A Market Timing Report based on the 11-30-2018 Close, published Saturday, December 1st, 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):

We need to check up on whether we can “Avoid the Big Red Wave…”

Last week I discussed what could avert a further big fall in the market and those comments are in quotes and in blue…

1. “Data indicating stronger than expected holiday sales would help.”  Sales were strong for the entire Black Friday weekend and Cyber Monday.  The other proof is stocks like Macy’s (M), Kohls (KSS), Walmart (WMT), and Amazon (AMZN) stocks were all up for the week.

As far as a decent shopping season goes, so far we have a “check.”   The consumer is in a good position because of 1) lower unemployment and 2) the tax cuts, so this will likely continue.

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.”  This one is pending a Saturday night meeting between Trump and Xi at dinner.  Trump sewed confusion, whether intentionally or not, by saying he was both close to an agreement and that he might not want one, because he likes the tariff revenues coming in from China.  He said both in one day! 

I will write a brief note on social media (links below) when we know more, but there’s no clear check mark for trade with China until Saturday night’s dinner.  Then we can gauge the market reaction from Sunday night futures.

I also have updated remarks about the rise in the market on Monday December 3rd HERE.  It is my private “Market Timing Room.”  You likely will have to join StockTwits to access these remarks, but you do not have to post any comments if you prefer not to.

3. Part A: U.S. interest rates staying relatively low, but not breaking too low (which hurts financial stocks) would help.  The 10 year Treasury yield moved lower after comments in a speech by Powell at the New York Economic Club on Wednesday, when he said:

“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth. My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent.”

Let’s digest that.  He said Fed rates are “just below the broad range of estimates of the level that would be neutral for the economy.”

That gives him tremendous latitude to hike or not hike, so unless he firms up on his bias toward “not hiking,” we won’t know until he and other members of the FOMC Committee decide.  In early October, per CNBC Powell said of the Fed, “We’re a long way from neutral at this point, probably.”

So which is it?  I believe he was throwing the market a bone, because in the end he does not know if the Fed will hike in early 2019 or not.  If he had not fallen back from the “long way” rhetoric, he risked fueling a further downturn in stocks, which does not make consumers who own stocks feel wealthy.  People who feel they have become poorer often don’t feel as happy about big expenditures.  Powell knows retail depends on a Merry Christmas selling season.

But Powell also said he and “many private sector economists” are expecting “solid growth” in the U.S. economy in 2019.  Solid?  I’ve covered this is prior posts, but the Fed’s own numbers say growth of GDP is supposed to slow substantially into 2019 when GDP will be a mere 2.5% vs. 3.1% this year and by 2020 it will drop to 2.0% and then finally to their long run estimate of “longer run” growth of just 1.8% by 2021.  That’s a drop in GDP of 19.4% for 2019 and a drop of 35.5% for 2020 vs. 2018! 

Powell and the Fed don’t believe the U.S. economy is supposed to be growing above 1.8% in the long run.  Maybe it’s realistic and true, or maybe it is not, but one thing is for sure – GROWTH IS NOT GOING TO BE SOLID for the next few years! 

There’s a disequilibrium between Trump’s view of “solid growth” of GDP, which is 3-4% and Powell’s view of it, which is 1.8%.  This means Trump may attempt to further stimulate the economy by various means, including an infrastructure bill he passes with Democrat help.  The Fed will then be put in a position of having to slow growth to avoid inflation due to a further fall in unemployment with corresponding wage hikes.  The Federal Reserve is responsible to its Congressional mandate of maximum employment with inflation of roughly 2% per year.  It cannot simply give Trump and his collaborators a pass.

Trump and the GOP passed their tax cuts and the Fed has kept raising rates through this period, which tends to work against Trump’s vision of higher growth.  That’s why he’s “not happy” with his choice of Jay Powell as Federal Reserve Chair!

Bottom line?  Rates have moved down off the peak of 3.248% in the 10 Year Treasury Yield since Nov. 8th, so that’s a “check.”

Part B: “The Fed could turn to being marginally move dovish…” I stated Powell did not do this, not really.  If you call NOT repeating “we are a long way from a neutral rate” dovish, then it was dovish. 

I think Powell is letting the market think what it wants.  He will hike and hike again as the data requires him to or not.  All he did was give up on defending a set interest rate as “neutral.”  He reiterated that they are on no “preset course,” and we may or may not be close to the neutral rate, but he really has no clue!  This idea that he truly said anything new is nonsense in my view. 

The market’s misconception is that Powell shifted to more dovish, so we’ll give that a skeptical “check.”  The proof is in the “NOT hiking” come January and March.  If the economy continues to slow in the U.S., they won’t be able to hike. They will be led by the economy and the Treasury market.

4. Oil staying low but not breaking to major new lows that would shut down drilling operations would help.  We saw MBS of Saudi Arabia high fiving Putin, so you can guess the oil cartel will figure out how to prop up oil prices.  It runs both their countries and now has a big impact on U.S. employment, so Trump is involved.  There could be both indirect and direct pressure on the Saudis to keep oil prices low, but not too low.  Trump seemed to be celebrating the oil crash as good for the economy, but it won’t be good if banks blow up, and our U.S. sourced supply becomes less economical as a result and is shut down with associated job losses.

Oil is now languishing just above $50, so there is no guarantee other than the happy oil pumpers at the G20 to reassure us that “they’ve got this.”  So no check for oil.

5. Stability among tech stocks would help.  Tech stocks rose this week, and even Apple’s stock did, though not as nicely as the QQQ for example.  Although the tech heavy QQQ was above its 10-11-18 low, XLK closed at 67.94 below the 10-11 low at 68.07.  If you see a rise above there Monday, it would be more convincing that tech was fully joining this rally.  Otherwise this is the end of a sizable bounce.

“Check” with an expectation of follow through Monday or else!

So what’s the Report Card on the 5 points above? 

3 of 5 are checks with one of those a skeptical check and another a “to-be-proven” check, so not great, but possibly passable for a further leg of this bounce.  You can review the possible “Bounce Levels” HERE (scroll down and you’ll see the list).  No one can tell you how high the market can bounce.  If they’re sure, they’re lying.  

We can only assess the way the market behaves at any given market level and decide whether the market is stretched to the upside or stretched to the downside.  That process itself is not foolproof as we’ve seen markets that were very overbought just keep rising and those that were very oversold just keep falling. 

During overly Bullish run ups in stocks and indexes, we sometimes just have to hang on and let the market rise, or set tighter stops to protect profits on such a meteoric rise.  During a cascading fall by a stock or the market, we may sometimes buy at a lower levels and hold paper losses for a while, and at other times, raise more cash by taking profits during the first part of the fall, or limiting losses by quickly selling new buys that fall into the red, and then waiting for the air to clear.

I have lowered my exposure a bit going into this weekend, which may prove unsuccessful if Trump gooses the market again with a quasi win on China trade.  My exposure level can be accessed at the social media links below…

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Negative. Intel bounced from the 50 day moving averages (mav), which is positive, but has to get over the 200 day mav to convince me the trend has changed.  It will have to scale the highs from late August to November to get there.  For now, this is a robust bounce in an ongoing correction (it’s a Bear market for specific stocks, but not for the S&P 500 or even the worst performers, the small caps).  (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.  Financials including BAC rose with the S&P 500 Index this week, but stopped barely above the 50 day mav.  They did so as interest rates (10 Yr Yield) FELL.  That’s not how it’s supposed to work.  Banks depend on higher rates to improve their numbers, so the rise to just above the 50 day mav has to be assumed to be a bounce in an ongoing correction.

This is a classic pattern for an ongoing correction (potentially turning into a Mini Bear market as defined HERE (scroll to “New Rules”).  The market rises to or slightly above the 50 day mav and then falls again.  Investors are sucked into thinking “it’s over now,” and down the market goes.  If you hold such a stock, you could stay with it long enough to see if it moves up or down from a key pivot like this and act accordingly. 

Look at where the SP500 sits now in the chart below.  You can see it’s above that yellow down trend line, but just below the 200 day and 50 day mav’s.  It is farther below the orange line that represents the lower 2017 up channel line.  If this correction is not over, the market must fail at one of these spots.  Remember the last failure was from an all time high, so the market could rise even as far as the January high (or less likely to the all time Sept. high) and fail.

The reason I expect the correction is not yet over is because the economic picture is not one of rising earnings and revenue growth.  I’ve said since early August that growth is NOT enough.  You must have accelerating growth to send stocks up appreciably.  Until that is at least predicted by analysts, there won’t be a basis for bidding stocks back to the all time highs.

That is, unless the economy is goosed there by external forces as was the case with the Trump tax cuts.  The cuts created a 17% increase in the deficit over the prior year.  That is NOT “paying for itself,” which is the B.S. promise of what I call “Tinkle Down Economics.”  But President Trump did goose the economy and that goosed the stock market while creating even more national debt, something he campaigned against!  Ever since Reagan, both parties have spent money we don’t have year after year with no exceptions (Google “The Invention of Fiscal Lying” to find the post. Even with Bill Clinton’s “surplus,” they used Social Security to pretend there was a surplus.) 

President Trump is running out of tricks now other than infrastructure, and furthermore,  the GOP may oppose it when they consider the deficit they’ve created through their fiscal irresponsibility.

Where is the most obvious place for the stock market to turn down?  Right at or slightly above the 50 day mav just as with Bank of America.  Notice how it did exactly that once before in November…

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 33,738 investors are following the markets with me…

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

No Big Bear Market ahead or a Fake-out Bounce?

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -5.59% vs. -21.89% the prior week.  We never got to a wash out level of sentiment, and there is room for more upside at this point as well as downside.  Sentiment is not that helpful when we’re in the middle like this.

2.  U.S. Small Caps Market Timing (IWM):  The small caps bounced just above that red line shown in the chart, which is the 10-11 low.  That’s a positive, but I would have preferred to see a higher high than that of 11-29 (152.74).  The 50 day mav is nearby, just above…. The comments above on where markets commonly fail apply here too!  The 50 day mav or here for that matter would be a great place for IWM to fail.

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

Close above my trigger point of the 10-11 low, but not by much.

 3. Gold Market Timing (GLD):  Gold has hesitated to rally this week despite rates falling again after Powell’s comments.  That’s a negative.

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

Hesitating to rally.

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

Rates moved down further after Powell’s comments.  If they continue to fall as the stock market rises, beware!  That’s not how it is supposed to work in a recovery.  It means the recovery is false.  It means the stock bounce will be limited. 

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):

Powell’s speech sent rates lower.

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!)

The VIX (which relates to SPX volatility) closed at 18.07, which was progress from the close last week at 21.52.  But that is still a high VIX.  The VIX cut below the bottom of the triangle shown in the chart last week, but it would have to drop below the 11-02 low of 18.05 to take the next Bullish step down, meaning Bullish for stocks (specifically the SP500 Index).

VIX Targets: The first step for the Bears is to retake the up trend line shown last week.  For the Bulls from prior issues are these additional targets: “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.”

Three 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.  Lower rates this week SHOULD have pushed gold up, so the gold market may be anticipating a rise in oil and a rise in rates soon.  As said, it needs to rally 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.  The trend is still down.  It fell again after the Powell comments.  A China agreement could set off a risk on scenario where rates move up again for a bit.  Oil rising could do the same as said.

As for much higher rates and their possible impact, I said previously:  “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% on the 10 Year Yield TNX (IEF, TLT, etc.).” 

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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