Market timing as of 09/22/2018

The market is making new highs. There are always two camps of market timers. One camp predicts a crash is coming while the other predicts it will continue making new highs. This article includes both arguments and suggests how and what actions to protect your investments.

Management summary

The market is fundamentally unsound as evidenced by fundamental metrics but technically sound as evidenced by technical metrics that both will be described in this article.

Suggested actions

No one predicts the market correctly and consistently. Otherwise there are no poor folks. Moving the risky investments such as most stocks to cash too early would miss the potential profits. Moving it too late would risk the loss of your stocks.

Your actions depend on your risk tolerance. If you are conservative such as a retiree, you may want to have larger portion of your investments in lower risk. You can take one of the following three actions or combine all the three actions.

1.       When the market turns to technically unsound, it is time to move your stocks to cash. The market timing indicators may give false signal. In this case, the same indicators would tell you to move back to stocks. Most likely you do not lose much except dealing with the consequences of taxes in non-retirement accounts.

2.       Move a portion of your risky investments into cash, laddered CDs and/or short-term bonds. Again, the size of the portion depends on your risk tolerance.

3.       Use stops. The sell orders would be changed to market orders when the stocks dip below prices specified by you. I prefer use SPY or other ETF to determine the market direction. Some sectors and some stocks move faster than others. In one crash, my energy stocks were still profitable while the market was tanking. Eventually these energy stocks caught up and fell fast. Today’s highly profitable stocks are FAANGs.

I propose and prefer ‘manual stop orders’ to prevent market manipulation. However, usually large ETFs cannot be manipulated easily. Manipulators try to profit from your stop orders. You set a stop order in your mind. When the stock falls to such price, you sell it via market order.

My friend confirmed my “manual stop order”:

“High-frequency trading via algos can see exactly where pre-set trailing stops are and sweep across them (play them) like strings on a violin. Pre-set a trailing stop and it is bound to be triggered because algos hunt them down. Then watch the market rip higher.”

Technical is more important than fundamentals as the market could stay in high value for a long time as described in my article on market timing. If you had an inverse ETF betting the market to fall 5 years ago, you may have lost up to 50% of its value by now.

Analysis: Fundamentals and Technical

It consists of Fundamental Analysis and Technical Analysis. The former measures how expensive is the current market and the latter measures the trend of the market.

Many metrics are obtained from finviz.com as of 9/22/2018 while others are obtained from other websites. With the exception of Fidelity.com, all websites described here are free and readily available.

The following chart use SPY to represent the market of the top 500 stocks. It is market cap weighted. It means the higher the market cap the stock, the higher percent of the stock is represented in the index. It turns out most are riskier FAANG stocks.  

Enter finviz.com in your browser and enter SPY. I am not responsible for any errors.

Indicator	Pass	Current Value	Indicating
·         Technical
Death Cross1		SMA-50   = 2.3% & SMA-200 = 6.3%	Pass
Technical Analysis: 350 SMA%2	>0	Price above the SMA-350.	Pass
RSI(14)	<70 span="">	61	Pass
Duration (yr.)	<5 span="">	10	Fail
		Overall	Pass
·         Fundamental
Valuation
P/E3	<15 .7="" span="">	25.4	High by 62%. Fail.
Shiller P/E3	<16 .6="" span="">	33.5	High by 102%. Fail
P/B3	<2 .78="" span="">	3.52	High by 27%. Fail.
P/S3	<1 .50="" span="">	2.33	High by 55%. Fail.
Oil price	30-100	70.71	Pass
Interest rate6 T-Bill 1 months7	<5 span="">	2.05	Pass
T-Bill 3 months7	Yield	2.18
T-Bill 30 years7	Curve	3.20	Pass
Flow to Equity4		-3.371M	Fail
Flow to bond4		7.206M
Corporate debt/GDP8	<40 span="">	45%	High by 13%. Fail.
USD5		Strong	Fail
Gold		High	Fail
Bubble		Several	Fail
Market experts		Fear long term	Neutral
Politics		Trump	Fail
Misc.		Trade war	Fail
		Overall	Fail

Some links are deleted as this article is not replacing the one in my book “Profit from coming market crash”.

¹ This is the market timing technique without using chart.

² I tried to use SMA-400% to reduce false signals without success.

³ Same as CAPE.

⁴ It is based on 09-12-18. “Flow to Equity” is based on domestic ETF estimate. Treat it as two phases in moving to equity. First phase of moving excessively to equity indicates the market is peaking. The second phase indicates the market is plunging when flow of equity is excessively negative.

 

⁵ Global corporations will suffer in profits converted back to USD and hard to sell to foreign countries.

 ⁴ Get it from the above link.

⁶ Rising interest is bad for corporations and high-ticket products, but good for lenders.

⁷  Based on 09/21/18

⁸ With the low interest rate, it may not be that critical. Corporations take advantage of the low interest rate.

Overall

Overall, technical is fine as the market is making new highs.

Overall, fundamental is not sound. The increasing market price also is decreasing the fundamental metrics such as P/E, P/B and P/S. It is bad unless there is reason to support such as the fast earnings growth in 2009.

Many metrics are deteriorating

RSI(14) is getting closer to 70 (a passing grade specified by me).

Inverse yield curve (1.5 vs. 2.33) is about 61% apart from my interpretation and calculation. It is not a warning now but we should keep an eye on it. Most market crashes has occurred when it is 0% or negative. The theory is in normal case the short-term interest rate should be lower than the long-term interest rate.

Another source calculates it is 1.1% and that is very close to inversion since the last recession. From MarketWatch, the 30-year fixed interest rate is 4.66% and 1-year rate is 3.96% giving an inverse yield curve 18% apart, which is quite alarming.

Mathematically incorrect, today’s 4% is full employment. Most recession are closely preceded by troughs in unemployment and the reverse for economy recovery.

GDP growth has been predicted from 1.8% to 3%. The 3% is from the White House for their obvious purpose. I predict it will popped up due to meeting the tariff deadlines, tax cuts and spending increases. It will then declining to 2%. A healthy US economy should maintain 3% without special factors such as excessive immigration.

We have record debts: investors’ margin, corporate debt and Federal debt. These are bubbles going to burst.  Federal debt / GDP is about 95% today. It does not predict the market performance as this ratio was 53% and 55% before the last two market crashes. It will affect the long-term performance of the economy when we have to service the huge national debt.

We do have 10 years of stock growth at the expense of record Federal deficit. Thanks to President Obama from investors and no thanks from next generations who have to pay back our national debt. It is overdue for a correction. Hopefully it is not a crash which has an average loss of about 45%. We did have two recent corrections losing more than 10%: 2011-12 EU debt crisis and 2014-16 oil crash.

Oil price has been rising from $30 per barrel to today’s $70. It is still a long way from my warning of $120.

Triggers

Trade wars with China, Canada or EU will be the strongest trigger. Our most profitable companies are virtually all international companies. They need fair trade to prosper.

The other trigger is the possible impeachment of President Trump.

Afterthoughts

This is a good article to start looking at the market risk. If you have my books “Profit from coming market crash”, refer the market timing chapters for more information.

Update.12/4/2018 (today at 3:35 pm). From 9/22/18 to now, SPY lost 7% (35% annualized) while FAANG lost 16% (77% annualized) without including dividends.  

-------------------

For more of my reasoning, check out the book described next. It has 950 pages (6*9) for $9.99. It could be the best $10 you ever spend.

The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.


I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book.

--------------------