Forecast and Follow: If rain is forecast, carry
January 1, 2020
Over the long term, crude oil and gold are highly correlated. Crude oil is under performing compared to gold. see CHART 1
Earnings of the S&P large cap, mid cap, and small cap indexes appear to be overvalued relative to most financial benchmarks. This overvaluation suggests EITHER we will see as much as a 50% drop in the indexes to bring the markets to fair or undervalued, OR we need to see a strong increase in earnings. see CHART 2
The energy sector is an important segment of the stock market indexes and the low energy prices have had a very negative impact on energy stock earnings which has had a negative impact on overall corporate earnings. In 2011, when gold was $1,800 and crude was $100, and the energy sector of the S&P 500 was a significant contributor to overall earnings of the index. Currently, small cap energy earnings are less than 10% of their 2011 earnings. see CHART 3
Forecast Conclusion: The huge $1.5 trillion deficit budgeted by the US Government suggests the US has no desire to control spending, interest rates, or inflation. As long as the Fed keeps rates relatively low and gold remains firm, OIL can begin to "catch up" to gold resulting in a significant increase in stock index earnings changing the overvalued condition.
Stock Index Timing .com follows gold looking for divergences between gold, silver, swiss, and the gold miner stocks to identify Market Price Box areas of support and resistance. The plan is to be long gold above and short gold below the current MPB.
A favorable view of gold suggests a favorable view of oil which suggests strong energy sector earnings could help the stock market move higher. Stock Index Timing looks at market trend indicators to forecast market direction, then looks to trade with a bias in the direction of the indicator forecasts. The current extremely over bought forecast indicators, an example is the Active Trader Index indicator shown in Chart 4, suggests an intermediate stock market decline that might be a possible beginning of a correction of the 9 year bull market.
Alternatively, a strong rise in energy sector earnings with an accommodative Fed holding rates low, could set up another bull market leg extension. In that case, we would ONLY look for the intermediate term indicators to work off the extreme over bought condition and then look to follow the market to the buy side. A Market Price Box review of the Stock Market and Gold is posted on www.stockindextiming.com each week.
BOTTOM LINE: After the over bought indicators correct, strong oil with low interest rates could signal another up leg in stocks.
BOTTOM BOTTOM LINE: In 2017, the corporate tax cuts resulted in a 20% increase in earnings that extended the bull market another up leg. Strong oil prices and low interest rates could result in another 10% plus increase in overall index earnings and cause another bull market leg extension.
Intermediate Term Forecast indicator: Based on the historical data shown, the Active Traders Index gives trend change signals at extreme over bought or over sold levels and momentum indicator based trend change signals.
The Active Traders Index is a proprietary indicator calculated each day from the listing of the ten most active stocks on the NYSE and ten most active stocks on the Nasdaq. The red line is the cumulative Active Traders Index and the oscillator in the middle of the page is based on the daily Active Traders Index number.
Chart 4. ACTIVE TRADERS INDEX
If anything in this report is viewed by the reader as a trade recommendation, all aspects of any trade recommendations contained in this report are subject to modification at any time.
FUTURES TRADING INVOLVES SIGNIFICANT RISK OF LOSS AND IS NOT SUITABLE FOR EVERYONE AND THE RISK OF LOSS SHOULD BE CONSIDERED CAREFULLY BEFORE MAKING ANY TRADES.
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PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
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ANY REFERENCE TO PERFORMANCE IS INTENDED TO BE UNDERSTOOD AS STRICTLY THEORETICAL.
REGULATORY DISCLOSURES REGARDING HYPOTHETICAL RESULTS
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS EXISTS IN FUTURES TRADING.