A Market Timing Report based on the 12-29-2017 Close, published Sunday, December 31st, 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 Market Timing: The index is barely off the 2017 high as of the Friday close.  Now that fiscal stimulus is on the way in the form of tax cuts, the largest for corporations, further upside is likely.  The Chicago PMI which includes both manufacturing and service components was at 67.6 as reported this past week, above the 2011 and 2014 highs.  That’s impressive. 

The SPX market timing “Channel Reset” as I’ll call it may have resulted from the Tax Bill.  There is a new up channel above the level of the prior channel (see chart below).  If this goes away, and the price falls into the prior channel, it would be a negative sign for the rally.

Housing prices are rising faster than the rate of inflation, up 6.4% Y/Y per the Case Shiller data.  The Federal Reserve has managed to inflate housing prices that are drawing near 2006-2007 peak levels as shown in this Nov.29th chart.  In that way at least, the Fed has in fact been able to produce inflation.  Stock and bond prices have been inflated as well.  Some say the risk to stock prices is big now.  We are staying invested for now, but protecting profits in more volatile holdings.

We’ve done very well this year in the US market predominately in SPY and QQQ.  A big part of those gains resulted from buying off the 2015-2016 lows and again on 11-01-2016 just before the election (time stamped on social media).  Buying mid caps on dips through 2016 paid off too.  As my followers know, I buy fear not greed. Remember that dip buying only works well in a Bull market (unless you are trading bounces quickly), so one day we’ll need to have a lower exposure level to stocks.

Gains in IJH midcaps were a bit less for 2017 at 16.15% with dividends, but over time they tend to return more.  The immediate post-2016 Election run-up in midcaps and small caps worked against them for total 2017 returns as they were running ahead of the S&P 500, so the perceived underperformance over longer time periods is artificial.

My honing down on some sector picks last year showed mixed results with a missed opportunity by owning XLE and did not significantly beat the market in the others.  This year, let’s look at sectors each quarter one at a time and preserve big profits when appropriate.  The data below shows the difficulty of making any year long predictions.  Energy was down significantly and steadily to the August low, but was up strongly from that low into the end of 2017.  That meant that owning it at the start of the year was “bad” and owning it from August on was “good.”

What the market is doing NOW is far more important than a theoretical prediction based on the facts of one particular moment.  I made up for some of the XLE losses by reinvesting the proceeds in the rising market, but needless to say, it did not help over the year long period.  XLV and IBB were almost identical in total returns vs. the SPY.

My conclusion is that making year long predictions is foolish and potentially misleading to those not willing to trade in and out of positions.  As you see every week on Twitter and StockTwits, I do not “sit there” if the market is moving against me.  When I did, I paid for it, so now I don’t!

Investment in China paid off this year in FXI, which had you entered on Jan. 1 and exited on 12-06-17 would have resulted in a total gain with dividends of 29.75% for that 2017 exit point.  But China has not been straight up, so the gain from my purchases for CNYA (Chinese A Shares w/o dividends) was 18.75% and 15.43% for FXI (H shares w/o dividends).  KWEB helped boost the overall China returns with a total return of 69.73% for 2017.  My remaining KWEB position shows a paper profit of 52% from purchase, with 20% of the total buys sold 10-25-17 for a 22.60% gain after prior buys/sells that were profitable along the way.

Update 1-02-2018: If you have not sold FXI or CNYA yet, you may want to wait a bit to see if the bounce in the New Year sticks.  At the moment, FXI is up a big 2.99% for Monday Jan 2nd.  The consensus view of China is “further slowing,” but we’ve seen how China has wiggled out of slowing growth before – in 2017.  It may happen yet again. 

Given the problems with year long forecasts, there are still areas of the market we may want to be over-exposed to going into 2018.  And some like healthcare and biotech could prove treacherous if Trump decides to negotiate drug prices despite early indications he’s fallen in line with the GOP line.  If you follow me this year, you’ll see my entry and exit points at the social media links below.  Please follow me on both networks (Twitter and StockTwits) as outages occasionally occur.

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Review the SP500 Index chart and then we’ll look at the small caps.

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

Coming off all time high.

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of  +32.02% vs. +24.88% last week.  The last time the sentiment spread was even close to 30% was on 11-23-16 when it was 27.8%.   This was followed by massive 2017 gains as you know.

It was above 30% last on 11-26-14 at 31.4%.  That was near the Nov. highs in the market, which followed a significant decline in October.  Higher highs were made after several Dec. and Jan. downdrafts, but these gains were lost in Aug. 2015 and again on the second low which occurred during January to February 2016.  But this does not prove anything that we can use today as a predictor!  The current level of positive sentiment certainly does not prohibit additional gains from here as long as the economic and earnings data remains positive.

What is the risk of lowering overall market exposure?  The S&P 500 ran up an additional 15.23% to 46.11% at the 1850.84 high after sentiment hit 30.60% on 7-10-2013 on the rally off the June 2012 low.  That represents the gains from the retracement low of 6-04-2012.  This means that by taking gains too aggressively without using other indicators beyond sentiment, we could lose out on major further gains.  As long as the dominant chart trend remains up and the economic trend is still up, we’ll remain long and look for entry points during sell-offs. 

2.  U.S. Small Caps Market Timing: Performance of small and mid caps has been mid double digits, which means relatively weak this year vs. large caps.  If interest rates don’t climb, small caps will experience a drag this year as well; however, IWM is leading vs. the SPX off the August low and this leadership could persist into 2018.

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

Small Caps coming off a top, but still near all time highs. Performance has been relatively weak this year.

3. Gold Market Timing: Gold is showing surprising strength.  Interest rates have been easing off the recent high.  If the Fed continues raising rates at a steady pace, gold will suffer however.  Protect your profits if you trade gold in 2018. We previously had a technical break to the downside of that prior triangle and now we have one to the upside!  Follow rates and you’ll likely get gold right in the absence of big geopolitical upsets.  In doing so, consider rates around the world, not just in the U.S.  Remember US rates should rise if the economy continues to do well, but foreign rates could pressure ours.

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

Gold rallies as rates fall.

4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX): Rates went higher than I thought they would, with the 10 Year Yield hitting a top of 2.499%.  There is room for more downside for interest rates.  The fall since then has pressured financials and helped gold, precisely as my “Playbook” states HERE.

U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX,TLT,TBF): (“Rate Triangle” in yellow…)

10 Year Yield falls from 2.499%.

Now, as usual, we need to review our three market timing signals (below the chart after you review it…)

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”).  Staying long for now.

Gold Signal OFF (GLD is below the “Trigger line” which is positive for gold, and worse for stocks). 

Rate Signal ON (10 Year Yield above the “Trigger Line,” good for stocks, not bonds). 

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