Insider Selling of Stocks is at Highest Level for the Year

Insiders are fearful of an impending sell off. When this happened earlier this year the S&P 500 quickly declined 10%. Other sentiment measures are reaching extremes too, but there’s a silver lining.

All major U.S. stock indexes continue to trade near multi-year highs, but insiders are selling stocks of the companies they own or manage at a pace not seen at any other time in 2012.

Investors Intelligence reports eight sales for each purchase and considers the current rush for the exits “panic selling.” The question we should ask is, “what do insiders know that we don’t?”

Another sentiment extreme can be seen in the high yield bond market, more appropriately called junk bonds. Companies just issued the third-highest amount of junk bonds.

The prior records were set in October 2010 and May 2011. Those two dates are marked in the chart below. I’ll explain in a moment the significance of those two dates.

Mutual fund managers tracked by the National Association of Active Investment Managers report that managers have a median exposure of 95% to equities. This is close to a six-year high and sets an 18-month record.

The Dow Jones just went an entire quarter without losing more than 1%. Jason Goepfert with SentimenTrader took a look at what happens historically when the Dow goes an entire quarter without a 1% decline, while trading close to a 52-week high.

There were 16 such instances since 1900. Over the next six months, the Dow was positive every time with a median return of +6%.

Getting back to the two dates highlighted in the chart above, we are currently in a situation where sentiment is becoming extreme. But just as Advil covers up pain, QE3 tends to neutralize extreme optimism.

Back in October 2010 it took several months before sentiment extremes caught up with stock prices. In May 2011 however, it resulted in a nasty sell off.

From a seasonal perspective October is an interesting month. It has hosted a number of crashes but also a number of important lows.

Looking at stocks, we see that the S&P 500 (S&P 500 SPDR – SPY) has been trading in a well-defined parallel trend channel. The strategy – as long as the S&P remains within this channel – is to sell when it reaches the top of the channel and buy at the bottom.

Once the bottom (of the channel) falls out, it’s probably time to become more bearish.

The Profit Radar Report monitors literally dozens of sentiment gauges, seasonal patterns, and technical developments to identify high probability investment opportunities for the best investment strategy.

VIDEO: Will QE3 Drive Treasury Bonds to New All-Time Highs?

Now that QE3 is here we have to talk about the elephant in the room; Treasury bond yields and Treasury bond prices. The purpose of QE3 and Operation Twist is to lower yields. Will it work and is there an investment opportunity?

The Federal Reserve is buying Treasury bonds (more via Operation Twist than QE3). According to the law of supply and demand this should result in higher T-bond prices and lower yields.

This video looks at the historic effect QE and Operation Twist had on 30-year Treasury prices (cause and effect) and identifies the next high probability trade set ups.

ETFs that track long-term Treasuries are the iShares Barclays 20+ year Treasury ETF (TLT) and its double inverse cousin, the UltraShort 20+ year Treasury ProShares (TBT).

Continuous analysis of long-term Treasuries is provided via the Profit Radar Report.

>> Click here to watch video on Treasury bonds.

Week Ahead for the S&P 500 – QE3 vs. Worst Week of the Year

Last Friday was triple witching and the week after triple witching is notoriously bearish. How bearish? The S&P 500 Index has closed down 22 out of 26 weeks since 1990 (82%) with average maximum losses about 5x as high as average maximum gains.

Historically short sellers of stocks have an 82% chance of making money this week. However, the S&P 500 Index failed to registered a bearish price/RSI divergence at its September 14 recover high.

All recent highs that were followed by a decline of around 10% or more were foreshadowed by a bearish RSI divergence (I use a unique RSI setting to spot divergences – see chart below). So even a bearish outcome this week would likely be followed by higher prices later on.

The purpose of the Profit Radar Report is to identify high probability trading opportunities. With the conflict between bullish technicals and bearish seasonality, there obviously is no high probability set up right now.

One of two things will have to happen to create a better set up:

1)   Prices decline to trend line support to present a possible buying opportunity.

2)   Prices spike quickly to a new high accompanied by a bearish price/RSI divergence to set up a possible shorting opportunity.

Non-leveraged ETFs that can be used to trade the above set up are the S&P 500 SPDR (SPY) and Short S&P 500 ProShares (SH).  Leveraged options include the Ultra S&P 500 ProShares (SSO) and UltraShort S&P 500 ProShares (SDS).

An early tip off to the next developing set up may be a developing triangle. A break out above or below triangle support/resistance should give us a measured target, which may quite possibly set up an even better opportunity than the actual triangle.

Continuous updates and trading opportunities are provided via the Profit Radar Report.

Will the Persistently Wrong Dow Theory Sell Signal Finally Come True?

No other technical indicator has been around as long as the Dow Theory. Dow Theory started out more as an economic theory, which Charles Dow published in the Wall Street Journal around the turn of the 20th century.

Dow’s theory focused on two key economic sectors: manufacturing (industrials) and transportation. If goods were being produced and moving through the economy, it should show up in the price action of the Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJT). A strong economy would buoy both averages.

The corresponding ETFs for the DJIA and DJT are the SPDR Dow Jones Diamonds (DIA) and SPDR Dow Jones Transportation Average (IYT).

Despite a rather decent century long track record, the Dow Theory sell signal has been dead wrong for well over a year. Why is that, and will the sell signal finally kick in late September/October?

The chart below plots the Dow Jones Industrial Average (DJIA) against the Dow Jones Transportation Average (DJT). There are a number of bearish divergences, but none of them have hindered the DJIA from breaking to new recovery highs.

The Dow’s trend is clearly up while the Transport’s trend is clearly down. The Dow is above resistance while the Transport is below support. Something’s gotta give, will the Dow break down or the DJT catch up?

Historical Performance & Seasonality

An examination of the historical significance of the current divergences doesn’t reveal a bearish bias. In fact, the performance of the Dow has been positive after instances where the Dow traded close to a 52-week high, while the DJT was nearly 10% below its 52-week high.

October is also the beginning of a historically favorable season for the Transports (perhaps due to the upcoming holidays). However, the week after September triple witching and October in general, has a bearish bias for the Dow Industrials.

Technicals

As if the bearish divergence wasn’t enough, the DJIA is now above resistance. The DJT is below support. Technically it will take a move above what’s now resistance to unlock more bullish potential for the Transports, but historical performance and seasonality suggest the risk for Transports is limited. Exactly the opposite is true for the Dow Industrials.

Intangibles

QE3 is here and the massive inflow of liquidity tends to buoy all asset classes including oil. High oil prices in turn cut into the profit margin of transportation companies like FedEx, UPS, Union Pacific, etc.

FedEx has already cut its fiscal 2013 forecast. Chief Financial Officer Alan Graf blamed weak global economic conditions. But that’s old news and already priced into the Transports recent slide.

It is obvious that the Transports refuse to confirm the Dow’s rosy picture, but the bearish omen hasn’t hurt the Dow’s performance either.

I follow and respect Dow Theory, but have learned not to be dogmatic about any one single indicator. The Dow Theory sell signal will be right eventually, but the weight of evidence of technicals, seasonality, and sentiment suggests some weakness for stocks over the near-term followed by year-end strength.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

S&P 500, Dow Jones and Nasdaq – The Deceptive Intricacies of Popular Stock Market Indexes

On first glance the performance of the Dow Diamonds (DIA), S&P 500 SPDR (SPY) and Nasdaq QQQ (QQQ) seems to be closely correlated. This first glance assessment, however, couldn’t be farther from the truth. Here’s what separates the indexes from each other and why it’s important.

Index investing or ETF index investing is a popular and low-cost way to put your dollars to work, it’s like putting your portfolio on cruise control.

But driving on cruise control isn’t always the best way to get from A to B and doesn’t mean you won’t get into an accident. It merely means that you delegate speed control to your car.

Your level of commitment to your own portfolio ultimately dictates your style of investing: buy and hold via indexes or ETFs, buy and hold via actively managed mutual funds, or a more active approach to buying and selling.

Regardless of what type of investor you are, you need to be familiar with your investment vehicle(s) of choice, just like a driver needs to know the difference between automatic and stick shift.

Look Under the Hood

The S&P 500, Dow Jones, and Nasdaq are the most popular U.S. indexes and if you are an investor, odds are some of your money is invested in one or more of those three indexes.

Equity indexes are often described as a basket of stocks. Retirees or near retirees are familiar with the term nest egg and the comforting picture of many golden eggs nested up to provide a comfortable retirement.

But what if the basket of eggs is made up of one or two giant ostrich eggs that limit the space for other eggs? That wouldn’t be well diversified and one knock against the basket could scramble most of the retirement.

Hidden Ostrich Eggs

Financial ostrich eggs among major U.S. indexes are more common than you think.

IBM accounts for nearly 12% of the Dow Jones Industrial Average (DJIA or Dow Jones). Technically speaking, the DJIA is an average not an index. The DJIA is price weighted, in other words only the price of a stock matters, nothing else.

IBM is the most expensive stock of the DJIA and moves the index (or average) 20x more than Bank of America (BAC) even though IBM has only about twice the market capitalization (the price per share multiplied by the amount of outstanding shares) of BAC.

The ETF that best represents the DJIA is the SPDR Dow Jones Industrial Average ETF. Its ticker is DIA, that’s why it has the nickname Dow Diamonds ETF.

The Nasdaq-100 and the PowerShares Nasdaq QQQ ETF (QQQ) hide another “ostrich egg,” – Apple. Apple accounts for a whopping 20% of the Nasdaq-100 Index. If you already own Apple or don’t believe Apple is the way to play technology, you may not want to own QQQ.

The S&P 500 Index – represented by the S&P 500 SPDR (SPY) – provides more balanced diversification than the DJIA or Nasdaq-100. Apple, still the biggest player of the S&P 500, accounts for less than 5%. IBM has a weight of only 1.8%.

Considering the different composition of the three indexes, it’s remarkable how closely their day-to-day moves correlate.

The chart below provides a visual of the long-term correlation between the Dow Diamonds (DIA), S&P SPDR (SPY), and QQQs. Illustrated is the percentage change since April 1999 (when the QQQs began trading) to provide an apples to apples comparison of the three indexes.

The SPY and QQQ delivered a near identical return (+38%). The DIA is up 68% since April 1999. Of course the picture looks much different if you start measuring the return from the 2000 highs.

All three indexes and index ETFs share the commonality of having had very sizeable swings ranging from -60% to +60%. The Profit Radar Report advocates an investment approach that capitalizes on larger up moves and turns neutral or short during major down moves.

This approach can significantly enhance your return and reduce your exposure to risk.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

S&P 500 vs. Investors – Are Retail Investors Really the “Dumb Money?”

Retail investors have many choices to buy and sell stocks: Mutual funds and ETFs are just two of them. Regardless of the options, investors are often considered the “dumb money.” Is the dumb money really dumb?

Wall Street geniuses and the financial media often consider retail investors the “dumb money.” That’s ironic, because Wall Street and the media are notorious for dishing out group think advice that’s getting many of the small guys burned.

There’s plenty of data that shows that a plain index investing or index ETF investing approach (the real “dumb” buy and hold a basket of stocks approach) handily beats the returns achieved by Ivy League educated mutual fund managers that engage in actively buying and selling.

If you’ve read my articles before you know that I like to pick on Wall Street and the financial media, but today we’ll talk about the investing prowess of retail investors – the “dumb money.” Is the dumb money really dumb?

Is the Dumb Money Really Dumb?

One of the best measures of retail investor’s appetite for stock is the asset allocation poll conducted by the American Association for Individual Investors (AAII).

The chart below plots the S&P 500 Index (SPY) against investors’ portfolio allocation to stocks. Investors’ stock allocation pretty much waxes and wanes with the performance of the S&P and almost plots a mirror image of the S&P.

Unfortunately, the cliché is true; retail investors buy when stocks are high and sell when stocks are low. I believe this is due to crowd behavior and the forces of investing peer pressure rather than stupidity, as the term dumb money implies.

What else can we learn from this chart aside from the fact that retail investors tend to buy high and sell low?

The average allocation to stocks since the inception of the survey in 1987 is 60.9% (dashed red line). The S&P currently trades near a 52-month high, yet investors’ allocation to stocks is below average (60.5% as of August). This is unusual.

In fact, in the 21^st century there’ve only been a couple of instances where investors’ stock allocation was below average when the S&P was near a 3+ year high. Those instances are marked with a red arrow. In August 2006 stocks went on to rally. In March 2012 stocks declined first and rallied later.

Lessons Learned

The lesson for investors is A) not to follow the crowd and B) not to follow Wall Street or the financial media.

The mission of the Profit Radar Report is to keep investors on the right side of the trade. A composition of indicators used identified the March 2009 and October 2011 lows as investable lows and got investors out of stocks at the 2010, 2011, and 2012 highs.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

Technology Investing for Beginners – You can’t Lose Money with Apple Math

I got this piece of “Apple Hot News” in my inbox yesterday: “Apple today announced that pre-orders of its iPhone 5 topped two million in just 24 hours, more than double the previous record of one million held by iPhone 4S. Demand for iPhone 5 exceeds the initial supply, and while the majority of pre-orders will be delivered to customers on September 21, many are scheduled to be delivered in October.”

What’s the profit margin on 2 million iPhones? Apple doesn’t reveal profit margins, but Reuters got hold of a document filed in Apple’s patent battle against Samsung.

According to this document, Apple’s gross margin for U.S. iPhone sales between April 2010 and March 2012 ranged from 49 – 58%. The iPhone 5 sells for $199 – $399 (depending on built in storage).

Let’s calculate a 58% profit margin on 2 million iPhones sold for $299. The result is $347 million. Since last Thursday’s unveiling of the new iPhone 5, Apple (AAPL) shares have risen 3.5%. This means that Apple’s market cap increased by some $24 billion.

A $24 billion increase based on the news of 2 million pre-orders worth about $347 in gross profit doesn’t make sense.

In fact, common sense and seasonality suggests that Apple is soon due for a reality check (a. k. a. lower prices). Since Apple is the MVP of the technology sector, it’s likely that the Nasdaq QQQ ETF (QQQ) and SPDR Technology ETF (XLK) will follow Apple’s direction.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

Oil Flash Crash Erases 3.8% in 4 Minutes – Is This a Sell Signal?

Wall Street traders returning from lunch saw one of the most pronounced mini flash crashes in history. Within a matter of 4 minutes (between 1:51 –  1:54 pm EST) crude oil prices dropped 3.9%. The day’s trading range was 4.9%.

The swings were equally dramatic in oil related ETFs like the United States Oil ETF (USO) and iPath S&P GSCI Crude Oil ETN (OIL). The ripple effects were also felt in the broader PowerShares DB Commodity Index ETF (DBC) and iShares S&P GSCI Commodity Index ETF (GSG).

What caused this mini flash crash and is this a sell signal for oil?

What Caused the Sudden Drop?

Traders, analysts and regulators are still fishing for reasons, but there are only speculations thus far. An incorrectly entered trade (“fat finger error”) or rumors of a possible release of oil by the United States strategic reserves are possible suspects.

Is this A sell Signal?

Oil is not one of the asset classes regularly covered by the Profit Radar Report, but we can apply the same technical analysis methods used for the S&P 500, gold, silver, currency and Treasuries to oil.

The chart below plots crude oil futures prices against the 20 and 200-day moving average, prior support/resistance levels and a largely unknown but effective indicator called percentR.

We see that Monday’s quick dip pulled oil prices briefly below the 20 and 200-day SMA, which converged at around 96.50. Prices found support at 95 (green line), which is an area that buoyed oil prices several times before.

In addition, Monday’s drop triggered a bullish percentR low-risk entry. Only a close below 94.65 would negate the bullish low-risk entry.

Obviously, most asset classes are overbought due to last week’s Federal Reserve induced price pop and due for a correction. However, as long as oil prices stay above support at 94.65 – 95 any correction will have to wait.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

Is QE3 a Big Fat Buy Signal for Stocks?

It’s official, QE3 is here. Unlike QE1 and QE2, which had a predetermined ceiling and expiration date, QE3 is open ended. The Federal Reserve pledges to buy $40 billion worth of mortgage backed securities (MBS) per month for as long as it takes.

Investors got what they wanted, so is this a big fat buy signal for the S&P 500, Dow Jones, gold, silver and all other assets under the sun?

To answer this questions we will analyse the effect of previous rounds of QE on stocks (some of the details may surprise you) and compare the size of QE3 to its predecessors.

QE Like Snowflakes

Just like snowflakes, no day in the stock market and no version of QE are alike. Nevertheless, a better understanding of QE1 and QE2 may offer truly unique iinsight about QE3.

The chart below provides a detailed history of QE and Operation Twist (detailed dates are provided below).

QE1 Review

The S&P 500 (SPY) dropped 46% before the first installment of QE1 was announced (the Financial Select Sector SPDR ETF – XLF – was down 67% at the same time). By the time QE1 was expanded the S&P was trading 51% below its 2007 high.

Even without QE1 stocks were oversold and due to rally anyway (I sent out a strong buy alert on March 3 to subscribers on record). One could say that the Fed’s timing for QE1 was just perfect. The S&P rallied 37% from the first installment of QE1 (Nov. 25, 2008) and 51% from the expanded QE1 (March 18, 2009) to the end of QE1 (March 31, 2010).

QE2 Review

The S&P lost 13% from its April 2010 high to August 28, the day Bernanke dropped hints about QE2 from Jackson Hole. The S&P rallied 18% (from the July low to November 3) even before QE2 was announced.

The market was already extended when QE2 went live, but was able to tag on another 11% until QE2 ended on June 30, 2011.

QE3 Projection

Even before QE3 goes live, the S&P has already rallied 33%. Although the S&P saw a technical break out when it surpassed 1,405, the current rally is in overbought territory.

The timing for QE1 was great and the S&P rallied 37 – 51%.

The timing for QE2 was all right and the S&P rallied 11%

QE3 doesn’t have an expiration date, but is limited to $40 billion a month. During QE2 the Fed spent an average of $75 billion a month on bond purchases in addition to the $22 billion of reinvested matured bonds. Operation Twist is still active, where the Fed is selling about $40 billion of short-term Treasury bonds in exchange for long-term Treasuries (related ETF: iShares Barclays 20+ year Treasury ETF – TLT).

In summary, the timing for QE3 is less than ideal, the committed amount is less than during QE1 and QE2, and QE2 has shown that stocks can decline even while the Fed keeps its fingers on the scale. QE3 may not be as great for stocks as many expect and rising oil prices may soon neutralize the “benefits” of QE3.

Detailed timeline:

November 25, 2008: QE1 announced.
Purchase of up to $100 billion in government-sponsored enterprises (GSE), up to $500 billion in mortgage-backed securities (MBS).
January 28, 2009: Ben Bernanke signals willingness to expand quantity of asset purchases.
March 18, 2009: Fed expands MBS asset purchase program to $1.25 trillion, buy up to $300 billion of longer-term Treasuries.
March 31, 2010: QE1 purchases were completed

August 26 – 28, 2010: Ben Bernanke hints at QE2
November 2 – 3, 2010: Ben Bernanke announces $600 billion QE2
June 30, 2011: QE2 ends September 21, 2011: Operation Twist
June 20, 2012: Operation Twist extended

Bi-Polar Technology Sector is Torn By Performance of Groupon, Facebook and Apple

About 18 months ago stocks were fueled by the Facebook, Groupon, and the smart phone app frenzy (i.e. Angry Birds). None of the above companies are actually included in the Technology Select Sector SPDR ETF, but the prospect of a new tech boom was enough to lift the entire sector.

And while the technology sector has continued to move higher, it has left Facebook, Groupon and others in the dust. Why? Allow me to republish some research notes previously reserved for subscribers.

Facebook Warning: Published May 11, 2012

“Facebook (FB) is expected to go public on Friday, May 19. The media will gladly spread the frenzy, but I’d like to point out a few nuggets to put Facebook’s insane valuation into perspective:

– Assuming a valuation of $100B, FB will trade at 33x advertising revenues. Google trades at 5.5x.

– At $100B, FB will be worth more than: Caterpillar, American Express, Home Depot, Walt Disney and even McDonalds. In fact, 15 components of the mighty Dow Jones Industrial Average have a market cap of less than $100B.

– The market value of Google at its IPO was “only” $27B

– Apple currently trades around 3.8x sales. The same metric applied to FB would put its valuation at $15B.

To some degree the social media bubble is reminiscent to the 1999 tech boom. Most social media companies are valued based on promises more than established accounting standards. Recent IPO’s of Groupon, Pandora, Yelp, and Zynga created a lot of hope during the first couple of days of the IPO and fizzled thereafter.

Will FB await the same fate? You can’t predict the extent of any frenzy, but the amount of fizzled frenzies dwarfs that of sustainable ones. My bold prediction is that FB will loose at least 30% of its IPO price by sometime in 2013.”

Well, it turns out I was wrong. Since its May 2012 IPO ,Facebook shares have fallen as much as 61% (from a high of $45 to a low of $17.55). Facebook’s market cap is now $44 billion.

Groupon Warning: Published December 17, 2010

It was my belief that the Groupon movement (group coupons) is dangerous for the economy and unsustainable. This was contrary the most of Wall Street‘s outlook. I picked on James Altucher, a popular tech cheerleader, to contrast our difference of opinions.

“Altucher doesn’t believe there’s a new social media/coupon bubble. This time is different because Groupon’s rejection of Google’s $6 billion bid is ‘the dawn of a new and improved internet bubble. Unlike the bubble of the late 90s, though, this one is based on fundamentals, not irrational exuberance’.

It’s ironic that Groupon’s success and refusal of Google’s advance is seen as the dawn of a new era. Groupon has a killer business model, which is a goldmine for Groupon, but poison for healthy economic growth.

This new way of buying nurtures frugality and robs restaurants and other retail stores of their pricing power. Groupon is feasting on a deflationary trend while wizards like Altucher see the company as a gateway to the new and improved economy.

According to Altucher this is ‘not a bubble, it’s a real significant boom.’ It’s a boom all right, we’ll just have to see whether it’s an economic or deflationary boom. My money is on the later.”

Since its November 2011 IPO Groupon shares have fallen from a high of $31.14 to a low of $4. Groupon’s current market cap is $3 billion, half of what Google was willing to pay for the company.

Technology Sector at 11+ Year High. Why?

The Facebook, Groupon, smart phone app boom is deflated, so why has the tech sector moved on to an 11+ year high?

A look at the top holdings of the Technology Select Sector SPDR ETF (XLK) may hold the answer.

Apple, IBM, and Google account for 34% of XLK and trade at or near all-time highs.

Microsoft, AT&T, and Verizon account for 19% of XLK and, like the Nasdaq-100, trade at or near a 10-year high.

Former highflyers like Cisco, EMC, Hewlett Packard, Corning, Yahoo, Broadcom, Dell, Applied Materials, Sandisk, Juniper Networks and others continue to trade near the lower end of their 15-year range.

It appears that a few strong companies mask the performance of many weak companies. That’s not the definition of a strong market or sector.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.