A Market Timing Report based on the 05-31-2019 Close, published Saturday, June 1, 2019…
I deliver focused comments on market timing once a week. These are supplemented with daily “Tweets/StockTwits” (see links below) and comments in the “markettiming” room on StockTwits.
1. SP500 Index Market Timing (S&P 500 Index®; SPY, SPX): I warned you in early May the market was overvalued. They went away in May, right on schedule with much help from President Trump and his hawkish trade policies. Now we are in a trending Bearish stock market. How far we go down is unknown to all guessers. How the market behaves at certain levels and when a positive catalyst shows up is much more useful than predicting a bottom. Get your shopping list ready.
Remember that if this becomes a bigger market decline, ALL sectors go down, even Consumer Staples (XLP) and Utilities (XLU). They may not go down as much depending on the inflation rate. Since inflation is falling, they likely would hold up better than the S&P500 Index®, but they’ll still fall.
The only way to protect oneself from a redo of the December decline and make money by buying low is to raise cash ahead of time (which is why I already hold a lot of it) and hold longer term bonds/Treasuries as a hedge (you can own a ladder from short to long durations, but trade at least part of the longer end perhaps). Gold will do well as long as the lift the USD gets from foreign assets sales is overwhelmed by the Fed devaluing the U.S. dollar. Sale of U.S. assets by foreigners during a decline can also hurt the dollar, and help gold. Our market is more overvalued than EM markets, so the selling of U.S. assets could prevail in pushing the dollar down.
How much farther interest rates have to fall is always a question, but many questioned the wisdom of owning bonds when TLT was 120 and it’s now 131.83 as investors finally pile on (plus the coupon!). The best approach is probably to trade the swings in bonds if you have the temperament, or just hold money market funds making 2.23% as I do. TLT could easily make it back to 138 or so as an initial upside target, but it looks extended right now.
I have bond exposure through munis and corporates, but admittedly could have had more! If the Fed is forced to cut rates, which the market now believes it will as soon as September with an over 50% certainty, rates will continue to decline – your window of opportunity is from now to then and for some time beyond if they cut multiple times to keep the economy afloat.
Let’s check in with the earnings trend again…
Earnings Risk: what is shown are the projections in the FactSet 3-15-19 report followed by the reports from 4-12-19 through 5-31-19 (details HERE)…
An additional 1% of companies in the SP500 Index reported this week (98% in total have reported), and earnings growth for Q1 was steady at -0.4%, which if unchanged would represent the first quarter of earnings recession. Companies are selling more products and making less money on the sales.
Here is the data updated for the last data point from this week:
For Q1 2019, analysts expect (98% reported!) earnings growth of -3.6% -> -4.3% -> -3.9% -> -2.3% -> -0.8% -> -0.5% -> -0.5% -> -0.4% -> -0.4% .
and revenue growth of 4.9% -> 4.8% -> 5.0% -> 5.1% -> 5.2% -> 5.3% -> 5.3% -> 5.3% -> 5.3%.
For Q2 2019, analysts are projecting earnings growth of 0.1% -> -0.4% -> -0.5% -> -0.6% -> -1.3% -> -1.7% -> -1.9% -> -2.1% -> -2.1%.
and revenue growth of 4.6% -> 4.2% -> 4.4% -> 4.3% -> 4.3% -> 4.3% ->4.2% -> 4.1% -> 4.1%.
For Q3 2019, analysts are projecting earnings growth of 1.8% -> 1.4% -> 1.3% -> 1.3% -> 0.8% -> 0.6% ->0.5% -> 0.3% -> 0.3%.
and revenue growth of 4.4% -> 4.1% -> 4.4% -> 4.4% -> 4.4% -> 4.3% -> 4.3% -> 4.2% -> 4.2%.
For Q4 2019, analysts are projecting earnings growth of 8.1% -> 8.3% -> 8.2% -> 8.1% -> 7.5% -> 7.4% ->7.3% -> 7.2% -> 7.2%.
and revenue growth of 4.8% -> 4.7% -> 4.7% -> 4.8% -> 4.8% -> 4.6% -> 4.7% -> 4.6% -> 4.6%.
For CY 2019, analysts are projecting earnings growth of 3.8% -> 3.4% -> 3.4% -> 3.6% -> 3.4% -> 3.3% -> 3.2% -> 3.2% -> 3.2%.
and revenue growth of 4.9% -> 4.6% -> 4.7% -> 4.7% -> 4.7% -> 4.7% -> 4.7% -> 4.7% -> 4.6%.
I did the math on earnings growth for the year using data for quarterly 2018 earnings and applying the earnings growth projections for Q1 through Q4 of 2019 and calculated a 2019 earnings growth rate of 1.02%, not the 3.2% growth rate analysts project per FactSet. One would have to assume analysts are either coming to their annual numbers differently than they are their quarterly numbers OR the analysts making 2019 annual estimates are different analysts!
A 1.02% earnings growth rate means a trailing 12 mo PE of 21.66 for the SP500 Index is unreasonable (data HERE)! It means the stocks in the index are starting to act like bonds rather than stocks. The yields on bonds do not have the organic growth that stocks of growing companies have. If you are not getting growth from stocks, you turn to bonds. A bond gives you a set yield as long as the company or country is not going out of business. If it remains in business, it pays the c0upons due on its bonds. What is happening in the market is that economic growth is slowing to a point that stocks look like risky bonds. In these circumstances, the stocks you own need to be the strongest ones around, not the high beta, highly indebted companies that may not be able to pay back their debt when due. Many of those are small caps. Check each stock you own for its debt level. Sell all highly leveraged stocks that lack growth to match the leverage!
A new growth company is by definition making new products, which are not yet perceived as “required for business” by many companies trying to cut back on expenses as tariffs hit their bottom lines. That means they choose to forego adoption of these products for as long as they can. If they can’t, then the companies who sell to them could continue to do well in a slowing economy, but be sure to make those distinctions with accuracy, or you’ll lose several times as much as you would holding the SP500 Index by holding the high beta stock of a company selling products that are not needed on a pressing basis.
Are the Bulls serious? As I asked seven weeks ago…
What would satisfy me that the Bulls were serious about this advance?
Let’s check that list once again… 5/5 Negative!
1. New high. No. We are already in correction territory with the market at -6.85% from the ATH (all time high). A 7% correction is not a dip in my view! Where that commonly used 10% number for corrections came from I don’t know, but it’s a dumb rule. See my Oct. 26, 2018 issue for the “New Rules” on various market decline definitions (dip vs. correction etc.)
2. VIX below the “Bull Nirvana Number” AND my bonus number? No. The VIX Game Score as I call it is Bulls 0/Bears 8. All out Bearish.
3. AD % Line: No go. This is the forth week of declines, now at 16195, although it’s still above the 9-21-2018 high of 16175 after testing it this Friday 5-31. The most charitable view of that is that a bounce is due. Since a Treasury yield bounce is also due, stocks could stage a minor counter-trend rally.
4. Volume: Negative. SPX Volume rose dramatically on the Monday selling and was up again on Friday selling. SPX volume reached a level similar to Oct 23, 2018 (Ref.), which was followed by another 5% drop in the SP500 Index before the bounce to the November high. Investors were dumping stocks this week.
5. The “U.S. Index Matrix Signal” as I call it: No go. IJH breaching March support. Same for IWM. Both have breached the 38.2% retracement level of the advance from their respectively December lows and are headed to the 50% level.
Here’s a Brief Review of the Other Market Risks at Hand:
China Deal Risk: Unchanged. President Xi supposedly reneged on his prior agreements and President Trump called foul. They are not talking for now with no dates set. Negative for all companies doing business in China.
U.S. Iran War Risk: Higher. But still low only because Trump hates wars. 1500 Troops are following the aircraft carrier and B52 deployment. However, the risk is still relatively low, because Trump hates the waste of money that wars are, and he hates blood (talks big, but he’s squeamish as his repeated “bone spur” repeated deferments proved, not to mention being afraid of germs).
Mexico Border Closing Risk Becomes Mexican Tariff Risk: After President Trump folded under Republican pressure, he continued to scheme and decided to impose an initial 5% tariffs on Mexican products if they don’t comply with his demands to control their border with the U.S. by June 10th. These tariffs would rise to 25% over a period of months without Mexican compliance with his demands. If enacted, the tariffs would drive up prices for importers, decreasing competitiveness of those products vs. U.S. manufactured products. That hurts companies like GM who have farmed out their production to Mexico. This will cause inflation to the extent that either producers and/or importers do not eat the tariffs themselves.
Peter Navarro, who is Trump’s super hawk on trade is an outright liar. He claimed Mexican producers would absorb the tariffs entirely. That is a gross exaggeration. Many companies won’t, and inflation will rise in the U.S. This provides a counterbalance of some degree to falling inflation by the way.
Mueller Report/Impeachment Risk: Moderate to High risk now. Mueller made it clear Weds. that he did NOT exonerate President Trump, and had essentially referred the obstruction case to Congress, as the Justice Dept. cannot indict a sitting President. So they say. That DOJ policy has not been testing in court.
The DOJ and, hence the Special Prosecutor could under DOJ rules only render an opinion such as “there was no organized conspiracy to work with Russia to influence the election.”
Note the specificity of the “no organized conspiracy.” The Trump campaign clearly flirted with breaking the law multiple times and that is why they were being monitored by the FBI. If you want to call that spying, go for it. What Trump et. al. did was fully worthy of being monitored. The FBI did the right thing. They did their job.
AG Barr is the most partisan fool one could imagine the way he discusses “spying” in his public appearances. He’s acting as Trump’s personal lawyer and obstructing justice himself at this point. I smelled a rat when Nixon was President, and I smell a rat now. Partisan talk? Nope. I see what I see and look at the possible consequences for the market.
Trump is clearly in danger of impeachment and the stock market will not like that. Clinton’s lying about his affair was nothing compared to what Trump has done. Remember that attempting to obstruct justice equals the crime of obstruction of justice in legal terms. If two or three witnesses testify you attempted to bribe them, you’re guilty of obstruction of justice. Scroll down when you click HERE to read about what the market did around the time of Clinton’s successful impeachment in 1998. It was not pretty. Buying low paid off!
2020 Election Risk: June Democrat debates are on their way with Joe Biden still the track favorite. Read my comments on this HERE. Biden is still about 8% ahead of Trump in a one-on-one poll. Please note that this is about the same lead Clinton had prior to her defeat. The Dems have no chance of coasting to a victory. They must work hard for it.
Deficit Threat: Moderate, but more an issue when rates are rising, not when stable to falling. This is an ongoing threat to our current system, and fiscal liberal Trump and Congress seem to care less about it by their actions. There are no high profile GOP leaders who are deficit hawks. That species is extinct.
Fed Rate Hike Risk to Fed Rate Cut Risk: Much lower risk of a hike for now. The market now expects a rate cut by September due to economic slowing accompanied by a profit recession. Some expect two cuts in 2019, the second in December. A cut is a risk because it’s the opposite of what happens in a growing economy. It could obviously goose the market for a while. Quick and/or large cuts would help the market. Look what “going dovish” did in 2019! In the end, the economy could slow enough that the Fed will be back in a race toward zero interest rates. That would mean huge gains in bonds still lie ahead. Buy long bonds/Treasuries when rates bounce. Be ready to dump a lot of that exposure if Trump swoops in with China and Mexico trade deals and buy some stock exposure.
What’s my SP500 Index downside market timing target? I covered that several weeks ago at the end of the SP500 section #1: HERE. I have more cash than I would normally in a Bull market, because of the catalyst risks noted above. I’ll update my current allocation to equities by Sunday on social media (links below). My belief currently is that my cash will pay off when I’m able to add to equity exposure at lower prices (at least 10-20% off the top). It has NOT paid to hold extra cash recently other than to collect interest of about 2.3ish%.
You can ALWAYS perform “with the market” if you always stay fully invested in your maximum Bullish equity exposure to the SP500 Index and other indexes in your investment plan (small cap, mid cap, and foreign exposure etc.) and rebalance those exposures when they slip or rip. That means to outperform the market using the indexes themselves via ETFs, you must sell exposure higher and buy it back lower.
Now take a look at the SP500 chart. The orange lines are the 2017 up channel.
SP500 Large Cap Index (click chart to enlarge; SPX, SPY):
Now let’s check in on two “Canary Signals” we’ve been following:
“Intel-igent Market Timing Signal” (Intel; INTC): Outright Bearish but has already entered its very own Bear Market at about 26% off right now. It’s attempting to find some support at this level.
Bank of America (BAC) Market Timing Signal: Negative. Fell on increased volume as rates dropped further – again this Friday. As long as rates move lower, so will BAC. It has already corrected over 50% of the move from the Dec. low, and is at the center of its downtrend channel.
Now let’s go on to review investor sentiment…
Keep up-to-date during the week at Twitter and StockTwits (links below) where a combined 34,011 investors are following the markets with me…
Sentiment of individual investors (AAII.com) showed a Bull minus Bear percentage spread of -15.29 vs. -11.37% last week. This is negative, as virtually no Bears have been added vs. two weeks ago when the market was higher and just below the 50 day mav. Now it’s below the 200 day mav. and investors still are not fearful enough for us to call a bottom. You will see a bounce in stocks when rates bounce, however, but don’t be sucked in too easily. Rates are stretched to the downside now and are due a bounce.
Make sure to read the following sections, because they will give you two more clues as to where the stock market will trade!
|Thurs. 12 am CT close to poll|
2. U.S. Small Caps Market Timing (IWM): Stay out. How’s that for simple?
Russell 2000 U.S. Small Cap Index (click chart to enlarge; IWM, RUT):
3. Gold Market Timing (GLD): Gold broke up and out from the downward Bullish wedge. It’s about time! Look at that beautiful volume confirmation as well. Stay with that trend for now. 123.19 is a reversal number and the close was just above it on Friday.
Caveat? Things can change on a Trump tweet dime, but will require substance this time in the form of trade dispute resolutions with China and/or Mexico. Either now would cause a market counter trend rally. The trend is down, so the counter moves can be strong and then be faded. Clearing up both Mexico and China trade deals would induce a major bounce though, so be aware of that in your trading.
The Gold ETF (click chart to enlarge the chart; GLD):
4. Interest Rate Market Timing – The 10 Year Yield is now stretched to the downside and due for a bounce. A further collapse would trigger a cascading sell off in stocks. Watch interest rates closely this week! Stocks have room to fall another 5% or more from here for sure, but it does not happen in one move necessarily. The latter requires real panic, and investors are not panicked yet.
Check out the “Market Signal Summary” below – after you review the following chart…
U.S. 10 Year Treasury Note Yield (click chart to enlarge; TNX, IEF, TYX, TLT, TBF):
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 own moves 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 RED for a further U.S. stock market rally with a Bearish SP500 Index trend. The stock signal is based on small caps, as they often lead the market down.
The V*IX (which relates to SPX volatility; * added to symbol to throw off the webcrawlers!) closed at 18.71 vs. 15.85 last week. These are the other targets: 13.31, 14.04-14.08, 15.04, the “fulcrum” point = [15.94-15.95 to 16.09], 17.06, 17.27, and 17.89. The bonus target #8 is [12.-17-12.37]. The Bulls have ZERO of 8 targets.
The ‘Bull Nirvana Target’ is our V*IX # of 2018: 13.31.” (That is target #7 for the Bulls.)
Gold Signal RED for a further U.S. stock market rally with a BULLISH Gold Trend. What gold does mostly as I’ve written HERE is follow real interest rates.
STILL HOLDS 4-26-19: G*LD has to rise above 123.19 on an immediate basis (* added to throw off the “crawlers,” as I don’t like being part of “consensus.”) IT HAS NOW! Close was 123.33 Friday.
From before: “Remember GLD is being used as an indicator for the ECONOMY here.” If gold continues to rise, it means the market believes real rates will fall, which in the current context means the global economy is slowing. That would hurt U.S. stocks.
Rate Signal RED for a further stock market rally with a Bearish 10 Year Yield Trend. Rates usually RISE slowly in a strong recovery and the stock market rally continues, as I’ve repeated multiple times on social media as well as here. Empirically though, rates that are “lower” (than 3.11%) and are NOT rising rapidly have allowed the market to climb back above the prior all time high (ATH).
I said weeks ago, “Watch the oil price too. Higher oil tends to mean higher rates.” WTI is collapsing and closed at 53.50 vs. 58.63 last week. term (weeks to a few months).
I’ll keep this here as a reminder: this is not currently an issue… “Watch the rate at which TNX climbs if the current trend reverses. If it shoots up very fast, stocks will correct.” In the Sept. 28th issue: “A rapid push higher in rates would mean trouble for stocks, as occurred in early 2018. That’s what I called ‘Rate Shock.'” The period of rising rates in early October I called #RateShockII.
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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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