Market Timing Brief™ for the 5-10-2019 Close: “Bulls In A China Shop. Which Companies Will Rally Despite the U.S. China Trade War? Gold Rises on Rate Drop.”

A Market Timing Report based on the 05-10-2019 Close, published Saturday, May 11th, 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):

We’ve been monitoring a number of risks that have been percolating along, but as you are well aware since the January to February 2018 sharp decline in the markets, volatility does not send you a letter before appearing.  It rises quickly, sometimes with zero warning from very low to a very high.  This week our “VIX Game Score” went from Bulls 7/Bears 1 at the end of last week to Bulls 0/Bears 8 on Thursday and then at Friday’s close back to what I am calling the current “fulcrum point.”  The current score?  Bulls 3/one point a tie/Bears 4.  A split decision…

What was the volatility stimulus?  China risk rose dramatically this week as President Trump and company (U.S. Trade Rep. Lighthizer and Sec. Mnuchin) entered what was hoped to be a final negotiation battle to resolve the U.S. China trade dispute.  The President claims China changed its negotiating position at the last minute, about which he said “You can’t do that!”  Apparently, if you are Supreme Lifetime Leader of China, you definitely can do that.

Markets staged a nice reversal on Friday after hitting a fresh recent low earlier in the day based on one word Sec. Mnuchin had about the Friday China trade talks: “Constructive.”  The SP500 Index was only -2.46% from the all time intraday high at Friday’s close after being -4.36% at the low on Friday.

I had warned last week:

“The hyper-Bulls, and there are many today, will tell you the market will always go higher, and they never sell any exposure no matter how high their stocks go, at least until it’s “late to be selling.” The hyper-Bears have mud on their face for clinging to their Bearish stance after December.” 

I do not believe the market has topped, even if it pulls back into a full correction (definitions I use are here; scroll to : “New Rules”)

What about the predicted 2019 revenue growth rate for the SP500 Index?  Per FactSet it’s steady at 4.7% as of Friday.  

Let’s check in with the earnings trend again…

Earnings Risk: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 5-10-19 (details HERE)…

The earnings numbers for the SP500 Index improved slightly for Q1, now almost completely reported, but are, as last week, slightly worse for the coming three quarters.   Revenue estimates ticked up a bit for Q1, but were steady for Q2 and ticked down for Q3 and Q4. This new look is with 90% of companies reporting.   FactSet says “The percentage of companies issuing negative EPS guidance is 79% (65 out of 82), which is above the 5-year average of 70%.”

It’s interesting that only 82 of about 450 companies that have reported even bother to issue guidance to analysts.  Have you ever asked yourself why analysts estimates are often within a very small fraction on both earnings and revenues, when generally they receive no guidance?  There are surprises for sure, but there are many non-surprises.  It should only be easy to come close to the actual results if a company is not growing or is barely growing.  That they do far better?  Suspicious.

Here is the data updated for the last data point from this week:

For Q1 2019, analysts are projecting (mostly reported!) earnings growth of -3.6% -> -4.3% -> -3.9% -> -2.3% -> -0.8% -> -0.5%

and revenue growth of 4.9% -> 4.8% -> 5.0% -> 5.1% -> 5.2% -> 5.3%.

For Q2 2019, analysts are projecting earnings growth of 0.1% -> -0.4% -> -0.5% -> -0.6% -> -1.3% -> -1.7%.

and revenue growth of 4.6% -> 4.2% -> 4.4% -> 4.3% -> 4.3% -> 4.3%.

For Q3 2019, analysts are projecting earnings growth of 1.8% -> 1.4% -> 1.3% -> 1.3% -> 0.8% -> 0.6%

and revenue growth of 4.4% -> 4.1% -> 4.4% -> 4.4% -> 4.4% -> 4.3%.

For Q4 2019, analysts are projecting earnings growth of 8.1% -> 8.3% -> 8.2% -> 8.1% -> 7.5% -> 7.4%.

and revenue growth of 4.8% -> 4.7% -> 4.7% -> 4.8% -> 4.8% -> 4.6%.

For CY 2019, analysts are projecting earnings growth of 3.8% -> 3.4% -> 3.4% -> 3.6% ->  3.4% -> 3.3%.

and revenue growth of 4.9% -> 4.6% -> 4.7% -> 4.7% -> 4.7% -> 4.7%.

Are the Bulls serious?  As I asked six weeks ago…

What would satisfy me that the Bulls were serious about this advance?

Let’s check that list once again…

1. New high. The SP500 Index is off the prior high by 2.46% as said, but still above the 10-17-18 high, which was fairly closely tested with a low of 2825.39 and also above the Jan. 2018 high of 2872.87, which was a stretch back when it was achieved (the market then proceeded to collapse with a massive volatility volcano, as I called it then)  No check this week, but that the test of the Oct. high was successful is a positive.  A deeper test at least to the Dec. high of 2800.18 or the 200 day mav of 2776.04 (changes daily) would be healthier.  Without China resolution, we won’t be moving to new highs, unless the administration signals the delay will be relatively short to the endpoint. These are my short term target thoughts.  My longer term downside target is discussed below.

Whether the market consolidates while it waits (moves sideways) or falls another step lower is complete guesswork.  Don’t trade or invest based on guesses.  If you are doing any buying, find those companies that are not dependent on the China trade deal or global trade in general and that have strong revenue and earnings growth.  Those companies could have a bid, while the rest of the market stagnates or drops further.

Read the FactSet report which gives the returns on companies that are U.S. local vs. global.  HERE is one article from CNBC on thoughts by David Kostin on what to buy and what to avoid.  Of course, rotating out of China exposure works while the tariffs are on and then everyone will be pivoting to companies doing business in China, as well as to Chinese stocks.  Jack be nimble…Jane be quick…  I am not yet selling my China exposure as it is significant, but it’s sized well, meaning I could simply hold it on any pullback and add once things have stabilized. 

2. VIX below the “Bull Nirvana Number” AND my bonus number?  No with a 16.04 close on Friday, exactly within the “fulcrum range”  (see VIX targets at base of report).

3. AD % Line: 16,385 vs. 16,463 last week vs. the prior high of 16471 on 5-01.  The market could easily move into another wave down early next week if the China talk resolution date is moved out too far into the future. 

4. Volume: No check because volume FELL on Friday.  It should have spiked on such a big reversal.  For small and midcaps, however, the volume was decent.  Mixed review here.

5. The “U.S. Index Matrix Signal” as I call it:  The matrix is again supportive this week (e.g. small caps; see section 2 below).  Small, mid, and large caps on Friday reveal what are called Bullish engulfing patterns (IWM, IJH, SPX). Interestingly, SPY showed a Bullish piercing pattern at the close, but not an engulfing pattern in contrast to the index itself (SPX).

Candlestick signals are NOT 100%, and it’s hard to find statistics on all of the candlestick signals (if you have a reference that is comprehensive, comment below please).  I am not a candlestick focused investor, but I pay attention to the signals within the context of the market trend and the news context.  This week, they add a Bullish spin to the price action.

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

Mexico Border Closing Risk: President Trump folded under Republican pressure.  It’s not going to happen unless things get appreciably worse, as it would disrupt trade and U.S. GDP growth.  It’s interesting how fast certain issues are lost from the news flow.

China Deal Risk:  Center stage, as discussed in detail above.

U.S. Iran War Risk: From BBC: “The US said the moves were a response to a possible threat to US forces in the region by Iran, without specifying. Iran dismissed the claim as nonsense.” Meanwhile Patriot Missile system has been sent to the area and “the USS Abraham Lincoln passed through the Suez Canal on Thurs., US Central Command said.” B52 Bombers have also been deployed to the region.  BBC Reference

Mueller Report Risk: I covered this HERE.  My conclusion was Trump’s risk of impeachment has declined dramatically, but this could change suddenly WHEN Mueller shows up to testify.  He will testify.  Trump is simply delaying it as long as he can.  Congress has the constitutional right to oversight and the country deserves to know whether Mueller intended for the House to take up the impeachment case for obstruction acts that many former prosecutors say are criminal.  It is claimed the only reason Mueller did not indict the President is because of the DOJ rule that says you cannot indict a sitting President.  Here is their STATEMENT.

It’s the House’s job to impeach the President if they find grounds to do so, not Mueller’s job to indict him.  It’s that simple.  Trump saying “No obstruction” does not make the whole thing blow away.  Remember, Nixon was not the mastermind of the Watergate intrusion into DNC headquarters and did nothing EXCEPT obstruct justice, and he would have been convicted by the Senate had he not resigned. 

2020 Election Risk:  Read my comments on this HERE If the economy and the stock market are strong at the time of the election, it will be hard for any Democrat to beat Trump, especially if they lean toward greater socialism.  But socialist Sanders is far behind Biden.  This week Trump again trails Biden by 7.3% as reported HERE. Yes, Clinton also ran ahead of Trump for many months, and yes, it’s early.

The markets will not like it if Biden wins, as corporate rates would likely go up to at least Sen. Klobuchar’s suggested 25% from 21% and individual rates would rise as high as Obama’s 39.6% for those making over $418,000 per year.  I smell a million dollar tax bracket coming too, perhaps at 42%.  Estate taxes would also reappear under Biden: a 35 percent tax rate on estates worth over $5 million for individuals or over $10 million for families was the prior policy (tax tables HERE).  

The Democrat VP pick one of my loyal readers and I agree upon is Klobuchar, who can help Biden off the coasts where Trump won the 2016 election.  Harris is doing better in the polls than Klobuchar by a significant margin, but would be more suited to U.S. Attorney General in my view, and she’s West Coast.  Trump has already tweeted this week he expects to run against Joe Biden, calling him names of course. 

Deficit Threat: Moderate, but more an issue when rates are rising, not when stable to falling.  This is an ongoing threat to our current system, and fiscal liberal Trump (it’s a fiscal liberal who spends more than he has!) is guilty of adding to this ticking clock.  See my comments HERE.

Fed Rate Hike Risk: Low.  The Fed is stuck in neutral due to rising gas prices and globally falling inflation with negative interest rates in Europe and Japan.  China tariffs are paid by U.S. importers and are passed on to U.S. consumers (China does not pay them as Trump says; they are hurt by them, but do not pay a cent directly).  If that adds enough to inflation, the Fed will be forced to hike rates.  Trump could ironically be the cause of the next Fed hike.

The markets would NOT like even a 0.25% hike as we say in December in the wrong context – such as NOW.  From that experience, rate hikes are a threat to the Bull market, again, only if driven by higher inflation, which has been relatively tame.  Core CPI came in at 2.1% Y/Y, while CPI was 2.0%.  This is in contrast with the Core PCE Inflation Index, which has been trending down each Month from January to March as follows: 1.8%, 1.7%, 1.6%.  The next report is on May 31st when April data will be reported by the BEA.

What’s my SP500 Index downside market timing target?  I covered that last week at the end of the SP500 section #1: HERE.  We could definitely see a greater pullback, given the risk catalysts I’ve noted above.  Because of that risk I have more cash than usual, but not as much as I’d have in a Big Bear Market as I call it in my “New Rules.”

Write down the target numbers from last week’s issue.  It’s a good practice to keep a notebook as I have for years with these numbers, so you can refer to it during the week.  I use steno pads, but any other bound notebook will work.  Bound, not loose leaf, because you want to treat it as a record of your thoughts and actions.

Now take a look at the SP500 chart.  The orange lines are the 2017 up channel.

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

SP500 Index Market Timing Chart for 5-10-2019 Close

Down but not yet out.

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Outright Bearish.  Intel is down 13 of the last 14 days. Bearish enough?  Fell straight through 50.60 to 46.20.  It should continue falling to the December low…at least.  I would not short it personally.  It will rocket back up as soon as the U.S. China Trade Deal is announced.

Bank of America (BAC) Market Timing Signal:  Negative, but…  Although BAC closed back below the high of 30.14, and is now at 29.58, the upside for rates in the short to intermediate term is not great, so financials’ prospects are also not great.  A twist?  Because XLF is doing just slightly better than the SP500 Index, that tells me investors do not believe rates are headed much lower.  That assumes global economic healing and accelerating global growth in revenue and earnings in the coming months. Failing that, rates will fall still lower, the Fed will cut rates, giving up on being “neutral,” and financials will fall faster than the SP500 Index.

How about financials vs. tech in this little pullback? Tech is slightly trailing the SP500 Index, which is slightly trailing XLF off the last high.  I would still prefer buying tech over financials should the market drop another step down.  Tech (XLK) has outperformed all other sectors since the Dec. low.  I’ve also added some individual tech exposure on this pullback. 

Now let’s go on to review investor sentiment…

Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 33,951 investors are following the markets with me…

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Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +19.93% vs. +17.72 last week.  The highest sentiment has risen in the entire trailing year is 23.1% back on June 13, 2018, and the reading this week is close to that.  A similar level achieved on 4-10-2019 of 19.9% resulted in a sideways move followed by a very gradual inching up of the SP500 to the 5-01-2018 “Go Away in May” high.  And then the current drop started.  Bottom line?  Sentiment is at a relative high vs. recent history, but not at a “This is the Big Top” sort of high, which we last saw during the blow-off rally in Jan. 2018.

Bulls Neutrals Bears
43.12% 33.70% 23.19%
Thurs. 12 am CT close to poll

2.  U.S. Small Caps Market Timing (IWM): Small caps had a Bullish engulfing day Friday as mentioned above, but they lost the breakout above 159.50, which is a negative.  I’d call that picture mixed.  They are higher risk (high beta), so don’t load up the boat with small caps unless you are buying individual rapidly growing, well capitalized companies.  A further general market decline will take them down farther than large caps.  A plus?  Many of the companies are not China dependent. 

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

Small cap Bullish Engulfing Signal 5-10-2018

Stick with individual companies if you can tolerate the volatility.

 3. Gold Market Timing (GLD): Rates fell with the dollar flat, gold rose.  Any questions?  Keep some gold insurance, perhaps 5% of your investable net worth. Gold also likes a weak stock market.  Notice it rose to the top of the wedge shown (yellow lines)?  It must cut UP through there early in the week or it could easily slump again.

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

Market Timing the Gold ETF 5-10-2018

Gold up with rates down.

4. Interest Rate Market Timing – The 10 Year Yield FELL this week from 2.531% to 2.455% from Fri. to Fri or 7.6 basis points, as we say.  That is Bearish for the U.S. economy.  The test above 2.554% failed on 5-03-19.  The downtrend is still intact until that number is breached to the upside.

Prior: “Note: The key levels for the Rate Bulls to cross to the upside are 2.554% and the 1-31-19 low of 2.626%.”

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):

10 Year Treasury Yield Falling is a negative.

10 Year Yield back near prior low.

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.  The signal here is based on small caps, as they often lead the market down. 

The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!) closed at 16.04 vs. 12.87 last week.  These are the other targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” point = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89.  The bonus target #8 is [12.-17-12.37].  The Bulls now have 3 of 8 targets.  Bears 4. And one tie.

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.  Testing the Bullish wedge as seen above.  Needs a push UP Monday.

STILL HOLDS 4-26-19: 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.”) 

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 in the current context 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.  Rates usually RISE slowly in a strong recovery and the stock market rally continues, as I’ve repeated multiple times on social media as well as here. Empirically though, rates that are “lower” (than 3.11%) and are NOT rising rapidly have allowed the market to climb back above the prior all time high (ATH). 

I said weeks ago, “Watch the oil price too.  Higher oil tends to mean higher rates.”  WTI was stable this week and closed at 61.66 vs. 61.94 last week.  I expect oil could rally again even if it eventually makes a lower low over the intermediate term (weeks to a few months). 

I’ll keep this here as a reminder: this is not currently an issue… “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.

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I thank Worden Brothers for the charting system I use to post these charts.  If you want to know more about the charting system I use every day, go HEREIt makes it much easier to follow along with me if you can see the charts and manipulate them on your own computer.  It’s a great investment to have an excellent charting system.  Check it out with a free trial at the link above.  I am an affiliate of Worden Brothers, though oddly I’ve never been paid a cent by them.  If you HAVE subscribed to their service, please send me a message. 😉

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.

Copyright © 2019 By Wall Street Sun and Storm Report, LLC All rights reserved.

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2 Responses to Market Timing Brief™ for the 5-10-2019 Close: “Bulls In A China Shop. Which Companies Will Rally Despite the U.S. China Trade War? Gold Rises on Rate Drop.”

  1. Charles Royal says:

    Thank you David!

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