a rate hike, and economic activity is expanding at a moderate rate.  Household spending is growing strongly while business fixed investment has been soft. Inflation is below target, but the influences that have been keeping it down are transitory in our view.

We believe that, overall, the economy is improving enough to raise rates fairly soon, but we are chicken, and we’re planning on being accommodative whatever that takes. 

In other words, we are not telling you what we’ll do and you’ll have to guess, because we honestly have no idea about when we should raise rates.  But don’t go making any bubbles out there in the markets, because we could raise rates at any time given the economic data and mess your hyper-Bullish financial plans up.” 

UPDATE 7-27-2016  #1  –  Federal Reserve FOMC Statement:

Here are the changes from last month.  [IN BLUE ] means deleted and BOLD means new language since last month.

Press Release

Release Date: [June 15] July 27, 2016

For release at 2:00 p.m. EDT

Information received since the Federal Open Market Committee met in [April] June indicates that the [pace of improvement in the] labor market [has slowed while growth in] strengthened and that economic activity [appears to have picked up. Although the unemployment ] has been expanding at a moderate rate [has declined, job.] Job gains [have diminished. Growth] were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in [household] labor utilization in recent months. Household spending has [strengthened. Since the beginning of the year, the household sector has continued to improve and the drag from net exports appears to have lessened] been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation [declined] remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; [Esther George]; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

There you have it.  The market reaction thus far vs. the 2 pm opening prices is SPY up 0.24%, IWM +0.17%, GLD up +0.43%, and GDX up 2.67%, and TLT up 0.12%.

Back to the issue…

1.  SP500 Index: The market is hanging close to the new high it established above 2134.71 on 5-20-2015, now at 2175.03, 1.89% above the prior high.  The market timing data on news highs after a prolonged period of no progress of a year or more are very Bullish. Review what I wrote last week on what I’m actually doing about it.  I’ve been trimming my individual stock exposure over time and have sold some U.S. exposure near the highs, while adding some Chinese stock market exposure.  I added some gold exposure on the pullback this week.  What I am doing is noted on my Twitter/StockTwits feeds every market day (links below).

Earnings season is mixed so far.  Some groups are having a worse time of it, particularly the regional banks.

The Federal Reserve has a two day FOMC meeting this next week on July 26 and 27th with no dog and pony show to follow, just the written statement.  The markets would be shocked by a rate hike as the current probability per the CME group is just 3.6%.  The Fed has been very reluctant to hike rates when both Japan and Europe have negative interest rate policies.  Here is where you can follow the changes in their number day to day: CME Group Fed Rate Hike Risk

Note that I highlighted the volume decline during part of the recent rally.  That means this rally has been a bit shaky as volume rises with price in a healthy market.

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

***DATE OF CHART IS ACTUALLY 7-22-2016 CLOSE***

Market holds new highs.

Survey Says!  Sentiment this week among retail investors (AAII.com) showed a Bull minus Bear percentage spread that went down just a bit to +8.71% [over 40% Neutrals is Bullish for market timing 6 months out]).  At these levels there is plenty of room for sentiment to go in either direction.

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

2.  U.S. Small Caps: I made some money on a quick addition to my IWM short last week, but kept the core short position.  The Bulls have the edge based on the new closing high above the prior top.  A quick reversal is needed or my short will fail.  The close did not take out the 7-21-2016 high of 1213.52.  Remember that I am using this to hedge just about 5% of my long positions.

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

***DATE OF CHART IS ACTUALLY 7-22-2016 CLOSE***

Small Caps flirt with a new high.

3. Gold: I bought more gold on the pullback.  When you are in a Bull market, buy the pullbacks, not the rips to the upside.  Gold could keep falling a bit more, and if the economy actual turns around, it could fall a lot more, so don’t get too cozy with your trading position.  With the central bank antics around the world, the intermediate trade is likely safe however.

The dollar is still rising which is OK when there is a financial rush to safety, but not OK if there is not.  In any case, a strong dollar pressures the gold price for those buying it in U.S. dollar terms.  If the dollar goes back to the 2015 highs, the stock market won’t like it due to pressured earnings abroad.  This is especially true of international large cap stocks and less so for small caps.  A strong dollar is OK if the economy is strong, but hurts when it’s not. 

If you want a bigger “pop,” which also means larger losses if gold falls more, buy the gold miner ETF, GDX. 

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

Bought gold on the pullback.

4. U.S. 10 Year Treasury Note Yield (TNX): U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX,TYX,TLT,TBF): The 10 year yield needs to hold above 1.567% to keep the momentum going into the Fed meeting statement to be released at 2 pm on Wednesday.

1.567% needs to hold if rates are to rise further near term.

Stay with me throughout the week for the LATEST via the links to Twitter/StockTwits above.  Feel free to comment, retweet etc. to spread the word.

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