A Market Timing Report based on the 12-09-2016 Close, published Sunday December 11th, 2016
I deliver focused comments on the markets. These are supplemented with “Tweets/StockTwits” (see links below).
1. SP500 Index: As said last week: “The Federal Reserve will be raising the Fed Funds rate 0.25% come Dec. 14th as the economy continues to be on the mend.” Now the probability of that according to the CME Group is 94.9% as of Friday, still as much of a done deal as can be expected.
The Fed will raise rates this week, but what they project going forward in Dr. Yellen’s dog and pony show (aka news conference at 2:30 pm on Weds.) is what guides the markets into the future. The adjustment to higher interest rates is just beginning. The U.S. dollar is in a strong Bull market due to rising rates from the expectation of higher inflation, in turn due to strong expectations for an increased growth rate under the Trump administration.
This dollar strength lowers our inflation rate as we purchase foreign goods, but is an issue in selling our goods abroad when it appears before growth has been rekindled. This can feed back to slow U.S. growth. The dollar is rising due to U.S. growth that is somewhat improved of late, but really has not yet begun to the extent that is being discounted into the future. The cart is to some extent running ahead of the horse. Trump policies must be instituted quickly to produce the expected growth, or the markets will be disappointed, and market timing parameters will be swept aside.
In market timing terms, note that we are coming out of a long consolidation of the markets (sideways move) with a relatively new breakout, so further progress by the Bulls would not be unexpected.
Despite any minor pullbacks, the Trump Rally should continue until the market once again changes its mind.
Buy the dips when they appear, not the rallies, to get better entry points.
SP500 Large Cap Index (click chart to enlarge; SPX, SPY):
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Survey Says! Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +16.63% down a bit from +18.68% last week. There is STILL room to move in either direction frankly and the data is less predictive at the moment.
|Thurs. 12 am close to poll||Bulls 43.12%||Neutrals 30.39%||Bears 26.49%|
2. U.S. Small Caps: The crazy small cap rally (crazy in speed) resumed this week. Small cap stocks don’t have to deal as much with dollar strength. Plus they represent “beta” exposure, which should be favored in a continuing rally in which higher U.S. growth is expected.
Russell 2000 U.S. Small Cap Index (click chart to enlarge; RUT, IWM):
3. Gold: We sold our trading GLD position (from the 1-29-2016 entry) profitably based on the market timing signal of a major support break around 115.00 for GLD. The slide continues and could, as said last week, destroy all gains early buyers of the previous rally have achieved. Growth means higher rates, which means a higher dollar, which means gold under pressure. (for those who are just arriving, read more here: “When Gold Shines”
12-12-2016 Update: If the Fed indicates a steady progression of rate hikes from here, gold will retrace back the entire rally of 2016 (see chart below).
Gold ETF (click chart to enlarge the chart; GLD):
4. U.S. 10 Year Treasury Note Yield (TNX): Note that the 10 Year Treasury Yield hit the 2.489% mark and pulled back yet again. We have the exact same set-up as last week: That 2.489% mark is clear market timing resistance and, if violated, it means another dose of pain for bond/treasury holders.
U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX,TYX,TLT,TBF):
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