A Market Timing Report based on the 11-09-2018 Close, published Saturday, November 10th, 2018…

I deliver focused comments on market timing once a week.  These are supplemented with daily “Tweets/StockTwits” (see links below).

1.  SP500 Index Market Timing (S&P 500 Index®; SPY, SPX):

I called for a bounce, but at the end of this week, I called for a trounce, which began subtly on Thursday when I sold a chuck of stock exposure.  On Friday, the market started to fall again in earnest.  I’ll get to “how low will it go” after sharing some insights.

The market does not always immediately do what I say it will do as my long time readers know.  This time, I was right on time.  Sometimes I am early.  Sometimes I’m late.  The market loves to make fools of us all, so I assume each call I make is tentative/to be proven, and so should you.  Decide for yourself what actions you will take if any.  IF the thesis is right that the market will continue to correct further, but not drop more than 25% (which is the upper limit of my “Mini Bear Market” definition), and then recover, do you really have to sell?  Not really. But you may preserve more capital if you sell the tops and buy the lows, even if you are off a day or two.

But how can we be completely sure an earnings slowdown with growth slowing globally will not turn into a recession?  For a recovery from this correction and avoidance of what I term a “Big Bear Market” (terms defined HERE), these things must NOT happen…

1. The interest rate on the U.S. 10 Year Treasury (TNX) must not move over 3.248%.  It especially cannot do that quickly, or we’ll see RateShockIII.  Read past posts on the #RateShock principle to catch up (top section of 10-05-18 post).  The big mistake many make is using prior U.S. rate history to make their arguments without considering the global rate context!  That’s just plain dumb.

2. Earnings and revenues cannot continue to deteriorate.  The market must be able to see the reversal of this global slowdown coming to reverse the decline confidently.  The test is to see analyst estimates of both E and Rev improving over time.

3. The President must not be impeached.  That alone won’t create a “Big Bear Market” per my terminology, but could take us to a maximum “Mini Bear” as I call a decline that can go as high as 25%.  Since the GOP controls the Senate, conviction will only happen if the President has done something egregious such as directly collude with the Russian government in a direct way to undermine Clinton in the 2016 election, something we have no hard evidence for to date.  Not reporting a payoff to a porn star could be overlooked by the Senate, like it or not.  Clinton paid off Paula Jones to keep her quiet about the sex she had with him. Was that a failure to report a campaign contribution, because it made him more electable? That’s not what the Senate decided.  They acquitted him after his House impeachment.

Most of the charges by Mueller relate to tax issues and lying to the FBI etc.  on the part of Trump associates.

The catch would be obstruction of justice.  Nixon was kicked out on the basis of obstruction of justice, NOT his participation in the Watergate break-in.  However, there would have to be hard evidence against Trump for the Senate to give him the boot.

I’ve written before on the impact of the Clinton impeachment HERE.  The drawdown would likely be similar if Trump is impeached, but not convicted.

4. The China Trade War must not be continued.  It must be ended or the trajectory altered prior to 25% tariffs being imposed in January.  Companies are already complaining about cost increases due to the tariffs, and this does not help the Fed keep interest rates low.  Trump has chastised the Fed for raising rates, while he contributes to inflation by: 1. Tax cuts that are inflationary and raise the cost of debt by raising the national debt level and 2. Imposition of tariffs that impact company manufacturing input costs, some of which are passed on to consumers.

The Fed has a Congressional mandate to contain inflation as well as seek maximum employment.  The latter goal has been accomplished in their view, so the whole game is controlling inflation now.  That is the Fed’s ONLY job for now.  And Trump is making that job much harder. 

Trump is slated to meet with China’s Xi at the Nov. 30-Dec. 1 2018 G20 meeting in Argentina.  If a deal is made then, it could goose the market once again. Trump was able to directly manipulate the market upward with his comments just before the election, although Larry Kudlow, the Director of the National Economic Council, tamped down expectations shortly after Trump tweeted.

5. Oil must not spike higher than 75ish, a prior high.  Since oil is now in a Bear market, that is not a problem we face currently.  Trump is allowing Iran to “cheat” by selling to certain countries. What the point of a “non-embargo embargo” is, is not clear.  Oil below a certain price carries with it some financial danger, as oil companies go belly up when they can no longer service their debts.  The oil price needs to be “just right.”  I would say below $40/barrel, the caution lights start flashing.  Oil has been in a decline since the high of October 3rd.  The SP500 re-topped (just below the all time high) on October 3rd as well. Coincidence?  Remember that growth slowing means less oil demand, so my answer is “I highly doubt it!”

Getting back to the deterioration of earnings for U.S. companies…

Below is an update of last week’s analysis comparing the FactSet published analyst projections into Q2 2019 made back in my 7-22-2018 issue which referenced their 7-20-2018 data to the current projections as of Nov. 9th.  This week, I compare them to last week’s data. 

Guess what?  Earnings projections are even LOWER than before from the current Q4 quarter all the way out to Q2 2019 which will be reported starting in July 2019.  They could continue to get worse, if global slowing continues to percolate through the U.S. economy.

Here is the data (latest FactSet PDF  for the Nov. 9 data below will open directly HERE):

7-20-18: Prior Quarter (Q3): For Q3 2018, analysts are projecting earnings growth of 21.6% and revenue growth of 7.5%.
Actual: companies are reporting earnings growth of 25.2% (vs. 24.9% last week) and revenue growth of 9.4% (8.5% last week).
Relative performance: Earnings Growth = 16.7% HIGHER (ALL vs. July predictions).  Rev. Growth = 25.3% higher.

7-20-18: For Q4 2018, analysts are projecting earnings growth of 18.0% and revenue growth of 5.7%.
Now: For Q4 2018, analysts are projecting earnings growth of 15.0% and revenue growth of 6.8%.  11/09/18:  E 14.2%/Rev 6.7%.
Relative performance: Earnings Growth = was 16.7% LOWER, now 21.1% LOWER.  Rev. Growth = was 19.3% higher, now 17.5% higher.

7-20-18: For Q1 2019, analysts are projecting earnings growth of 7.1% and revenue growth of 5.5%.
Now: For Q1 2019, analysts are projecting earnings growth of 6.0% and revenue growth of 6.6%.  11/09/17:  E 5.6%/Rev. 6.6%
Relative performance: Earnings Growth = was 15.5% LOWER, now 21.1% lower.  Rev. Growth = was 20.0% higher, now still 20% lower.

7-20-18: For Q2 2019, analysts are projecting earnings growth of 10.4% and revenue growth of 4.7%.
Now: For Q2 2019, analysts are projecting earnings growth of 6.5% and revenue growth of 5.1%.  11/09.18: E 6.2%/Rev 5.3%.
Relative performance: Earnings Growth = was 37.5% LOWER, now 40.4% lower. Rev. Growth = was 8.5% higher, now 12.8% higher.

As I said last week: “…earnings growth expectations between that 7-20-18 report and the 11-02-18 report have fallen considerably, which means stock prices have to adjust.”  How much stock prices adjust will depend on the factors noted in my above list of 5 trouble spots. 

Last Saturday I wrote: “We are not out of the woods yet.”

I told you two weeks ago: “I am OK with my exposure level being between 75 and 85% roughly as I trade in and out of the bounces and trounces to come.  This is not going to be a straight line.  Manage your exposure level to a point you are comfortable with…”  My current exposure level is noted on social media. 

The exposures I bought last week were working this week.  A REIT I bought as a “Happy Floater” (floating above the falling market) was still going up on Friday with the market down almost 1%.  My utility position is up 3.5% since the buy on 11-02-18.

Realize however that if a market drawdown accelerates, it can easily bring EVERY sector down.  The relative performance may be better in utilities and REITS at certain times, but the absolute return can still be negative.

Selling exposure and raising cash at the market’s lower highs or shorting the market (which most investors won’t ever do) are the only ways to protect/increase capital on an absolute basis during drawdowns like this.

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative.  The stock is now retracing to test the upper line of the down channel it is in.  It is below the October high and more selling on Monday would like define the last bounce up as a failed rally in a downtrend.  It would be significant if Intel could break up and out above the Oct. high instead! (Reminder: INTC is our “tell” on 2nd half earnings in tech as noted HERE.)

Bank of America (BAC) Market Timing Signal: Negative.  I said it would likely fail from the 50 day moving average (mav), and it did not quite get there before turning down.  Breaking UP through the 50 day then 200 day mav’s would be very positive should it happen.

The 2017 channel line is in orange on the chart below…speaking of which, the SP500 Index stopped almost exactly on that line as well as testing barely above the 200 day mav.  These levels are not sacred, but they are watched.  They only have significance when we observe the market’s behavior as they are tested to PROVE their significance, which is why my ability to communicate with you virtually real time on social media is so important.  My first prime target to examine will be that lower yellow line in the chart below.  Ultimately, could the market fall to retest the May low again or even go to the April or Feb. low?  Of course, but the first opportunity for a reversal in my opinion comes at that yellow line.  

Could the market simply bounce UP from here?  Yes, but it would take a tangible important catalyst to do that such as a real resolution of the trade war with China. With the elections over as predicted (plus or minus), there is no election catalyst to be had.  Infrastructure could become a catalyst especially for certain stocks, but it won’t come this year.  Without a catalyst, the market will most likely move to a lower retest as outlined above.

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 33,722 investors are following the markets with me…

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

Failed at a bounce to a lower high.

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of 10.09% vs. +3.45% last week.  The poll closed on the day of the double top in the SP500 Index.  Sentiment is not particularly helpful other than to say that at the lower top, investors were not all that Bullish.  There is plenty of room for downside in sentiment.

2.  U.S. Small Caps Market Timing (IWM):  They led on the way up, but they are also leading on the way down.  Liquidity is an issue for small caps, so when there are too many sellers, small caps stocks go down 10-20% in a day.  Facebook fell 19% in a day based on a big, bad surprise for the market, so this liquidity issue is not entirely restricted to small caps, although it’s generally more of an issue.  You can see that 151.89 target is an easy one to reach from here.  IWM should hit that top red line on Monday in my view.

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

Small caps sold off hard on Friday.

3. Gold Market Timing (GLD):  GLD slipped on the Friday PPI data, which was warm in inflation terms.  Yet gold fell as rates fell, despite that data, which is not a good response.  GLD ended at 0.01 below the 50 day mav and back below 114.87, which was the top of the prior range preceding the now failed breakout.  None of that is constructive, although falling rates should eventually support gold.

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

Gold slipping. Falling rates will help.

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

The interpretation of interest rates is muddied a bit by the fall in the stock market this Friday.  Risk off means Treasuries are bought with cash raised by selling stocks.  Taken by itself, it looks like rates have peaked, but this must now be confirmed by November reports of LOWER inflationary pressures.  It must also be confirmed by a further fall in the 10 Year Yield shown in the chart below.   That hurt’s financials like BAC, by the way.  See my advice on how to play this fall in rates below the chart…

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):

Retested top? Or will there be more inflation scares?

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.

The trend is Bearish particularly because the SP500 Index is falling off a lower double top.  The VIX (which relates to SPX volatility) closed at 17.36 above the low of 17.06 set at the 10-17 intraday market top.  It was below last Friday’s 19.51 close.

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.'” VIX 17.06 is the immediate Bull target. Then the nearby 16.86 etc.

Last week: “The Bears need to take out the 26ish top that was tested once again this week for the market to  go into another leg of  decline.  If they do it soon, it COULD still just last a day or two.”  It lasted a day and then the market bounced.  VIX 28.84 is the Bear target for Armageddon (another big chunk of losses driving SPX down to the May lows or worse).

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

From before: “Remember GLD is being used as an indicator for the ECONOMY here.  The trend is neutral due to the loss of a breakout.

Rate Signal  RED  for a further stock market rally with a BEARISH 10 Year Yield Trend.  The up trend is still broken until the lower high is exceeded (see above).  All heck would break loose for equities if TNX lurches above 3.248%, particularly if the rise is rapid.

For now, this is where you buy long dated Treasuries as close as you can to 3.248% (IEF, TLT, etc.)

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.”

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.

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