A Market Timing Report based on the 8-04-2017 Close, published Saturday,  August 5th, 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: Last week I said “US Employment numbers will be out Friday August 4th.  My sense is they need to be close to 200,000 (170-230K) to keep the market and the Federal Reserve happy.”  The number was 209,000 jobs for July.  Average hourly earnings were up 2.5% Year over Year.  Along with the mainly decent Q2 earnings we’ve seen, this is good enough for a continuation of the market rally.

The Bears have started growling again, as the markets reach ever higher highs.  They don’t like the valuation of the market.  Without peeking, is the SP500 Index cheaper or more expensive than it was last year?  According to Lazlo Birinyi and Associates as published in the Wall Street Journal HERE, the SP500 Index PE was 24.68 last year while it is 23.90 as of Friday’s data.  In case you are interested, I have previously checked with Thomson Reuters, who is the source of the data and found that the trailing earnings are GAAP, not the looser non-GAAP earnings.

GAAP, Non-GAAP, what’s the difference?  Non-GAAP earnings excuse exceptional items from the reported earnings, which is legalized cheating in my book.  You can tell me what the company did apart from GAAP earnings, as long as I get to see the numbers with ALL expenses accounted for.  I want to see the GAAP earnings regardless of how much they want to explain away “extraordinary expenses.”

What about the tech heavy NASDAQ 100?  It is a bit more expensive at a PE of 25.73 vs. 24.35 last year, but that is only 5.66% more expensive.  Given these numbers, why are the Bears out in greater numbers over the last few weeks, while we heard little from them last year (except for the PermaBears who are essentially worthless to consider)?

The important question is “What can one do to protect capital no matter what happens?”  Set stops on your positions, deciding for each position how much of your profits and/or your capital you are willing to give up.

Be careful though.  If you set stops too tightly, generally you’ll be kicked out of a great position early and find it hard to get back in at higher prices.  In the meantime, if the SP500 Index or the index related to the individual stock you sold is still rising, you can redistribute some or all of the capital to the relevant index ETF.  If the entire market is breaking down, you can lower your exposure, but ONLY if you are willing to get back in.  Otherwise, don’t bother selling or you’ll ruin your investment results over the long haul.

If you go to a very high level of cash, while the market is still rising, you’ll miss out on what could be big further gains.  Obvious in a way, but it’s a major reason investors under-perform the market.  I expect the gains to continue until the economy says otherwise.  Profits for Q2 are strong and GDP is set to strengthen more in Q3, according to some including the Atlanta Federal Reserve Bank.  The NY Fed is not as sanguine.  You can see their tentative estimates HERE as of Friday.

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

Still in consolidation, yet stepping higher.

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of  +4.01% vs. +10.14% last week.

The increase in Bears was more than the Bulls, even though the market was simply consolidating (going sideways) over the past week!  This is typical wrong thinking of investors who believe markets that are doing well must be headed into major trouble.  Could some unanticipated event or even a suspected event happen? Of course it could, which is why I always keep some cash around in case there is a “North Korea” opportunity or a “Trump impeachment” opportunity (no proof yet, just suspicion).

2.  U.S. Small Caps: My option hedge on my IWM buy last week is paying off as I’m down less than I would be had I not sold the calls against the stock (Sept. covered calls).  Note how IWM bounced after falling to a point fairly close to the orange “Trigger Line” I have defined.  I still believe a violation of the Trigger Line by the small caps will not be a good harbinger for the overall market.  It could signal a broader August correction of 5-10%.  It would mean a wiping out of all small cap gains since the post election Dec. 9th high other than the small dividends received.

Valuations are usually not very reassuring for small caps unless there is a massive wipe out, but they stand at a PE (TTM) of 95.83 vs. “Nil” for one year ago. The data are HERE.  The operating earnings PE is OK, at 19.56, lower than the NASDAQ 100’s, but remember that it’s fudged by not including all costs.  This is why I invest in midcaps and trade in small caps and their ETFs, not that one could not have a position as a long term hold.  Just don’t buy high and sell low.

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

Watch the orange line A close below there won’t be helpful.

3. Gold: Rates up, gold down. Any questions?  See last week’s commentary to catch up… (link to upper right). Also, read my rate commentary below.  It’s why gold likely has further to fall before the next bounce.

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

Gold down on rates moving up.

4. U.S. 10 Year Treasury Note Yield (TNX): If US employment and GDP keep performing as they have been, the Fed will continue to slowly increase rates as well as reduce the balance sheet.  There is downward pressure on rates from a sluggish Europe and China, so the Fed may be limited in how much it can do.  If rates move too high too quickly, the dollar will rise quickly and hurt U.S. sales abroad.  There’s a balance to achieve.

Because of my belief that rates will move higher from here, I lightened up on my municipal bond exposure.  I don’t trade individual munis, but I do sometimes trade the ETFs.  I will assess things if we rise to the top of the range and may then buy that exposure back.

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

Rates may now be rising again higher in the recent range with an improving economy.

Let’s review the three market timing signals together….

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

Despite a bit of wiggling up and down, the signals are:

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

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