Gotcha! Stocks Did it Again

Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on September 23. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

The Risk/Reward Heat Map (RRHM), featured in the September 6 Profit Radar Report (and re-posted below), showed an elevated risk level for September, and we saw the biggest pullback in over a year (5.28% peak to trough for the S&P 500).

Monday’s decline, the biggest one-day drop since May 12, moved a couple of big forecasting services to call this bull market ‘confirmed over.’

While the risk was ‘on schedule,’ I didn’t – I couldn’t – call the bull market over or even presume further losses. Here were my three reasons for giving bulls the benefit of the doubt:

– The S&P 500 still closed above key long-term support levels

– The decline unfolded in only 3 waves (wave 3 tagged Fibonacci target at 3,308).

– Stocks left a massive open chart gap

In Monday’s special Profit Radar Report update I stated the following:

The S&P 500 decline is best counted as 3 waves. There is a massive open chart gap at 4,427.78 which is highly likely to be closed. The S&P 500 closed above various support levels and is likely to bounce from here.”

The charts below show two long-term S&P 500 support or ‘ditch levels’ (as in: don’t ditch stocks until support is broken).

The next chart shows the 3-wave decline (this is the original chart published in Monday’s Profit Radar Report) and open chart gap (dashed purple line). Also notice that wave 3 tagged the 1.618 Fibonacci extension level (of wave a green line) at 3,308 and that RSI-2 was over-sold.

As of this morning, the gap has been closed and price already overlapped the wave a low (4,435.36), which means a straight-forward, bearish 5-wave decline is no longer possible.

According to Elliott Wave Theory, a 5-wave decline would have indicated a trend change from up to down, while a 3-wave decline is only a counter trend correction.

To be honest, on Monday I thought there’s at least a 50% chance the 3-wave decline in place at the time would tag on waves 4 and 5 and turn into a more bearish 5-wave decline.

A number of analysts projected just that and already called the bull market over, but such conviction without evidence is just wishful thinking. My analysis is certainly not perfect, but I don’t allow it to be clouded by personal expectations.

Based on Elliott Wave Theory, the decline is likely over unless it turns into a more rare and exotic pattern indicative of a trend change.

Simply based on resistance, stocks still could be rebuffed and I mentioned in Sunday’s Profit Radar Report that:

“Bearish September seasonality seems to have gotten a fair amount of media attention. The market may decide to bounce and flush out premature bears.” I suppose the bounce is accomplishing just that.

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Profit Radar Report.

S&P 500 Update


Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on September 16. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

This is the S&P 500 Futures chart we’ve been looking at. The September 6, Profit Radar Report stated that: “Initial support is at 4,510 and a break below will increase short-term risk.”

The S&P has drifted lower since falling below 4,510 and, unlike all other pullbacks since April (blue boxes), the S&P has not bounced right back. Perhaps this means that the character of this rally has changed. Next support is in the low 4,400s. A sustained break below would further increase risk.

AAPL peeled away from double resistance, and the decline from last week’s high looks like 5 waves, which suggests 2 things:

1) a bounce (wave b or 2)

2) followed by a relapse and at least one more leg down (wave c or 3)

Last week’s Market Outlook mentioned that August highs tend to make investors cry (if you haven’t read it, the full article is available here). Here is another study that suggests to be cautious.

The chart below plots the S&P 500 (red graph, since 12/1/20) against the 10 most similar time periods. For this study we only focus on the average forward performance, which is illustrated by the bold black graph to the right of the dashed red line.

On average, the S&P has hit a rough spot right about now … and that rough spot can last several months.

The Risk/Reward Heat Map projected risk for September and we are starting to see some of that risk. To kick up the risk level further, the indexes need to stay below resistance for the next few days and start heading south again thereafter (which seems like a real possibility).

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Profit Radar Report

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

S&P 500: August Highs Make Investors Cry


Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on September 9. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

The S&P 500 finished August perched on an all-time high (ATH). In the past, August highs have often made investors cry.

Since 1970, the S&P carved out 12 other August ATHs (it set a 6-year high in 1979 and missed a new ATH by a few tics in 1984). All 14 signal dates (starting with the first day of September) are shown and highlighted below.

It’s tough to cram 50 years of history into one chart, but we can still see that August ATHs preceded some challenging times (i. e. 1972, 1987, 2000, 2014). Let’s drill a bit deeper.

The chart below shows the S&P 500 forward performance starting with the first day of September. The 5 instances since 2000 are shown in yellow, the 9 instances prior to 2000 are shown in gray. 2020 (in red) shattered all precedents with the exception of 1986.

As the performance tracker (bottom table) shows, returns for the next 1 – 3 months have been dismal.

The above study was just 1 of 3 studies published in Monday’s Profit Radar Report, which also featured the latest Risk/Reward Heat Map (a visual tool that shows risk based on 100s of studies).

Stocks have been immune to any kind of risk projection so we need price to verify risk with a drop below support.

Below are some basic levels to help judge risk and reward. The Nasdaq QQQ ETF is up against resistance. It will take a break above resistance to unlock higher prices (perhaps a blow off top).

DJIA is stuck in a potential wedge. A move above and back below upper wedge resistance would be a warning signal, as would be a good close below the lower wedge line.

Monday’s Profit Radar Report showed the below Bitcoin Futures chart and pointed out that price is against resistance while over-bought, which meant short-term risk was elevated. Within hours, Bitcoin dropped 10,000 points, nearly 20%. This general bias is likely positive as long black trend channel support holds.

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the

Continued updates and factual out-of-the box analysis are available via the Profit Radar Report

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

Inflation, Gold, S&P 500 Update


Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on August 26. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

Stocks actually pulled back a bit last week, but last Wednesday’s Profit Radar Report showed the chart below (price has been updated) and stated the following (the chart was also included in last week’s Market Outlook):

On Monday, the S&P made it as high as 4,480.26 and has fallen below some minor support levels since. RSI-2 is now over-sold, which has marked the end of any pullback since May (dashed gray lines). Since the 4,485 target was not fully met, the market has still the option to reach and perhaps briefly exceed it.

While the bounce to tag our target around 4,485 was not unexpected, I was surprised to see such oomph behind that move.

On Friday, Monday, Tuesday (3 consecutive days), more than 68% of NYSE-traded stocks advanced and, more noteworthy, more than 75% of volume flowed into advancing stocks all 3 days.

The chart below highlights the 10 other days (since 2003) when the S&P 500 rallied into an all-time high, while a bearish NY Composite advance/decline divergence exists, with the 3-day SMA of up volume and advancers >77% and >70%. This has been bullish since the 2020 low, but a bit more mixed prior to that.

In my opinion, this mini breadth trust neutralizes some of the bearish divergences reported recently.

Nevertheless, my Risk/Reward Heat Map still projects risk for August/September, the up side target has been met, a small 5-wave rally may have concluded. At minimum a brief pullback is likely (such as today), but it still will take a break below support to dent the bull market.

Below is just a quick glance at some inflation metrics. What they mean for consumers and investors and how to hedge against inflation is discussed here: How Bad is Inflation?

The August 8 Profit Radar Report featured the gold chart above and stated that:

If gold reaches the green target box, the decline from the August high could be counted as 5 waves, which would clarify the longer-term picture and set up some better trading opportunities (i.e. buy in the target range).”

Within hours of that update, gold tumbled 5%, touched the upper end of the target box, and bounced back. It all happened overnight. The rally from the low appears to have traced out 5 waves, which suggests another (brief) pullback before a more sustainable advance.

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Profit Radar Report

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.

How Bad is Inflation?


Inflation is on the rise and it’s a real concern for consumers and investors. To help readers assess and navigate the inflationary environment I am publishing excerpts of recent Profit Radar Reports below:

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

Excerpt from the August 22, 2021 Profit Radar Report:

The June 6, 2021 Profit Radar Report talked about inflation and stated the following: 

From a contrarian perspective, when a trend becomes too popular, it’s usually nearing its end. However, unlike any other class, inflation can turn into a movement and instead of reversing it could turn into a self-fulfilling prophecy. How so? If the fear of inflation becomes engrained enough for consumers to buy items today because they fear it will cost more tomorrow, the cost of goods will rise regardless or despite of supply and demand forces.

I don’t think we are there yet and we may see inflation stabilize for a while. Nevertheless, inflation will likely become more of an influence for our recommended trades. In times past, when cash was king, we were more content sitting out a trade knowing the purchasing power of cash will remain stable. Moving forward, more research will be devoted to identifying sectors and commodities more likely to prosper in an inflationary environment.”

Since the above assessment, the CPI’s 12-month rate of change (ROC) increased from 4.2% to 5.3% but Google searches from inflation dropped 43%. At this point it doesn’t seem like consumers’ fear of inflation is pronounced enough to turn it into a self-fulfilling movement.

Commodities in general, one of the better inflation hedges, haven’t moved any higher over the last couple months. 

DBC (Invesco Commodity ETF) dropped 8.7% from its high, but is at support while over-sold. 

DBA (Invesco Agriculture ETF) was unable to break higher, pulled back, and is also near support while almost over-sold.

This is a short-term inflection zone for DBC and DBA. We’d like to ultimately see a deeper pullback (possibly after a bounce).

Excerpt from the August 18, 2021 Profit Radar Report

EWZ (iShares MSCI Brazil ETF) failed to close the open chart gap (dashed purple line) at 42.09 by a few tics and has since dropped some 15% and sliced through the rising support trend line. By many measures (in addition to RSI-2), EWZ is oversold. 

About 25% of Brazilian stocks are in the materials sector, as such EWZ is a partial commodity play, and as mentioned in the June 6, 2021 Profit Radar Report, commodities are historically one of the best inflation hedges. Short-term, EWZ would have to move back above resistance or meet the next support around 34 for a lower risk entry.

Continuous updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. 

Follow Simon on Twitter @iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

Stocks are Tired but Fighting


Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on August 19, 2021. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

The stock market has coughed up some epic divergences and curious internals lately. First we’ll look at what we’re seeing and then at what it means.

– At the last 3 S&P 500 all-time highs (Aug. 12, 13, 16), less than 50% of NYSE-traded stocks advanced and less than 50% of trading volume went into advancing stocks. This happened 11 other times (since 2009).

– The cumulative NYSE advance/decline line has failed to confirm S&P highs since July 6. With 32 consecutive days, that’s the longest divergence since July 2014 (see chart below).

– There’s never been a bigger spread between Nasdaq-100 and Nasdaq Composite components trading above their 50-day SMA (in August, as high as 73% for the Nasdaq-100 and as low as 31% for the Nasdaq Composite).

– Yesterday, the VIX soared 20.44% even though the S&P dipped only 1.07%. This happened only 6 other times since 2009. 

Usually when there’s a big VIX spike knee-jerk reaction, it’s a positive for stocks (almost like a flush out the weak hands event). This time, the figures tell a different story.

The chart below shows every time the VIX spiked more than 20% on a day the S&P dipped less than 1.10% (there were 7 total signal dates). A quick glance reveals that 5 of 6 signals preceded some pretty rough markets.

Yesterday, the VIX soared 20.44% even though the S&P dipped only 1.07%. This happened only 6 other times since 2009.

The chart below shows S&P 500 forward performance after each signal date. Two things jump out:

– Forward returns were anemic.

– Odds of positive returns were only 50% for the first 6 months.

Those are dismal return figures considering that the signals occurred during one of the strongest bull markets in history.

Needless to say, there’s a lot of activity under the stock market hood and I’ve seen the media coming to misleading conclusions without checking the facts.

The Profit Radar Report always looks at the facts. Recent updates identify other times when similar conditions existed (i.e. 3 consecutive all-time highs with less than 50% participation, NYSE a/d line divergences lasting longer than 9 days, Nasdaq-100 vs Nasdaq Composite spread) and how the S&P 500 performed thereafter.

The stock market is unprecedented as it is, but there is no excuse for at least getting our facts straight and make fact-based decisions.

Short-term, as brought out in last night’s Profit Radar Report, the S&P 500 ended yesterday over-sold (dashed gray lines, chart above), which marked the last 3 pullback lows.

Failure to get above resistance (red lines) and progress to the down side would suggest this pullback has more bite than prior ones.

My Risk/Reward Heat Map (more info available here if you are not familiar) shows elevated risk for August/September.

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Profit Radar Report

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

S&P 500 Update

Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on August 5. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

Please accept my apologies for the lengthy newsletter pause. My brother and I had to go to Germany to take care of some property-related issues.

Thank you for the concern many have shown about the devastating floods. Fortunately those occurred north of where we were, but we feel for many who have lost their homes and lives. This is the view from our balcony after it stopped raining.

I always work remotely and have never skipped a scheduled Profit Radar Report update, but since I didn’t expect any big moves (and nothing changed) there was no absolute need for Market Outlook updates. I hope you are enjoying a good summer (up until today uninterrupted by my e-mails :).

From a timing perspective, the S&P 500 encountered an interesting 114-day turning cycle that’s been working since 4/26/2019. Thus far, the cycles has not been validated nor has it been invalidated, but if the cycle is going to show its teeth it should do so soon.

Two developments I always monitor, especially with the S&P 500 at or near all-time highs, are breadth and sentiment.

The chart below plots the S&P 500 against a variety of breadth gauges, all of which have failed to confirm the latest S&P highs. The bearish divergence between the S&P and the cumulative NY Composite advance/decline lines are considered highly bearish by many analysts.

While the 1987, 2000 and 2007 market tops were preceded by S&P 500 / NYC a/d line divergences, not every divergence causes a major top.

The Profit Radar Report looks at the big picture and now consistently identifies how the market reacted in the past to conditions we see today.

For example, in addition to the bearish divergence, at the July 26 all-time high:

– only 43.62% of volume flowed into advancing stocks

– only 45.75% of NYSE stocks advanced

– NYSE highs outpaced lows by only 1.85%

– 56.31% of stocks traded above their 50-day SMA

– 87.98% of stocks traded above their 200-day SMA

The first 3 data points are based on 10-day SMAs to smooth out outliers. Aside from the 200-day SMA figure, that’s some seriously ‘bad breadth.’

One could (and many do it every day) cherry pick one of the above indicators, look at past precedents, and paint a bearish picture (the percentage of stocks above their 50-day SMA is particularly ominous). But, and that’s a big but, if you you look at all of the above indicators, you get the signal dates below.

Unfortunately those signals dates are neither bullish nor bearish and are not very actionable, so what’s the point?

This knowledge protects us against falling prey to biased, ignorant or fear-mongering analysis.

The latest Sentiment Picture features the same kind of analysis for investor sentiment and shows at what other times the 9 sentiment gauges we monitor stood at levels most similar to today.

In short, based on cycles we are watching if there’s enough weakness to draw the S&P 500 below important support. As long as there isn’t, stocks can continue to grind higher.

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Profit Radar Report

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

Smoke Under the Hood While Firing on All Cylinders


Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on July 8, 2021. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

Here is the S&P’s ‘resume’ for the first half of 2021 (how time flies!):

– S&P closed 5 consecutive months at an all-time high

– S&P closed April, May, June at an all-time high

– S&P gained 14.4%

– S&P delivered one of the most persistent H1 rally ever

That’s obviously impressive, especially after what happened 2020. The question is this: Have stocks come too far or will momentum push them higher?

To get a clue, I’ve identified times when the S&P 500 met at least 1 of the 4 criteria mentioned above. The search resulted in 45 dates, 10 of them met multiple (1 of them all) of the 4 criteria.

S&P 500 performance following the signal dates has been downright mind-boggling with a directional consistency of up to 88%.

The full study along with S&P 500 forward returns for each instance (including the one that met all 4 criteria), average return, odds of positive performance, etc. is available in the July 5 Profit Radar Report.

The VIX is up 13% today, which comes after a S&P 500 all-time high against a bearish NY Composite advance/decline line divergence yesterday.

This has happened only 9 other times since 2007. As the chart below shows, 5 of those 9 times preceded corrections (at times quite nasty ones). The other 4 times were quite bullish for stocks.

Courtesy of the pandemic, seasonality has become less effective, but it’s still one of the factors I monitor. The chart below compares YTD S&P 500 performance with regular and post election year seasonality.

July is a strong month in post election years … but then June was supposed to be flat … and was everything but.

More intriguing than S&P 500 seasonality is VIX seasonality right now. The June 13 Profit Radar Report stated that:

The VIX is sliding lower with support at 13.50 – 15. VIX seasonality projects the biggest low of the year around late June.”

On July 28, the VIX traded as low as 14.10 and spiked as high as 21.29 since, a 51% move. That’s why I still look at seasonality.

The July 5 Profit Radar Report highlighted that the S&P 500 had closed higher 9 of the last 10 session, a pretty rare feat.

Interestingly, this also happened not too long ago with a very similar looking pattern but on a larger scale. The blue chart insert below also shows the ‘big brother 9 of 10.’

Will the outcome be the same (the exact location of the ‘big brother 9 of 10’ was highlighted in the July 5 Profit Radar Report)?

There actually were more unique developments to share – such as extremely weak breadth as the S&P 500 is trading at all-time highs – but the bottom line is simple:

Long-term momentum is strong, but we are seeing some ‘smoke under the hood.’ Thus far the car (aka stocks) is still moving forward and we don’t want to throw ourselves in front of a moving car, but we’d also think twice about buying any such car.

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Profit Radar Report

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

One Simple Chart to Gauge Real Estate Bubble Risk


Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on June 10. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

If you own a home, want to buy a home or live anywhere but under a rock, you’ve felt or heard about skyrocketing real estate prices.

Is there a real estate bubble, and what’s the risk of it bursting?

Here is one simply chart to gauge the real estate bubble risk … and incidentally, this short article also explains why the S&P 500 has been stuck around 4,200.

Ironically, COVID-19 accomplished what the Federal Reserve has tried for over a decade and failed: Inflation.

In May, more people than ever googled ‘inflation’ (orange graph, second chart). Often this kind of interest in a topic occurs towards the end of a trend.

For example, in the April 8, 2020 Profit Radar Report, I published google searches for ‘recession’ (chart below) to make the argument that the recession is over.

This contrarian take worked great for the recession, but does not work like that for inflation. Here’s why:

Most trends exhaust themselves when they become too popular (popular usually means there are no more buyers left, i.e. Bitcoin in April).

However, when inflation becomes too popular it can turn into a movement, a self-fulfilling prophecy, where consumers buy today because they think it will be more expensive tomorrow. That’s when inflation becomes a real problem (worse than supply shortages).

I don’t think we are there yet, but it must be carefully monitored (and I will provide specific inflation protection trades via the Profit Radar Report).

Anyway, the chart below provides a big picture look at the CPI, a popular but far from perfect inflation gauge.

I don’t want to be an alarmist here, but the CBOE equity put/call ratio closed at 0.36, the CBOE SKEW Index at 150.71, while the VIX is quite high and the actual daily range is only 0.21% (10-day SMA).

There are no precedents for this particular set of readings. If we relax the parameters, we get the signals shown below.

When there’s such a small sample size, I always ‘widen the net’ to ‘catch’ more precedents. Doing this revealed another common (at least in the past) outcome (discussed in last night’s Profit Radar Report).

From a charting point of view, the S&P 500 is trying to break above 4,250, which can be used as line in the sand to gauge risk vs reward.

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Continued updates and factual out-of-the box analysis are available via the Profit Radar Report

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

‘Black Swan’ Warning Indicator Soars to Record High

Have you even seen a black swan, I mean the actual bird? Probably not, because they are extremely rare.

That’s why the black swan has been used to describe extremely rare outlier stock market events. ‘Event’ is simply a nice way of saying crash or meltdown.

Black swan events are as rare as they are unpredictable, but the CBOE (the same outfit to create the VIX) crafted an index designed to measure the risk of a black swan event. This index is called the SKEW Index.

Here is the main difference between the VIX and SKEW: The VIX is based on implied volatility of S&P 500 at-the-money options while the SKEW is based on implied volatility of far out-of-the-money S&P 500 options.

Here is how the SKEW works: Readings of 100 mean that the risk of a black swan event is low. For every 5-point increase in the SKEW Index, the risk of a black swan event increases 1.4%.

On Friday, the SKEW Index closed at 155.31, which is the second highest reading since 1990 (as far back as SKEW data goes). A reading of 155 also means that the risk of a black swan event is 15.4% higher than usual.

With the theoretical stuff out of the way, let’s see if the SKEW Index actually works.

Does the SKEW work?

The chart below plots the S&P 500 agains the SKEW Index (going back to 1990). The SKEW moved above 150 only on 17 of 12,967 trading days (that’s 0.13% of the time). And none of those 17 days happened before 2015.

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The next chart makes it easier to identify those 17 times. Here are the key takeaways:

13 of the 16 prior signals (81%) saw any gains erased within the next 3 month

3 of the 16 prior signals (19%) saw significant further gains (2 of those gains were erased within 18 months)

Summary

The SKEW Index deserves credit for flashing warning signals prior to the 2016, 2018 and 2020 declines. It needs to be noted though that those signals were about 2 months too early. It will take a break below support to edge the potential black swan risk closer to reality.

Continuous updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. 

Follow Simon on Twitter @iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.