A Market Timing Report based on the December 24, 2020 close…
First some orientation to what you’ll see here going forward in terms of market timing. I’m going to reduce my view of the markets to short simple statements. There are plenty of writers who bloviate about the markets, which is not really that helpful. Although I’ve kept my analysis reasonably brief, it will be briefer yet this year.
MY FINAL COMMENTARY ON THE TRUMP PRESIDENCY is at the base of this report. We are moving on to a new administration and will be focused there. I’ll be equally tough on Biden and his plans (as I have recently on the proposed vaccine program changes proposed) and discuss their market impact…
All economic and political analysis will be conducted in a similar reasonably brief format, as usual focusing on how it could impact the financial markets. Mainly we’ll look at the key market timing charts…
There will always be more that I share on social media in terms of the variety of market timing charts I follow and refer to including foreign markets and major cryptocurrencies. I won’t always post the charts and will leave you to use your favorite chart source to follow what I’m saying. Time is precious.
Enjoy and be sure to share the blog with others. My goal is to have an impact to help the world, so I’ll be putting my efforts behind that which serves the greatest number of people as much as I appreciate all of my followers here and on social media. Happy New Year to you by the way! Thanks for reading, and now…to the markets…
1. SP500 Index Market Timing (S&P 500 Index®; SPY, SPX):
Let’s look at where we are first, and then discuss where we’re going…
The trend for all U.S. market caps, small, mid, and large is UP (see 1st chart below). Stay invested.
What Are the Risks to the Recovery?
1. COVID-19 Infection Rates forcing more partial shutdowns of businesses. We’ll see soon how bad the Christmas and New Years bumps will be. My advice? Stick to your “bubbles” over the holidays unless everyone has quarantined for 10-14 days in advance. Testing is not enough as proven by the White House’s experiment that caused numerous people to become ill with COVID-19. Shutdowns are only required, as I’ve said repeatedly, IF healthcare systems would otherwise be overwhelmed. If not, you don’t need to shut down. It’s not a political decision; it’s a healthcare decision. More shutdowns, even if partial, would hurt the speed of the recovery and secondarily the stock market, but NOT IF vaccination continues to speed up, and the market looks forward to recovery despite the holiday infection bumps. We are in a different place with now THREE vaccines on the way. (AZN-Oxford’s is expected to be approved as the 3rd very soon.)
UPDATE 12-29-2020: Coronavirus Active Case Stats in the U.S.
Only negative Day Over Day numbers on the chart below, which show you the direction and rate of change of Day Over Day Active Cases, can help take the pressure off of hospitals. As long as that number is positive (and the 5 day moving average is a better test of the trend), hospitals are filling up more and more. The rate of change improvement (the orange line is dropping) shows some of us are trying hard to keep the virus under control, but the rest of us have to pitch in, or hospitals in LA for example will be forced to turn away patients due to healthcare system overwhelm.
Imagine your loved one needing to be transported an extra half hour with a heart attack or stroke because your local hospital was chock-full of COVID-19 patients. That’s what we’re talking about here.
It’s not political as said; it’s practical, so again, please help out by NOT mixing your home’s bubble with other bubbles unless those in it have quarantined for 10-14 days prior to mixing. If that is too much, at least wear a mask (correctly over the nose) when you are out and don’t socialize with anyone outside your home prior to visiting your family, or you may literally be the “death of them.” It would be foolish for us to kill our relatives and friends by getting careless just a few months (more or less) prior to vaccination. Be safe and have a very Happy New Year!
Let’s now look at other risks to the recovery and the markets….
2. TWO SOLVED RISKS: The stimulus bill was just signed by Trump Sunday night along with general spending that will keep the government open. Closing the government during COVID-19 would have been definitionally insane, so it’s good Trump capitulated. He capitulated to Democrats, but also to his own party that negotiated this package with Sec. Mnuchin for many long months.
3. Election Risk? None. It’s over rover. It’s a “fake news” risk. There is no legal recourse for Trump now despite the massive disinformation on Twitter and Facebook. The Constitution requires the House agree with the Senate on a Jan. 6th coup, and they won’t. Mitch McConnell told GOP Senators to NOT rock the boat with BS claims of widespread election fraud. The courts have ruled against Trump’s claims, including the Supreme Court with Trump’s 3 appointees. There was no significant election fraud or the courts would have ruled otherwise. There is ZERO election risk remaining.
4. A double GOP Loss in Georgia. The GOP needs to keep only one Senate seat to maintain Senate control on the big bills. Some moderate GOP members could flip sides on some legislation with a one vote majority however. If Mitch is taken out by a double GOP loss in GA, tax legislation rollbacks will hurt corporate earnings over the short term and lead to a 7-20% correction/Mini-Bear Market in my view (See “New Rules“ for my cutoffs for dips/corrections/Bears). That’s because earnings would be adjusted back down to pre-taxcut levels based on the tax increases that would ensue. Income Taxes: Those making less than $400,000 as an individual, $622,050 for couples would not be affected.
5. Rate Shock: When rates rise slowly during a recovery, that is fine. When they shoot up too fast, the stock market usually takes a hit. If rates rise above the current lid you see on the chart below, they could start rising too quickly and shock the stock market. Bonds take money from the stock market when real rates are FALLING. They are RISING of late.
SP500 Large Cap Index (click chart to enlarge; SPX, SPY):
Follow me on StockTwits/Twitter and you’ll see when and what I buy and sell…
Now let’s go on to look at investor sentiment…
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.)
Now let’s review investor sentiment…
Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of +21.58% on 10-14-20, which was 10th week of positive sentiment spread after 34 weeks of negative sentiment spread! As my prior study showed (published earlier on this blog), such a long negative sentiment spread has historically resulted in a strong rally in the stock market. I’ve bought both before and after the election and increased my exposure to close to 100% of my “usual maximum for a Bull market.” Adjust to taste! I report my exposure level regularly on social media as I change it (see links above).
|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)
The trend is up! Stay with it. And stay with ALL caps including mid caps as well.
3. Gold Market Timing (click chart to enlarge; GLD):
I’m fully out of my trading position as stated a while back on social media. I only have “gold insurance” for protection from the dying U.S. dollar at this point. The typical “insurance” recommendation is 5% of investable net worth (although many never tell you if you should include real estate or not). Some like Cramer have said to own a 10% gold exposure. Gold does not work well with rising real rates, as I’ve discussed numerous times (ref. link is at the bottom of this report).
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): Rates are poised to head higher still. The formation is an ascending triangle on the chart below. A breach above the obvious current range will be required. That could make the market nervous about Fed action despite their reassurances to let inflation rise a bit higher than they previously allowed. “Rate Shock” is a stock market risk I’ve covered for years here.
The rate of rise is the key, not the level in a strong recovery until we reach 4.5-5% some say, but regardless of the precise level that spells “trouble,” it’s MUCH higher than we are now.
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 BULLISH 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 in this section of the report. If they are strong/weak, generally the SPX is strong/weak too.
Gold Signal GREEN for a further U.S. stock market rally. The Gold Trend is short term Bearish and longer term Bearish. “Longer term” may only be for a few more months or much longer. No one can tell you how long it will continue to decline. Economic glitches that arise will help gold. Unconstrained fiscal spending will help as well over time, but not while the economy is recovering at a reasonable pace.
Kept for Reference: “Gold can RISE with stocks when real rates are falling, and the dollar is falling. Gold has recently been falling with rising real rates, despite US dollar weakness, because the stock market is made more attractive by the combination of 1. Rising real rates and 2. Economic recovery with higher corporate earnings.
In liquidity crunches (which the Fed is supposed to prevent) gold can drop with everything else but the US dollar.”
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 Bullish for a further stock market rally with a short term Bullish, but now an intermediate term NEUTRAL 10 Year Yield Trend. Rates have to bust that lid on the chart above to change the intermediate to longer term trend. (Remember: higher rates mean lower bond and Treasury prices and vice versa).
***START OF COMMENTARY***
MY FINAL COMMENTS ON THE TRUMP PRESIDENCY AND DEMOCRACY
This will be my final comment on Trump here, as he will shortly be irrelevant except how he influences others in the GOP. I laid out the possibilities for Trump this week, because we need to be informed of how politics can intersect with the markets. If you read my pre-election post and actually made the trades I made both prior to and after the election (all timestamped here), you’ve made big money by now.
I don’t hold grudges. I don’t condemn Trump as a human being, as we’re all flawed in some ways, but I do have to make a judgment about his fitness to lead and have done so. What he did both as an “Election denier” and in calling for a march on the Capitol Building was anti-Democratic IMO.
BTW, I never said “Trump did not win the 2016 election,” because those who did are as misguided IMO as those who believe Trump’s distortions as I’ll call them about the election of 2020. Biden won the election by the rules the states decided upon. States rights are a fundamental pillar of Republicans, at least that used to be the case. The Constitution placed the authority with the States to decide on how to run their elections. They did so in 2020 in the midst of a pandemic. They sent out more mail in ballots to avoid spreading the virus. That was their sincere intention and it was right IMMedicalO.
Al Gore actually won in 2000 based on some recounts and not on others when they went back and recounted votes in Florida after the fact. (I didn’t vote for him. I’m a proven Independent as I’ve said; I vote for the better leader, per my beliefs at the time I vote.) But the courts are the FINAL arbiters of elections even if the laws concerning elections are changed after the fact. The results of the preceding elections are not changed.
After the 2000 election was decided, they did not tell Bush to leave based on the recounts that found Gore won, or say there had to be another election. Some here were likely not very focused on politics when that was going on, and others were, but the point is, when the COURTS say “Game over,” it is done. The Supreme Court ruled and Al Gore conceded. He said he didn’t like it, but he accepted it (you can find the video). He did not then carry on in public to taunt Bush saying “I actually won!” He conceded, and it ended there. That’s Democracy in motion. There is no going back. No whining.
In sports, refs make bad calls. They challenge some bad decisions by refs, but they never get to go back and “challenge the results of the Super Bowl.” “It was a corrupt Super Bowl!” That does not fly. Some of those supporting the losing Super Bowl team do continue to object to “who actually won,” but you and I know those people are ultimately poor losers. Few elections are perfectly clean except those for dog catcher, and there was no widespread fraud in the 2020 Election. Even Bill Barr (who searched for dirt on Biden for months) said so and Trump still forced him out or made him feel he had to leave to support Democracy.
To conclude my comments on the Trump Presidency, Democracy in the US per the Constitution is about 1) Voter rights (the vast majority of those who voted cast legal ballots despite all the noise) 2) States’ rights, and 3) Court Decisions (the 3rd branch). All those say Biden won, so he won. I would suggest that if that makes no sense to you still, you go read more from sources other than Fox News. Study the Constitution directly. Read contrary opinions to Rush Limbaugh’s. If you feel hurt by the results of the 2020 election still, act like you care to know the truth and investigate it like a true reporter would rather than someone on a sports team that cannot admit the team lost. Then our country will return to a more reasonable state in which things are discussed civilly and compromises are reached to move our country forward.
Let’s solve our nations challenges together. Contribute in a positive way if you can vs. getting bogged down in past grievances, and make our country and the world a better place. Per a recent Gallup Poll, as of Dec. 2020 41% are Independents, 31% Democrats, and 25% Republicans. That means most people land in the middle as I do. Don’t use the liberal Democrats’ or radical Republican behavior as an excuse to behave as they do. Be far better than the worst elements of our society whether on the right or left, and we will succeed as a nation.
***END OF COMMENTARY***
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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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