A Market Timing Report based on the 07-05-2019 Close, published Saturday, July 6th, 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 don’t see 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):
We have new highs this week, so part of the answer to the next question, we already know…price is working for the Bulls, volume not so much, although it is summer, and there was the July 4th holiday this week. At the same time, as you know from last week, earnings this season do NOT match the price of the SP500 Index. They do not warrant a new high, yet investors are still buying as they are squeezed by the dovish comments of the Federal Reserve into the stock market to find a return and/or a dividend yield.
Remember that long-only funds have no place to go other than to rotate from one SP500 Index sector to another when their mandate is to be fully invested. The question is “Do you want to be fully invested in front of a very weak earnings season?” You have more flexibility than a mutual fund manager. So far, being very long stocks has worked, as price has trumped any sense of logic in reference to earnings prospects, just as it did in the stock market leading up to the internet bubble, and just as it did in the housing market leading up to the housing bubble. Eventually the last buyer arrives.
For the devout Bulls, I will share the sentiment numbers that say the top is not yet in. Will it take another week to get there? Months? Or will the market go down in between by 15-25% as it did back in December (-20%), before reaching an even more remarkable all time high (ATH)?
Earnings don’t take off until the 15th with Citibank and the 16th with JPM, WFC, GS, etc. Pepsi goes earlier on the 9th and there have been a few (net = weak) reports already. But that gives the Bulls another week of potential gains until reality hits with the onslaught of earnings reports.
Are the Bulls serious?
What would satisfy me that the Bulls are serious about this advance?
Let’s check the list once again… The Score this week? Bull 3: Bears 2. For each checklist item below, I give you the points scored as Bullish or Bearish. The Bulls picked up a full point against the Bulls and shifted the score to Bullish.
1. New high. Bulls 1 point. We had a new ATH of 2995.84, and the price is back in the 2017 channel. Obviously the up trend has been fully re-established for the SP500 Index of large caps. We are above the May 1st high prior to the May decline of about 7.5%. Even the most grumpy Bear would have to call a new ATH Bullish. As you know, I’m an independent in both market and political terms! My positioning is shared on social media usually the same day I change it.
2. VIX below the “Bull Nirvana Number” AND my bonus number? Bulls 0.5 point. “Not quite” is the answer, because it should be below BOTH those VIX numbers at a new market ATH. The Volatility Game Score as I call it is Bulls 7/Bears 1. The close was 13.28, just below point #7 for the Bulls (numbers at the base of this report).
3. AD % Line (proprietary stat; see base of report about this): Bulls 1 point. New high. That is very positive for the Bulls, because it says the advance is not overly concentrated. (That’s not to say that some stocks have been over-represented in the advance.) The close was 16,571 on Friday. The 6-20-19 high at a peak in SPX was 16,517.
4. Volume: Bears 1 point. SP500 Index volume was low on Friday, although it was a holiday. I am not allowing for an excuse though for an all time high. It is subject to reversal without volume behind it. That UP volume must show up this coming week.
5. The “U.S. Index Matrix Signal” as I call it: Bulls 0.5 point. The small caps are above the 6-20 high, so I’ll score that 0.5 points. They must be above the May 1st high to score a full Bull point. Some would argue a new ATH would be needed or at least a close over the Jan. 2018 high. The small cap weakness is a cause for concern on the part of the Bulls. In a strong economy, small caps are very strong, not lagging as they’ve been doing. The same thing applies to midcaps. Their lagging is a negative.
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 7-03-19 (details HERE)…
Here is the data updated for the last data point from this week. There were very few changes vs. last week’s numbers – analysts were off drinking and lighting fireworks. 😉 We are still looking at the 2nd and 3rd earnings seasons in a row with negative earnings growth…unless the numbers change and are better than expected.
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% -> -2.6% -> -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% -> 3.8% -> 3.8%.
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% -> -> -0.5% -0.5%.
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% -> 3.8% -> 3.8%.
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% -> 6.3% -> 6.3%.
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% -> 4.3% -> 4.3%.
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% -> 2.7% -> 2.6%.
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% -> 4.4%.
For Q1 2020, analysts are projecting earnings growth of 10.5% -> 10.7% -> 10.3 -> 9.9%.
and revenue growth of 6.2% -> 6.1% -> 6.0% -> 5.8%.
For Q2 2020, analysts are projecting earnings growth of 12.9% -> 13.3% -> 13.3% -> 12.9% -> 13.2%.
and revenue growth of 6.8% -> 6.8% -> 6.8% -> 6.6% -> 6.6%.
Here’s a Brief Review of the Other Market Risks at Hand:
China Deal Risk: Negotiation is happening we are told. Meanwhile our markets head higher despite it all. See last week’s post for further details (link at upper left).
U.S. Iran War Risk: Trump supporters believe he is going to achieve peace with the terrorist leaders of Iran. That would be nice. Meanwhile an Iranian vessel was seized by the UK for violating the ban on oil shipments to Syria. Soon more sparks could fly.
Mueller Report/Impeachment Risk: No change. “Mueller Time” is Wednesday, July 17th. Mark your calendar for market risk on that day. Just by repeating certain conclusions, he could influence public opinion against Trump. That’s what the Democrats hope.
2020 Election Risk: No change. Probably the biggest risk to the markets and most Americans are oblivious to this from the markets’ point of view. I’ll stand by this: The market will likely pull back at least 10-15% going into the election if the outcome is even unclear, meaning President Trump is NOT ahead by a wide margin (a likelihood, but not a certainty, depending on whether the Dems go for a “McGovern” candidate, as in Nixon-McGovern in 1972, a Democrat disaster.
Deficit/Debt Threat No change. Building in the background, dollar by dollar – by both irresponsible political parties. 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 corporate earnings through higher borrowing costs.
Fed Rate Cut Risk: We are back to a 0.25% cut for July, because employment was stronger than expected. Last week we had dovish Bullard saying 0.50% cut would be “excessive.” Without the 0.25% cut, the Fed’s credibility would likely be hurt, so they’ll do it unless GDP is overly strong vs. their long term view of the economy. GDP will be reported on July 26th prior to the Federal Reserve FOMC meeting.
From last week: “In my view, many investors are in LalaLand when it comes to rat cuts. CME Group says 28.1% still believe the Federal Reserve will cut 0.50% in July. The rest expect a cut of 0.25%. No cut would cause the market to dive. A cut of just 0.25% could disappoint the market as well, although the majority would be fine as they expect that cut.” Now 68% expect three cuts of 0.25% by December, the majority looking for July, Sept. and Dec. cuts per CME. They don’t expect any other cuts all the way out thru April 2020.
As I said two weeks ago, the Fed members actually don’t believe three cuts are going to be needed, as summarized HERE.
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):
Now let’s check in on two “Canary Signals” we’ve been following:
“Intel-igent Market Timing Signal” (Intel; INTC): Negative. Failed a breakout above the 200 day moving average, which is not a magical number, but is a place the market is pausing ahead of earnings estimated to be on 7-25. The stock has not recovered half of the fall from the April 17th high yet. Intel needs a China resolution to happen quickly, AND it needs the global economy to pick up soon.
Bank of America (BAC) Market Timing Signal: Neutral. This could be a head and shoulders formation (with subsequent failure to make a new high) unless rates keep climbing based on stronger than expected economic data, as we saw with the strong jobs report on Friday. That jobs number is why rates popped a full 9.5 basis points in one day, which is a big move. It was above the average for the past 12 months as I reported on social media on Friday.
It’s good market timing practice to pay attention to highly volatile moves such as this interest rate move, meaning the move may not be over. That rate move is also why gold and metal stocks sold off on Friday. Higher rates mean higher real rates, even if temporary – a negative for gold. Remember we’re SUPPOSED to be in a falling rate cycle with the Federal Reserve CUTTING rates! So which is it?
Wouldn’t it be just super if the Bulls now shift their thesis to say, “The Federal Reserve will raise rates, because the economy is great and we’ll buy even more market exposure”? They cannot have it both ways. The Fed will NOT be cutting rates in a ramping U.S. economy. We assume this Friday move was just a blip up in a downtrend in rates, which is why I suggested buying some gold GLD/gold stock GDX exposure (the latter riskier with more potential gain) on Friday if you had none.
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 34,055 investors are following the markets with me…
Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of just -0.81% vs. -2.46% the prior week. Bulls and Bears seem to be locked in their views as the market rises!
Short term, the position of that spread is not helpful. There is room to convert more Bears to Neutrals or to Bulls and for the opposite.
I said last week: “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.” That was right…the market kept moving up.
|Thurs. 12 am CT close to poll|
2. U.S. Small Caps Market Timing (IWM): Discussed above. Study the chart…
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold Market Timing (GLD): Still a Bull. See comments above please under BAC comments. The next move up depends on interest rates heading lower. That’s the Fed plan supposedly, so stick with the trade for now, perhaps setting a stop on profits IF you are willing to get back in quickly if proven wrong on an exit!
The Gold ETF (click chart to enlarge the chart; GLD):
4. Interest Rate Market Timing: I warned last week: “This is a trade that could last just a few weeks or many months. Why? Because rates are very low and due to the current weakness globally. As the world perks up eventually, so will interest rates, and both bonds and Treasuries will fall. “
This Friday rates shot up as said above and could go further still given the size of that move. I’m not convinced the move is done, which is why I added short Treasury exposure on Friday, but not long maturity exposure (3 months vs. 10 years!).
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):
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 Bullish SP500 Index trend. The stock signal is based on small caps, as they often lead the market down. The progress small caps made (noted above) moves me to neutral.
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 7 of 8 targets this week at a 13.28 VIX close. 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.
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 they rise, as I’ve repeated multiple times on social media and 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 had bounced, but has started weakening again. It closed at 57.51 vs. 58.47 last week and looks like it could be rolling over. There is a lower high already forming below both 50 and 200 day mav’s.
If the hard bounce on Friday in TNX continues, this will give rise to Rate Shock III… As said before: “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 saw in May as discussed previously.
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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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