A Market Timing Report based on the 8-26-2016 Close, published Sunday August 28th, 2016

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

UPDATE 8-29-2016: Gold Holding Weekly Up Trend

Market timing gold?  Well, it’s still holding onto its weekly up trend and I noted on Twitter/StockTwits (links below) today that TLT (Treasury ETF) is holding a breakout.  I think these two are closely linked.  The fact that Yellen’s hawkish talk could not wreck these two charts is significant.  The short term trend line was broken as I suspected it would be, but now may be one point at which to add more exposure with a stop. 

What’s the risk?  That the economy will improve dramatically with rising interest rates that ALSO stay ahead of inflation, making the stock market a more attractive place than gold.  If the two trends being testing (GLD and TLT) both break down from here, it will be a negative intermediate prognostic sign.

Weekly Trend Still Holding Up for Gold

1.  SP500 Index: The market is done waiting for Dr. Yellen.  She said that the Federal Reserve is about ready to move interest rates up.  The key line from her speech was: ” I believe the case for an increase in the federal funds rate has strengthened in recent months.”  Here is the Entire Text.

The box the Fed is in has to do with the fact that the economy is still sluggish at best despite the prediction by the Atlanta Fed for a 3rd Quarter real GDP of 3.6%.  Remember that real GDP is a seasonally adjusted annualized rate of growth of the economy.  That number, if attained, is far too strong for interest rates to remain as low as they are.  Inflation would result, and the Fed wants to be ahead of that curve.  There are those who are predicting a much softer number for Q3 GDP and raising rates ahead of that weakness would be an error.  The Federal Reserve clearly has no clue, no visibility beyond a few weeks.  

Remember that the real market timing killer is recession and that won’t be happening, even if GDP comes in soft next quarter.  So for now, we’ll stay long, not leveraged long, but long.  The SP500 is testing the base of a range, and yes, it can correct from here, but the Bull is not dead.  We have cash to deploy and will buy the next time fear rises and investors are again uncomfortable.  Check the sentiment numbers below and you’ll see what kind of room is left for the Bulls…

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

SP500 Index backtests the recent range.

Survey Says!  Sentiment this week among individual investors (AAII.com) showed a Bull minus Bear percentage spread of -0.22% after bumping up a bit last week.  That means the Bulls have pulled back from a relatively weak rally up to a 9.2% sentiment spread back down to zero.  Markets don’t end this way classically.  Investors are hyper-Bullish at big tops.

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2.  U.S. Small Caps: Same position as large caps, testing back a bit within the latest consolidation, but with higher risk.  If you are market timing, be sure to take beta (greater movement up and down vs. the SP500) into account.  Lower your beta (risk) exposure at highs and increase it when investors are foolishly fearful.

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

Small caps dip slightly post-Yellen.

3. Gold: “It’s still the economy stupid.”  The line happens to apply here.  Gold does not do well in an “improving economy rising rate environment.”  However, my belief is that the economy, while better than some were expecting, is still running on the soft side requiring dovish Federal Reserve policy for a while.  Given that view, we’ll keep some healthy exposure to gold, but watch our profits to date.  We took some trading profits higher.

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

Gold fails a rally post-Yellen. May drop yet another notch.

4. U.S. 10 Year Treasury Note Yield (TNX): The break of the prior triangle was to the upside.  The market believes the Federal Reserve’s story for now.  If they are right, rates will rise from here.

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

Rates rise post-Yellen speech.

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