A Market Timing Report based on the 06-21-2019 Close, published Saturday, June 22, 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.

I provide quite a bit of intraweek commentary, and if you miss it, you will miss out on quite a bit of context, so please click on the social media links below and have a read…  Thank you as always for being loyal readers and interacting on social media with your questions and comments! 

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

Let’s start with the key issue: The SP500 has failed its first attempt to reach a new all time high…

Are the Bulls serious?

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

Let’s check the list once again… The Score?  Bull 1: Bears 4.   This week the goal line was a new all time high.  But parts of the total stock market are not even close to that as you’ll see…  For each checklist item below, I give you the points scored as Bullish or Bearish. 

1. New high.  Bears 1.  The SP500 Index is above the Wave 2 top I’ve been writing to you about.  That’s a positive, because if you look back at the 2018 chart, the market failed horribly from LOWER highs in Nov. and Dec.  This time the market was able to scale above the prior lower high achieved in May.  The negative?  It failed to rise above the prior all time high this week.  That does not mean it cannot retry taking out the top, although I’ll show you why it may not, as we examine the health of the market fully. 

2. VIX below the “Bull Nirvana Number” AND my bonus number?  Bears 1 point.  The Bears get this point, because of the lack of progress during a week when the market re-topped.  Last week the VIX close was 15.28.  This week?  15.40.  The Volatility Game Score as I call it is Bulls 4/Bears 4.  As before, the Bulls have a slight edge, having overtaken the “fulcrum,” but being back at the old ATH (all time high) with the VIX not making progress to a new recent VIX low (meaning not taking even point #5) is a sign of weakness.  

3. AD % Line: Bears 1.  The prior high on May 1st when the market topped out was 16,471.  The close Fri. was 16,455.  This mirrors the market to some extent, because it tested a breakout and failed on the first try last week.  That failure is a negative that could be overcome.  More buyers are needed!

4. Volume: Bulls 1. There was a good increase in volume through Thursday, but Friday was a triple witching day, so that throws off the volume comparisons vs. recent numbers. 

5. The “U.S. Index Matrix Signal” as I call it:  Bears 1.  To avoid making false comparisons due to recent dividends, I reviewed the data for the raw indexes.  While SPX is tested the prior all time high (ATH) and failed, midcaps (MID) are just above the Wave 2 high of 1922.32, but well below the Sept. 2018 high of 2052.39 with a Fri. close of 1928.11.  Small caps are even worse off.  The high for the week was 1570.74, ABOVE the Wave 2 high of 1567.17, but the CLOSE for the week was 1549.63, back below that high.   In summary, we have:

1. Large: SPX failing to achieve a new all time high, but above the Wave 2 high.
2. MID: rising above the Wave 2 top, but still -6.06% vs. the Sept. 2018 ATH.
3. Small: RUT FAILING to rise above the Wave 2 top of 1567.17 despite testing up to a high of 1570.74 this week.  And the close Friday was at 1549.63, still -11.05% vs. the Sept. 2018 ATH.

Do you see the pattern?  The higher the risk, the greater the lag.  The market is still wary of higher risk stocks.  That is not the healthy picture of a rip roaring Bull market.  Small and midcaps have been lagging large caps since the May 1st market high, and since the small cap market top of course.  The May 1st high is the one the large caps are now challenging, but without company from their smaller siblings.

Here’s the Truth Behind the Headlines:  The U.S. Stock Market Topped on August 31st, 2018!

What do I say that?  Because that is where the small caps topped.  They lead when things are actually good vs. “Trump saying their good” or “The media saying they are good” and especially not “The Fed saying their good.”  Small cap companies create the most jobs in a healthy economy, and are the true engine of the economy and the birthplaces of many great innovations.

President Trump knows the economy is not that strong now and to be re-elected he MUST have a strong economy.  His negatives are too high to be elected in the midst of a weak economy.  And the bad news for Dems is that historically, they will likely lose with any of their 20+ candidates going against Trump, if the economy is extremely strong just prior to the election.  That is why Trump has been jawboning Fed Chair Powell nearly to death, or at least to demotion (unlikely to be legal or it would already have happened and would have shaken the markets to their core by the way).  He wanted Powell to cut rates this past week.  It did not happen, but 100% of all investors polled say it will start in July.  Maybe even with an impressive 0.50% cut.

The success of what I share here is created by a simple fact...and hear this clearly…THEY CANNOT HIDE CERTAIN THINGS FROM US!   The politicians, pundits, machines, and big money buyers and short sellers can create a lot of noise, but they cannot hide price, relative performance, volume, and volatility from our eyes.  The rest provides context for that essential information.     

The above conclusion means we now and always will know things that the “big players” would rather we not know. 

And this we know this… – > The small caps led the market down off its “True Top” marked by the small cap Russell 2000 high on August 31st, 2018,  and it has not recovered since, despite all the ups and downs in between.  The small caps are the most sensitive indicator of the health of the market, and they have just failed at a critical level (the Wave 2 Top of May 16th) in this decent from the May 1st high.  Until that Wave 2 Top is scaled with conviction, this top is the same as the prior two tops – unhealthy and likely to lead to more downside in the intermediate term than upside.  Small caps must then make a new high above the May high or this overall rally is toast.  Those are two key check marks needed for the rally to persist.

Let’s check in on the context around the price action of the market by looking at the current RISKS…

Earnings Risk: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 6-21-19 (details HERE)…

Q2 earnings are reported starting in mid-July.  Note that earnings were negative in Q1 per FactSet and are slated to be negative for Q2 and Q3 unless something changes.  An earnings recession may precede a real recession or just indicate a soft spot for growth that then resumes.  Note that earnings start to look better again in Q1 and Q2 of 2021, because, for one thing, the comparisons are easier – the comparisons are against the same quarters this year, which are negative until Q4 2019, when the sun is supposed to shine once again.

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

For Q2 2019, analysts are projecting earnings growth of 0.1% -> -0.4% -> -0.5% -> -0.6% -> -1.3% -> -1.7% -> -1.9% -> -2.1% -> -2.1% -> -2.3% -> -2.5% -> -2.6%.

and revenue growth of 4.6% -> 4.2% -> 4.4% -> 4.3% -> 4.3% -> 4.3% ->4.2% -> 4.1% -> 4.1% -> 4.0% -> 3.9% -> 3.9%.

For Q3 2019, analysts are projecting earnings growth of 1.8% -> 1.4% -> 1.3% -> 1.3% -> 0.8% -> 0.6% ->0.5% -> 0.3% -> 0.3% -> 0.2% -> 0.0% -> -0.3%.

and revenue growth of 4.4% -> 4.1% -> 4.4% -> 4.4% -> 4.4% -> 4.3% -> 4.3% -> 4.2% -> 4.2% -> 4.1% -> 4.0% -> 4.0%.

For Q4 2019, analysts are projecting earnings growth of 8.1% -> 8.3% -> 8.2% -> 8.1% -> 7.5% -> 7.4% ->7.3% -> 7.2% -> 7.2% -> 7.0% -> 6.8% -> 6.7%.

and revenue growth of 4.8% -> 4.7% -> 4.7% -> 4.8% -> 4.8% -> 4.6% -> 4.7% -> 4.6% -> 4.6% -> 4.5% -> 4.5% -> 4.5%.

For CY 2019, analysts are projecting earnings growth of 3.8% -> 3.4% -> 3.4% -> 3.6% ->  3.4% -> 3.3% -> 3.2% -> 3.2% -> 3.2% -> 3.1% -> 3.0% -> 2.8%.

and revenue growth of 4.9% -> 4.6% -> 4.7% -> 4.7% -> 4.7% -> 4.7% -> 4.7% -> 4.7% -> 4.6% -> 4.5% -> 4.5% -> 4.5%.

For Q1 2020, analysts are projecting earnings growth of 10.5% -> 10.7% -> 10.3.

and revenue growth of 6.2% -> 6.1% -> 6.0%.

For Q2 2020, analysts are projecting earnings growth of 12.9% -> 13.3% -> 13.3%.

and revenue growth of 6.8% -> 6.8% -> 6.8%.

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

China Deal Risk: Meeting scheduled at the end of July with Xi at G20 will lay clear groudwork for a definitive deal, or it will be seen as a big failure.  The teams from both sides are talking vs. stagnation before.  Positive.  I added to China exposure, which I’ll warn you is still viewed as risky due to their economic slowing.  I could be early.  Still, I re-entered some FXI exposure I had ditched due to the turn around of the chart in response to the positive news.  This may not stick if the Chinese intend to wait out Trump vs. finish this and grow up (stop stealing tech from us and forcing tech transfers in collaborations with Chinese companies, and dumping cheap products as examples)

U.S. Iran War Risk:  After the tanker attacks, I said last week “There could be a message sent by air to the Iranians however (a few missiles) as early as next week.”  That was about right, except for the execution part of the plan, which was put on hold, supposedly 10 minutes before “go time.”

The Iranians know Trump does not want another Trillion Dollar War, and know from his prior limited action against the Syrians that he likes proportional strikes vs. risking all out war.  Trump must negotiate an end to the Iran situation or he will bring down his Presidency in 2020 Election terms, as well as destroy his legacy.  There is no way he’ll win the 2020 Election with a war raging with Iran.  Zero chance.  And he would become known as the President who started “the U.S. Iran War.”  Let’s hold something more positive.  Negotiated solutions.

[Tangentially: He was dissuaded from action supposedly because of the potential loss of 150 lives, which conservative media I hear on Florida radio were all weepie eyed about.  “He saved 150 poor souls from perishing” was the gist of it.  Funny how he and they like the idea of torching souls, but not killing them.  When Trump has a conscience, they do too.  When he doesn’t, some other issue is more important that what is just.  I like people who are consistently just.

Personally I like the fact that Trump hates the dollar cost of war as well as the gore and maiming of actual human beings on both sides during war, which is NOT the consistent belief of the “right wingers.”  Remember, David, one of God’s greatest warriors, never made it into the promised land, because of all the killing he had done at God’s own behest.  That seems like a raw deal, but I’m fairly sure he eventually made it to the real promised land above… Being a President or anyone who is charged with killing in the name of freedom, is an honor, but also a huge burden to carry.  So no, I will not judge Trump for hesitating to kill.  I will judge him for publicly supporting human torture, which even General James N. Mattis, Trump’s first Secretary of Defense, said does not work vs. other approaches.

Finally, John Bolton is a know Iran hawk, meaning he really wants to change the government there.  Aren’t we past that practice now?  Trump needs to axe him to stay out of another major war.  I believe Bolton tempted Trump to take military action without blinking.  But Trump has not fallen for it so far, as close as he came.  Again, good!]

Mueller Report/Impeachment Risk  As said last week: “Speaker Pelosi won’t move forward until the Dem ducks are in a row.  It’s a slow motion process.”  As I’ve said, as an independent, my first allegiance is to the U.S. Constitution and to the right of the people to life, liberty, and the pursuit of happiness above all parties and politics.  If we could do what is right, what everyone truly knows in their hearts is right, that would be a nice change for D.C. and our nation.

2020 Election Risk: Probably the biggest risk to the markets and most Americans are oblivious to this from the market’s point of view.  The attack on the U.S. markets and the “wealthy” could begin with the Democrat Debates on Weds. and Thursday.  Attacks on drug pricing should also be expected, so watch your healthcare stocks carefully for signs of breakdown.  From last week: “The markets will suffer as all Dem candidates say they’ll roll back the tax cuts on all but the middle class.  That means higher corporate tax rates again and lower earnings, and lower E’s mean lower P’s – prices!  The market will likely pull back at least 10-15% going into the election if the outcome is even ‘unclear.'”

Deficit/Debt Threat  Unchanged.  Building in the background, dollar by dollar.  This is a building threat but won’t manifest until our interest rates climb and then it will put huge pressure on the U.S. economy and suppress earnings through higher borrowing costs.

Fed Rate Cut Risk: Bigger risk than the market realizes – for NO cut or just one cut in July.  Three cuts are expected by December.  The Fed members actually don’t believe that yet however, as I summarized HERE.  (Scroll up to read the other messages on Fed day.)  The media read the Fed incorrectly.  I pointed this out to CNBC in that message, and the next day they published a similar headline/article.  Just keeping you on your toes, my media friends.  😉

If the Fed fails to cut in July, the market will drop quickly and hard, as 100% believe they will cut in July.   The majority on the Fed FOMC Committee was NOT for that (I verified this with the actual numbers in their projection materials, not a guess!).  They want to see more negative data before getting on board with an easing cycle.  Powell cleverly quoted the feelings of the MINORITY in his press conference, NOT the majority.  What if the tariffs are taken off the table with China and the stock market is 5% above the prior ATH by July 30-31 when they meet?  You think they will cut 0.50%?  Could they simply just pause again?

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):

Tested all time high and failed first attempt.

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

“Intel-igent Market Timing Signal” (Intel; INTC):  Neutral leaning toward positive in an up trend off low.  Did remain above 45.95 number pointed out last week.  47.32 was the last breakout that must be held.  A China trade resolution would be very helpful to Intel, and that’s what the rally is about.

Bank of America (BAC) Market Timing Signal:  Negative.  Unchanged vs. 1 week ago.  “Off the prior low, but turned down from the 200 day mav, which is negative…. BAC is at the top of the downward channel that started back in early 2018!  Stay away!”  BAC has to break above that down channel on the daily chart to make any progress.   With the Fed lowering rates for the next 6 months at least, do not count on it! 

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  -2.62% vs. -7.36%.  Sentiment should be more Bullish at a test of a prior all time high.  Over the short term, I view this as Bearish, because the price action is failing to change sentiment in a positive way.  The other side of that coin is there are more investors to convert into being Bulls.  For this reason, sentiment is not too helpful here in the middle.

At the same time, we have not likely seen the ultimate top of this Bull market, at least for the large caps, because sentiment is just not positive enough.  Investors came closest to euphoria at the end of January 2018, but that was 7 months prior to the small cap market top on August 31st.   Remember we had a “Mini Bear Market” in December, but no “Big Bear” as defined HERE under “New Rules.”  A “Big Bear” is required to terminate a Bull market.

2.  U.S. Small Caps Market Timing (IWM): Still in correction territory per my defintions (covered in detail above). 

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

Well below all time high and FAILED to break above Wave 2 lower high this week.

 3. Gold Market Timing (GLD): We had no deeper correction in gold and gold stocks than a brief dip.  That’s the way Bull markets are.  This is a very strong Bull Market that closed above the 7-11-2014 high.

Add to gold/gold stocks (higher risk) on pullbacks until the trend changes.  This has been a great hedge and will likely continue to perform in my view, even if stocks fail here, as long as Fed rates are being lowered. 

We have to be careful at the end of this Fed easing cycle IF it happens – meaning, if they cut rates starting in July.  If stock market selling becomes brutal though, that won’t be the case, because value is always relative, and you may have to preserve profits. Follow the price!

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

Clearest Bull market around.

4. Interest Rate Market Timing – This is another very strong Bull market in Treasuries, which means a Bear market in interest rates.  If you examine the stretch, it’s to the downside, so I expect a further bounce could occur before Fed cuts show up.  This may happen due to a rise in nervousness that the Fed in fact will NOT cut in July.  If there is a new low in the 10 Year Yield, it will confirm both the global slowdown as well as Fed rate cuts to come. 

The lower it goes, the worse it will be for the U.S. economy in the coming quarters….not a good set up for higher PE ratios in stocks, right?

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):

Further bounce ahead?

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 stock signal 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!) See above for the close this week and other comments.  These are the targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” range = [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 have 4 of 8 targets.   I consider the “fulcrum” the key decision point that turns the market from Bearish to Bullish, when the VIX falls below that entire fulcrum range.  It’s still leaning Bullish, but with no progress made this week at the time of a failed attempt at a new SPX high.

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

Gold Signal RED  for a further U.S. stock market rally with a BULLISH Gold Trend.   What gold does mostly as I’ve written HERE is follow real interest rates. 

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 will ultimately hurt U.S. stocks. 

Rate Signal RED for a further stock market rally with a Bearish 10 Year Yield Trend.  For Reference: “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  has been weak but is stabilizing a bit at a lower level.  It closed at 57.43 vs. 52.51 last week – huge move based on the Iran initiated attacks.  Last week I said: “Oil looks like it could revisit the January low at this point.  The Middle East could interfere with that outlook should the Iran situation ignite.”  It ignited with the downing of the U.S. drone by Iranian forces, something they admitted to, so it’s no speculation.  See above. 

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.  The risk lately has been the “Negative Rate Shock I” we’ve seen as discussed above.

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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, contact me.  It 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.

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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