A Market Timing Report based on the 11-23-2018 Close, published Saturday, November 24th, 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):
No, not a political “Red Wave” as they call it, a red wave of selling…
Last week I said: “So far, that technical level of the Oct. 11th low seems to be working, more or less. For the tech heavy QQQ, it’s working “less well”… For small caps, it’s close… “For midcap IJH it is working… For large cap SPY it is also working…”
Well, “sort of working” did not cut it, and the Oct. 11th low stopped working as soon as buyers failed to show up. Levels are not promises, and the behavior the market is what must be examined when any level is being tested.
“Round and round it goes, and where it stops nobody knows” is the truth. Although we are able to see ahead of time when the market is not discounting “growth slowing” in the U.S., as the FactSet data showed us in early August, that does not give us any certainty as to the final lows in the market.
All predictions are subject to failure, although they work best for the very short term (sometimes just for an hour if the market is very volatile; sometimes a few days or weeks when it’s less volatile) or the very long term (markets go up over time, because they throw the losers out of the indexes).
Because the market is highly volatile now, predictive windows are getting narrower. Things are moving fast!
This week buyers did not show up, and sellers did show up, so down the market went.
As I said on social media, there was in fact a small bounce from the reverse head and shoulders level, but it was pathetic. This tells you something about how weak the market is. Rotations back and forth between risk on and risk off accelerated this week. I bought XLP on 11-20 expecting a bounce along with the market, and they went down on 11-21 instead. It was because of a “Risk On” mini-rotation in the market that lasted for a day! Then on Friday, when the market was weak, XLP outperformed. This is the sort of pace we now see…
What’s the worst case scenario for the next move? We will not “expect the worst,” but we’ll “be aware of the worst.” The most Bearish view would be to say that the November rally is notable for a gap up on 10-30 and a gap down on 11-20. This creates a sizable island reversal, which marks a top. If the November high is the last top, where is the next bottom? We’ll again look at the worst case first.
In Fibonacci terms, the next move measured from the top of a double two wave ending 11-07-18, would be 372.79 SP500 Index points lower. That’s the “Big Red Wave” as I call it. Wave 3. It would bring the SP500 Index to an initial drawdown of 16.95% from the all time high on 9-21-18 to 2442.36. These things are not precise, but that is the Fibonacci view of a breach of the Oct. 29th low of 2603.54.
UPDATE 12-21-18 (11:14 am): Big Red Wave Count Alternative:
There is an alternative wave count that says Wave 1 did not end Oct. 11th as in the prior count, but at 10-29. The Big Red Wave, the Wave 3 of the pattern then runs from the Nov. 7th high to 1.618 X the length of Wave 1 which was 337.37 SP500 points long (from the all time high on 9-21-18 to the Oct. 29th low. That means the Wave 3 target is 2269.29 at a minimum, or another 7% lower from the 2442.36 level noted above.
The total loss off the top becomes 22.84% which is still within my subjective boundary of a 25% loss in a Mini Bear Market. Remember, that would be the minimum length of a perfect Wave 3 down wave in a five wave pattern.
What could avert such a big move?
1. Data indicating stronger than expected holiday sales would help.
2. A Trump Xi agreement with China to avoid 25% tariffs, or better yet, an even more comprehensive agreement at the G20 on Nov. 30-Dec. 1, would help.
3. Part A: U.S. interest rates staying relatively low, but not breaking too low (which hurts financial stocks) would help. Part B: The Fed could turn to being marginally move dovish at least in their December 19th statement and/or in the “dog and pony show” at 2:30 pm ET that day.
4. Oil staying low but not breaking to major new lows that would shut down drilling operations would help. The shutdowns the Saudis likely deliberately forced by “over-pumping” during the prior massive drawdown in oil is unhealthy for U.S. production stability, not to mention the associated jobs. Oil is a big cost to the economy, so the current lower oil prices (despite the higher natural gas prices) should help both corporations and consumers.
5. Stability among tech stocks would help. That does not have to be Apple. It probably does have to include Amazon, however, given it’s share of internet sales, and its share of the Consumer Discretionary sector (20.16%). Apple has previously fallen in a Bullish overall market, but when many major tech companies are falling, given their share of the SP500 Index and their growth centered nature, it’s hard to impossible for the overall market to rally.
So if you see weak holiday sales, a Trump Xi stalemate, interest rates falling steadily and a stubbornly Bearish Federal Reserve, as oil collapses further with Tech stocks selling off, it may be time to take off even more stock exposure. To date, the SP500 Index has fallen 10.5%, but one worst case scenario is 17% as noted above.
The Technical Catch?
The February low could hold this move down. This has been a commonly discussed target, even by me, but I suspect there could be a significant overshoot if the SP500 Index reaches the Feb. low rapidly. That would take volatility (VIX) well over the most recent lower highs.
Could you still simply hold your exposure through that and wait for recovery? I’ve brought this up before. Yes, you could, as right now even the negative brokerage firms are not predicting a recession. But what if it turns into a recession? Then we are talking about far greater drawdowns as I define HERE.
The risk of being too aggressive in selling exposure is:
- There is no evidence that the U.S. is headed into a recession at the present time.
- You have to be willing to buy your exposure back and catching the bottom and loading up at precisely the final low is a difficult task.
- The February low could hold this move and it’s “only” another 3.79% below the Fri. close.
- Investor Sentiment says we could sustain another drop 4.8% below the current level (see sentiment section below on why), but that we could be approaching an important low.
Those stated losses shrink quickly when the market bounces. For the reasons stated, I’m personally positioned “in between” as I detailed HERE. (My current exposure levels are shared on social media – see links below.)
If the Oct. low does not hold, I may reduce my exposure to as low as 60% of my usual maximum equity exposure for a Bull market worldwide. I may do that in stages rather than all at once.
Remember positive catalysts such as those I’ve described can create a sizable bounce that I will most likely be selling into. We have to see when we get there. You can review the “Bounce Levels” HERE (scroll down to see the list when you get there).
Now let’s check in on two “Canary Signals” we’ve been following:
“Intel-igent Market Timing Signal” (Intel; INTC): Negative. Intel has fallen back into the downward channel, which is negative. SMH, the semiconductor index is hovering just above the Oct. low.
Could Intel still rally? “Yes, maybe” is the best it is showing. It closed at 46.54, barely below 46.60, a prior minor low, which is negative, but still lies above its 50 day moving average (mav), which by itself is not a great assurance, but it’s better than being below it. A fall below the 50 day mav on Monday would confirm the descent back into the downward channel and the breach of 46.60.
(Reminder: INTC was/is our “tell” on 2nd half earnings in tech as noted HERE. We are now well into the 4th quarter.)
Bank of America (BAC) Market Timing Signal: Negative. BAC failed a reversal above 27.63, which is negative. Interest rates have been falling since 11-09 with the exception of just a single day on Weds. 11-21. They must bounce a bit or BAC could cut through the Oct. low, above which it now hovers.
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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 -21.89% vs. -0.87%. Say this market decline vaguely resembles the 2015/2016 declines. This would be the 2016 part of that decline.
The current negative level of sentiment was last seen between 1-06-16 and 1-13-16, a long time ago in market terms. I picked the middle of that date range for comparison purposes. From a comparison to the sentiment table back then we could have another 4.79% SP500 Index drop from here to drive the investor sentiment spread to about -27% to -30%ish. Sentiment has finally accelerated to “worse” finally, and has one more jump to get to a potential tradeable low.
|AAII.Com Individual Investor Sentiment Poll|
|Thurs. 12 am CT close to poll|
2. U.S. Small Caps Market Timing (IWM): The small caps are hovering just above the October low. See last week’s comment for more…
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold Market Timing (GLD): Last week I said: “Rates are falling and gold is perking back up.” If rates rise to a lower high as I am suspecting they will (not a guarantee esp. if oil collapses further), gold 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):
Last week I said: “Rates are falling but have a chance to bounce soon from the Oct. low due to “Risk On” positioning in the stock market, if this equity bounce continues.” There was only a pathetic stock market bounce, which created no more than a consolidation in stocks, so rates kept falling.
Stocks “need” a mild rate bounce, which would be a “safety off,” move. We already know that a hard bounce due to inflation fears creates #RateShock as I call it as well as a higher dollar which hurts U.S. multinational profits. A rising dollar with a rising stock market works. A rising dollar with a falling stock market does not.
Rates can rise when the economy is improving. They rise with the dollar AND the stock market. The Fed is hiking rates into a slowing economy. Really, well…not smart. 😉
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):
Now let’s review three key market timing signals together….
And just below, I have a “Bonus Chart” this week…
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 Signal here is based on the small caps, and I’m sure you can divine their trend is also Bearish!)
Despite the possibility of a bounce, more healing (economic and technical) must occur before the market can shift in a big way back to Bullish, other than engaging in bounces, some pathetic. The VIX (which relates to SPX volatility) closed far too high for the Bulls at 21.52 vs. 18.14 last week. The VIX is triangulating as shown here and it would be advisable to follow the signal out of this triangle if you are trading. The down trend line is at the Nov. 15th VIX high (22.97) right now (trend line changes daily of course):
VIX Targets: The first step for the Bears is to retake 22.97, the high and failed breakout level. 20.11 is the next Bull target. Then from prior issues: “The Bulls must first get through (drop below) 17.24 and then retake the 8-15 high of 16.86. The next step would be taking back 16.09 to create a new recent daily low. The ‘Bull Nirvana Target’ is our VIX # of the Year: 13.31.”
The Bears got to 23.81 in this last upswing in volatility. Two weeks ago I said: “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.” As before, VIX 28.84 is the Bear target for Armageddon (another big chunk of losses driving SPX down to the May lows or far lower).
Gold Signal NEUTRAL for a further U.S. stock market rally with a NEUTRAL Gold Trend. Follow rates as noted above. On the positive side, there is now a higher low and a higher high, but on the negative side, GLD is consolidating below the prior high. It needs to rally very soon to avoid a fall back into the prior trading range.
From before: “Remember GLD is being used as an indicator for the ECONOMY here.”
Rate Signal RED for a further stock market rally with a BEARISH 10 Year Yield Trend.
As said: “All heck would break loose for equities if TNX lurches above 3.248%, particularly if the rise is rapid. You buy long dated Treasuries as close as you can to 3.248% (IEF, TLT, etc.).” Still true: At this point, I will likely wait for a bounce in rates. In fact I sold 2/3 of my IEF exposure this past week.
I previously warned about the Fed tightening process: “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.”
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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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