A Market Timing Report based on the 4-21-2017 Close, published Sunday April 23, 2017
I deliver focused comments on market timing once or twice a week. These are supplemented with daily “Tweets/StockTwits” (see links below).
UPDATE 4-26-2017: Stock Signal ON. Revision to Gold and Bond/Treasury Signals
Small cap stocks (IWM) have given the market timing “all clear” for a big, new leg UP in the Trump Rally. We are above my breakout number (see chart below for the number).
But what about the gold and interest rate signals that are also keys to a new rally? Market timing signals need to be grown organically through observation. Since gold and Treasuries/Bonds overshot to the upside, it would not be reasonable to use the prior markers as the trigger points. The initiation of a step-wise DECLINE even on short term charts in gold (GLD) and a RALLY in rates (TNX; remember, rates up = Treasuries and bonds down) can be taken in my view as a confirmation of the market timing breakout of small caps (see IWM chart if you don’t know what that is or yesterday’s Tweets/Twits on social media! I try to not make it too easy for crawlers to find my breakout numbers.).
NEW Gold and Treasury Signals: First, note that “ON” for each signal means it is confirming a further RALLY IN STOCKS. I am using short term market timing chart trends to say the recent trends in gold/Treasuries are reversing: for GLD we’ll use 122.61. A move above there means gold has recovered into possible Bull mode and the signal is OFF (remember, gold tends to do poorly when real returns above inflation are HIGH, so economic growth and gold go in opposite directions as long as inflation stays subdued. One can argue the latter with rising deficits under an aggressive Trump tax cut plan.)
The 10 Year Treasury Yield Signal will be considered OFF if it sinks below 2.209%. Below there the prior trend may be reasserting itself.
Given the above definitions I am considering all three market timing signals as ON, meaning there is another leg to this Trump Rally ahead of us. I remain overexposed (see Twitter/StockTwits for numbers – I print them generally after each trade.) to the market vs. my “usual exposure.” I will talk about this over the weekend in my next post, but I believe that however misguided the Trump Tax Plan is fiscally (will heap LOADS of debt on our children), it will fuel a major leg in the stock market rally.
Remember that market timing signals do not mean once ON they have to stay ON. Sometimes they are triggered, and we see reversals in the same day or week. A test of a breakout is just that. It must be verified by continued buying and a continued uptrend after the breakout despite any normal backtesting that may occur.
A Warning: We generally DO NOT buy breakouts (unless for a single company with fantastic news that will drive earnings for many quarters to come for ex.), but instead we buy the pullbacks in index ETFs BEFORE the breakout as we just did with IWM. If you buy a breakout, wait for the first pullback after the breakout (unless things have changed in a big way economically etc. to explain the pullback, in which case you may choose to pass on buying), and you’ll often get a better entry point.
UPDATE 4-24-2017: Le Pen to Lose French Election on March 7th per Markets and World Markets Rally
We will have a GREEN Stock signal in my three signal predictor of a “further Trump Rally” if small caps can close above the critical level shown in the chart below (Green Line at top). The gold and 10 Year Treasury Yield signals will take a while to turn positive again, but if they are trending down with an IWM win, I’ll take that as a sign that the markets are ready for more gains in stocks. Once again, the market “has my number,” which simply means the number marking that green line is what the market is now trading around, currently at 138.83 having moved to a high of 139.34 earlier. Watch that number (testing back BELOW the breakout to 138.70 as I type this). A close back below the key level will be a negative in at least short term trading.
The GDP number on Friday is still extremely important to the market. A number that is too weak will be evidence that the market is more overvalued than investors currently believe. To be clear, I still believe there is another big push up left in the markets based on further Trump wins, like him or not. That’s why I remain long with overexposure vs. the usual maximum exposure level (follow social media links for my actual exposure level).
And now back to this week’s issue. Read it to understand the set-up for the U.S. GDP release on Friday…
1. SP500 Index: Gold and bonds/Treasuries have direction, but stocks still do not. The big number out this week, really big, is the U.S. GDP report on Friday at 8:30 am ET. Market timing mavens need to wake up for this. The Atlanta Fed expects almost no growth with their seasonally adjusted annualized rate of GDP growth at just 0.5%. On the other hand, the New York Fed predicts much stronger growth at 2.7% for Q1 2017 and 2.1% for Q2 2017. Consensus per Bloomberg is 1.1% with a range of 0.7 -1.7%.
That tells you pretty much how well these numbers are predicted! And those are their predictions just 4 working days ahead of the number’s release.
A strong GDP number could help the market extend the current rally to a new leg up. A very weak number could cause a further dip/correction, as most feel the market is somewhat overvalued.
If we are in the late innings of an economic expansion, we should expect one more push up by the economy and the markets in my view. Market timing based on valuation is notoriously faulty. Valuations can certainly help you rebalance your porfolios to a lower equity exposure, but I’m not doing that at this point in the cycle. My working hypothesis is that Trump Growth will occur due to fiscal policy changes (however delayed) and push this market up one more time prior to a more significant correction.
Remember that the market doesn’t like uncertainty, so the French election of Marie Le Pen, an anti-immigrant racist (“they’ll steal the wallpaper off your walls” and “rape your wife.”) would upset the markets temporarily, but remember that as with Brexit, a Frexit would help the U.S. by dissolving the EU Trading block. The EU cannot survive without France. It would have no credibility with the UK now also gone. That would destroy the European currency. I think the entire experiment was dumb. Our country is one in which states that are incredibly different are now stuck together. Texas and California would not agree to be a part of the same country in a 2017 referendum. There is no unified fiscal discipline in Europe and given that, there can be no viable European Union. Security issues are also a problem across nations in the EU.
If our markets were to go down on a Frexit from the EU, it would be a buying opportunity.
We’ll continue to follow my 3 signals defined in early February HERE.
As of today the signals are still ALL off for a continued Trump Rally: STOCK SIGNAL: OFF. GOLD SIGNAL: OFF ( means gold is rallying). INTEREST RATE SIGNAL: OFF (means Treasuries/bonds are rallying).
Keep up-to-date during the week at Twitter and StockTwits (links below), where a combined 26,570 people are joining in…
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SP500 Large Cap Index (click chart to enlarge; SPX, SPY):
Survey Says! Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -12.99% down a bit more from last week’s -8.41%. These numbers confirm our strategy to buy the dips given investor sentiment is this bad near all time highs in stocks.
|Thurs. 12 am close to poll||Bulls 25.71%||Neutrals 35.59%||Bears 38.70%|
2. U.S. Small Caps: I’m now in the green in my “early” buy in IWM. Buying at the low end of the range is a routine market timing maneuver. Even if you don’t trade, I recommend you time your new buys using new capital in this way.
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold: Gold is still happy with crashing rates and geopolitical nonsense going on including a French election that could destroy the European Union.
Europeans hiding in gold of late could come OUT of hiding if Le Pen loses and sell. A Le Pen victory on Sunday, May 7th could add some fire to the gold rally. Gold has entered a consolidation over the past few days.
Gold ETF (click chart to enlarge the chart; GLD):
4. U.S. 10 Year Treasury Note Yield (TNX): The financials are testing the January lows still, based on the dive in interest rates in March. If the GDP number is “hot,” yields will shoot up quickly. If very cold, the 10 Year Treasury Yield could easily revisit the Election Day levels. Remember too that US Treasuries see a market timing rally if the Euro is doomed by a Le Pen win on May 7th – a flight to safety rally away from the Euro.
U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX,TLT,TBF):
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Good morning David,
I see this rally if sustained as a “anti-populism” move based on the French election. The talk about tax reform can be good for the next move higher and if the republicans stick it to the middle class all bets are off! Staying with my process of buying the pullbacks.
The word yesterday was that due to the elimination of numerous deductions, the wealthy would be paying about the same and the middle class would be the winners. We have to see the actual tax tables to know this is going to be true in the final bill. As we know, those who make little pay no federal income taxes as it is. The middle class needs the break most of all. If Trump follows through on his stated intention, the GOP could become stronger than ever. It will become the party of the middle class. All that aside, the tax cuts will fuel the economy and hence the markets, and the rally could be much bigger than many expect.