A Market Timing Report based on the 3-16-2018 Close, published Sunday, March 18th, 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: The President is still waging an undefined trade war with the rest of the world, and this has unsettled markets. 

This week there is something even more important to the markets and that is the first full Fed meeting accompanied by a televised news conference.  The new Federal Reserve Chair, Powell, must make the stance of the Fed clear to the markets.  A 0.25% hike in the Fed Funds rate is expected.  If he is more hawkish than previously believed, the markets will not like it.  The markets could react badly if he is too dovish too, as that would mean the Fed no longer has confidence in the trajectory of the economy as they previously envisioned it.  Although a negative reaction to increased dovishness is possible, my personal sense is that the markets will like a more dovish stance, as they already see the relative slowing of Europe and China.  The best case is that is is a bit more dovish than before, but not dismally dovish.

As far as the chart goes, there are two Bearish features that must be overcome for the Bulls to re-top this market.  1. A rising wedge, which is Bearish until the market cuts above the top magenta line and 2. The double top, which must be overcome to avoid turning down into a C wave down in an A – B – C wave pattern or even worse, into a 3rd Fibonacci wave or “Wave 3,” which is classically 1.618 (min.) times the Up 2nd wave.  That would mean a drop of 415 points from 2789.15, which would bring the market to 2374.  These numbers must be confirmed by examining the behavior of a market once it reaches them.

What would bring us there?  Perhaps slowing in the rest of the world detracting from U.S. multinational growth.  Furthermore, if the U.S. economy continues to strengthen ahead of the rest of the world, the dollar will strengthen and our goods will be less competitive.  Earnings come down in that situation as foreign money buys less in U.S. dollar terms.

There is also a Bullish view of the chart that says the yellow line marking the last two highs plus the lower magenta line represent an ascending triangle, which is normally seen as Bullish.  The combination of the wedge and double top bring this into question.  Better to follow the trade in the direction of the next swing!

UPDATE 3-21-2018: A further Bullish view that has developed over the past two days is that the current consolidation is at the 50% retracement level of the entire move down in Jan.-Feb., but more importantly, this low matches the 2-21/2-22-18 low (left shoulder), which forms an inverse head and shoulders on the chart, which could drive the market to a new all time high.  The Head is 3-2-2018 and we are now forming the second inverted shoulder.

What’s the best case scenario?  Trump tax cuts are borrowing future purchases into the present (companies can write off investments in one year), so U.S. growth could be stronger than the rest of the world for a while before demand starts falling fast as the impact of tax changes wears off.  But until that time, earnings could remain strong and even surprise analysts.  For this reason, the markets could have further to go, in spite of Fed worries that may arise this week.  Low corporate taxes could spur further growth and extend the economic cycle even further before the next secular slowdown.

When it comes, the next slowdown will be “big,” so we must watch the exits, even if, and as I expect, the markets continue to rise.   Jeremy Grantham was quoted as saying large-cap U.S. stocks will return NEGATIVE 4.6% per year over the next seven years without taking inflation into account.  Not good.  And the next downturn could last far longer than 7 years. No reason to “get out” now, but a reason to be very alert to changes in the economy.

You can check my investment stance in exposure terms at the social media links below…  And now, let’s look at small caps.

Keep up-to-date during the week at Twitter and StockTwits (links below), where a combined 33,400+ people are joining in…

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

Rising wedge and double top are Bearish unless the Bulls can rally above both.

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +15.51 vs -1.98% last week.  Note the high “Neutrals” level, which is predictive of a higher market 6 months out (about 80% odds per AAII).  The spread level itself is not helpful as it’s only mildly to moderately Bullish.

2.  U.S. Small Caps Market Timing:  Since the 2-27 high, IWO is leading IWM and IWN is last, while all three have beaten SPY.  Since the 3-13 high, IWN is beating IWM, which is stronger than IWO, with all three again beating SPY, but only since Friday.  IWO is below its prior high of 198.30 at a Friday close of 198.21, so barely below it.  There is an opportunity to make a new all time high if the Fed comments are taken well.  If not, down we go.  Achieving a new high close before the Fed meeting ends on Weds. would be impressive. 

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

Small Caps off their prior high, but small cap growth is barely below the prior high.

3. Gold Market Timing: Rates down, dollar down, gold up.  Same old dance.  If the Fed reaction is rising rates this Weds., gold will fall below support.

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

Waiting for the Fed now.

4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX):  I stick by this: Rates must move down from here for stocks and gold to continue upward.  CPI turned out to be flat Y/Y in this week’s report, so rates simply hovered near the prior 3% cap.  Any move above 3% would be taken badly by the markets in the near term.  Over the longer term, rates will move back above 3% due to Trump’s inflationary tax and tariff policies.

Avoiding a Big Third Wave Down:

So what must happen for the SP500 Index to move still higher rather than rolling over, resulting in another DOWN wave?   Same list as last week.  Read it HERE (near bottom in section #4).  Add to that list “The Fed must be neutral to incrementally more dovish.”

U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX,TLT,TBF):

Rates above 3% will choke the stock market.

 Now let’s review the three market timing signals together…. 

Do not use these signals as a trading plan.  They are rough guidelines.  I currently share my own moves on social media (links above).

MY SIGNAL SUMMARY for a Further U.S. Stock Market Rally with Low Inflation:

Stock Signal YELLOW with SP500 Index Neutral

Turned yellow from Green as it’s based on small caps that must make a new high to become Bullish again.  Follow IWO as a more sensitive indicator this week.

Note: I’ve updated my criteria for the equity signal for a further U.S. stock market rally to the following: GREEN = Bullish, YELLOW = Neutral, RED = Bearish. 

Explanation: Note that a RED signal does not mean we should not buy.  A GREEN signal does you cannot sell some exposure.  It depends on what is going on in the economy and how oversold/overbought the market is at a given point whether the Bearish signal is to be sold, sold on the next bounce, etc. and whether a Bullish signal is to be bought or profits should be taken.  YELLOW does not mean the end of the Bull or Bear. It means look for possible entry points within the existing trend, Bull or Bear, but preserve capital if the entry fails.  Our strong intention is to buy low and sell high.  By the way, I will keep showing the prior orange “Trigger lines” in the charts for now as reference points only; they have historical value for us from the post-election period.

Gold Signal  YELLOW in a Bullish Gold Trend

Remember GLD is being used as an indicator for the ECONOMY here.  A new recent LOW in GLD will turn the signal GREEN.  It’s a bit more complicated over the short term as rates above 3% are currently being taken as a negative by the markets.  Gradually rising rates can be fine for the economy, but not rates that rise too fast as important parts of the world economy slow. 

Rate Signal YELLOW with a Bullish 10 Year Yield Trend.  Remember this too is a signal for a “further stock market rally” as it’s being used here.  Remember “Bullish” for yields is Bearish for bonds and vice versa. 

For the near term move, the bond setup is Bullish due to the wedge break.  Longer term, I expect rates to gradually rise as the recovery matures and the fiscal stimulus either wears off or forces the Fed to raise rates repeatedly due to inflation finally increasing. 

As said last week: “Remember that Goldilocks feelings (growth with relatively low rates) will vaporize if and when we return to a worldwide slowdown with deflationary fears.  Then rates would plunge, causing bonds to make big gains, gold to rally strongly, and stock markets to decline in a big way.  Remember that any rapid reset could hurt gold as well as liquidity is sought. “

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