A Market Timing Report based on the 8-11-2017 Close, published Sunday,  August 13th, 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: I tell you my overall position on a correction at the end of today’s issue.  The market timing “Trigger Lines” are under attack.

This week the market pulled back on the hawkish threats from President Trump, so you can blame Kim and Trump for not working things out and taking your retirement money, at least on paper.  Of course, that’s just the backdrop of a market that has delivered large gains over several years now.

I warned you here last week about the need to have some cash (despite my high relative exposure vs. prior levels, I still have plenty of cash to deploy should things get silly).

Last week I said in the Investor Sentiment Section: “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).“

I increased my exposure level to equities (see what I bought at the social media links), while others were running in fear, based on my views of the economy and current events like North Korea and Trump’s Russia-gate. I could be early, but I’m investing based on these runs on the trigger lines as being tests.  Tests can go below certain lines and reverse.

The Bears achieved some manner of attention in the prior two trading weeks, despite the acceleration many see of both GDP and earnings into the 3rd and 4th quarters of this year, and into 2018.  I would preserve profits in your individual stocks as you see fit and rotate the money into other growth stocks that may be undervalued on a short term basis. I do not reduce my overall market exposure unless 1. I find I cannot sleep at night. (doesn’t happen) or 2. I am Bearish on the US economy.  (not)  Remember, most individual investors make about 3% on their money on an annualized basis vs. roughly 8% for the market over long periods of time.  A three percent return is achieved through under-investment primarily by buying high and selling low.  That’s what’s called really bad market timing!

Sometimes, as an example, I’ll sell a tech stock such as Microsoft and buy XLK to stick to what is more purely a tech ETF (QQQ contains companies like Costco and is only 58.5% tech as shown HERE.).  I increased my exposure to nearly the max I’ve held since Feb. 2015.  See the links just below here for the exact numbers.  I am obviously still Bullish as long as the economics that underlie this market hold up.

You can also read my remarks about the North Korea issue and why it will blow over at the social media lings.  It will blow over or be a complete disaster in human terms, so by necessity it will blow over.  Keep that in mind.  This only becomes a structural issue for the economy if we all stay hunkered down in bunkers instead of going shopping for the next several months.  As others have also said, I believe the U.S. is going to have to live with the idea of North Korea having nuclear weapons, because imagine our national indignation if we were told the same thing by an external party.  Don’t get me wrong.  I don’t like the idea of Kim having nuclear weapons, but the North Koreans appear to be intent on having them.

On the chart, we have a backtest of the prior breakout thus far (see below)…

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

SP500 testing first area of support.

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of  +1.34% vs +4.01% last week.

The movement was not great, but it was a conversion of about 3 percent Bulls to Neutrals.  The Bears hardly budged!  This tells you that individual investors are not terribly concerned about North Korea yet, despite the fact that they have been somewhat brainwashed into fearing the valuation of the market.  Unfortunately for them, markets don’t top until the economy tops and sentiment tops, neither of which have happened. 

Sure, the market can drop another level and that too would be a place to add some more exposure for those who do not have enough.  If you feel the Bear is here, by all means, cut your exposure level.  I do not.

2.  U.S. Small Caps: Small caps concern me more thus far than the SP500, but they are expected to give up more during these pullbacks (“higher beta”).  Still, all gains going back to Dec. 9th have been wiped out by crossing that line to the downside.  And that line was a test of the Trump expansion thesis.  Small companies need to participate with large ones if this recovery is going to continue. Thompson Reuters data says Small Caps WILL catch up: HERE.  In contrast you can see the Midcap 400 Index is doing better HERE.  And running in first place on earnings growth from the same quarter last year, the SP500 Large Caps: HERE.

Still, we need to see a reversal back up through that orange line to say the Trump Bulls are correct.  Otherwise the market is telling us it does not believe in the Bullish thesis.  Small cap earnings have not been as nearly good as for large caps, as they have fallen year over year, which is another reason to avoid them on a relative basis.  I have most of my non-US Large cap weighting in mid, not small caps as I’ve mentioned before; however, the Bullish thesis for small caps going into the end of the year and into the first half of 2018 is that earnings are expected to accelerate into Q2 of 2018.  The market generally rallies ahead of the results, but I’d still like to see a reversal of IWM above the orange “Trigger Line” soon.

If you seek perfection in yourself or in others, you will be disappointed.  Within the bounds of “life itself,” that applies to investing and trading as well!  The end results matter as long as your success rate yields an “expectancy” that is high enough.  If you don’t follow your success rate and expectancy at least periodically, you are not a serious trader or investor.  Improvement can only be had when we monitor our results.  Take the time to do that for yourself.  You’ll see patterns and be able to hone your craft over the years.

My market timing mistake this week?  I failed to hold my hedge of calls I sold against my shares, when things were looking rosier earlier in the week, but I did shave a bit off my IWM paper loss by collecting about half of the Sept. call credit. The North Korea Trump comments changed the tone of the market quickly as I showed you on Twitter/StockTwits this week.

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

Small caps break the “Trigger Line.”

3. Gold: This week is the reverse of last: Rates down, gold up.  Any market timing questions?  See prior commentary to catch up… (links to upper right). North Korea fears and perhaps some credit/banking fears pushed gold higher this week.  Remember that support and resistance lines are not magical without the background of macroeconomics.  Also, I do not trade moving average and support/resistance lines blindly, but instead, look at the market’s behavior at the time it hits those target lines.

When the world is calm, business revenue is growing rapidly, earnings are expanding rapidly, inflation is tame, and real interest rates are high enough for investors to be enticed, gold does poorly.  Be prepared to take market timing profits if you are Bullish on our continued economic expansion.  Perhaps we’re headed into the last inning or two of the game, but my opinion is “the Bull is not done yet.”

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

Gold rises to resistance.

4. U.S. 10 Year Treasury Note Yield (TNX): Rates have dropped below the orange “Trigger Line” in the chart below, and that is Bullish for bonds/Treasuries and Bearish for stocks.  All is not lost if the prior market timing low is not exceeded, but we are on the warning track running toward the fence and a possible head injury if you follow.  Rates need to rise in a mature recovery and when they don’t, it tells you the market is afraid the economy may slow down.

Some claim Europe is turning toward the better, while others claim it is now decelerating again.  The same claims are made about China.  I say follow the charts and preserve profits you may have at a certain level.  Don’t go all the way back to zero.  Remember if you get out, you MUST be willing to get back in, or you will tend to under-perform the market.  It is also wise to get out of only a portion of your holdings. 

For example, during the last Bear market (the Great Recession), I held only half of my “usual maximum equity exposure,” and quickly expanded my exposure once the market got a footing.  I bought gold aggressively in the high 300’s when the Hollywood stars were shorting it, but now have just 50% of my highest exposure level.  I sold 100% of my initial investment in gold on the way down off the top at about 1370/oz and just kept profits.  I am riding the gravy.

Now we need to review our three signals (below the chart after you review it…)

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

Rates break the “Trigger Line” to the downside.

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

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

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

All three signals went from ON to OFF.  They must reverse back to ON quickly or we will be headed into a more serious stock market correction (at least 5-10%). 

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