A Market Timing Report based on the 12-21-2018 Close, published Sunday, December 23rd, 2018…

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

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

I’ve noted there are many issues being faced by the weak market of late.  Let’s do a quick update of these and then get to the technical damage of the U.S. equity markets that occurred this week…

1. Data on holiday sales.  Bloomberg says that this past Saturday should have been a very strong day as the Christmas season has been thus far with sales on Dec. 22nd to exceed Black Friday sales as detailed HERE.  I am still concerned that this last push may be weaker than it could have been due to the poor stock market behavior of late.  There will be data on this in the coming week.  I’d say overall, retail sales are a plus for the market with that caveat of potential late December weakness.

2.  A Trump Xi Trade U.S. agreement with China within the 90 day period with the clock running since the G20 meeting.  The adminstration seems to have gotten the message from me and hopefully you and many others that they should talk less and work more and deliver a coherent message on their progress.   (Public officials respond to calls, emails, and letters more than the public understands.)

3. U.S. interest rates staying relatively low, but not breaking too low (which hurts financial stocks).  

I said 2 weeks ago: “Rates have moved down off the peak of 3.248% in the 10 Year Treasury Yield since Nov. 8th and now look ready to perhaps find support at the summer lows of around 2.80% and bounce.”  

That 2.80%ish number is now just above the current level of 2.792%.  It would be Bullish in the current technical context for rates to rise somewhat from here rather than fall further.  A further decline in rates would signal a deepening Bear market (it is already a “Mini Bear Market” in SP500 Index terms, thus far, as I’ll get to…)

Last week my Fed Rate Hike Handicapping included this choice:

3. If the Fed hikes 0.25% and does not make clear dovish overtures to the markets, the SP500 Index could move into the Big Red Wave.  The Federal Reserve Chair Powell made the #3 choice and failed to be sufficiently dovish for the U.S. stock market.  He set off a “Mini Bear Market” due to the Federal Reserve posture being the front and center issue for the stock market.  Trump’s shutdown of the government and his rising impeachment risk did not help either (see below). 

I did not position further ahead of the Fed, because no one can predict ignorance on the part of an organization (the Fed), which employs over 400 economists with your and my tax money.  The Fed gets some major credit for pushing the market over the edge this week, but Trump and the GOP get credit for tax cuts which drove inflationary pressures high enough for the Fed to need to start hiking rates.  Trump and the GOP got what they paid for through fiscal irresponsibility. 

4. GDP growth is slowing. Here is the key that Ray Dalio and others have figured out: It’s not the absolute level of GDP growth that matters most to stock prices; it is whether GDP growth is rising or falling that matters.  Hint: the same thing applies to individual stocks, so pay attention to that in your research on specific companies. 

The Fed focuses on GDP levels instead of GDP growth in their work and thought process.  They even say on paper they believe the long term growth potential for the economy is 1.8% Y/Y GDP growth.  They project growth will drop even lower than their prior 2.5% estimate for 2019 to 2.3% from 3.0% in 2018, but they are not adjusting their rate hike path meaningfully, given that degree of slowing.  They did lower their hike expectations from 3 to 2 for 2019 in their supplementary data provided with the FOMC statement, but that is still too aggressive for stock market investors.

I’ll tell you why the Fed looks confused to Jim Cramer and many other critics.  Their mandate is to maintain monetary policy to support full employment at a longer run level of 4.4% unemployment (per this week’s PDF) and low inflation at about 2% for the PCE Inflation Index (they most closely follow Core PCE inflation but don’t provide a “longer term” estimate of what it should be).

That means as long as employment is good and inflation is low, “All is well.”  They have no mandate from Congress to maintain the acceleration of GDP growth at a certain rate.  If they did have a “Three Mandate System,” of full employment, low inflation, and accelerating GDP growth, they would still be forced to fight inflation at a certain point to prevent the Fed from getting too far behind and creating a bigger recession.  That’s what they claim about the risk of uncontrolled inflation to steady long term economic growth.  They can no longer promote acceleration of the year over year (Y/Y) GDP level when they feel their focus must be on inflation to meet their dual employment/inflation mandates.   I’ve told you repeatedly over the past several issues that the Fed is now solely focused on inflation.  Yes, they have a dual mandate, but they can let unemployment rise and still meet their mandate per their definitions. 

Now we need to update the prior percentage drops in GDP that are expected by the Federal Reserve based on their published numbers this week:  The Fed’s own numbers say growth of GDP is supposed to slow substantially into 2019 when GDP will be a mere 2.3% (revised from 2.5%) vs. 3.0% (revised from 3.1%) in 2018 and by 2020 it will drop to 2.0% and then finally to their long run estimate of “longer run” growth of just 1.9% but not before dropping to 1.8% for 2021.  That’s a drop in GDP of  23.3% (revised from 19.4%) for 2019 and a drop of 33.3% (revised from 35.5%) for 2020 vs. 2018.  For 2021, the fall vs. 2018 GDP is 40%.  

Strategically, we have to remember this from last week: “This “global growth slowing” period is a slow multi-quarter event, but we can monitor the economic data and analyst projections to decide when to add back equity exposure from our current lower level. ”  However, until things change, I won’t change my stance, which is to sell more exposure higher to be sure my exposure level remains lower than usual (read my comments from last week HERE about how to think about adjusting your exposure under “What You Could Consider Doing”)

5. Oil staying low but not breaking to major new lows that would shut down drilling operations.  WTI Oil fell below 50 this week to about 45/barrel, which can begin to shut down operations in the U.S. and increase unemployment.   Not helpful.  Lower oil cost is a benefit to the overall economy, but there are banking financial risks involved too.  Low is great.  Too low, not so great!

6. Stability among tech stocks would help.  Not happening.  There was a bad break there below the Feb. lows for XLK (Tech sector of SPX) and QQQ, -21.6% and -21.3% respectively.  Those breaches just happened on Friday.  The NASDAQ broke the Feb. low a day earlier and is -22.1% from its all time high (ATH).

7. Impeachment and possible Senate trial risk for President Trump.  Read last week’s update please.  Bottom line?  If Mueller has a lot of new information on Trump that raises his Senate Trial conviction risk, the stock market could move down another “chunk” to reach the Clinton level of drawdown as discussed previously HERE.  From this level, ejection of Trump from office could result in this “Mini Bear” market becoming a “Big Bear Market.” 

8. U.S. Government Shutdown on Dec. 21: I reviewed this last week (see link just above).  Bottom line?  Shutdowns don’t matter unless they are protracted.  And yet, it’s a problem the market really does not need so contact your Rep and two Senators using the links I provided last week and let them know they are not helping.   

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

“Intel-igent Market Timing Signal” (Intel; INTC):  More Negative.  Fell this week into the prior down channel after a failed recovery.  Down about 22% from its ATH.

Only a rise above 50.60 would change the current picture of a down trend since the June high. (Reminder: INTC was/is our “tell” on 2nd half earnings in tech as noted HERE.)

Bank of America (BAC) Market Timing Signal:  Last week I said “Not Negative – Even More Horrendous than Negative.  It fell to brand new recent lows this week.  Financials broke the October low.”  The stock is now down over 29% from its ATH.  Points to a Bear market for stocks.  

What, No Santa?

I pointed out this week, December crashes through major support are virtually unheard of.  There is really only one that is even close and this December is worse.  An issue to consider for a Year 2000 analogy is that valuations were off the wall high back then and are not as bad now.  The thing to realize is that estimates can come down further and further as economic slowing snowballs around the world.  For now, a recession is not predicted with high confidence by any reasonable estimates I’ve seen, so I’m still in the “Mini Bear Market” (a.k.a. “Cyclical Bear” Market) camp.   I call them “Mini Bears” because the economy does not slide into a recession, and stocks recover much faster, evening reaching new all time highs.  The economic and market trauma from a Mini Bear is much less than in a Big Bear Market; hence, it’s really “Mini” in proportion, even though the maximum decline of around 25% does not feel very good at all.  How you feel does not matter.  How you respond matters.

A great example of a Mini Bear Market was that of the Clinton Impeachment period.  Another would be the 2011 Mini Bear Market.  Those declines were over 20% but there was no recession in either case. 

From last week: “December 2000: In December there was a swoon below major support and the year ended “on the edge.”  There was a bounce but the year did not end above support and 2001 was even worse after a short rally as I described HERE in my StockTwits Market Timing Room.  Remember that 2001 was a continuation of a massive Bear market for the SP500, but even more so for tech stocks that went down 78% from the highs.”

Will this be the first time since 1970 (which was as far back as I looked) that the market crashes through obvious support and just keeps falling?

The odds said no, but Friday was the 3rd close below major support for all remaining holdouts.  The SP500 Index fits that as does XLK (Tech) and QQQ (heavy on Big Tech).  The SP500 Index entered a “Mini Bear Market” in loss terms on Thursday and broke lower by another 2.06% on Friday.

What’s my new “Big Red Wave” target?  I posted it as an update to the prior post with that title HERE.   Please read that update…  It is critical.

We will get a rally, but when?  Tax loss selling could continue the cascade into the 28th, the last trading day of the year.  Read my comments in the room regularly.  I won’t repeat everything here and there are some useful comments I think, because the room allows me to expand on my thinking to a point of greater clarity. That’s the goal.  Let me know how much you like the room by leaving comments in the room if you have not.  Thanks. The room link is just below here…

WARNING: There will be fake bounces.  I called out one within 2 minutes of the fake bounce top on Friday after the market reacted positively to Fed Gov. Williams saying about the same thing Powell said.  A bunch of blowhards (to put it nicely) got on TV, and said Williams was saying something different.  He did not.  Don’t fall for these fakes!  Selling the bounce was the thing to do and certainly the right thing was NOT buying it!

Another fake bounce this week would be a government shutdown reversal.  Whatever magnitude bounce that yields, which cannot happen until Dec. 27th will be a SELLING opportunity in my view.  As said above and last week, shutdown reversals are NOT a Bullish catalyst. 

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 33,802 investors are following the markets with me…

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

Big Red Wave continues.

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -22.44% from -27.97% the prior week.  The fact the percentage of Bulls increased into the Weds. poll closing after the market tanked was completely the wrong way to think and a contrary indicator!  The spread is going to have to hit 30 or so unless the market bottoms and rockets before we can see the shift in investor sentiment.  The polls don’t always capture what has happened as they are done once a week.  Investors are still trying too hard to “believe” in the market.

2.  U.S. Small Caps Market Timing (IWM): Covered this for weeks and warned to sell high volatility stocks, which includes IWM.  They are in a cascading crash.

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

Cascading crash.

 3. Gold Market Timing (GLD):  A trading add on pullbacks.  Because I believe rates may move up with the dollar in the near term, gold could pull back until that rate bounce is over.  If stocks move up, rates will too.  If stocks keep sliding straight down, rates will keep falling.  Follow the dance if you are trading GLD.

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

Gold in an up trend for now. Buy pullbacks.

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

Rates are UP slightly after Powell and I believe that could continue for at least a bounce.  But that will depend on stocks as just mentioned in the GLD section.   T*N*X 2.808% is the key level to watch for a reversal back UP.  (the *’s are there so bots cannot read my targets)

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):

Time for a little bounce?

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. (signal here is based on small caps)

The VIX (which relates to SPX volatility) closed at 30.11 which is off the wall high for a close!  Volatility took off to the upside on Monday and kept climbing on Thurs. and Fri.  It closed at 21.23 the prior week.  The VIX must reclaim 28.84 now and keep falling.  It could simply explode to 50 in the next move, so be careful.  I said last week “rising above 23.81, which would embolden the Bears in a big way.”  It did. 

Further V*IX Bull Targets: 25.94, 23.81, 20.34, 18.18 to 18.10, 17.24, 16.86, and 15.95 to create a new recent low.   The ‘Bull Nirvana Target’ is our V*IX # of the Year: 13.31.”

Six 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.”

I also said previously for weeks: “As before, VIX 28.84 is the Bear target for Armageddon (another big chunk of losses driving SPX down significantly lower).  Just moving above 26 could do it however.”  Yup, it did.

Gold Signal RED for a further U.S. stock market rally with a BULLISH Gold Trend.  It rose back above the prior consolidation band.  See GLD section above.

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 despite the potential now for a bit of a bounce. I said last week, “Watch the oil price too.  Higher oil tends to mean higher rates.”  Oil collapsed to new lows this week.

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.'”  The period of rising rates in early October was #RateShockII as I called it. 

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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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