A Market Timing Report based on the 9-29-2017 Close, published Sunday, October 1st, 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: The US equity markets hit all time market timing highs this Friday and brought the Dow Transportation Index with them (DJT; IYT). Meanwhile, the Federal Reserve is confused. Dr. Yellen, the Fed Chair, gave a speech on Thursday saying the Fed may not really understand inflation in the current context, meaning it does not seem able to predict its course. Normally as the employment drops below 5%, wages rise and inflation ensues. It has remained tame, with the Year/Year Core PCE Inflation Index the Federal Reserve follows dropping from 1.4% last month to 1.3% this month. That’s not what is supposed to be happening. The Fed’s target is 2%.
Now the Federal Reserve has a big problem. It wants to reduce the size of the balance sheet, which involves letting debt run off as I described last week: HERE This will drive up long rates, which will allow them to hike short rates gradually as well, but only if the economy does not slow as a result.
I believe creating the huge balance sheet they have now was easier than unwinding it will be. The other side of the box they are in is that the longer they put off reducing the balance sheet, the more expensive it will be to reduce it. As rates rise, our government will have to pay more to finance our national debt.
What keeps us in the market is US economic growth. GDP will remain strong over the next few quarters, meaning growth will stay strong for now (the headline GDP number is a measure of US economic GROWTH, not the level of output) The out-performance in small caps I pointed out early on after the Fed statement’s release has continued as the market timing charts show this week.
Rates are expected to rise as the Fed reduces the balance sheet size, and actually have front run the process, which will begin this month, in October. If this trend continues, the U.S. dollar will be higher and multinationals will be under relatively more earnings pressure than small caps or mid caps, at least the ones that are not primarily serving an international market. Plus there is a sizable Russell 2000 exposure to financials, which do well when rates rise and banking spreads rise fueling bank profits.
Review the SP500 Index market timing chart below and then we’ll discuss investor sentiment and the US small caps…
Keep up-to-date during the week at Twitter and StockTwits (links below), where a combined 30,879 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 +4.59% vs. 12.93% last week. Investors were more Bearish this week just before the market hit all time highs. This means there is more upside. Investors will be VERY Bullish when the market reaches its final top.
|Thurs. 12 am close to poll||Bulls 33.33%||Neutrals 37.93%||Bears 28.74%|
2. U.S. Small Caps: We DID actually get the strength I was looking for this week and in a big way as the market timing chart shows. Small caps initially led the charge up after the election, but then stagnated for months as the large caps caught up. But if you missed the rocket ship that took off right after the election, you missed a lot of the post-election gains. I think there is still more in this trade though in this move in particular, due to the long consolidation (move sideways) in market timing terms after the election. For that reason, we added to our small cap position twice last week as noted on social media (links above) in real time.
Mid caps (IJH) are lagging a bit, but did just eek out a new high close of 1795.94, barely above the prior intraday high of 1795.14 on 7-25-2017. Look for them to move higher early next week to confirm the large and small cap highs.
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold: Again last week, I told you to watch your gold profits, and I was correct. By market timing of interest rates I knew to tell you to get out of some gold exposure, at least by setting mental sell stops.
The Federal Reserves plans to raise rates and reduce their balance sheet is not going to be friendly to gold and it could go on for a while. Only if the Fed falls behind inflation, does gold win. Read my article on “When Does Gold Shine and When Does It Decline” if you have not (Google that phrase and it’s at the top).
Gold ETF (click chart to enlarge the chart; GLD):
4. U.S. 10 Year Treasury Note Yield (TNX): This period of economic growth is the Federal Reserve’s chance to raise rates. If the NY Fed proves to be right about it’s relatively anemic growth prediction for the U.S. economy, rates will come back down again. That’s not what I believe will happen, but we have to rely on the other questionable economic forecasts to refute the NY Fed! So I will continue to follow the market timing charts, most of all. They often tell the truth before economists do.
I told you last week exactly what I am doing with bond funds in particular (link at top right). I sold muni bond fund exposure just prior to the Fed statement (timestamped on Twitter). Keeping durations relatively short would be good to do as well.
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 including small and mid cap stocks as well as large caps is a positive for stocks).
Gold Signal ON (GLD is below the “Trigger line” which is negative for gold, not stocks).
Rate Signal ON (10 Year Yield above the “Trigger Line,” good for stocks, not bonds).
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