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Market Timing

Tuesday, March 26 2019

I rarely do this, but I have a included below a copy of an article that explains the fallacy of last Friday's drop as a "tip" to what is coming a lot better than I can.  The article explains how traders and algos can almost immediately move the market dramatically, and can come and go like the wind.  They react to recent news almost immediately; even to events that may not happen until 6-18 months in the future, or not at all.  They can easily trade a very high number of times each and every day.  BUT, US "LITTLE GUYS" CAN'T TRADE LIKE THAT WITHOUT GETTING SLAUGHTERED (so, don't chase your tail).

Does #GrowthSowing Subbenly Matter?

By Dave Moenning on Mar 25, 2019 07:20 am (slightly modified)

One of my favorite sayings on Wall Street is:
"Things don't matter on Wall Street until they do.  But then they matter a lot."

For example, the dueling issues of slowing growth and the flattening yield curve have been with us for quite some time now. In fact, we've known that global growth has been slowing for more than a year. We've known that the torrid pace of growth in the U.S. economy and corporate earnings would have to slow for almost as long. And we've been watching the yield on the U.S. 10-year fall steadily for the last 6 months.

On Thursday, March 21, 2019, the stock market appeared to make a meaningful break above an important resistance zone as the S&P 500 and NASDAQ both stepped lively to their highest respective closes since last October. To the bulls, this meant that investors were ignoring the current data (you know, the slowing growth stuff) and focusing on better days ahead.

After all, the Fed has reversed course and is now on hold, and the trade deal - the deal that the bulls hope will spark a resurgence in global economic activity - is expected to get done.  All good, right?  

Lest we forget, the stock market is a discounting mechanism of future activity. So, the bullish premise actually made some sense.

But then it happened.
On Friday, the yield curve (as defined by the spread between the yield on the U.S. 3-Month T-Bill and the 10-Year Treasury Bond) inverted. Meaning that the yield of the longer-dated bonds fell below that of short-term T-Bills.

Yep, that's right; what is known as the nearly infallible predictor of U.S. recessions flashed a sell signal on Friday.  And apparently the algos knew what to do with that (yea, right).

Suddenly, the concept of #GrowthSlowing mattered. No one had given it a thought the day before. But now that the predictor of the last seven recessions here in the good 'ol USofA had flipped from green to red, this was suddenly a problem (as in a drop of  -2% in one day kind of a problem).

The impetus for the rather sudden concern about the yield curve was the nasty manufacturing data out of Germany and the Eurozone. In short, Germany's PMI, as calculated by IHS Markit, fell to the lowest level since 2012 and the New Orders component hit it's lowest reading since, wait for it... 2008. Ouch.

This report was accompanied by the fact that Germany's official GDP for Q4 came in at 0.0% and the PMI for the Euro area was the weakest since 2013. Now couple this not-so-hot news with some recent weak data in the U.S., the yield curve inverting, and word that the Mueller Report would be delivered imminently and well, things started to unravel pretty quickly Friday.

So, Is It Time To Worry?

Another WallStreet-ism that might be applicable here is:
"One day does not a trend make."

In this case, it is important to recognize that the yield curve inverting for a single day isn't "the" signal that a recession is about to happen (yea, like in the next 6-18 months). Especially in the era of high-speed trading (across all markets, around the globe) where things can - and often do - turn on a dime.

No, the point is that the yield curve will need to stay inverted for some time before we should view this as a harbinger of bad things to come.

The chart below makes this point clear. On a monthly basis, the yield curve has inverted before the last three recessions. But it also important to note that the yield curve has inverted at least eight times since 1965. And yes, six times recessions did follow. But the key here is that the indicator isn't perfect.  Nor has it even flashed a signal yet (although we are just a week away from the latest update).
In addition, those seeing the glass as at least half-full can argue that there is generally a pretty decent lag (months/years, not days) between the time when the yield curve inverts and when a recession begins. As such, there is still time for good things to happen.  You know, like a tremendous trade deal.  Or lower rates to encourage home buying and capex. Or action by the central bankers of the world.  Or for the data to improve.

On that note, don't look now bear fans, but last week's Philly Fed report actually rebounded nicely in March.

In addition, the recent report from the Conference Board's Leading Economic Indicators came in above expectations. As did the latest data on Existing Home Sales.

Speaking of the data - particularly the U.S. data, that is - let's also keep in mind that the long government shutdown likely impacted the efficiency/accuracy of some of the numbers. So, there's that.

To be sure, the trend of a lot of economic data has not been going in the right direction. As such, it will be important to keep an extra close eye on the data in the coming months. Because in short, if the trend can turn (or at least flatten out) then the risk of recession in the U.S. declines.

The Key Point

My key point on this fine Monday morning is that from a macro point of view, nothing changed on Friday. There was no new information provided.  That is, everybody knows that growth has been slowing.

The question we should be asking is if the slowdown is going to get worse. Remember, the U.S. economy is driven by the consumer. And the bottom line is consumers like to spend money. Unless, of course, there is a crisis that puts their jobs or the economy at risk. Then they tend to stop on a dime and wait to see if everything will be okay.  But then it's back to the malls and to all those shopping sites.

So, will the inverted yield curve become reason enough for traders to move to a risk-off mode for a while? Sure, that could certainly happen. The big boys and girls on Wall Street do love a good bout of volatility to spruce up their trading returns.

But for most of this year, investors (the folks with an investing time frame beyond lunch that day) have been looking at the bright side. And unless something bad actually happens, I (Moenning) would expect to see this continue. Once the dust settles, of course.


MIPS - At any rate, we don't have to worry because we have MIPS to tell us what to do...  Stay tuned...

Paul Distefano, PhD
CEO / Founder
MIPS Timing Systems, LLC
Houston, TX

Posted by: Dr. G. Paul Distefano AT 04:15 pm   |  Permalink   |  Email
Thursday, March 21 2019

From the previous email below dated 3/15/2019, you can see that the SPY (S&P 500 Index ETF) has been trying to break above its tough upside resistance level at $281/share for several weeks.  Today's graph immediately below shows that after trying for 18 days, the SPY strongly broke above this resistance level today and closed very near $285. 

The All-Time High for the SPY sits at $294 (set in Sept'18).  That is only 3.5% above today's level.  I believe that it is almost a given that the SPY will move up in the next few weeks to test that level.  And, if the SPY breaks above $294/share and holds for a few weeks, we can look for another good run up. 

The MIPS1234 and MIPS/Nitro signals are all Long now, but stay close...

Let's hope for new highs in the next few weeks, but wait for MIPS to tell us what to do...

Good Trading...

Paul Distefano, PhD
MIPS Timing Systems, LLC
Houston, TX


Posted by: Dr. G. Paul Distefano AT 10:29 pm   |  Permalink   |  Email
Friday, March 15 2019

This may be the "Breakout" for the SPY that we have all been waiting (and hoping) for:
 - see purple box on the middle right in the graph below
1) The SPY climbed to and hit the Resistance 1 level at $281/share, 
2) and it stayed around there for about 7 days,
3) then in the next 5 days the SPY dropped to the 200-Day SMA level for support, and   
4) moving average support held, and SPY rebounded back up to (and slightly above) Resistance 1 again.

Let's hope for new highs next, but wait for MIPS to tell us what to do...
MIPS1234 and Nitro are sall till Long.

Good Trading...

Paul Distefano, PhD
MIPS Timing Systems, LLC
Houston, TX


Posted by: Dr. G. Paul Distefano AT 11:55 am   |  Permalink   |  Email
Tuesday, March 05 2019

There is a lot of talk (and a lots of good reasons) why we should strongly consider the possibility of, and even expect, the end of this market rally and/or the end of this 10 year bull market.

Current Rally
First, the current rally in the S&P 500 (SPY) has been "on" for two strong months
(up over 20%) without looking back, and is now being challenged by strong resistance at $281/share.  As you can see in the graph immediately below, the SPY has tried to break above $281 for the last 5 days in a row, and has failed to do so.  And, exactly $281/share was the strong resistance price to the upside in the previous three rallies in 4Q'18.  So, what's next?

There are a multiplicity of reasons why the long-term bull market that we have been in since 2009 may be coming to an end.  We have what feels like the strongest political unrest in decades, the Fed and interest rates, China tariffs, overbought markets, slower earnings growth, etc.  We are all aware of these and there is no reason to repeat them herein.

There is one other thing brewing that all investors should be aware of that could lead to a correction soon or even be the catalyst for a serious bear market. This threat is "Margin Debt".  Margin Debt, of course, is the money that large investors and institutions have borrowed (hence, debt) to buy or short more equity positions than they have "real" money to cover.  For example, qualified investors can buy $2,000,000 in equities with the $1,000,000 in cash they actually have (2.0x leverage) by "borrowing" the sceond $1,000,000 (debt). This is great ride when the market is going up.  But with 2.0x leverage, if the equity they own drops say 25%, they will have lost 50% of their initial investment.

The above is why Margin Debt is dangerous for investors who owe the debt AND for us that don't.  It is dangerous for these investors because of their leverage and it is dangerous for us because when the market goes against the investors who owe the debt (mainly very large investment firms and hedge funds), they run for the hills and drive the market down much quicker than normal (and innocent buy and hold investors can get cremated along the way).

Margin Debt is at an all-time high from all views (like total debt, or debt as a % of ownership, etc). See the graph below.  The current level of debt is staggering, especially when compared to 2000 and 2008.

When stock markets roll-over from up-to-down, its moving averages roll-over from where the short term moving averages (50-day) are on the top and long-term averages (200-day) are on the bottom to where the short-terms are on the bottom and the long-erms are on the top. And, vice-versa for markets that move from down-to-up. 

Note that in September 2018 the market was going up and the 50 was above the 100, and the 100 was above the 150, and the 150 was above the 200.  Then, as the SPY tumbled in 4Q'18, by mid-December the moving averages had changed places with the 50 on the bottom and the 200 on the top.  Since then, with the current rally, all moving averages have merged to the same price today, which kind of puts all market direction forecasts back to ground zero. So, where does the market go from here?

Wow, what can normal investors like us (the little guys) do in times like this.  MIPS told us what to do in 2008 and we were up over 50% when the market was down more than 50%.  So, we are going to wait for MIPS to tell us what to do in 2019.

Paul Distefano, PhD
CEO / Founder
MIPS Timing Systems, LLC
Houston, TX

Posted by: Dr. G. Paul Distefano AT 02:43 am   |  Permalink   |  Email

MIPS Timing Systems
P.O. Box 925214
Houston, TX  77292

An affordable and efficient stock market timing tool. Contact MIPS
281-251-MIPS (6477)