Market Timing Brief™ for the 08-21-2020 Close: “Which Equity Markets Are You In? Gold Still In Bull Trend. Rates Falling Again.”

A Market Timing Report based on the August 21st, 2020 close…

The context for the market timing charts are addressed on social media during the week (links below), so be sure to read those posts as well, or you’ll miss at least half of the picture .  I would review the post two posts back 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 (BMHS) Update:  Last month’s issue describes how I arrive at the score (HERE).   The S&P500 Index just hit a new all time high (ATH) above the prior 2020 ATH of 3393.52 on Feb. 19, 2020, while the BMHS is falling.  That’s not good for the overall market.  In healthy Bull markets, all stock indices generally move up together. 

Bull Market Health Score

Bull Market Health Score falling as SPX hits new high.

Part of that falling BMHS arises from the fall of both small caps (see 2nd market chart below) and mid caps as the large caps hit new highs.  IWM hit a new recent high on Aug. 11th and has moved down since, while SPX just made a brand new ATH.  That is a warning signal (see further discussion in the small cap section below).  It means that if you were to add to the market given the breakout, you probably should go smaller vs. larger with such a buy.  That’s what market timing is about. 

However, if you use market timing repeatedly to “back up the truck” or “sell everything,” you will eventually run into trouble, especially if the market moves against your decision, and you freeze in the headlights.  If you book a loss quickly on a big, bad timing decision, you’ll do better.  

I promised my social media followers I’d talk about buying pullbacks and bottoms in this post.  If we see a pullback ahead of the election, how should you think about it?  My answer is my mantra taped to the bottom of my computer screen: “Buy levels, not bottoms.”  HINT: You don’t know in advance whether you are looking at a “Bottom” or not.

Of course, you may want to risk manage “Buying Levels” in terms of exactly what you are buying and how much.  Position sizing is a key to investment success vs. failure.  The best approach I have seen to date relies on adjusting position sizes vs. their volatility.  If a stock or ETF is twice as volatile as stock X, then you should own 1/2 the position.  That can be adjusted to taste by your conviction in the idea, but don’t go overboard.  If you depart from your rules on position sizing to make exceptions, those are the exceptions most likely to bite you.

Buying levels in indices like QQQ is much different than buying levels in an individual stock like Intel (INTC).  Is INTC a good buy, because “you know the company will get its act together”?  How much lower could it go, if it does not solve the fundamental competitive issues that brought it down recently?

The bottom line on bottoms in any ETF/Stock/Commodity/Currency is that no one recognizes one until it is in the rear view mirror.  If you are lucky, you’ll see a double bottom or even a triple bottom, but the last major US stock market bottom created no such low, so if you did not buy on the way up, you did not buy.  There were pullbacks on the way back up, but you had to suck up and buy them, not hesitate, “Because I missed the actual bottom!”  Don’t become anchored on the past.  Decide what you will do given the market NOW.  Today.

The NASDAQ dropped 78% from 2000-2003.  Think about how you would risk manage that, even if it doesn’t happen this time around… You’ll be a better investor if you have a plan. If my “level buying” fails, I have a written plan for dealing with it. Do you?  If not, write your plan down now…  Unwritten plans are much less often executed compared to written plans (and that means on paper or in a “Trading Plan File”).

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

Let’s catch up on SP500 Index Earnings and Revenue projections and then look at the current SPX chart…  The data are through 8-7-20 (because the author is away for two weeks of vacation).  89% of SPX companies had reported results to that point.  

See FactSet.com for original data and some great content. 

You can see in the charts below that the current Q2 2020 results have ticked up a bit since July’s actual results started coming in.  Analysts tend to underestimate results, which leaves room for upside surprises.  COVID-19 has further complicated their work.

They are expecting a relative recovery next year, but it may not come until the expected vaccine is fully deployed and working, which could be delayed until late Q2 of 2021 or later. That means the market could experience bumps between now and then, but guess what?   The market has anticipated a recovery for months now, which is why we are at new all time highs in the SPX and NASDAQ (which came first).

SPX Earnings Growth per Factset as of 8-07-20.

SPX Earnings Growth per Factset as of 8-07-20.

SPX Revenue Growth per Factset as of 8-07-20

SPX Revenue Growth per Factset as of 8-07-20.

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.)

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

Market timing the SP500 Index (SPY, SPX). New all time high.

New all time high.

Now let’s review investor sentiment…

Survey Says!

Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -12.01% on 8-19-20, which was the 26st week of a negative sentiment spread!  That is astounding and I analyzed the subsequent market behavior after such long runs of negative sentiment in detail two issues back (see link at top or to upper right).

When there are still too few Bulls around, markets are generally not at tops. 

In fact, many studies I’ve seen of multiple markets show new highs often result in BETTER market performance, not worse, so “Selling the Double Top” especially since the SPX is above the prior ATH now, is not likely to be a great strategy. 

I would instead set mental stops on positions, so you can take off exposure when the trend changes, and/or rebalance when the market is stretched and add back to your exposure when it pulls back. 

The US equity market is a Bull until it is not.  At the moment, that means the large high quality names and the QQQ (with a high exposure to tech) should be our focus despite the prior gains. 

Now is there some risk in adding exposure in a big way after such a long run?  Yes there is, which is why if you add here, add small and then add more on PULLBACKS, not on the rips.  If you are too overexposed to stocks due to gains, then take some exposure off in steps rather than all at once. 

If it’s money you need in the next year, take it all off now IMO.  But of course, follow your own plan, as you must live with the results.  

Bulls Neutrals Bears
30.39% 27.21% 42.40%
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.  Back in February, the small caps made a LOWER high as SPX was making a higher high, just as is happening now… NOTE: THE DATE ON THE CHART SHOULD BE 8-21-2020

UPDATE 8-24-20: Small caps (IWM) tested the prior breakout at 153.39, bouncing off 153.60 on Friday and then extending the bounce today to 156.23 at the close.  That’s positive as long as the rally continues from here.  A passed retest of a breakout is generally a positive sign.  The close at the end of today was above the high of Friday, which is also a plus.  

Market timing the U.S Small Cap Index (IWM, RUT). Small caps leading down?

Small caps leading down?

 3. Gold Market Timing (click chart to enlarge; GLD): Note that “all” GLD has done is drop back to the lower trend line of the prior upward channel.  The gold market was over-extended, yes, but it’s not yet been broken.  There is too much fiscal spending yet to come by EITHER party, no matter who is in power!

Market timing the gold ETF (GLD). It's a pullback in an overextended Bull trend until proven otherwise.

Market timing the gold ETF (GLD). It’s a pullback in an overextended Bull trend until proven otherwise.

My current exposure to gold/metals/metal stocks is shared HERE.  The added exposure (>100%) I consider a trading position and is held only when gold is in a Bull market, which means adding more gold/gold stocks/silver/silver stocks (is silver is also in a Bull market) etc. to core gold holdings.

Commodities are always a “trade only” for me (consider DJP and DBC for general commodity exposure; SLV for silver; I’ve discussed these recently on social media and won’t repeat it here).  I, like others, do not consider gold to be a “commodity.”  It’s more of a currency.  That’s why I hold a core position.

My commodity exposure ranges from zero to max.  Some generic raw exposure recommendations are 5% for gold (Jim Cramer has been saying 10% for a while, but I haven’t heard whether he drops that at times) and 5% for commodities.  I don’t share my exposure choice, because you must always adjust yours to your situation and investing plan.

Ray Dalio suggested in Tony Robbins’ book on money (“Money: Mastering the Game”) to hold 7.5% in gold and 7.5% in commodities with a (low) stock allocation of 30%, 15% intermediate term Treasuries (7-10 yrs), and 40% LT bonds (20-25 yr Treasuries).  That’s a very conservative portfolio, so adjust it to suit your own life and preferences.  It would be considered too conservative even for retired investors with substantial assets, because it does not preserve net worth vs. inflation very well.

Some money managers suggest a minimum of 40-50% stocks for wealthy investors.  60% is aggressive for retired investors, unless there has already been a massive sell-off.  It obviously depends too on what is in that stock mix.  Your stock exposure level should be sized vs. the volatility of the SPX if you want to adjust it apples to apples.  The key is being able to ride the market down by 50-60% in the worst Bear markets (in SPX terms).

Let’s use a 50% drawdown as an example.  If you have 50% of your net worth in stocks and you experience that drawdown, your net worth goes to 75% of prior all else being equal.  Can you stomach that?  What if that happened to your educational savings account in the 3rd year of your kid’s college education?  What would the impact be?

Set up a spreadsheet manually or using software and know what you own across asset classes.  I use an Excel spreadsheet to do it, because I break things down in unique ways I would not find in a generic program.  It also allows you to have a more granular view of your portfolio.  If it becomes “too much work,” then have someone else manage your money or cut down on the number of stocks/ETFs you own (owning just 10 stocks adds quite a bit of risk, so only do that if you consider yourself a master at investing and trading and have a proven track record in Bull and Bear markets).

You can always keep a small trading account to “play with,” but if you are not doing serious work on a daily basis I would say ( others say on at least a weekly basis), then you should stick to your career and make money in it for others to invest with the vast majority of your money.  Of course, if you have a proven track record doing it your way, keep it up!

Finally, fire managers who are not performing year after year.  One or two years or even more of under-performance may NOT be a reason to fire a manager, however,  IF they are meeting their usual benchmark (growth vs value etc.), but consider how much money you have allocated to their approach and how it has worked over 5, 10, and 20 years.

I have seen people keep managers who failed them year after year after year…  Not good.  Tell them I like you, but my spouse says we have to move our money.  😉  Or tell the truth in a nice way.

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): 

This still holds: “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.”  Let’s add commodities to that.  “This is a Fed run economy with a big booster from Congress and the President.  Deficits up the wazoo!  Consumers are already feeling it [the inflation] too…”   

It is clear the Fed is going to tolerate higher than normal inflation to keep all the economic balls in the air. 

THE DATE ON THE CHART BELOW IS the close on 8-21-2020!  (ignore the label at the bottom…)

Market timing the US 10 Year Treasury Yield (TNX, TYX, TLT, IEF). Rates falling again.

Rates falling again.

And finally, let’s look at the current COVID-19 Active Cases Chart (data through 8-21-20):  Coronavirus is one of the key factors that will dictate future revenues and earnings of US companies here and abroad.  STILL HOLDS: “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 the U.S. is still failing to get a handle on the Coronavirus (SARS-CoV-2) vs. the rest of the developed world.  The 5-day moving average is about where it was at the end of May!  The public is going to have to be more consistent to bring success.  

COVID-19 Active Case % Day Over Day Increase with 5-day moving average.

COVID-19 Active Case % Day Over Day Increase with 5-day moving average. Not a lot of progress.

Understanding the pandemic seems to be beyond Trump’s grasp, possibly because he is always worried about his “numbers.”  He once kept a ship of COVID-19 patients offshore to keep the U.S. from having “bad numbers” so to speak.  That is ridiculous.

President Trump very recently said paraphrased “You don’t want to do lots of tests, because then you have a lot of cases.”  You FIND a lot of cases, you don’t create them!  Good grief!  You find cases by testing and isolate the positives and their contacts!  

As I’ve shared, “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 spreads 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.”

Once the numbers are that low, you aggressively test to ID cases and isolate those patients with their contacts.  Testing is always important, but contact tracing isn’t possible when there are too many infected patients running around.  You have to get the numbers down to contact trace successfully.  That’s what I said (timestamped on my “School of Health” Facebook page) on January 21, 2020, when the first U.S. case was reported.  We did none of that.  The President closed the door to China and left the doors from Europe wide open.  The only “medicine” to speak of until we have a vaccinated population is LOWERING the R0 below 1!  

I’m an independent, but I can see bad leadership when it’s in front of me.  You may not like hearing that Trump failed to lead on COVID-19 in key ways, if you generally support him, but the facts are undeniable.  His leadership on COVID-19 has been objectively awful.  There is still no coordinated national response, largely because Trump doesn’t want to take the blame.  He dissuaded people from wearing masks, even when the Surgeon General said to wear them.  And Trump blamed Obama for medical shortages, when he’s been in office for 3 and a half years.  Huh?  That makes zero sense.

No one should count him out yet, however, despite Biden’s DNC performance that was even praised by Fox News anchors.  That would be naive, considering the experience with Hillary Clinton in 2016.  If the Dems decide to coast again, they’ll lose. 

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 Bullish SP500 Index trend.   The small caps determine the stock signal.  The small cap signals are falling at the moment.  See above.  The next step in developing a small cap Bear is a breach of 153.39 and then 144.88. 

Gold Signal GREEN for a further U.S. stock market rally.  The Gold Trend is  short term NEUTRAL and longer term Bullish.   Gold can RISE with stocks when real rates are falling, and the dollar is falling.  If the dollar gains significant strength, that will hurt both stocks and gold in the near 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: As long as rates stay within a relatively low range, the signals are not as valuable when the Fed is manipulating them.  The Rate signal on a non-manipulated basis would be RED for a further stock market rally with a short term BEARISH  and longer term BEARISH 10 Year Yield Trend.  (Remember: higher rates mean lower bond and Treasury prices and vice versa).  If rates crash to new lows, the market will not likely behave very well!

Thank you for reading.  Would you please leave your comments below where it says “Leave a reply”… or ask a question if you like…

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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.

Copyright © 2020 By Wall Street Sun and Storm Report, LLC All rights reserved.

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