A Market Timing Report based on the July 28, 2023 close
9-18-23 Market Timing Update:
Today I’m giving you very graphic proof that we are NOT in a “New Bull Market” as so many have publicly led you to believe. Note that after the 2009 low, large, mid and small caps all came along together. (see market timing charts below)
Now? See the “Inverted Traffic Light Sign” as I’ll call it with a wink? Large caps are holding up better than mid better than small (SECOND chart below). Do small caps look like they are in “New Bull Market” too? Nope!
It’s good to be optimistic in life, but I’m optimistic that the statement I just made is correct, not optimistic about the near term for the U.S. stock market. This is NOT a “New Bull Market.” When it becomes one, I’ll let you know I have changed my mind, so keep in touch!
This first chart shows a true “New Bull Market” off the 2009 Low.
Great Recession Rebound from Low
Now compare that to today’s chart off the October 2022 Low… (ignore all the numbers in light white, which are SPY prices of interest in the past). Focus on where the three lines track. Yellow line is IWM. Blue line is IJH. The bars are SPY.
Rebound from the October 2022 Low
9-18-23 Market Timing Update:
SPX/SPY, IJH, and IWM (large, mid and small caps) are all variations on the same theme if you examine their market timing charts.
There are two ways out of the current price level. Up or down. 😉
More specifically, and I’ll pick on IWM which is the weakest part of the market, IWM could either move up from here as part of an A-B-C (up-down-up) pattern if the current base holds…
OR
if IWM breaks the recent lows, we will enter a “Big Red Wave” down, which is a 3rd Wave in Fibonacci terms, which would bring us almost back to the Oct. 2022 low.
The 3rd Fibonacci Wave is 1.618 times the size of the first wave down, which is just 1.0% above the October 13, 2022 low for IWM.
Remember, we would have to get the break of the current lows to get the ball rolling to the downside. You can use the same math to calculate the lows for large and mid caps. For SPX, the predicted 3rd wave low would be 4169.26, which would bring the large caps to the consolidation during April and May of this year, not nearly as bad as small caps, but still a sizable drop.
Back to the prior post…
What did I cover last time? Note that I mentioned oil as “rising again.” It had fallen to 64.5ish and is now at 91.62. I also predicted in earlier posts that the terminal Fed Funds rate (the highest rate the Fed hikes to) would exceed what the market was pricing in as discussed.
I also proposed a redefinition of what Bull and Bear Markets are! It makes sensem and it’s important to how you consider the current risk of stocks…
The Big Picture
As before, wherever possible I’ll keep my commentary to reasonably short points, because what matters most are the trends, not the narratives…
The Fed is not done raising interest rates. Furthermore, compared to the prior assessment of investors that they’d lower rates early next year, the odds don’t get over 50% for the first 0.25% cut until the May 2024 meeting. The market now thinks the Fed has stopped raising rates, but will not cut them for a long time. (You can see the raw numbers HERE.)
Two posts back I said, “The market assumes Fed hikes will stop at a top (terminal) Fed Funds rate of 4.75%, but who is to say that will be enough?” It is now headed to 5.25% to 5.50% or so at a minimum per the CME data.
It’s now at exactly that level. The current Fed Funds target range is 5.25%-5.50%.
The Federal Reserve just raised interest rates, namely the Fed Funds rate, by another 0.25% this past week. That made the U.S. equity market vibrate a bit, but the up trend in the SP500 Index remained intact. They raised rates appropriately, because although as measured by the Headline CPI number, inflation has fallen from 9% to 3%, it is now rising again. Powell did not admit that in his press conference. And yet, agricultural and oil prices are rising again. You can review the DBA (Ag commodity ETF) chart yourself. Here is the oil chart…
WTI Oil On the Rise Again
There is no up trend yet in WTI Oil, but there is a sizable bounce that consumers have noticed. It’s what I’d call a “Bouncing DownTrend™.” These are tradable bounces with specific rules (review this in the prior issue HERE. Scroll to the table.)
The Fed is still a single mandate Fed solely focused on inflation, while previously they were also concerned about unemployment. The labor force is still going strong with employment near 50 year highs. Wages are also rising, though they’ve lagged prices, which is why Americans mostly feel the “economy is not good.” They equate high inflation to “bad economy.” The president sitting in the White House is blamed for current conditions regardless of party.
President Biden need only have a chat with former President Jimmy Carter to find out how the perception of higher inflation works out at the polls. Inflation needs to come down even more prior to the election, or Democrats will have a tough fight on their hands. The Fed is going to do their best to accomplish that reduction in inflation, but the rub is whether they will hurt the economy enough to scare voters despite lower inflation. If unemployment goes up by 1% from 3.6% to 4.6%, that only effects a tiny fraction of voters, but the psychological impact can be greater than that.
So what’s the paradox? It’s the strong up trend on the one hand in the SP500 Index, which is now only 4.91% below its all time high (ATH) of 4818.62, and on the other hand the huge inversion in yield curve represented by 10 year yield minus the 2 year yield along with multiple months of weak Leading Economic Indicators, both of which have predicted prior recessions. And there is more. Earnings for the S&P500 are negative this quarter. There is also a manufacturing recession in the US and elsewhere.
My conclusion, which I shared over a month ago on social media (HERE) is that we should reserve the term Bull Market for market up trends backed by economies that are strengthening, not weakening.
In a Bull Market:
1. The market is in an up trend.
2. Growth of the economy is accelerating.
In a Bear Market:
1. The market is in a down trend.
2. Growth of the economy is decelerating.
If the market is moving opposite to the economic trend, then the market is simply in an up trend or down trend, but there is no Bull or Bear market when the economy is not aligned with the stock market. We could instead say, “The trend is Bullish (if it’s up), but the economy is Bearish (if it’s decelerating).”
Why is this useful? Because it defines the degree of risk. If a stock market is supported by accelerating economic growth (GDP as one measure), no matter where it is in the world, it’s a more reliable up trend to invest in. How does that change what you do? You could choose either to limit your exposure to such a market or set a tighter mental stop if the fundamentals are saying “It’s not a Bull Market. It’s just an up trend.” Only when the trend and the economy are in synch, will we call a given global market a “Bull Market.” Perhaps we should call the other markets “Mixed Markets.”
Now we’ll look at the current charts…
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1. SP500 Index Market Timing (S&P 500 Index®; SPY, SPX):
You can see that the Aug. 2022 high did not contain this bounce. As discussed above, the higher we go based on a slowing economy, the greater the correction to come. I am not saying not to play this up trend. I’m invested in this up trend. I am saying to preserve profits on at least a portion of your exposure, should the trend reverse. You’ll see me lower my exposure when that time comes…
Click the chart to see the details… (the lower RED arrow marks the October 2022 low)
The up trend is intact.
Now let’s review investor sentiment…
Survey Says!
The AAII Survey of Individual Investor Sentiment (AAII) spread is +20.8% (Bulls – Bears). That’s not a huge spread. Positive spreads can press toward 30% or higher in a strong stock market.
There is a cautionary sign for the near term, however. Bullishness hit an extreme level one week prior to this poll. You can read my comments HERE.
| Bulls | Neutrals | Bears |
| 44.9% | 31.0% | 24.1% |
| Thurs. 12 am CT close to poll | ||
Now let’s look at the small caps, gold, and interest rates…
2. U.S. Small Caps Market Timing – Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT)
Small caps are now in a “Bouncing DownTrend™.” It’s a tradable bounce. Don’t chase, but you can buy pullbacks until the trend fails per the rules (see table in prior issue).
Remember that with high interest rates that will be “higher for longer,” those small to mid sized companies that cannot refinance at higher rates without impacting their earnings significantly will fall in price.
Small cap bounce under way.
Gold is next…
3. Gold Market Timing (click chart to enlarge;GLD):
Gold is in a “Consolidating UpTrend™,” which means a deeper correction vs. a “Correcting UpTrend™,” with the possibility of turning into a down trend.
The immediate up trend has been broken, but the longer term up trend remains intact. You’ll see below that GLD is still above the prior breakout above the February 2023 high. That’s a positive.
4. Interest Rate Market Timing (10 Year Treasury Yield; click chart to enlarge; TNX, IEF, TLT):
If the 10 Year Yield (shown below) climbs above that magenta line, we will be on the warning track. If it climbs above the red line, equities will likely finally start reacting to higher rates again after a long slumber of denial.
The number for the Bond Bulls to follow has not changed, and we are above it now. As said on 5-04-23, “The TNX number I’ve been following is 3.334%. The 10 Year Treasury Yield must sustain a fall below there to get the “Big Green Wave” going in earnest. That is the “number of the year” for the long bond/long Treasury market (means 10 years to maturity or more in this context).”
Here’s the current chart…
Rates creeping up again. Must stop to avoid significant damage to long term bonds.
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.
Gold Signal Neutral for a further U.S. stock market rally. The Gold Trend is short term Bearish and longer term Bullish (see discussion above though). The Fed raising rates is a problem for gold until the economy starts slowing or until the market starts anticipating that happening.
Gold will take off again to the upside IF/WHEN 1. Rates start falling at the long end. 2. The economy slows 3. Earnings fall for stocks, which reduces the overall yield on stocks. Gold likes weak competition!
As said before, “If real rates rise as the Fed acts, gold will be hurt, but in the short term, the Fed is hiking into economic slowing Y/Y, so that means rising short rates can LOWER long rates, which could help gold by depressing long term real rates.”
Kept for Reference: “Gold can RISE with stocks when real rates are FALLING, and the dollar is falling. The dollar has been stronger of late, due to the Fed’s planned pivot. Gold could rise WITH the dollar if the economy slows and real long rates fall.
These are thing gold doesn’t like: 1. Rising real rates (bonds/Treasuries become a threat to gold which pays nothing; banks and other companies make more money with rising rates) and 2. Economic recovery with higher corporate earnings. Earnings drive stock prices higher. Stocks pay dividends that compete with bonds, and companies use cash to buy back stock, which drives up stock prices, while gold pays nothing.
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. Real interest rates have been rising around the globe. Economic slowing is creeping in now, which means ultimately real rates will fall again if the Fed suppresses growth.
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.
Rate Signal: At this point Neutral for a further U.S. stock market rally, as rates have risen again. The 10 Year Yield trend is short term Bullish, and intermediate term Bearish.
(Remember: higher rates mean lower bond and Treasury prices and vice versa). We want slowly rising rates in a recovering economy. That’s what happens normally. The Fed raises rates slowly as the economy continues to grow until it doesn’t. What we don’t want is rapidly rising OR rapidly falling rates, both of which I call “Rate Shocks.” The Rate Shock we saw in 2022 was due to the Fed raising rates at the fastest rate since the 1980s.
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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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Sun and Storm Investing Market Timing Blog™ 
Thank you. The post looks great.
Thank you Charles!