A Market Timing Report based on the July 17, 2020 close…
The context for the market timing charts are addressed on social media during the week, so be sure to read those posts as well, or you’ll miss at least half of the picture (links below). I also share buys/sells, while many tell you when to buy, but never say when to sell. That’s because they are talking their book. It’s done all the time on the major networks. They pay by placing adds and then are crowned “experts” to talk up their stock positions. I am paid zero by followers to do this work. I am only paid when my decisions are right.
I would review last month’s post HERE, if you have not yet read it, as it is the ongoing thesis of this earnings season – this is a “BullBear Market” with big winners and equally big losers.
Bull Market Health Score Update: My score for the health of the SP500 Bull Market, BMHS, is derived from my assessment of 5 factors: 1. Uptrend or not. 2. Volatility Trend (VIX ). 3. AD% (a stat that looks at the cumulative percent changes day to day of the % advancing – % declining for NYSE stocks). 4. Increased volume on up moves and decreased volume on down moves. 5. The US Index Matrix. Does the rest of the stock market support the move up in the large caps? Equivocal market timing signals are given a score of 0.5.
When the market has reached this level recently (4.5), it has had the ability to rise further (e.g. 12-20-19), but then gave back the gains. The uptrend then resumed. What’s the point then? If you add to the market, wouldn’t it be better to add more when prices were lower vs. higher? That’s the whole point of market timing. Both Buffett and Dalio say to hold no less than 30% in stocks (their general advice to long term investors). I’m fine with that as a minimum, but it’s reasonable to hold more when 1. There has been a significant drawdown in the market or 2. The market is in a strong uptrend having hit a major bottom.
There is a caveat coming as you may have guessed. Here it is… When the market is stretched, as I will show you below it currently is, that is a time to stop adding and to in fact trim profits and have mental stops ready to keep some portion of your profits, particularly for individual stocks. IF you own stocks that are still in uptrends, you can wait to sell when they break trend or take some profits and retain a core holding if you still believe in the business longer term.
Indexes tend to go up over time, because they drop the losers. GE was kicked out and replaced by Walgreen’s (WBA) in 2018 after more than a century. Kodak was kicked out along with T and IP and they were replaced by AIG, PFE and VZ. AIG was kicked out 4 years later! NOT EVEN THE DOW IS “Buy and Hold”! Yet sheep investors are told to what? “Buy and hold.”
1. SP500 Index Market Timing (S&P 500 Index®; SPY, SPX):
Let’s catch up on the earnings and revenue projections and then look at the current SPX chart…
See FactSet.com for original data and some great content.
You can see in the charts below the numbers have not changed much at all since mid-May, which would add concern for more misses.
So what’s the data show this earnings season to date? FactSet says, “For Q2 2020 (with 9% of the companies in the S&P 500 reporting actual results), 73% of S&P 500 companies have reported a positive EPS surprise and 78% have reported a positive revenue surprise.” That means roughly 3/4 of companies were able to beat analysts estimates despite companies suspending guidance.
How does that compare to Q1? FactSet said on 5-29-20 “For Q1 2020 (with 97% of the companies in the S&P 500 reporting actual results), 64% of S&P 500 companies have reported a positive EPS surprise and 56% of S&P 500 companies have reported a positive revenue surprise.”
Despite the huge drops in earnings and revenues, more companies are surprising than for Q1 of 2020. Remember the market was already rallying after the March 23rd low (end of quarter is March 31,2020), so the current BETTER results to date are a potential stimulus for more market upside. “Better than awful is OK,” investors think. It is OK, at least until the economic drag becomes a more chronic problem, say with a delayed vaccine deployment.
You can see that the Q1 2021 and calendar year 2021 projections are floating far above current levels. This assumes deployment of a vaccine by late 2020 or early 2021 at the latest. It assumes growing economic strength as well. It could happen, but these expectations are built into the market. We need to recognize there would be a negative reaction to the slower arrival of a vaccine.
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…
Join the Conversation in the StockTwits “MarketTiming” Room (I’ll publish comments in the room periodically)I
In my last chart issue, I said, “If the SP500 does not take out the 4-17 AND 4-29 highs, there is no point in adding further market exposure IMO.” The market did make it above those highs, but it is now stretched above the longer term uptrend (two parallel yellow lines). The last time that happened, the market went higher and then lost all the ground it gained. I think we are in a similar position. There are possible further gains that will likely be lost. The trend, however, is still UP as indicated by the magenta line.
SP500 Large Cap Index (click chart to enlarge; SPX, SPY): That 4-29 High you cannot quite see is 2954.86. 😉 6-08 H = 3233.13. Friday, the market failed a breakout attempt there.
Now let’s review investor sentiment…
Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -14.53% on 7-15-20, which was the 21st week of a negative sentiment spread! That is astounding, as I analyzed in detail in the prior issue (see link at top or to upper right). Bearishness has come down just a bit to 45.37%. Bullishness has been constrained despite the big jump in the overall index (despite the Bears that live within it; however, since my last issue, those Bears have weakened).
I’ll leave this here as it’s worth rereading: “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.”
|Thurs. 12 am CT close to poll|
2. U.S. Small Caps Market Timing – Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT)
Small caps are higher risk, so watch your stops, as any downturn would be amplified in them. They also have less access to capital and pose more risks in a prolonged downturn. Above the 6-16-20 high, the uptrend will be confirmed. The first attempt on Friday failed to breach that level by 0.10 points. Close huh? I call that “anointing” of a price level. Think dog on a walk/hydrant. Marked! If it makes it above that level, the 6-08 high is the next test, but this one has more weight, because it marks a lower high.
3. Gold Market Timing (click chart to enlarge; GLD):
Ditto my prior comment: “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.”
For now, the SPX and gold trends are both UP. See the next section for more gold comments…
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):
A breach of the base marked by the red line in the chart would cause stocks to tank IMO. It would say the economy is nowhere close to a true recovery trajectory. The most recent pattern is a head and shoulders pattern, the base of which must be held. The fiscal spending is unlike anything we saw in 2008-2009, so I expect inflation to arise over the intermediate term at least, even if there are intervening deflationary pressures due to economic slowing. If the global economy can be kept “open enough,” inflation will be with us. Gold will be a great hedge against it as the dollar is further weakened.
The Fed is trying to keep rates very low and must ignore inflation to keep the economy going, which means real rates FALL and gold wins. If you look at CME Group futures as a predictor of future rates, they are UNCHANGED from the current 0-0.25% level as far as the eye can see, which for their data is to March 2021! NO ONE expects any different interest rate through the entire data series! That is remarkable and shows you how artificial this environment is. This is a Fed run economy with a big booster from Congress and the President. Deficits up the wazoo! Consumers are already feeling it too…
And finally, let’s look at the current COVID-19 Active Cases Chart (data through 7-18-20): Coronavirus is one of the key factors that will dictate future revenues and earnings of US companies here and abroad. The more open our economy can remain, which depends on mask wearing, social distancing and hand washing, the better our markets will do. We should all pitch in by wearing a mask, avoiding large groups, and social distancing. And take your group outside if you can!
You can see that active cases are still increasing last check at a rate of 1.30% day over day which is too many cases to be able to contact trace and isolate the contacts along with the primary case. THAT is why we must wear masks.
You wear a mask to help drive down the R0 (“R-naught”), which is the number of people each infected person in turn infects. It has to be below 1 to drop the new cases/day number. At 1, you are replacing every old case with a new case. At 0.5, each new case spread to only 1/2 a person on average, and eventually the virus dies back to baseline and there are only a few hundred cases at most in the entire country.
That is where we need to achieve. The current rise is out of control in some areas like Florida and California, but overall for the country it’s elevated beyond where it should have gone, but not exploding. We cannot beat this virus without everyone throughout the country obeying the guidelines for COVID-19 prevention.
About 100 years ago, about 50% of doctors STILL did not believe in the germ theory. It’s as if Trump and those believing his confused and scientifically ignorant statements about masks are still back in the early 20th century. This is the 21st century! The world is not flat either btw…. Read my comment on the history of mask wearing HERE.
If we keep passing the Coronavirus (actual name is SARS-CoV-2; the disease is COVID-19) from New York to Florida and back again, without a vaccine and/or drugs to treat it much more successfully than with what we have now, the pandemic will continue to hurt our economy.
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 NEUTRAL for a further U.S. stock market rally with a short term BULLISH and longer term NEUTRAL SP500 Index trend. The small caps determine the stock signal. The small cap signals are mixed at the moment. See above.
Gold Signal RED for a further U.S. stock market rally. The Gold Trend is short term NEUTRAL and longer term Bullish. In consolidation now but still in an uptrend longer term.
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). See comments above for context.
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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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