A Market Timing Report based on the 06-15-2018 Close, published Sunday, June 17th, 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®; SPY, SPX): Let’s check in on two signals we’ve been following:
“Intel-igent Signal”: Positive, but consolidating. Last Friday’s close was 55.05, but this week the close was just 55.11. This is still above the 54.36 number we’re following, but not making progress. The move out of this consolidation, up or down, will be a “tell” on the market. Read last week’s blurb on this to understand its importance as a “tell” for the general stock market in the U.S. HERE.
Bank of America signal: Negative. I said last week: “Looks like it is rolling over again at the 50 day moving average.” The February low in BAC was 29.15 and the close Friday was at 29.28. It is in danger of breaking, and if it does, it could be a sign for the overall market to fall. It could be an indication that the markets are expecting another significant decline in interest rates. Gradually higher rates are OK in a strong recovery; “Rate Shock” is not OK, as I explained back in February when many commentators were falsely blaming “inflation fears” for the market’s precipitous fall. You can read about that HERE if you haven’t. Then again, falling rates don’t compute in a strong recovery. They are a sign of deterioration of prospects. We’ll keep an eye on whether BAC can hold the prior recent major lows. If not, a greater decline in interest rates would be expected.
The Federal Reserve this week stayed on track with their planned hike of 0.25%. That is exactly what the market expected. The Fed expects two more hikes this year, one in September and one in December. There is an aggregate 86.6% probability of one or more Sept. hikes and a 55.4% probability of one or more hikes in Dec. per the CME.
Of course, the Federal Reserve remains “data dependent,” meaning that if circumstances intervene that prove there is slowing of the economy, they may forego one or both of these hikes. From my reading of the data, unless there are intervening emerging market blow-ups before September, the hike in September is highly likely. Given the Ex-U.S. global deceleration occurring now, the U.S. may start showing cracks before December, causing the Federal Reserve to back off from the last rate hike.
The SP500 Index is hugging the upper trend line of the 2017 channel. This is not a problem, but it allows for a pullback within the trend without ending it. The trend is still up, so I’m sticking with it for now. If you are over-invested, the top of the current range is where you can “take some off.”
The Federal Reserve dot plots expect slowing of GDP growth from 2.8% this year, to 2.4% in 2019, and to 2.0% in 2020 with a longer run tendency running at 1.8%. If growth is slowing, growth rates of companies will be slowing more or less depending on the nature of the businesses considered, and slower growth will mean lower stock prices, if in fact the market is now valuing stocks at their current earnings and revenue growth rates. If this general slowing hits your companies over the next two years, their stock prices should fall.
This means we must watch for deceleration in revenue and earnings growth of the companies we own! Even the Federal Reserve is indirectly telling investors that stock prices won’t do as well over the next two years as they have in the past due to deceleration in the growth of the overall economy.
If the companies you own remain at the top of the heap despite some slowing, you may want to ride out the fluctuations in their stock prices. If not, you may want to seek out companies with higher growth rates, especially companies that can grow despite the global economic deceleration. One example, could be companies that deal with internet/computer security. Companies are forced to invest in security to meet threats regardless of what the economy is doing.
Biotech companies are other examples of course, as their products are in demand to solve medical problems regardless of the economy’s trajectory. The government has spent billions of dollars on Hepatitis C cures and AIDS treatments, because companies discovered the drugs. AIDS patient treatment did not stop, even during the Great Recession.
Deceleration of growth does not have to mean an immediate recession. Recession by definition means a contraction of GDP over two or more quarters. Decelerating growth can simply bring stock valuations down as company revenues and earnings fail to meet prior growth expectations. The coming earnings reports out in July could lead to such adjustments in expectations for the final two quarters of 2018 and lower prices in a number of stocks.
Keep up-to-date during the week at Twitter and StockTwits (links below), where a combined 33, 527 people are joining in…
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 +23.08% vs. +12.21% vs. the prior week. This is the strongest Bullish spread number since February when the market was in the middle of its first bounce. This is compatible with a continued Bull move, but allows for a dip of a few percent (say 3%) or a period of consolidation. Sentiment alone gives me no reason to “sell some” just yet. I already have some excess cash/short term Treasuries to take advantage of pullbacks. (I share my exposure level on social media at the links above if you are curious. Simply scroll back to the last message which says “Now at X% of usual max. equity exposure worldwide (meaning vs. usual max. for a Bull Market.”)
|AAII.Com Individual Investor Sentiment Poll|
|Thurs. 12 am CT close to poll|
2. U.S. Small Caps Market Timing (IWM): The small cap rise has decelerated, but that’s all at this point – it’s called a consolidation (4 days). There is no reason IWM cannot make higher highs. In general, small caps should not be doing this well and leading the SP500 Index if the belief were the U.S. economy is headed for trouble. The U.S. remains a prime place to invest in the midst of global deceleration, and investors believe small caps have a home stadium advantage as they do most of their business in the U.S. vs. large cap multinationals. It is the relative U.S. advantage that may keep the rally going here as long as the emerging market blow-ups don’t threaten the global financial system.
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold Market Timing (GLD): Gold is in a “heap of trouble.” The chart (second below) looks bad with lower lows being made. Friday’s break was on very high volume, which is a bad sign. But let’s also examine the relationship of the US dollar plotted against the 10 Year Yield (TNX) and GLD.
The first chart below that starts at 4-23-2018 shows this: Since the U.S. dollar broke out of its prior consolidation on 4-23-2018, TNX has been rising and falling, while GLD has made a series of 3 lower lows. Remember gold reacts most strongly to real rates, so this means the market believes real rates are rising in dollar terms, not falling.
The Federal Reserve is raising rates while the rest of the world’s economy outside the U.S. slows. The slowing takes pressure off of input pricing and hence dampens inflation. Higher rates with falling inflation (from the current highs or so) is a recipe for higher real rates and BAD FOR GOLD. That last statement is WORTH GOLD! 😉 Watch your stops. We have no trading positions on when gold is falling. We only use it for “insurance” during those periods.
When the Fed is forced to reverse course (which could take months as described), gold will rise again.
The Gold ETF (click chart to enlarge the chart; GLD): You can see the breach!
4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX): You can play the trading range of rates, but you had better be prepared to act outside the typical monthly newsletter time frame! Inflation could rise a few more months on a Y/Y basis and drive the Fed’s rate hikes into Sept. but global slowing (initially from higher to lower growth rates and then potentially into recession starting outside the U.S.) could cause the Federal Reserve to pause and forego the December rate hike.
As said above, falling rates are NOT what we want to see in a strong recovery. The Fed is already ahead of the global economy as I summarize below in the “Signals.” This does not mean it will impact the U.S. stock market immediately, but it does mean “global slowing” may come home to roost on a time lag. If the Fed ignores this, it will flatten and then invert the yield curve – not a good thing as demonstrated by history. Why invest in corporate debt if you can get “risk free” U.S. Treasuries at relatively high rates over short periods of investment (like 2 years)?
Just to clarify this point even more… The Federal Reserve has ALREADY tightened too much vs. prevailing global economic conditions in reaction to U.S. inflation. That is its “job,” but it does not make it correct in the sense of sustaining the recovery. The Fed in fact, created the inflation by inflating asset prices.
Trump and the GOP have now added to inflation via late fiscal stimulus, regardless of whether we and corporations like the cuts or not. They may have accelerated the arrival of U.S. growth deceleration leading to the next U.S. recession. Why? Because they are forcing the Fed to raise rates in response to inflation induced by their stimulus.
The Fed tightening is already blowing up emerging markets and will compound the global slowing that is already occurring. They could have raised rates much earlier when the global economy was accelerating. Now the world economy will lead them by the nose. If you do not lead, you will be led.
Now the Fed is boxed in! If they don’t raise rates, U.S. markets could become inflated, and inflation will rise across the economy as well. Then the Fed would be forced to raise rates to curtail inflation as that is half of their mandate. The endpoint, if they do nothing, is stagflation, which means GDP stagnation/recession and inflation.
If they do raise rates, that could put them ahead of the rest of the central banks, and they then impact the entire global economy to further slow it. That slowing impacts U.S. companies, particularly multinationals, and stock prices fall. The endpoint if they hike too aggressively is recession and deflation.
In summary, the Fed must act cautiously in its reading of the economy and must not ignore global issues. For now, it has ONE mandate, which is to fight inflation as employment is “low enough” in its view. This mandate could lead us into the next recession as I’ve outlined in the above scenarios and lead to the next major market decline. Be careful about acting too early though as the “over-exuberance” of the last innings can be huge.
First review the rate chart below and then look at the signal updates…
U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX,TLT,TBF):
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 AND TREND SUMMARY for a Further U.S. Stock Market Rally with Real GDP Growth (“real” means above inflation):
Stock Signal GREEN for a further U.S. stock market rally with a Bullish SP500 Index trend. The VIX is back to levels below 13.31; a rise back above that could lead to significant selling. The close was 11.98 for the week and 12.18 the prior Friday.
Gold Signal GREEN for a further U.S. stock market rally with a Bearish Gold Trend.
Remember GLD is being used as an indicator for the ECONOMY here.
Rate Signal YELLOW for a further stock market rally with a NEUTRAL 10 Year Yield Trend. Things have changed due to the recent swoon and then bounce in rates. A more definitive rise above 3.036% would turn the rate trend back to Bullish (bearish for bonds). The close this week was 2.924% and 2.937% the prior Friday. A fall below 2.717% would be required to turn the rate trend back to Bearish.
I have been calling rising rates a “positive” thing for U.S. stock market gains as that is what normally happens in the late stage of recovery, yet the current situation is very abnormal. I am calling rates above my 2.676% number, but below 2.943% YELLOW for a further stock market rally. “Bullish” for yields is Bearish for bonds and vice versa. There is a twist here. This level of the 10 Year Treasury Yield, which is too high for current conditions as explained HERE, will eventually slow the economy. The market will likely be far happier if rates stay within a lower range, while not too low and not too high.
Finally, and this is an update, the market seems OK with rates up to 3% or so for now vs. current U.S. growth. A rise above the prior high of 3.115% could mean trouble for stocks; however, this depends on the economic context. Currently, moving above there could jar the stock market.
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. In other words, the colors tell you whether the signal supports the stock rally or not, while the Bullish, Neutral, and Bearish designations are about the trend.
NOTE: A BEARISH trend signal does not mean we should not buy. A BULLISH signal does not mean 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 if profits should be taken. A NEUTRAL signal does not mean the end of the Bull or Bear. It means to wait and look for possible subsequent 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-2016 election period.
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