A Market Timing Report based on the May 15, 2020 close…

The context for the charts will be addressed on social media during the week…be sure to read those posts as well, or you’ll miss at least half of the picture.

5-31-20 Update: Bull Market Health Score Update for close of 5-29-20: 

Bull Market Health Score for 05-29-2020

5-21-20 Update: Please read my comments in the market timing room from 5-26-20 HERE.  Remember, I am prepared to reverse my recent buys if the rally does not continue from here…

1.  SP500 Index Market Timing (S&P 500 Index®; SPY, SPX): Let’s get right to the data and then draw our conclusions…

Despite what you may hear, in my opinion (IMO), we are still in a Big Bear Market, even after the huge Bear Market Bounce we’ve seen.  Technically, the drawdown for SPX is at -15.62%, which places us back into the “Mini Bear Market” range (see the ranges/definitions HERE).  

I expect the market to pull back vs. make a new high, but the Bearishness of individual investors I discuss in the sentiment section below could push the market still higher.  The economic backdrop for this rally is ridiculously bad, and you can find some of the recent GDP estimates on my social media stream.  We are talking about Great Depression sized negative numbers.  The assumption is everything will get better, because we’re all going back to work now.   That is magical thinking as the virus has not changed at all.  It’s still as deadly as it was when the first case was reported in Seattle on Jan. 21st when I told the world HERE it needed to do testing and positive case isolation.  I said…

“The new type [of Coronavirus] is less deadly fortunately, but needs to be stopped by public health measures and prompt identification of cases followed by containment and support measures…” 

Nothing was done other than to unsuccessfully “close the door to China.”  The door was never actually closed to the Chinese who poured into our country from all over the world. 

President Trump and many governors and their advisors went to sleep at the wheel in January, even into March before they began to issue stay at home guidelines and orders.  That is why the virus got out of hand and hospitals were being pressed to their limits.  The only reason patients did not die for lack of respirators is that people were told to stay home from work.  Can we now go back to work in a SMART WAY?  It appears NOT!  

In truth, if they adopted the Re-opening Plan I shared with you in the prior post as an update, going back to work could succeed.  You can read it at the top HERE. 

Their plan is likely to fail or at least cost many more lives than is necessary.  Politely, “They lack insight.”  They are non-medical people making decisions based on politics vs. being strategic.  Their lack of insight could easily lead to a second major downturn in the equity markets.  

Now that we’ve delineated the gross continuing failure of political leadership in the U.S., let’s turn to the markets…

What would satisfy me that the Bulls are serious?

The Bull Market Health Score this week is Bulls 2.5/Bears 2.5 (see chart below).  It’s a 5 point scoring system.  This week we find the US equity market as a whole, the “Monkey in the Middle” in more than one way.  We’ve had a partial bounce and now that bounce has partial strength on the 5 point scale.  

For each checklist item below, I give you the points scored as Bullish or Bearish.  If the number is “Bulls 0.0,” that means the Bears score a point.

1. New high? (here I look at large caps alone) Bulls 0.0  Answer: No. 

2. V*IX trend favorable?  (VIX trend is either up, down or undecided and consolidating.)  Bulls 0.5  Answer: Neutral.

From last issue:  “Remember that as volatility falls from here, it does not mean we are back to the races.  After around 11-26-08, VIX fell over time right up to the bottom in early March 2009 at SPX 666ish.”

3. AD % Line in an Uptrend short term? (This is a proprietary stat; see base of report.): Bulls 0.5 point.  Answer: Neutral. 

4. Higher volume on Up Moves?  Lower volume on Down moves?  (Has to be true for either large caps or for both small and midcaps to be a “Yes.” If discrepant, the Score is 0.5)  Bulls 0.5 point.  Answer: Large cap volume was good, but the market barely moved in proportion to that volume.  Small/Mid did not have volume pickup with price moves.

5. Is the “U.S. Index Matrix Signal,” as I call it, positive?  (To be positive, small and mid caps must be trending up with large caps; if mid and small caps are discrepant with each other the score is 0.5)  Bulls 1.0 point. Answer: Yes.  Although small – mid caps are lagging large. 

Graph of the Bull Market Health Score (BMHS)

In the March issue I said: “Note that back in the summer of 2019, the market started to rally once the BMHS bottomed out for 4 weeks in a row.”  When it came off the low in March, that was very close to the March 23rd low as you see below…

Notice that the score is now mid-range.  To me this appears to be a pause, which could cut either way.  I and many others believe the economic backdrop is lousy for a robust recovery.  Investors can only buy and hold so much of the top 10 stocks.  They then start getting nervous about adding even more of those top stocks, and many companies are uninvestable right now.  I’ll be adding exposure should there be another significant move UP, as I’ve lowered my exposure enough (posted on social media) to face off any downside.  Stick with me throughout the week on social media, where I share my moves…

Bull Market Health Score for 5-15-2020. Monkey in the middle.

This Update of the Earnings Picture (see FactSet.com for original data and some great content!) for the S&P 500 Index (see caption): The deterioration in predictions for the U.S. economy seems to be slowing.  I imagine the reopening of the economy now being attempted is being factored in.  You can see the much higher relative expectations (it’s always growth vs. the prior year’s same quarter) for 2021 in the first two weeks of the data for the year…

2020-05-15-FactSet SP500 Index Earnings Data

2020-05-15-FactSet SP500 IndexRevenue Data

Keep up-to-date and read my comments on the current setup during the week at Twitter and StockTwits (links below) where a combined 34,571 investors are following the markets with me…

Follow Me on Twitter®  Follow Me on StockTwits®.  (real time messages are on StockTwits as always and back on Twitter)

Join the Conversation in the StockTwits “MarketTiming” Room  (I’ll publish comments in the room periodically)

If the SP500 does not take out the 4-17 AND 4-29 highs, there is no point in adding further market exposure IMO.  It could happen, as I’ll get into in the sentiment section, but valuations based on current earnings are super stretched in relative terms, as price has continued to climb as forward earnings estimates continue to fall (see the FactSet PDF for this week; scroll to the charts at the bottom).  Investors are crowding into fewer stocks and my Bull and Dog Stock Groups are showing signs of a turn down as well (see social media links).

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

Market timing the SP500 Index (SPY, SPX).  Bulls need a new recent high.

Now let’s review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -27.30% on 5-13-20 vs. -28.99 last week.  The spread has not changed much.  Sentiment is fairly negative near a high in the market, which is unusual for a top.  This still allows for more Bear recruitment to the Bullish side, which is fuel for the market.  The other side of this is that Bearishness need not top out at 50%ish as said before, so if the market tips over here, the Bulls could easily fall below 20% and the Bears could soar much higher to around 70% as they did in 2008.  

2.  U.S. Small Caps Market Timing – Russell 2000 U.S. Small Cap Index  (click chart to enlarge; IWM, RUT) 

US Small Caps. May be time to rotate out.

Still applies: “Simple message: Stay out of small and midcaps unless you intend to trade them.”  You don’t want to HOLD vs. TRADE them in Big Bear Markets due to their inherent higher financial risk….  It’s likely a good time to rotate from small and mid to large caps, especially to large companies that are still doing well in this COVID-19 era.

 3. Gold Market Timing (click chart to enlarge; GLD):

Bull market continues in gold.

If the market dives, gold may not be immune from liquidity driven selling as we saw in 2008, followed by a brisk recovery to new highs.  If you buy here, you may have to suck it up and “take it,” should gold fall with stocks, or otherwise risk selling on stops and booking a large loss.  Or trade it with narrower stops than usual IMO.  If it falls as in 2008, you’ll be out early, and be able to buy back shares lower. 

That’s what Passive Shorting is about.  Here is the Secret...  You must be willing to GET BACK IN if the trend reverses, or I would suggest holding gold through the bumps.  It depends on your preference to trade it vs. hold it.

To be clear, I am holding GLD as a currency alternative.  I am not trading in and out of my core holding, but may do so if I add more exposure from here.  

Check out the “Market Signal Summary” below – after you review the following chart…

4. Interest Rate Market Timing (10 Year Treasury Yield; click chart to enlarge; TNX, IEF, TLT):  

If you see rates crashing to a lower low, stocks will be dropping as well.

TNX is in a descending triangle formation, which is Bearish, and with the economy in distress, it could make brand new lows and make more money for U.S. Treasury investors.  If it happens, it will be correlated to a breakdown in SPX to correct at least 50% of the prior rally UP, IMO.   

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 actual BUYS and SELLS in as timely a way as possible 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 YELLOW for a further U.S. stock market rally with a short term NEUTRAL and longer term Bearish SP500 Index trend.   The small caps determine the stock signal.  The small cap signals are mixed at the moment.  I would not bet on them though.  I’d restrict my exposure to large caps at this level.  

Gold Signal RED  for a further U.S. stock market rally.  The Gold Trend is  short term BULLISH and longer term Bullish.   I noted the breakout above…

What gold does mostly as I’ve written HERE is follow real interest rates around the world (if you own “gold in dollar terms” you care about U.S. rates most of all).  The rest of the world does matter however, including massive buying by central banks. 

GUIDE: “Remember GLD is being used as an indicator for the ECONOMY here.”  If gold continues to rise again, it means the market believes real rates are going to fall or stay negative for a period of time.  Investors tend to stay out of gold particularly when stocks are doing well as they provide a higher real return.

Rate Signal RED for a further stock market rally with a short term NEUTRAL and longer term BEARISH 10 Year Yield Trend.  (Remember: higher rates mean lower bond and Treasury prices and vice versa).

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Standard Disclaimer: It’s your money and your decision as to how to invest it.

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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