A Market Timing Report based on the 4-27-2018 Close, published Sunday, April 29th, 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 (S&P 500 Index®): I told you last week that despite great earnings for the SP500 Index in general, the market was not able to hold a close above a key number (revealed HERE). This week the close was again just below the key numbers for the SP500 and SPY despite blowout earnings by many companies including Facebook, Amazon, Microsoft, and Intel.
Intel is the case study of the week as it shot up in a big way in the afterhours session after their earnings release to 57.75, but then closed down 0.60% at 52.73, a discount off the top of 7.5%. It was also a failed breakout. This happened because the company’s CFO said that Intel expected another strong quarter of growth for Q2 2018, but was not as certain about growth going into the latter part of the year.
The reason for this slowing for Intel in the 2nd half is likely that growth is slowing in Europe, China, and Japan on an incremental basis, and U.S. growth may be about to slow in turn after the rest of the world slows. For China and the U.S. at least, growth may slow, but is not likely to turn to recession in the near future. The Fed does not see that for the U.S. out to 2020. It sees slowing growth, but not recession.
As for US GDP released this week, it showed a steady climb over the past numerous quarters to a Year over Year rate of growth of 2.9%. Take a look at the chart HERE.
Below is the data for the headline GDP number, which fluctuates more wildly, released by the U.S. B.E.A. Growth has re-accelerated while Trump has been in office. Remember businesses were the biggest winners in the Tax Bill. You can see GDP for this past quarter more than doubled that seen in 2017’s first quarter:
Can the SP500 Index return at least a modest amount this year without another wild period of volatility? Volatility (VIX) must break down further, but it’s headed in the right direction for a Bullish outcome – down. Growth will be slower into the last half of the year, but still will be positive. Earnings will keep growing for that reason, but at a lower rate with tougher comparisons vs. the prior year. This will cause some stocks to fall to recognize slower rates of growth.
Make sure the individual stocks you own are not shaky in their earnings outlook this year and set stops on your profits in them rather than do what I call “Ride the pony back down the hill.” If you have huge profits, why give them all back?
The chart? It’s really looking better with gradually higher lows being made off the Feb. low. We are back to the middle of the channel formed in 2017, and climbing…a bit. The close was not terribly strong as it was below my breakout number, which is shown at the green arrow. The up trend must take out that number and continue with volatility falling in turn.
I have been sharing the key volatility numbers with my followers on social media (links below). Don’t disregard them when you are considering entering the market or exiting. They have been useful guides in this higher volatility period we’ve been in.
When volatility is very high, you need to be more careful than ever about where you buy and sell. And you need to have stops on any new buys in case you are wrong. (Always keep them to yourself, rather than put them in the market unless you need to step away. Realize they can be triggered by swoons (computer driven flash crashes), so never put a protective stop far below the market! It’s one of the dumbest things an investor can do.)
SP500 Large Cap Index (click chart to enlarge; SPX, SPY):
SP500 Index Triangulating (SPY): You can see the same thing on the chart above, but I pointed this out on 4-25 for SPY. Follow the direction of the move! This is an old version of the chart. We are now at 266.56, right smack in the middle of this market timing triangle…
See what my exposure is at the social media links just below… I raised it this past week.
Keep up-to-date during the week at Twitter and StockTwits (links below), where a combined 33,461 people are joining in…
Survey Says! Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +11.36% vs. +8.56% a week ago. This level of sentiment is not that helpful, as it is not at an extreme. Individual investors are still more Bullish than are the advisor group. The advisor group led the market up, and we have to wonder whether they will lead it down, but for now, individual investors are taking down some exposure (outflows from stock funds/ETFs recently), but are not expressing extremes of optimism or pessimism.
I warned you HERE in January about extreme optimism among individual investors and the fallout came to pass just as predicted. We are not at such a tradeable extreme at the moment.
|AAII.Com Individual Investor Sentiment Poll|
|Thurs. 12 am CT close to poll|
2. U.S. Small Caps Market Timing: Small caps have been leading for a while, possibly related to the stronger U.S. dollar, as mentioned last week. You can see the same sort of triangle forming here as for the large caps. Follow the resolution of the triangle. The rising 200 day moving average is a reasonable approximation for the lower part of the triangle formed by the prior major lows. The yellow line shown is the top of the triangle.
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold Market Timing: Inflation is still set to rise for the next two quarters, which means higher rates, which means a rising dollar at this point as the rest of the world experiences slower GDP growth with falling bond yields. Dollar up, gold down continues. My trading advice has preserved your profits if you listened.
For the immediate term, rates are pulling back a bit, which will weaken the dollar and strengthen gold. It may be the time or about time to add back to trading gold positions, but watch that market timing low. It MUST hold. I personally would not add gold until inflation slows again in 1-2 quarters – if it does. I would also not fight the U.S. dollar trend until it rolls over more definitively. If the U.S. dollar trend resumes in the upward direction, GLD will fall…
The Gold ETF (click chart to enlarge the chart; GLD):
4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX): If inflation is still heading up as mentioned, rates should NOT break down below the 2nd green line from the top. A market timing break below there would be one confirmation that U.S. GDP deceleration is in the cards for 2018, which would cause the Federal Reserve to turn dovish.
U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX,TLT,TBF):
In the last issue I reviewed “How to Beat This Market” HERE.
Now let’s review three key 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. Last week I said: “The S*P*Y must reclaim 266.77 (S*P*X 2674.78), which it could do Monday to turn back to neutral.” I am going to shift from that view to recognize that being mid-channel and mid-triangle is about as neutral as you can get. I would see the reversal UP through that level as Bullish if it sticks. A quick test above means nothing.
Gold Signal YELLOW with a Neutral Gold Trend. Now the advice is “Buy the low” if we get back there for more aggressive traders, OR preferably buy when you see the dollar falling for the 2nd or 3rd day.
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 GREEN with a Bullish short term 10 Year Yield Trend. Rates fell from the 2014 high of 3.036%, but the TNX is still above the prior breakout level of 2.943%. If it breaks that level, it becomes Neutral Trend.
Remember this too is a signal for a “further stock market rally” as it’s being used here. Remember also “Bullish” for yields is Bearish for bonds and vice versa. There is a twist here though. This level of the 10 Year Treasury Yield, which is too high for current conditions as explained HERE, will eventually slow the economy in my view (not to mention Gundlach’s view).
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.
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