A Market Timing Report based on the 03-22-2019 Close, published Saturday, March 23rd, 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):

To recap quickly, last week I asked:

“Is a new higher high for one day enough to say the Mini Bear is dead?  No.  It takes up to 3 days, as traders know, to confirm a move, but the way machines trade these days, that can mean leaving several percent on the table if you wait.” 

The market closed 5 days above the three lower SP500 Index highs we’ve been tracking here and on Friday swooned back below two of them closing at 2800.71 with the lowest of the three lower highs at 2800.18.   We closed below 2/3 targets.  “So you are saying there’s still hope?”  (“Dumb and Dumber” quote)  Not exactly!  I am expecting a correction began on Friday and I give you my first target below…. It’s more of a suggestion, because as many of you know by now, I judge the market’s behavior at the time it reaches a given level.  It’s a real time process!

I also added last week:

“To me, this is a fledgling Bull Market, but what don’t I like?  For one thing, the NYSE based Advance/Decline % Line (T2100) that I follow on proprietary software, shows a failure to make new highs despite the SP500 Index breaking out above the triple top target levels.  That means the move on Friday could be a head fake…Also, see “small caps” below, another warning sign.”

U.S. small caps have been falling since March 4th after peaking on Feb. 25th! And they dove 3.64% on Friday.  That is a very negative sign for the near term.

“But…but…but….the reaction to the Fed on Thursday looked very positive!”  The market was up another 1.13% to a new recent high, still above the “Big Three Lower Highs” of Oct., Nov., and Dec.   But then…on Friday, the Treasury market decided the Federal Reserve going “all out neutral” as I’ll call it, marginally much more dovish than their rate hiking stance at least, was a dire sign about the state of the economy, so investors sold stock exposure.  The percentage of stocks below their 40 day moving average (mav) per my proprietary software (see link at bottom) shot up by 88.13% on Friday to 36.14%.  To give you perspective, that number was 88.94% on Dec. 4th, the first day of the massive December decline.  

That bit of data alone, plus the weakness of earnings and projections going into earnings season that became progressively worse for the four weeks prior to last week’s post (it slowed down because the earnings season was 96% over by then), means that the stock market could be headed into a significant decline. 

Of course, no one could have told you the market was going to fall by exactly 16.54% from the October 17th high (the highest of the 3 lower highs) and by 20.06% from the 9-21-2018 all time intraday high (ATH).  Then they also could not have told you the market would, at the Friday close, be up 19.12% from the Dec. 24th close after peaking at +21.43% from the December low on 3-21-2019, just as earnings estimates for Q1 2019 and for the entirety of 2019 were being CUT WEEK AFTER WEEK. 

That’s the reason I wrote the warning early Friday morning when I said,

“This is why I call the market “Master Market,” an ignorant little emotional boy who does not know how to value himself properly.” 

Read the rest of my educational tweet series HERE.   I asked whether the market was “stupid,” for rising as earnings estimates were falling.  

Some would say, “But the market is anticipating a turnaround in 4th quarter earnings.” Why would that be, given the fact that they lowered their estimates 4 weeks in a row?  Why would that be, if the Federal Reserve is going “all out neutral”?

And they’d say, “But there are companies that are still hitting their numbers.”  That’s correct and on point – I covered that last week – check your companies one by one!

“But isn’t it Bullish for rates to fall?”  Not in this case….

On March 2nd on this blog I told you the “Only Way Up for the U.S. Stock Market” and it was:

Break out to new highs with SLOWLY rising (added 3-16-19: OR stagnant) interest rates.  This is the ONLY way UP for the U.S. stock market.

Friday’s plunge in the 10 year Treasury Yield was the opposite of the “Only way UP for U.S. stocks.”  Rates fall when deflation and economic slowing are feared.  As I explained, the normal healthy late cycle Bull market should be accompanied by slowly rising interest rates as the economy continues to expand.  That is not happening.  The opposite is happening.  I called out the breakdown in the rate chart last week and added:

If TNX were to make a brand new low, the stock market will likely enter a dip/correction, as that is NOT what is supposed to happen in a real recovery The Fed would have to move to an outright dovish position if that were to happen, at least in time they would.

Well, we may have just started the correction I referred to in the quote.   Some of you may still believe that following interest rates is boring, but you can see how exciting a plunge in rates can be.  Many high flying stocks were down 5-10% or more on Friday, because of the negative message the Treasury market was sending. 

If rates don’t stabilize early in the week, the stock market will fall farther quickly. 

Does the market believe a rate CUT could be on the way?  Eventually, yes.  The CME Group says the market gives a 18.4% probability to a RATE CUT by the June 19th Federal Reserve meeting.  That probability of a rate cut rises to 41.9% for the Sept. 18th meeting.  It’s 47% by Oct. 30th and 57.9% by the Dec. 11th meeting.  That’s a majority. 

But the Fed won’t be able to cut rates if inflation rises.  At the moment, that does not seem to be an issue, but we’ll continue to follow oil and gold to monitor the risk of stagflation (slowing economy with rising inflation as we had in the 1970’s, when stocks went UP and real returns in stocks were NEGATIVE due to the erosion of buying power.)

Here’s a Brief Review of the Market Risks at Hand:

China Deal Risk:  There is going to be a “big, beautiful deal.” It’s taking longer than most had hoped.  “No deal” would greatly upset the markets, but Trump seems to know that if the markets tank into the election, he’ll lose, as he’s said that privately it has been reported.  CNN just reported that a meeting between Trump and Xi may happen “next month.”

Mueller Risk: Diminished it seems.  Don Jr. and the Trump gang in general are off the hook, but oddly enough, President Trump is not off the hook until either AG Barr says so this weekend, or the report reveals it when it’s released with a lot of black redaction lines in it no doubt.  Barr promised to share highlights of the report by Sunday; he says now per CNN, it won’t be on Saturday.  (And then there is the Southern District, which I will get to in a moment.)  The reason Trump is not yet off the hook is that current DOJ rules say Trump cannot be indicted as President.

Although it’s a promising sign that no one else will be indicted by Mueller per the DOJ, that leaves the President the remaining question mark, since he cannot be indicted by Mueller, yet Mueller could have evidence Trump committed a crime.  The odds say to doubt that will be the case.

Parenthetically, the fact remains by the way that Russia was proven by Mueller to have actively hacked into our election in an attempt to elect Trump over Clinton, whom Putin hated. That does not mean Trump colluded other than openly in his campaign appearances (he encouraged Russia to hack Clinton in a speech), and the fact that no other collusion by others has reached the level of indictment is promising.

The stock market closed flat in the afterhours trade despite the news of “no new indictments.” I expect the markets will integrate in some “happiness” over Trump being cleared more fully in the coming days.  The Southern District of New York may not let that happen however.  And they are not prevented from indicting Trump.  If the market thought Trump was in the clear, it did not act that way Friday night.  As a political independent, I will state that just because he’s “not in the clear,” does not mean he has broken the law. 

2020 Election Risk:  Read my comments on this HERE. 

Fed Rate Hike Risk: Gone for the intermediate term. The Fed will remain on inflation watch with oil still in an uptrend, but for now, there is zero rate hike risk. The market thinks there is a “risk” of a cut by later in 2019 (see above).

Now take a look at the SP500 chart.  The orange lines are the 2017 up channel.  I give you my first downside target in the small cap section below…

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

Coming down a fourth time???

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Neutral short term. Chart is still Bullish.  Can fall to 50-51-ish and still be in an uptrend.  Reporting earnings supposedly on 4-25-2019.   

Bank of America (BAC) Market Timing Signal:  Bearish.  Last week I said, “Vulnerable to lower rates.”  It fell 4.15% in one day on Friday as rates plunged lower.  XLF is broken too of course, and Warren Buffett is losing a lot of money with his 39% exposure to financials. 

Now let’s go on to review investor sentiment…

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Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +13.89 vs. +1.36% last week.   The poll closed right after Fed Day on Wednesday.  That sentiment does not match the level of the market on Wednesday.  We are not coming off the ultimate top of this Bull Market run in my view.  Yet we may be headed into another earnings recession (2 negative quarters of earnings growth; not negative earnings – negative earnings GROWTH), which will drive the market down into a correction or even eventually if the slowing is enough into a Mini Bear Market status again.

The “New Rules” on what the various pullbacks are in dips, corrections and Bears are HERE (scroll down to “New Rules”).   They are rough guidelines, but useful I think.

2.  U.S. Small Caps Market Timing (IWM): I said last week,

“Small caps are showing negative divergence vs. large caps.  With the SP500 Index making new market timing highs, the small caps should be doing the same, but they are not!”  Small caps led the market down from the Sept. 2018 all time high, and they could do it again right now.”

Hope that helped.  Small caps are in an officially confirmed DOWNTREND as of Friday on a massive volume spike.  The divergence with large caps is why I’ve avoided small caps in the last few buys, which yes, may have been too early.  But realize I have been adding slowly along the way, and have plenty of cash to put to work in a bigger sell-off.  This looks like it could be a decent sized 7% SP 500 Index correction (to my first target at the October low) at the least given the stats on Friday.  Small caps could easily fall more than that.

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

Small caps leading the way DOWN!

 3. Gold Market Timing (GLD):

Last week I said, “I’ll change my mind if we see the upside reversal noted in the chart below.”  Meaning I’d recommend a trading position (vs. insurance position) for GLD/GDX.  GLD was up 0.23% with the market down 1.90%, which is good, but the reaction to crashing interest rates was muted.  I’d like to see gold perk up this week.  Maybe the gold market thinks even a whiff of stagflation will box in the Fed to the point of having to raise rates.

GLD attempted a move back through my “reversal number” shown on the chart on 3-15 and then failed.  It is now back above the reversal # for the fourth day, which is positive, but it’s barely above the 3-15 high, which is not as impressive.  Not a strong Bull, at least not yet.

And the GLD trend line remains broken, so I’m skeptical considering the interest rate action on Friday.  I do have some mining exposure that was hedged.  When the stock fell on Monday, I bought back the call I was short (pocketing about 84% of the original credit from selling the call), and the stock bounced nicely on Friday, causing call prices to rise nicely.  I should be able to sell another call for about the same amount if gold cooperates Monday, though I remain skeptical.  I’m fine with holding my “gold insurance” GLD in the meantime.

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

Not exactly excited about falling rates.

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

The triangle broke LAST week.  This week rates crashed further.  I’ve gone over the implications for stocks and gold above…

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):

Breaking lower…

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 Bullish SP500 Index trend.  The signal here is based on small caps, as they often lead the market down.  They have been and are leading down!

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!) closed at 16.48 vs. 12.88 last week, which means the Bears  have captured 4/7 targets.  The level reached on the spike Friday which topped out at 17.52, below the 7th Bear target, is similar to the spike in volatility from early Feb. forward.  This means the Bulls could rally back a bit before giving up target 7.  Below the “fulcrum,” which is the midpoint VIX target, the Bulls regain control.  

Same as before: There are now 7 Bear targets and the score is Bulls 3 to Bears 4.  The targets are 13.31, 14.04-14.08, 15.04, middle “fulcrum” point = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89. 

The ‘Bull Nirvana Target’ is our V*IX # of 2018: 13.31.”  (That # is target #7 for the Bulls.) 

Gold Signal YELLOW  for a further U.S. stock market rally with a NEUTRAL Gold Trend.  What gold does mostly as I’ve written HERE is follow real interest rates.  STILL HOLDS 3-15-19: G*LD has to rise above 123.19 on an immediate basis (* added to throw off the “crawlers,” as I don’t like being part of “consensus.”)  It did but with an anemic response after rates crashed on Friday.  The trend line is also broken.  The uptrend may not be over, but it’s wounded. 

From before: “Remember GLD is being used as an indicator for the ECONOMY here.”  If gold continues to rise, it means the market believes real rates will  fall, which means the global economy is slowing.  That would hurt U.S. stocks. 

Rate Signal RED for a further stock market rally with a BEARISH 10 Year Yield Trend.  Last week I said the slightly lower rates were being taken well by the stock market, but “If rates fall to new lows (substantially toward 2.554% or lower), however, that will mean something else, namely a worsening economy, and stocks would likely react negatively.” THEY DID on Friday!  FALLING rates are BAD for stocks at this point in the cycle, when rates should be rising as explained.

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”  WTI closed at 59.04 vs. 58.36 last week.  Oil is still in an uptrend, so either rates will rise now and the oil rally will continue, OR rates will keep falling and oil will reverse. 

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.”  I said, “2.621% was the peak back in 2017 when stocks did best.  Anything below that would be an improvement.”   The close on Friday?  2.455%! 

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.).”   That’s a long way away at this point!

Watch the rate at which TNX climbs if the current trend reverses.  If it shoots up very fast, stocks will correct.  In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018. That’s what I called ‘Rate Shock.'”  The period of rising rates in early October I called #RateShockII.  The next shock, I’ll be calling #RateShockIII.

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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 or bought, 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 IWM and GLD charts for now as reference points only; they have historical value for us from the post-2016 election period.

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