A Market Timing Report based on the 6-23-2017 Close, published Sunday,  June 25, 2017

I deliver focused comments on market timing once or twice a week.  These are supplemented with daily “Tweets/StockTwits” (see links below).

1.  SP500 Index: After the Federal Reserve raised the Fed Funds rate by 0.25% on June 14th, we’ve had a failed market timing breakout to new highs, and the index is back to where it was at the close just after the Fed statement. Employment is improving steadily, inflation as the Fed measures it is below 2% and they see it a bit lower for the year vs. their prior assessment, and the economy is chugging along at around 2% growth, but far below the 3-4% growth the Trump administration has said is their target.

What about valuation?  You can look up the Shiller PE Ratio (CAPE) HERE and see at 29.87 we’re back at the 1987 peak level and above the valuations seen in 2007 before the Great Recession, but still well below the 2000 peak of around 44.  This means that the market is already expensive, but could become more so if interest rates stay low enough AND if economic growth continues.  Remember, over the short run, which can be several years, PE ratios can be way out of whack, but over the longer term, stock prices follow earnings, whether up or down.  The current earnings momentum for the overall economy is UP.  For this reason, I am remaining long with more exposure than I usually have.

The healthcare system is still not working for a lot of people and it’s a very mixed picture.  For example, I know “wealthy people” who cannot get a policy covering basic care without paying a fortune. Oddly enough, one can honestly say unfortunately AND fortunately for those who need affordable healthcare, it appears the Republicans will after a period of haggling with holdouts, eventually be able to move forward the healthcare bill, now being offered up in the Senate as the “Better Care Reconciliation Act.”  As it stands, both the House and Senate bills will drive up the independent market cost of healthcare for people ages 50-64 by 4-8 times current pricing depending on the source you review.  There are groups who are being hurt pre-legislation and others who will be hurt post-legislation.

Many current Medicaid patients will be displaced into the private insurance sector supported by tax credits.  What they will end up with is up for debate.  Insurers are likely to limit the coverage of “essentials” for these patients to lower costs of coverage.  Remember that our system creates a good deal of waste because of the insurance company middleman which takes its cut.  Without real competition to drive down costs of providing care, the net effect is that our country delivers less care for more money.  The net effect on the healthcare system could be pronounced for the healthcare legislation losers, which will likely include the hospitals, so I would decide NOW what level of profits you want to maintain on our XLV Healthcare ETF and IBB Biotech trades.  Don’t give it all back.  It’s very hard to predict what this moving target of a healthcare bill will mean in the end for the net healthcare provided.  Follow the market timing signals in the market, rather than the news.

There are other landmines ahead for healthcare.   Trump is supposed to deliver on his promise of cutting drug prices in the near future.  This could slash our gains as the impact sets in, despite the recent big run up in drug and biotech company prices.  The rise has been almost straight up for a few days in a row, as though investors believe Trump’s words and actions will be relatively inconsequential.  If not, watch out below.

What about the current SP500 market timing chart?  If the lower yellow line in the chart below is broken, it is possible that we’ll only backtest the 2400.98 breakout, but that is not likely in my view.  Then IF we break the green line, the target becomes the red line, which would mean a 5.4% correction from the intraday all time high on 6-19-2017.   The highest fliers would be hit by deeper corrections unless their fundamentals are clearly superior to the market.

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Review the chart below…

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

Failed breakout.

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of  +3.74% vs +2.79% last week.  The numbers barely budged vs. last week, so please review the comments via the link to the upper right for the issue on the 6-16-2017 close.

2.  U.S. Small Caps: Our market timing “Stock Signal” is still on, despite the recent “Tech Swoon,” and Fed meeting.  The ETF is still above the orange trigger line shown in the chart below.  I believe a reversal of this signal could mean a full correction in the stock market to that “red line” discussed above.  

Small Cap Update 6-26-2017: Note the distinct difference in behavior during the last retest of the “orange trigger line” vs. the prior retests that failed.  There were two prior breakouts above the line that failed.  This one did not.  That is very positive for a continued rally in small caps.  The index needs to keep marching to a new high to verify this of course, but the odds have changed for more upside. Today the index is lagging the SP500 Index as I post this comment, but still +0.31%, but we’ll have to watch this trade.  Another failure and we’ll be headed at least back to that lower red line or worse.  This does set up a decent trade.  If you enter around here, you could cut your losses on a close below or on a decisive move through the orange line to the downside.

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

Small caps holding above the prior breakout, but barely above the May high.

3. Gold: The gold market timing signal is ON, which is technically bad for gold and good for stocks.  That said, gold is in a bit of a bounce.  I’m interested in seeing if the bounce can take us above the horizontal orange and aqua lines on the chart below, because if it can, the Bulls will be back in charge.  If the economy keeps improving with low inflation, gold will tend to lag. 

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

Attempting a bounce from a higher low?

4. U.S. 10 Year Treasury Note Yield (TNX): Rates remain low following the Fed’s increase in the Fed Funds Rate by 0.25% on June 14th.  The Fed’s own inflation estimate for 2017 was DECREASED at the meeting, and if inflation holds steady, rates may not need to rise much.  This should result in delays for further Fed rate increases.  This would mean the returns on bonds may not lose much due to loss of principle value.  Now let’s review the three market timing signals together….

MY SIGNAL SUMMARY for a Further U.S. Stock Market Rally is:

Stock Signal ON, Gold signal ON (good for stocks, not gold), Rate Signal OFF (good for bonds).

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

Notice how rates are still staying low after the Fed hike?

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