A Market Timing Report based on the 9-23-2016 Close, published Sunday September 25th, 2016
I deliver focused comments on the markets. These are supplemented with “Tweets/StockTwits” (see links below).
1. SP500 Index: Stocks liked the Fed FOMC meeting statement (See my messages at StockTwits/Twitter via link below. I won’t repeat them here.) The Fed is keeping rates constant due to uncertainty that is showing up in economies worldwide and our weakness at home.
Earnings season is the next challenge. Some recent estimates say that SP500 Index profits for Q3 could come in at -2% while revenues will rise 2.6% (there are typos in the article as you will see, but the same earnings number was quoted elsewhere). Companies are selling a bit more, but at lower prices or with increased costs.
(NOTE: GDP Number out this week is the 3rd estimate of SECOND QUARTER GDP, not the Q3 number! It should not change that much. 1.3% expected per Bloomberg News. Q3 GDP comes out on Oct. 28th at 8:30 am )
In any case, the economy is still too weak for the Fed to raise interest rates despite the improvement in the employment figures. Dr. Yellen mentioned in the “dog and pony show” at 2:30 pm Weds. that workers were being recruited from the “discouraged/not previously looking” pool, which provides some slack, although wages are finally rising, which could eventually trigger inflation. The Fed will watch, but likely resist raising rates until corporate profits and revenues improve further.
The chart shows that we rose to the top of the prior “Vibrational Range.” When investors become fearful, volatility spikes and then has to calm down. The SPY closed within this range, while as you see, the SP500 Index itself closed right at the top of the “Vibrational Range” that was set up on Sept. 12th (aqua lines; see also the last issue to upper right!). We bought near the bottom of this “Vibrational Range.” Buy lower, not higher is our motto.
I actually like this statement of one of our guiding principles best:
“Buy fear, not greed.”
SP500 Large Cap Index (click chart to enlarge; SPX, SPY):
Survey Says! Sentiment this week among individual investors (AAII.com) showed a Bull minus Bear percentage spread that was -13.45%, in other words tilted toward Bearishness. The percentage of “Neutrals” is AGAIN under 40% (above 40% Neutrals is Bullish on a market timing basis for higher prices out 6 months from today per AAII studies of their statistics).
This is again not an extreme. Extremes occur at spreads of 20-30% toward Bearishness or more. Stay flexible, but above all, buy low, NOT high.
|9-22-16 12 am close to poll||Bulls 24.83%||Neutrals 36.89%||Bears 38.28%|
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2. U.S. Small Caps: Small caps recovered strongly from their dip prior to the Fed, but have yet to reach their prior high (green line). There is further risk to small cap earnings for Q3 that is about to end (Sept. 30 for most companies), so let go of your dogs before they bite you with their “beta.”
“Beta” is a measure of risk usually measured in the U.S. vs. the volatility of the SP500 Index. A Beta of 2.0 means the stock or index is twice as volatile as the SP500 Index, for example.
Russell 2000 U.S. Small Cap Index (click chart to enlarge; RUT, IWM):
3. Gold: Gold made some gains off the lows…where we bought. Stick to the discipline of buying low, and you’ll do it when others are in fear, rather than overthinking it. There are times to step aside, and it’s not possible to get every move right, but remember that Bull markets tend to continue longer than investors expect. Trends, when they are strong, and backed by macroeconomic arguments, tend to persist.
Gold ETF (click chart to enlarge the chart; GLD):
Before we get to Interest Rates and how they reacted to the Fed statement…
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4. U.S. 10 Year Treasury Note Yield (TNX): Rates fell through key support AFTER the FOMC Federal Reserve statement. There’s still room to fall (meaning we make money on bonds/Treasuries), although the strongly Bullish investors out there expect the Fed to move as early as November. I doubt the economic numbers will support that move. I am following the break lower shown in the chart below. I bought municipal bonds before the Fed announcement, anticipating dovish talk from Dr. Yellen, despite all the grandstanding of other FOMC board members.
U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX,TYX,TLT,TBF):
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