A Market Timing Report based on the 9-01-2017 Close, published Sunday, September 4th, 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: North Korea is believed to have set off a thermonuclear H-bomb device on Sunday, while we were distracted with the Texas and Louisiana flooding. How will this impact our market? On an immediate basis, SP500 Index futures are down only 0.32%, while gold is up another 0.71% today. The reaction is not an extreme one. As I’ve said before, the military options are all horrendous and therefore will occur only if an error is made by an underling. For example, if shots are fired across the DMZ by a North Korean set on starting a war, a rapid large scale US and South Korean response could cause a further rapid escalation by North Korea, leading to hundreds of thousands if not millions of deaths near the DMZ.
Alternatively, a North Korean missile could end up in the wrong place and incite an all out war. If Kim were to launch an attack on Guam, millions of North Korean would die, as I believe Trump would seek to annihilate them as payback. Use of any nuclear weapon would result in complete nuclear annihilation of all of North Korea.
Now, I should hasten to say that I don’t believe any of that will happen. It’s the kind of thing that is impossible to protect oneself from in a portfolio, unless it is to unwind some exposure, but “selling everything” to avoid all risk generally results in great under-performance.
In the meantime, the economy is moving along with ISM manufacturing coming in strong at 58.8, despite some underlying weakness showing up in the form of slowing delivery times. US Employment was OK at 156,000 new jobs created in the month of August vs. 180,000 expected. (source of economic data = Bloomberg) As I said before the employment number on social media (links below), 156,000 is in the “good enough” range. The 3 month average after downward revisions was 185,000 jobs per CNBC.
Technically, the SP500 Index broke up through the right shoulder that was forming last week. In just three days, it’s back to challenging the prior market timing highs.
As long as the economy continues its current growth trajectory, I will remain overexposed to the market vs. my usual exposure. My up to date equity market exposure number is found HERE.
Keep up-to-date during the week at Twitter and StockTwits (links below), where a combined 30,026 people are joining in…
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 -14.89% vs. -10.19% vs. last week, and that happened due to an increase in Bears of just 1.6%% and a decrease in Bulls of 3.10%. Neutrals picked up 1.5%.
There is still room for the spread to rise as mentioned last week (please review my comment, if you did not read it last week – link to upper right).
This does not mean the markets must pullback further, and the pessimism near market highs, even at these moderate levels, is BULLISH. Only when investors are manically BEARISH near highs, will I have an issue.
|Thurs. 12 am close to poll||Bulls 25.00%||Neutrals 35.11%||Bears 39.89%|
2. U.S. Small Caps: I like that small caps are back above my market timing trigger line. This gives us the hope that the other two signals can switch back as well. Unfortunately for gold Bulls, gold should not do well in a vibrant lower inflation economy, so watch your profits. And review the charts below to know when the turn will be. Large caps typically hold up longer than small caps at the end of a Bull run.
The thing that will convince me the Bull is still healthy is a broad based rally, which is why the stock “Trigger Line” is so important. Mid caps have had the same reversal above their post-election high as well, so the equity markets are a GO for a continued equity rally. Rates may have found their bottom, so the rate signal can now turn ON as well. In this case, stocks are the leading signal.
Now we need a brand new all time high in the small cap index. Since growth is favored over value in a growth economy, the first thing we should see is a new high in IWO, then in IWM, and then in IWN. IWO is leading the way back up.
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold: Last week I said, “We need a new 2017 high in gold – right away, or we’ll have a marketing timing top. That would be a close over 123.31 and usually traders look for several higher closes over a resistance level to confirm a move.” We got that new high and the rally has continued in the overseas markets on Monday. This is despite the bounce off the lows in the 10 Year Yield. You MUST watch that number if you intend to trade gold. See the charts below.
Gold ETF (click chart to enlarge the chart; GLD):
This chart shows you why you must watch the 10 Year Treasury Yield to trade gold. If rates have bottomed, gold may start to slide once the North Korea fear passes.
4. U.S. 10 Year Treasury Note Yield (TNX): The chart below (click to enlarge) shows a Bullish Engulfing market timing pattern, in which the low and high for the day lie outside the range of the prior day with a close near the high. The downward move in the yield may have just ended, along with dollar weakness ending, which would be bad for gold as explained above. It is time to set your mental market timing stops to protect trading gold and gold miner profits.
I’ve already taken some municipal bond exposure off the table, due to this possible low in rates, and will most likely add it back when things swing back the other way. Bond funds could move down from here, unless the North Korea tension keeps rates artificially low. Remember one of my main strategies is “passive shorting” explained in detail HERE. When you use “Passive Shorting” vs. active shorting, you can reduce your stock exposure without going to an extreme, or generally having to pay attention to intraday trading.
Don’t put those “stop” numbers in the market if you can help it, as market makers benefit from it, and you may be hurt as a result. FYI, I use stop limit buy/sell orders when 1. I’m going to be indisposed for a while or 2. the market may move very quickly through a particular level. Realize the stops may fail to get you in or out if the market moves too far and passes your order by. Set up alerts at your buy/sell price to back up any such order. If your order does not go off, you can go in quickly and remedy the situation. Use your own judgment on whether these sorts of orders work for you.)
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):
Let’s review the three market timing signals together….
MY SIGNAL SUMMARY for a Further U.S. Stock Market Rally:
Stock Signal ON (Small Caps above “Trigger Line”; a broad rally is a positive for stocks).
Gold Signal OFF (GLD above the “Trigger line” which is good for gold, not stocks, but only IF inflation actually increases from here).
Rate Signal OFF (10 Year Yield below the “Trigger Line,” good for bonds, not stocks). But note the possible bounce in rates on Friday as discussed above.
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