A Market Timing Report based on the 1-05-2018 Close, published Sunday, January 7th, 2018
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: We are at a brand new high with economic data coming in about as strong as previously. You can review it HERE. The last bit of data on Friday was ISM services, which was 55.9 for December with consensus at 57.6.
My biggest concern for Q1 is about what tech companies are going to say. On the one hand, with the new depreciation rules allowing immediate depreciation of capital investments, tech should be helped in addition to the cash they will repatriate and disperse to shareholders. How much they give to their employees is another thing. We know that the earnings comparisons for Q1 2018 are going to be tough vs. last year, but we don’t know if the market will decide to discount tech stocks as they lay that out in their Q4 2017 earnings reports. Growth is still expected to be strong, but not as strong on a comparative basis going into Q1 2018.
As I discuss below, sentiment alone says the market will move higher before giving up all of what is gained from here and then some. But sentiment is not everything. We still need to use market timing to raise or lower our exposure and keep a close eye on the Federal Reserve, another wild card, given its more hawkish membership starting in 2018 with the new Fed Chair Jerome Powell and several other voting members. Our third eye will be trained on the economy and the impact of tax policy as it causes the next earnings reports to gyrate about as noted HERE. A number of companies will see big earnings boosts, but others will have to take huge charges against deferred tax losses first. Earnings start with big bank results out Weds. and Friday of the coming week.
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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):
Survey Says! Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +44.2% vs. +32.02% last week. I reported this week on social media about similar high sentiment numbers in the past. That number is truly “off the wall Bullish.” We’ve finally (it’s been a LONG time waiting for this…) come to a point where future gains, meaning gains prior to the next significant correction, will likely be wiped out, if we are to believe history. This does not mean the end of the Bull market, but it means a noticeable bump in it on the horizon.
Here are the extremes prior to this one:
These big sentiment numbers did not mean the immediate end of the up trend of the SP500 Index, but the temporary top occurred shortly thereafter (within several months) and all of the gains were given up and then some. All but the one following the 2010 sentiment top were between 6-8% corrections. The 2011 drawdown was 21.59% which is technically what the mainstream media calls a “Bear Market” as it exceeded 20%. It was really just a big correction in a Bull market.
The Bottom Line: You can probably hold through the coming drawdown, but one never knows how deep the next one will go, so I will be looking for a place to lighten up my excess exposure on the long side as the market climbs higher. I will likely allow for a small loss off the high rather than exiting too early. Then we’ll attempt to buy low. Does it always work? No, because the corrections are sometimes too shallow. Did we profit most recently in a big way by buying low in the big 2015-2016 corrections? Yes.
|AAII.Com Individual Investor Sentiment Poll|
|Thurs. 12 am CT close to poll|
2. U.S. Small Caps Market Timing: Small caps are now running neck and neck with large caps. There is inherently more risk (beta) in small caps, so they should be doing better than large caps. Interest rates have a sizable influence on their performance as the Russell 2000 has a hefty exposure to financials at 17.17% per Morningstar. Still, the small caps are still near all time highs, so the lag in performance is something to watch, most likely not a signal to bail.
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold Market Timing: Gold is now consolidating waiting for a “rate decision,” so to speak. Follow the 10 Year Yield and you’ll like have gold right in the short term. GLD is headed to a market timing test of 128.32 to 131.15, the two prior highs. The steady up trend in December that preceded the current consolidation was encouraging, but recall that a strong economy and higher interest rates work against gold as an investment. Preserve trading profits from here. I continue to own GLD as insurance against fiat currency. I also own it as a hedge against a complete collapse in the cryptocurrency markets based on massive worldwide government intervention. This probably won’t happen, but remember that FDR confiscated 100% of the gold owned by Americans when it suited him.
Bitcoin cannot replace gold completely as a store of value, but on a marketing basis it’s far sexier than the yellow stuff, and more importantly, it will have growing utility. I am holding both. If you followed me recently here and on social media and bought cryptocurrencies, you are “up nicely.” If you have massive or at least very large gains in cryptocurrencies, consider selling your principle plus 100% profit and buy gold and/or real estate with it. Keep no less than half of your original cryptocurrency investment, IF your position size is reasonable. It’s your money as I say, so make your own decision, but I am sharing what a wise investor would do with very large gains.
If you don’t understand what I just said, read about position sizing before you lose large amounts of money. Let’s just say that if you have more than 10% of your assets in cryptocurrencies AND gold (i.e. total > 10%), you are taking risks. Ten percent is double the usual exposure recommended for gold alone. Can you afford to lose all the money invested in cryptocurrencies and still be OK with it? Do you have a plan to exit at a certain point and will you be awake at 3 am to execute the crypto trades required to exit a collapse?
Gold has been a store of value for thousands of years. The Egyptians first smelted gold around 3600 BC. Cryptocurrencies started with Bitcoin in 2009. Diversify your crypto profits.
Gold ETF (click chart to enlarge the chart; GLD):
4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX): Yields rose, so I added part of my financial exposure back (see social media links), but the direction of rates in the short term has not yet been decided. The TNX close was at 2.476% on Friday, which is barely above 2.475% resistance.
The chart interpretation is that the 10 Year Yield moved down to test the prior triangle and then bounced. We are still waiting to see if there will be a breakout, but the financials have moved to start a marginal new breakout over the past 2 trading days (XLF). We’ll likely see a more substantial move next week with earnings coming out for some big banks as mentioned.
U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX,TLT,TBF): (“Rate Triangle” in yellow…)
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 ABOVE 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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