A Market Timing Report based on the 01-18-2019 Close, published Sunday, January 20th, 2019…

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):

Before I answer in market timing bounce terms where the market is now, let’s review the backdrop.  The market has been rising despite a government shutdown that is now impacting U.S. GDP, a trade war with China that the market now believes will be reasonably resolved in the coming weeks, and a President who this week was accused of obstructing justice followed quickly by a Special Prosecutor Mueller office comment that the reporting on that was faulty.

In the end, President Trump MAY have kept himself clear of the Russia collusion, which Giuliani now admits may have occurred on the part of the Trump campaign but not by Trump himself.   If true, they will have nothing on Trump in the end, other than his public encouragement to Russia to break the law and release illegally obtained Clinton campaign emails.  Of course, that was just a joke.  😉

Importantly, the Buzzfeed report is not getting further support in the media, so we are back to waiting for “Presidential Collusion Proof” to emerge, if ever.  The market could have cared less this week as their reporting was released.  Trump impeachment/conviction risk is not zero, but it’s not meaningful until proven otherwise, and to be about facts, we have to stick to what we know and don’t know, not what anyone suspects.

The market has also been rising despite the fact that the next three quarters along with the Q4 quarter (sub-optimal), will show further economic slowing.  Analysts will likely further cut estimates in the coming months, which would pressure stock prices.

What’s the practical upshot of that?  If you are deploying new cash, don’t spend it all at once.  Buy at various levels, adding a greater amount of exposure to the stock market on more severe pullbacks.

I gave you a re-entry plan on December 30th for those of you who followed my advice to sell the lower highs such as the Dec. 3rd high, and discussed the further damage that could occur to the market on the risk side and the opportunity on the long side if “the bottom [was] already in.” 

I also counseled on Dec. 30th: “On the other hand, I have plenty of cash to deploy if things go from “slow” to worse for the economy.  I will add exposure on pullbacks and will add higher if needed, mostly before I hit my prior selling points.  My prior exits were mostly higher, so there is still room to add back exposure (See my page on “Passive Shorting” if you haven’t).  I coined the term to help investors consider it as a way to navigate pullbacks and increase returns.”

I also said, “If you have remained frozen to this point, I would only “sell some,” on an overextended bounce [like this one], unless we break to a new lower level.  Then you could “sell some” lower [rather than selling the highs], but slowly, because you must be willing to increase exposure on a reversal or you will fall behind the market.  The goal is to beat the market by a few percent or more.  Even a 2% improvement on SP500 Index performance is worth it.”

As of this week, I would probably only sell some only on a close back below the 50 day moving average. One possible stop at which to reduce exposure might be an S*PY price 2.5-3.0% or so lower than the Friday close of 266.46. (Avoid leaving stops in the market unless you have to due to your schedule, because the market maker will sometimes pick them off and then move the market back up!)

Read the post again to see what difference even a 2% outperformance makes in the long term HERE!

There is 10.11% upside from the close on Friday back to the 9-21-2019 intraday high.  The downside risk is a retest of the prior low, which is 12.14% below the Fri. close.  It is also possible that the market could retrace to the Feb. low of 2532.69 or just 5.17% lower.  However, if recession becomes more likely (the risk of an outright recession vs. an earnings recession and slower growth is considered low by most at this point), the market could easily fall between 25-50% from the 9-21 high. This is why we have to keep close tabs on the economic numbers. 

Now no one can give you the answer on whether the market will continue straight up from here or retest the prior Dec. 24th intraday low or move even lower.

An intensive review of the McClellan Oscillator data that measure market breath more recently vs. more remotely shows that we could be in the middle of a bounce, meaning there could be more upside, prior to the next pullback. 

I thought the massive peaks in the oscillator might mark market tops, but that was not the case.  They mark the rough middle of the bounces from the data off the 2014, 2015, and 2016 lows.  This means from this data by itself, we may be “Mid-Bounce”!

The “not so hot” news?  The 2014 bounce led to the 2015 low.  The 2015 bounce led to the 2016 low.  Get the picture?  We may be going up, but we could easily go back down and retest the prior low once or even twice. 

How high?  A revisit to the 200 day moving average (mav) for the SP500 Index is not out of question. Neither is an even higher high, which is still likely to be LOWER than the September 21, 2018 all time high.  Why is that?  Because we are in the middle of an earnings and revenue slowdown for the SP500 index, the likelihood that we’ve already reached the final low for this period of higher volatility is low in my view.  I say don’t count on this move leading to a new all time high!

However, regardless of the market’s direction, you can continue to follow this from that same Dec. 30th issue: “Have a plan for the levels you will add exposure at either higher or lower and be willing to change your plan if and when things change…and they always do change eventually.”

What’s a possible plan to consider if you are Bullish and believe the Q1 through Q3 earnings reports will show an improving trend from here?  Increase your exposure level early in the week (Tues. is the market open due to holiday), and use a fairly tight stop on the new stock investments.  If the market moves down vs. up, you simply stop out of what you added and then seek to add back even lower.  Yes, you could be whipsawed by the market, but risk management does not come for free! 

Any trader will tell you to keep your potential gain 3 times or more greater than your potential loss based on your stop loss.  The target is the 200 day moving average to the upside for SPY, or 2.77% higher.  Above I told you a reasonable stop would be 2.5% to 3.0% lower than the close, so the trade has an even risk up and down – not good!  If SPY goes back to the Dec. 3rd high, that would be a 5.23% gain from here for a ratio of gain/loss of 2.092 at best with the 2.5% stop.  Better but also not great, which would be 3X gain vs. loss.

Adding “Mid-Bounce” could work out, but the set-up given the economic backdrop is poor.  If you think we’re headed back to new highs, add a bit and see what happens realizing there is market risk in making a trade with a mediocre set-up.   If you use not stop, the trade is a very poor set-up in my view.  

In any case… eventually the economy will turn for the better, which is why I say…

Don’t be a Permabull.  Don’t be a Permabear.  Be PermaAware! 

Spread the word on that would you?  It will help the average investor improve by simply not becoming stuck in one mode of thinking.  I’m sure many investors “sold everything” at the recent bottom.  Not a good practice, unless you need the money right away. But often investors don’t need the money right away and still sell everything at the lows.  Selling some at the lows is understandable.  Selling everything at one level is rarely going to be right in a market that is already as OVERSOLD as it was the day before Christmas. 

Things are never as bad or as good as they seem.  When tech earnings were off the wall high in the Q2 earnings reports, investors were giddy, and then we had a huge decline of about 20% in the SP500 Index off the 9-21-2018 top.  Stay “PermaAware” and all will be well with your investing.  You won’t get everything right.  I certainly do not, and even share my errors online, which few writers do.  I know a top newsletter that sends out their wins with the percentage gains and their losers with NO percentage loss.  Call them on it!  Write them an email and promote awareness.

Finally, review your results vs. your benchmark.  If you are about 50% invested in stocks, then find funds or managers that match that and see if they did better or if you beat them.  If they did substantially better and even more so, if they did so over several years, you may want to step back and spend your time more wisely.   Increase the assets you allow them to manage and reduce yours.  If you find the opposite is true, then take assets away from them.

If you stick with an advisor because you:

1. Like them a lot as people.
2. Believe in their process even when it has not worked for 10 years.
3. Have been with them “for so long.”
4. etc. insert any other irrelevant point….

THEN, you are being irrational and hurting your own family, because investment is not about liking your advisor.  It’s just one part of that relationship.  It’s one thing if they have a bad year or two in an otherwise great performance record.  That happened to many top advisors during the Tech Bubble of 2000.  But if they have trailed the market for the past 10 years, meaning their benchmark, then you need to strongly consider taking your money to someone else, whether another institution or a mutual fund with managers who have a top performance record dating back at least 10 years if not 15-20 years.  They have just three years of experience?   Let someone else risk their money with the green ones.

In comparing, please do not compare apples to oranges.  Do not compare a biotech fund or advisor to a U.S. Large Cap Fund advisor for example.  Compare 50-70% equity/30-50% bond invested funds to the same type of funds.

Not looking at 3 month, 6 month, 1 year, 3 year, 5 year, 10 year, and even 15-20 year results is simply dumb!  Look at yours.  Look at theirs.  Be honest and change your current plan as needed.  You can love ’em and leave ’em if the numbers don’t work.

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Stronger.  Now re-topping near the 200 day moving average – still.  Intel is not out of the woods yet!

As said: “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.) ”  The close was 49.19 on Friday the 11th. 

Bank of America (BAC) Market Timing Signal:  I’d call it “Neutral” and ready to pivot up or down!  It was essentially at the top of the down channel it had been in as of earlier this past week, but now after earnings, it has popped just above the 200 day moving average.  Still, I am somewhat impressed, having said,  “A rise above the July low of 27.63 would be impressive…”  So I logically must be impressed….

BUT read my note on rates below, because if interest rates don’t move higher and instead fall as the market was expecting just days ago, BAC and the financial sector ETF XLF will not likely behave well.

Last week: “The next market goal for the Bulls would include a further rally above the October 29th low.”   We got that this week, so the next stop is the 200 day moving average to the upside for the SP500 Index unless a sell-off wave begins early in the week.

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 33,829 investors are following the markets with me…

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SP500 Large Cap Index (click chart to enlarge; SPX, SPY): OBVIOUSLY it was from the 2019 close!

Still bouncing?

Survey Says!  Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -2.72% vs. +9.09% last week vs. -9.75% the week before that.  The market has been up strongly since the Dec. 24th low, and at a top, we’d expect more Bulls to show up.  That says to me, we are not yet at a “toppy” sentiment level.  Sentiment was in the high 20’s during the mid-bounce period off the 2014 SP500 Index low.  We are not even close now.  However, here is the catch.  Sentiment during the October 2015 mid-bounce was in the low single digits.  That bounce was only half done as well.

Bottom line?  The current sentiment level is consistent with a “mid-bounce” view of the market. Again, use a stop just in case!

2.  U.S. Small Caps Market Timing (IWM): I said last week, “A move higher would be impressive, and could embolden the Bulls further.”  That means I have to be impressed, but I would still warn that during periods of economic uncertainty, small cap stocks are NOT where you want to be, unless you are trading them on a short leash.  The December 3rd high followed by the 200 day moving average are the next obvious targets for the small caps.

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

High beta could be trouble despite the big gains off the low.

 3. Gold Market Timing (GLD):  Two weeks ago I said: “A trading add on pullbacks.”  If rates turn down from here (not clear yet), gold should start responding as the U.S. dollar weakens, unless the rest of the world turns south.  Then the USD is a place of refuge and that works against gold prices.

Lower rates could still make gold a “win” as the “real interest rate” is the ultimate driver of gold.  If inflation is set to increase a bit in the U.S. with the Fed easing, gold should be a good hedge to have on.  If the economy were on its way to recovery, we would need to be out of gold trades (I hold a core position of pure profits by buying when no one wanted gold and selling my entire principle as it came off its high), but as I’ve said, I doubt that is the case.  Read at my social media links above to see what I bought.  It’s higher risk, higher reward than is GLD.

Note that the pullback in gold is only to the fairly steep up trend thus far… The trend is still intact in other words.

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

Gold is easing.  Would have preferred another leg up.  Watch rates!

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

Rates are rising again!  Why do I say this?   The down trend was broken to the upside and there is also a slightly higher high in place now.  The immediate target specified last week was 2.717% and we are at 2.784% as of the close on Friday.  A move above 2.808% will add another nail to the “interest rates are falling because the Fed is going dovish” scenario coffin. 

This is a dumb market that makes up nonsense about the Fed as it sees fit and then ignores what interest rates do the following week.  Which narrative are we going with this week people??? 

With RISING rates this week, just after everyone was begging for a more dovish Fed and got it at the margin, the stock market should be selling off, should it not?  The whole idea was that the Fed was going to be lowering rates again, was it not?

You may say, “Well David, this is just a risk on rotation from Treasuries into stocks.”  It could be, but if the Fed is lowering rates supposedly, long rates (10 years and up) would not still be climbing UNLESS the market sees inflation ahead.  This may be a clue then that the Fed being more dovish, while inflation percolates up a bit more, will cause the Fed to have to pivot eventually and hike, or simply be stuck in a stagflationary position between a rock (slower economic growth) and a hard place (rising inflation).  They may chose to ignore higher inflation in favor of higher growth or not!

Look for oil prices to ease, or inflation will in fact start to pick up again. 

By the way, stagflation is great for gold prices!

This play between economic growth slowing and inflation will make it complicated to call the rate IMPACT  “Bullish” vs. “Bearish” in the coming months.  A rapid rise is proven as “bad” for the stock market.  A high value vs. the rest of the world is also “bad” for emerging markets and secondarily for the U.S. market.  Moving lower at a rapid clip could mean risk off and stocks down.  Context is therefore as important as ever and is needed in order to talk about the impact of interest rates.  Range bound rates would likely be handled best by the equity markets.  I’d like to see 2.808% stop the current rally.

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):

Rates are rising despite the begging for a dovish Fed? Huh?

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 NEUTRAL for a further U.S. stock market rally with a NEUTRAL SP500 Index trend. (signal here is based on small caps)  The small caps are now back above the down trend line, while SPX is above the Feb. and Oct. lows, both positive, while still being below the recent down trend line. 

The V*IX (which relates to SPX volatility) closed at 17.80, which is barely below last week’s close at 18.19.  Not impressed there by the Bulls effort!

From prior week and other back issues: Further V*IX Bull Targets: 17.35, then a move below 17.06, 16.09, and 15.94 to create a new recent low.   The ‘Bull Nirvana Target’ is our V*IX # of 2018: 13.31.”

NOTE: 17.98 was a previous target and it’s being tested 1-25-19.  Just below as I type this at 17.82.

The VIX Up Trend Line is at 20.31ish and a rise above there would be the first Bear target.  The 50 day moving average is 21.69 (Friday’s value).

Gold Signal RED for a further U.S. stock market rally with a BULLISH Gold Trend.  A further GLD rally will be subject to interest rates, which will impact the U.S. dollar as explained above.  Note that the pullback in gold is only to the up trend thus far.

From before: “Remember GLD is being used as an indicator for the ECONOMY here.”

Rate Signal  NEUTRAL  for a further stock market rally with a NEUTRAL 10 Year Yield Trend.  I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”  Oil is in fact bouncing with rates, but has reached a level it could pull back from. 

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.  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.”  2.621% was the peak back in 2017 when stocks did best.  Anything below that would be an improvement.

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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