Market Timing Brief™ for the 10-19-2018 Close: My Favored Scenario and the Risks. Small Caps May Underperform. Gold Just a Tease or for Real? Rate Top In?

A Market Timing Report based on the 10-19-2018 Close, published Saturday, October 20th, 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):

Two weeks ago I said there could be “About a 6% fall for the SP500 Index to test the 200 day moving average.”  Guess where we are trading?  The Friday close was 2767.78 with the 200 day moving average at 2768.24, so we’re just 0.46 points below that moving average (mav).

I teach people how to become more conscious in all areas of life.  It turns out, when you do it for investing, you are doing it for every other area of your life, which will allow you to act less like a monkey swinging from the branch of attachment, which means over-exuberance  in investing terms to the branch of aversion or fear and selling stocks at lows.  Contact me if you are tired of being a monkey emotionally via the contact tab above.  Let’s talk about your path to a conscious life including investing, and if it’s a fit, I’ll work with you…

How does this apply to the market?  The market represents the sum total consciousness of all participating investors.  It is useful to think about the market as a single individual to understand him.  Yes, it’s a boy.  😉  Women are generally more advanced spiritually (a fact) and therefore more mature than he is.  Investors have been falsely calling him “Mr. Market,” but he’s really more like “Master Market.”  Master Market is like a 5 year old and just like the monkey described, swings from attachment to aversion and back again.  Simply put, the market is like an emotional child.

What is Master Market (hereafter MM) thinking these days?  MM got really, really excited about stocks back in January, which as I warned here in mid-January, had driven individual investor sentiment to the sky.  You can even see it in the chart.  The SP500 Index was going up in parabolic fashion, which always leads to crashes back to reality in virtually every market.  The only justified parabolas in investing are those based on buyouts.  Otherwise they are bets for suckers.

What has MM been thinking since the February 9th intraday low?  MM believes the 200 day mav is a useful guide for him, along with the lower orange line representing the lower up trend line of the 2017 channel.   Once he got more comfortable with the up trend, he began using the 2017 up channel (orange lines on the chart below) as a guide for the high end and the 50 day mav as a rough guide for the low end (touching it twice on the way up), and then ignored even the 50 day mav and shot above the 2017 channel.  That was when we could have known things had gone too far.

There were a couple of pullbacks off the upper channel line and then it was ignored on several thrusts to the upside as everyone rushed to buy tech stocks like Square (SQ) again and again and again.  That does not make Square a bad company, just one that was overvalued, because MM was getting overly excited as if the trend could only end at the price of infinity. 

Now that MM is back at the same 200 day mav and the same lower 2017 channel line, using it for support for the FOURTH time now, already with two tests of it just in the past 7 trading days, a good question to ask is…

“WILL THE 2017 CHANNEL and 200 DAY MAV HOLD AGAIN THIS TIME?”

“It could” is the initial answer. 

What favors them holding?

  1. They held before.
  2. The market was very oversold at the low on 10-11-18.
  3. Earnings are coming in strongly, even a bit better than expected.
  4. Earnings projections are not as strong as they were last quarter, but they are decent.

What favors the market breaking at all?

If “it” holds, what will hold is NOT the 200 day in my view, or even the slightly lower 2017 channel line, but the low set intraday on 10-11.  Because the market is no longer as oversold as it was then, it can easily do a full retracement of the gains back to the 10-11 low.  That’s what it did earlier in the year.  That is a loss of 2.07% from here.  Not that big of a deal, IF it holds as a temporary low.  We could even call such an event something like “the 200 day mav roughly holding.”

What favors it breaking (at least in time) in a significant way? 

1. The current earnings season could allow the market to hold up for another quarter, but after that, reality kicks in.  I’ve documented in detail back in early August (remember to read carefully!) how much revenues and earnings are due to slide, not so much in Q4 2018, but in a bigger way in Q1 and Q2 of 2019 and for 2019 as a whole.  Factset has just updated the data HERE for the current quarter’s earnings, but read my explanation of how markets track deceleration of E by dropping stock Prices (lower E, means lower P): HERE (it’s in the top SP500 Index section).

This means that a rally from this level won’t prevent the market from ultimately testing a lower low. The 3 horizontal red lines in the chart below are all possible targets.  My sense is the February low will be a magnet for the market if one of the higher levels is reached. 

That means, if the market breaks the recent low, expect the Feb. low to be reached at a minimum. 

2. Investor sentiment (AAII as shown below) did not reach any sort of wash out level.  In fact, as I said last week, investors were complacent on 10-10-18, after a very big down day of 3.29%.  I believe with the deceleration of revenue and earnings coming in 2019 especially (GDP falling obviously), investor sentiment will eventually hit a reasonable washout level.

This meager low in sentiment does not preclude a bounce from this level.  In fact, even back after the huge fall in February, AAII sentiment was not washed out, and a bounce occurred driving sentiment straight back to sanguine levels which marked the top of a FAILED BOUNCE. Then down the market went…

What COULD favor a significant break lower from this level?

1. A surprise run by oil much higher, with an associated spike in rates to a new high.  Inflation and oil spikes move together despite what the Fed may say. 

2. A rate spike of the 10 Year Treasury Yield above 3.248% (without the oil spike) for ANY REASON would induce a further leg down in the SP500 Index and in midcaps and small caps as well of course.  The reason for this is I believe Master Market, MM, has decided interest rates have stopped going up for now, even though he doesn’t know it yet!  Yes, it must be proven by a fall back through 3.115% as I explained last week.  If rates misbehave by moving still higher, it will be taken badly by MM.  He’ll throw another tantrum being the unruly 5 yr old emotional child he is!  😉

3.  A bad break in the small and mid caps to new lows leading the SP500 Index down.  There is already some risk there. Look at where small caps (IWM) closed on Friday.  This was the second “MUST” I outlined last week HERE.  Last week’s issue was one of the most important issues I’ve ever written, so please read it if you haven’t.  It will prepare you for the coming continuing market swings…

What to Do?

If you’ve been ignoring me since early August and instead have been chasing tech stocks to the stratospheres, read last week’s issue (link just above) and learn something.  My situation may be very different from yours, so I cannot possibly tell you what to do.  With my exposure level now, the market can do whatever the heck it wants, and I’ll be fine.  Can you say that?  I’m not bragging.  I’m saying you NEEDED to have a plan.  You didn’t?  Then get one now.  WRITE IT DOWN or it’s NOT a plan.  It’s never too late to “get it right.”  I work at eliminating my own errors in investing every single day.  I suggest you do the same.

Keep improving by tracking your results, noting your victories and admitting your errors, and fixing the latter with improved processes you apply with discipline.

This is a pivot point, which means if the market rises, you may want to sell into bounces.  They can go farther than you think, so sell in stages and sell MORE on a break from a lower high that is of note (follow me on social media to spot the better times to buy/sell).

My Favored Scenario

As a pivot, the market could now go straight down from here.  That’s NOT the “Favored Scenario” which in my view is now…

1. FIRST a Bounce to suck investors back in, lasting even to Christmas and

2. THEN a Trounce to take it all back again. 

But if the market does break down directly from here, I’ll be selling even more exposure to an even lower 65-70% of “usual maximum exposure for a Bull market” as I say.  Adjust that to your circumstances if you like.  Remember the risk of lost opportunity by SELLING low and having to chase higher, so be willing to re-buy your exposure if the market does not do what YOU thought it would do.  Yes, YOU.  You, as I say every week in some fashion, are responsible for YOUR results, not me.  I cannot be, as I don’t know your circumstances or your risk tolerance.  If you cannot sleep at night, guess what?  YOUR EXPOSURE IS TOO HIGH!  😉

AGAIN: DO NOT SELL exposure you are not willing to buy it back if your SELL is wrong! 

And SELL exposure when your BUY is wrong by the way!

What am I going to do?  I’ll share that on social media as I do it.  Do me a favor by the way.  If you follow me on StockTwits, follow me on Twitter as well (link is above).  Thanks for doing that!  I appreciate my loyal readers, their retweets, comments, and interaction.  You and I both get better when we exchange ideas and views. 

Now let’s check in on two “Canary Signals” we’ve been following:

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative. It closed at 44.00 at a new recent closing low,  though barely below the September low.  The stock has to bounce above the 200 day mav to be back in recovery mode in rough terms.   (Reminder: INTC is our “tell” on 2nd half earnings in tech as noted HERE.)  Earnings are out Thursday after the close.

Bank of America (BAC) Market Timing Signal: Negative but now seeking support at the July low, so it’s not a sell in my view, unless it breaks again.  Their earnings were out Monday the 15th and the stock is up slightly from then.  Be careful if the stock rises to the 50 day mav and fails – it could be the time to sell again.

Note on the chart below that the 2017 channel line (in orange) served as closer support most recently, not the 200 day mav (white line on the chart).

Keep up-to-date during the week at Twitter and StockTwits (links below)…

Follow Me on Twitter®  Follow Me on StockTwits®.

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

sp500-index-spx-market-timing-chart-2018-10-19-close

Bounce then back down?

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -1.11% vs. -4.84% last week.  I explained what this lack of Bearishness may mean above…

AAII.Com Individual Investor Sentiment Poll
Bulls Neutrals Bears
33.94% 31.05% 35.02%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM): I believe the scenario I’ve outlined raises the risk for small (highest risk) and mid (medium risk) caps in particular.  If they behave as they did in the bounce between the 2015 and 2016 lows, they won’t bounce as much as the SP500 Index, and could fall much further in the second big wave down.

For tax and other reasons, I’m still holding midcaps long term, but I’m out of small caps for now with the exception of very small positions in speculative stocks (mainly biotechs).  Mid caps may also underperform large caps however if we see a bounce/trounce scenario to new lows.  When growth slows, small caps and to a lesser extent mid caps do not perform as well.  (And large cap growth suffers too!)  These are normally the faster growing companies in good times.

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

iwm-russell-2000-market-timing-chart-2018-10-19-close

Will small caps bounce as much as large?

3. Gold Market Timing (GLD):  Gold is perking up despite the dollar retesting the prior October high and rates moving UP, not down.  This is Bullish for gold, but we’re going to trade this one, not consider it a long term position (our gold insurance IS a long term position remember – see last week’s post HERE. Scroll down to the Gold section).

I left this trading view from last week: “If you buy here, you should consider using the lower red line, the 111.06 level, as your stop, or more aggressively and perhaps better, you could stop out below the 114.87 level (upper red line it [was] testing) to protect your capital.”  GLD is now above that test level in consolidation. 

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

gld-gold-etf-market-timing-chart-2018-10-19-close

Gold consolidates despite rates rising with the dollar. Positive.

4. Interest Rate Market Timing – U.S. 10 Year Treasury Note Yield (TNX):

Rates are edging up along the critical trend line, so there is no top in rates yet!  Remember that as you position yourself.  If you expect the 10 Year Yield and other U.S. rates to break lower as I do, you can buy earlier, but get out if there is an upside surprise.  The yield could certainly retest the prior high, even if it does not exceed that level and then falls.  Read last week’s post for rates in “Section 4” for more detail.

Check out the “Market Signal Summary” below – after you review the following chart…

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

tnx-10-year-treasury-note-market-timing-chart-2018-10-19-close

Rate top NOT certain yet. Edging up along trend line.

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 MARKET SIGNAL AND TREND SUMMARY for a Further U.S. Stock Market Rally with Real GDP Growth (“real” means above inflation):

Stock Signal RED for a further U.S. stock market rally with a BEARISH SP500 Index trend.

Two weeks ago week I said: “The small caps broke down badly, so the SP500 Index could follow them down (as I said, about 6% from the high to start).  The small caps are a better indicator of the health of the economy, as they are most vulnerable to economic changes, and hence, are the basis for this signal.”

Last week I said (still applies): “One could argue about the SPX trend.  If it stays above the lower orange line shown, it is still in the 2017 upward channel; however, it clearly has broken the prior up trend, so let’s call it Bearish with a caveat.  In other words, one could say the prior trend was unrealistic, and this one is realistic.

The VIX (which relates to SPX volatility) closed at 19.89 on Friday vs. 21.31 the previous week.  Above 19.55, the VIX level is BEARISH for the SP500 Index, but rising to the 26ish level and then falling could be Bullish short term.  The Bulls must retake the 8-15 high of 16.86 (break down below it). The “Bull Nirvana Target” is our VIX # of the Year: 13.31.  As I said 2 wks ago, “Super Bull Nirvana would be VIX below 11.22, but I have the feeling it will take a while to get back there.” 

The Bears need to take out the 26ish top that was tested this week for the market to  go into another big decline.  If they do it soon, it COULD still just last a day or two.

Gold Signal  YELLOW for a further U.S. stock market rally with a BULLISH Gold Trend. 

Remember GLD is being used as an indicator for the ECONOMY here.  I am calling it a BULLISH trend, because of both 1) the breakout above the recent trading range and 2) the stability in the face of rising dollar and rates.  It must hold above that upper red line discussed above however.

Rate Signal  BEARISH  for a further stock market rally with a BULLISH 10 Year Yield Trend.  Until the trend breaks down again, the current rate level can be seen as Bearish, in my opinion.  It is too high for current conditions, and yes, the Fed is likely wrong about their plans to raise rates as many times as they say they intend to through 2019.  I have my opinion, but I don’t blame them for the market’s condition.  Slowing growth can explain it all.  Raising rates is simply revealing how sick market dependence is on accommodation.

I’m leaving this important statement here until things change: “This level of the 10 Year Treasury Yield, which is too high for current conditions as explained HERE, will eventually slow the economy.”

I’ll keep this here as a reminder from prior issues: The market seems to have adjusted to rates of up to 3% or so as said in the signal summary HERE” but NOT above there.  Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018.”  That’s what I call “Rate Shock.”  This period of rising rates is #RateShockII.”

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. 

A BEARISH trend signal does not mean we should not buy.  A BULLISH trend 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 trend 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.

Thank you for reading.  Would you please leave your comments below where it says “Leave a Reply”… or ask a question…  Pay it forward too by sending the link to MarketTiming.Blog (that link will immediately connect them to this webpage) to a relative or friend.  Thanks for doing that.

Be sure to visit the website for more general investing knowledge at:

Sun and Storm Investing™

Standard Disclaimer: It’s your money and your decision as to how to invest it.

I thank Worden Brothers for the charting system I use to post these charts.  If you want to know more about the charting system I use every day, go to my “Other Resources” page here:  Other Resources   It makes it much easier to follow along with me if you can see the charts and manipulate them on your own computer.  It’s a great investment to have an excellent charting system.  Check it out with a free trial at the link above.

Finally: Please excuse and report all typos if you are so moved.  I do my best to pick up most of them, but have not always found them all.  Shoot me a comment (I don’t have to post your typo report as I filter them before publication, but I’ll be grateful to you!)

Copyright © 2018 By Wall Street Sun and Storm Report, LLC All rights reserved.

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