A Market Timing Report based on the 10-06-2017 Close, published Saturday, October 7th, 2017
I deliver focused comments on market timing once or twice a week. These are supplemented with daily “Tweets/StockTwits” (see links below).
Update 10-09-2017: Bank of America: The Market Timing Canary in the Trump Gold Mine
For this rally to continue, there will have to be tax reform, especially corporate tax reform with repatriation, as it’s been at least partially built into the market. And the other thing that must happen is for rates to rise; otherwise, it means economic slowing will likely occur with a potential recession to follow. No need to be pessimistic at this point however, so…
My favored scenario is: Rising rates with at least corporate tax reform and some sort of tax reduction for the middle class, which could be enough for the markets, even if individual tax reform is watered down.
The financials (XLF; financial ETF) are the Canary market timing signal in the coal mine, with Bank of America (BAC) being a more sensitive Canary than the XLF. I reviewed the comparison chart, and BAC will pack more punch to the upside than will XLF, if rates keep rising with further economic expansion, OR more punch to the downside if rates fall meaningfully from here (not just a few days of a reaction swing lower), and the economy slows.
The XLF and, more sensitively, in market timing terms, BAC will show us the way forward.
And now back to the major market setup for this week…
1. SP500 Index: Markets are still strong, but it seems many are still waiting for the next stock market crash, so they can swoop in and buy stocks on the cheap, but instead, they are being sorely disappointed. Of course, the doomsayers will be right one day, but please don’t mention the cost of their being out of the market since the 2009 bottom to them. The poor market timing of the average investor is a touchy subject, but is too often left unaddressed with ongoing lousy returns. And if you are one of the skeptics, it’s OK, because redemption is for everyone. Winter may be coming, but “Not yet, not yet!” as the Gladiator Juba says after Maximus dies in the Colosseum. (Gladiator meets Game of Thrones ;))
Investors could have used market timing to enter the SP500 Index SEVEN times just since May of this year. See the green numbers on the chart below. The entries were at higher lows or backtests of breakouts, both legitimate buying points. There is actually a 6th and 7th entry, at the breakouts themselves. Can you find them? #4 is one of the market timing breakout buys, but there are two others that have not been marked.
Employment did take a hit this past month (the US jobs number was minus 33,000 for September) due to Harvey and Irma, but should rebound along with increased activity due to the rebuilding efforts. The NY Federal Reserve still expects GDP for Q3 to turn out at 1.53%, slightly above last week’s estimate, while the Atlanta Fed brought down its estimate to 2.5%. Remember that the quarter to quarter seasonally adjusted annualized GDP numbers are more volatile than the year over year GDP numbers. At the end of Q2 2017, Year over Year US GDP growth was 2.2%. You can review the data HERE. As long as the economy is doing OK, and inflation is not running wild, I remain invested in equities.
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 31,066 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 +2.80% vs. +4.59% last week. A few more BEARS were recruited from Neutrals last week than were Bulls! Investors are incrementally more Bearish as the market continues to make new highs. That means there are more gains ahead!
|Thurs. 12 am close to poll||Bulls 35.60%||Neutrals 31.60%||Bears 32.80%|
2. U.S. Small Caps: Mid caps did indeed confirm the small cap market timing signal this week by breaking out to new all time highs. Small caps moved up yet another notch.
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold: In market timing terms, gold has reached the base of the trading range, which is represented by the yellow trend line in the chart below.
It must bounce from here or that will be a distinctly negative market timing signal. The GLD price would then undoubtedly test the next red line beneath the current level as an initial downside target. If you are Bullish, which I am not due to rising interest rates, then buy at the trend line and dump those shares back at the top of the range. You can keep a core position if you like. I use gold as insurance against fiat currencies.
The one thing gold has going for it at this level is the resistance interest rates are facing (see the next chart). No guarantees though and my bet is still for 10 Year Treasury Rates moving at least to 2.6%ish over the intermediate term.
Gold ETF (click chart to enlarge the chart; GLD):
4. U.S. 10 Year Treasury Note Yield (TNX): Rates moved still higher this week. I think they have farther to go, as the Federal Reserve will use this time of economic expansion to raise rates and reduce their balance sheet to get ready for the next economic decline. The 10 Year Treasury Yield can certainly run up all the way to 2.6%ish without destroying economic growth. The Fed will move slowly no doubt, as they’ve never undone QE before as they have raised rates.
Rates hit the top of the recent range and could move back down a bit before moving higher, but my bet is on higher in the intermediate term.
The Fed has never reduced such a massive balance sheet before, so I’ll follow the charts, not my assumptions about ranges holding! Rates could just as easily keep moving up steadily.
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). All three market caps are moving higher.
Gold Signal ON (GLD is below the “Trigger line” which is negative for gold, not stocks). Gold is on support at the moment. It must hold.
Rate Signal ON (10 Year Yield above the “Trigger Line,” good for stocks, not bonds). There is more room for rates to rise.
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