A Market Timing Report based on the 3-29-2018 Close, published Sunday, April 1st, 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: Let’s first go through the technical progress of the market over the past 5 days: There has been NONE despite some investors feeling relief on Thursday – it’s simply moving in whipsaw mode – so far. The only thing important is that which has NOT happened.
The market did not:
1. Break below the 200 day moving average.
2. Fall below the lower yellow up trend line.
3. Fall below the Feb. low.
The S&P500 Index simply bobbed up and down and the last bob was UP, so the next one, as I said HERE, could be down.
What’s still Bearish?
- Tech earnings growth acceleration may have peaked in Q1 with allowances already being made for the Trump tax cuts. Tech earnings are still expected to grow, but the rate of change of growth could fall.
- SP500 needs to climb back above the March 2nd low. If you try to buy exactly at the March 2nd low on the way up, the market could fake you out and fall after rising above it by a bit. If you wait for a close and the market has already retraced almost 50% back to the lower highs on the chart, then the gain you may have could be equal to the loss, which is a lousy Reward: Risk Ratio, which generally you want to be 2:1 or better. You may have to buy with a close stop in mind and sell when momentum runs out on the upside.
- CPI is supposed to resume its rise for a couple of quarters after this one, which could cause rates to rise, fears of the Federal Reserve hiking to rise, and the stock market to sell off again.
But the big Bullish factor per some and a growing narrative in mainstream media is much stronger earnings expectations with a record number of upward revisions during the quarter (when normally, the estimates FALL during a given quarter). This is all detailed HERE (PDF pops up; provided by FactSet.com), and you really should at least read the top section to get a feel for the possibility of a Bullish Earnings Surprise.
Per FactSet: “The forward 12-month P/E ratio for the S&P 500 is 16.1. This P/E ratio is equal to the 5-year average (16.1), but
above the 10-year average (14.3).” The market is not overvalued by these measures.
Valuation is not the issue. A deceleration of earnings will be the issue followed at some point by a GDP recession. As I said last week, the latter is not in the cards in the next year or two unless global slowing gets quickly worse. FactSet in the same PDF points out the SP500 is 69% US based, 31% ex-US in revenue exposure, but Tech for example has the greatest global exposure of any sector (40% US/60% Ex-US) to:
1. A possibly rising U.S. dollar as U.S. growth continues, while the rest of the world slows. U.S. rates would remain higher drawing more interest in the dollar and U.S. dollar denominated investments.
2. Ex-U.S. global GDP slowing.
This makes me less interested in being overexposed to tech going forward until the rest of the world picks up. This is also why small and midcap stocks could outperform large cap multinational companies in the SP500 Index. The exposure of those indexes is not dramatically lower than the SP500, but it is lower (see link below).
SP500 Large Cap Index (click chart to enlarge; SPX, SPY):
See what my exposure is at the social media links just below…
Keep up-to-date during the week at Twitter and StockTwits (links below), where a combined 33,400+ people are joining in…
Survey Says! Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -3.39% vs. +4.74% last week. Still not enough Bears to help define a bottom. That does not mean the market cannot bounce, but it could eventually find a lower low or at least visit the Feb. low. Bottom line: sentiment is not that useful, except to say “We have no great Sentiment Low yet.”
|AAII.Com Individual Investor Sentiment Poll|
|Thurs. 12 am CT close to poll|
2. U.S. Small Caps Market Timing: Small caps are down about 5.08% from their 1-23 high close and large caps are down about 8.18% from their 1-26 high close. Normally, all things being equal, small caps sell off harder than large. The dollar does not seem to explain it all, which means tariffs could be more of the issue, as they hurt the multinationals, while sparing companies with U.S. based revenues. This Data Set is not the best, because it does not tease out “the Americas” revenue, but it shows small caps do have less ex-U.S. exposure than large caps have.
Small caps did fall more at the Feb. low than large, but during this current decline they are holding up better. Because of the higher volatility of late, I am still not likely to add back small caps now, but I could not argue with doing it on a limited (using a short leash) basis. As far as valuation goes, here are the data for large, mid and small caps per Thompson Reuters I/B/E/S HERE.
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold Market Timing: Gold is trading off the dollar more than it is interest rates at the present time as shown in the chart. Follow the dollar and you’ll likely have gold’s direction in the near term at least.
Gold ETF (click chart to enlarge the chart; GLD):
4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX): Rates are headed in the wrong direction if you were expecting rising inflation due to a continued U.S. economic recovery. This also hurts financials. I discussed my targets for lows in this decline last week (see links to upper right). Trading this is tricky because CPI is still supposed to resume its rise over the next two quarters at least. If it does, rates could obviously perk up again and head toward the last high, even to 3% or higher. If the rest of the world is in fact slowing and that continues, U.S. rates may end up being lower than we would otherwise expect.
U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX,TLT,TBF):
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 GDP Growth and Low Inflation:
Stock Signal YELLOW with a Neutral SP500 Index trend. The market will have to break further to change the signal. Others are reporting “trend breaks.” I do not agree, but I will admit to the possibility of a full 3rd wave down (covered last week), which would define a Bear Trend for me.
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 with a Neutral Gold Trend
The failure to make a new high makes the trend “Neutral” for me rather than Bullish. To Repeat: Remember GLD is being used as an indicator for the ECONOMY here. A new recent LOW in GLD will turn the signal GREEN.
Rate Signal YELLOW with a Neutral 10 Year Yield Trend.
For now, this is a pullback in rates, not a trend change. To Repeat from last week: “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.
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