Technical Analysis – The Most Unique S&P Candle Stick Pattern Ever?

Candle formations are one of the more comical technical indicators, but comical doesn’t mean ineffective. Here are two takeaways from one of the most unique SPY candle formations ever.

Market analysts and market forecasters can’t be picky or biased. You can’t cherry pick data to support a bias. The tail doesn’t wag the dog and any forecast needs to be data driven.

A ton of data and indicators go into each Profit Radar Report update. There are different sentiment measures, various seasonalities and cycles and a wide variety of technical indicators.

Candle formations are one of the technical indicators I look at. I don’t follow them religiously, but they often add weight to the message conveyed by other indicators.

Anatomy of a Candle

Let’s review the anatomy of a candle before we look at a never before seen candle formation for the SPDR S&P 500 ETF (SPY).

The image below shows the main components of a candle: Open/close price, body, upper/lower shadow (also called wig) and the trading range (green or yellow, depending on up or down day).

The Only SPY Triple Outside Day

On Wednesday, the SPDR S&P 500 ETF or SPY opened below the low of the past three days and closed above the high of the past three days. This is called a triple outside day and has never happened before (see chart below).

That’s a curious factoid, but has it any directional implications? It just might. There have been seven double outside days. Each of them led to positive performance of the next couple of weeks.

Trading volume also picked up on Wednesday. Elevated volume increases the message of any candle formation, which suggests that this rally is not yet over.

A recent article here on iSPYETF.com (Nov. 19: Is it Time to Buy Apple Again?) referred to a reversal candle for AAPL at 506 and concluded that: “Prices are likely to move higher” (Apple traded as high as 595 since).

The November 18 Profit Radar Report spotted a similar reversal candle in combination with a bullish engulfing pattern (see image above) in the S&P 500 and stated that: “the immediate down trend is exhausted and stocks are ready to bounce.” The S&P is up as much as 80 points since. This bounce will continue and quite possible morph into a sizeable rally as long as prices remain above support.

Before we snub our noses at funny sounding candle formations, we should remember that they just called an 80-point (S&P 500) turn around.

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.

How to Spot Low-Risk, High Profit Trades

It’s easy to pick out bygone trading opportunities after the fact – hindsight is 20/20. But this article looks at live low-risk trades and provides a tutorial on how to identify low-risk trades and when to lock in profits.

“Buy the best and forget the rest.” This is the mission statement of the Profit Radar Report. “Buying the best” doesn’t refer to the best stocks but to the best profit opportunities.

The quality of trade setups is more important than the quantity, but how do you spot a quality setup? The next few paragraphs highlight three actual quality opportunities for gold, silver and the S&P 500,

Before we delve into the actual charts, I’d like to define what makes a quality setup.

1) High probability trade: I follow three key market forecasting elements (continuous coverage provided via the Profit Radar Report):

I) Technicals
II) sentiment
III) seasonality.

A high probability (usually equal to a high profit trade) setup only happens when all three indicators point in the same direction. Using this technique I identified the following high probability trades:

Sell: April 2010, May 2011 – Buy: March 2009, October 2011, June 2012.

It’s comparatively rare for my three key indicators to align. But that doesn’t mean there aren’t any quality setups.

2) Low-risk trade: A low-risk setup is a trade with significantly higher profit potential than risk of losses. That’s because the entry point is very close to key support or resistance, which provides a powerful and well-defined stop-loss level.

We haven’t had a high probability set up in nearly half a year, so the quality setups highlighted below are all classified as low-risk trades.

S&P 500

The S&P 500 reached our revised up side target of 1,475 on September 14, the day after the Fed announced QE3. We didn’t go short at 1,475 because the new recovery came come absent of a bearish RSI divergence (the April 2010, May 2011 and May 2012 highs were all market by bearish RSI divergences).

The initial phase of the decline was very choppy and difficult to trade. Key support was at 1,396. The November 7 Profit Radar Report warned that: “A move below 1,394 will be a signal to go short with a stop-loss around 1,405.”

The November 14 Profit Radar Report recommended to: “Place a stop order to close half of our short position at 1,348 to take profits.” The second half was closed out at 1,371.

We closed our positions for a 46 and 27 S&P point profit. At no time was the risk greater than 10 points. The 27 – 46 point gain wasn’t as great as if we entered earlier, but we had a favorable risk/reward ratio and most importantly low-risk profits.

Corresponding ETFs are the Short S&P 500 ProShares (SH), UltraShort S&P 500 ProShares (SDS) or the S&P 500 SPDR (SPY).

Gold

In early October gold was sitting atop quadruple support but sentiment had become frothy. The October 7 Profit Radar Report stated:

“According to the latest Commitments of Traders (COT) report, small speculators are now holding the most net long gold positions in a quarter century. Friday’s action also produced a red candle high. Both developments are generally bearish. However, as mentioned in Wednesday’s PRR, gold prices remain above quadruple support (2 trend lines, 20-day SMA, and 61.8% Fibonacci). As long as prices remain above support we’ll give this rally the benefit of the doubt. A move/close below 1,765 will be a signal to go short for aggressive investors with a stop-loss at 1,775” (later raised to 1,777).

When should we take profits? The October 25 Profit Radar Report said this: “Gold dropped to support at 1,700 today. We are getting to a point where it becomes tempting to lock in a 65-point gain. Since gold hasn’t seen a daily bullish RSI divergence yet either, we’ll hold our short position. We’ll sell half of our holdings at 1,680.

We sold half of the gold position at 1,675 in early November and the second half at 1,725 a few days later and captured a 5% and 2.5% profit. Corresponding ETF trades were a) short the SPDR Gold Shares (GLD) or b) buy the UltraShort Gold ProShares ETF (GLL).

Silver

Silver broke above trend line support on July 25 at 27.30. This was a buy signal. Our stop-loss was at no time more than 2% below the entry price (initially red, than green trend line).

In hindsight we could have held on to the position as long as the sharply ascending green trend line remained in tact, but hindsight is 20/20.

We closed the position around 30 and 32 for a 10% and 16% gain in the iShares Silver Trust (SLV).

Future low-risk and high probability trade signals are available via the Profit Radar Report. 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.

The Best Season For a VIX Trade

Forget “sell in May and go away,” the Thanksgiving VIX trade is statistically one of the biggest, if not the biggest, seasonal moves of the year. However, the year 2012 features one rarely seen caveat to VIX seasonality.

November/December is statistically the season for the best VIX trade of the year. On average, since 1990, the VIX drops 35% from Thanksgiving to Christmas.

The chart below illustrates the sharp VIX (Volatility Index) move from the November high to the December low. This year however, investors have to deal with a caveat.

No Slam Dunk – The VIX is in a Funk

The VIX is in a funk. How so? The VIX resisted the usual tendency to rise into Thanksgiving and is currently trading near its low for the year.

This is even more of a head scratcher considering that the S&P 500 (SPY) just dropped as much as 9.5%. Due to the inverse correlation between VIX and S&P, the VIX should have soared for much of November.

Quite to the contrary, the VIX actually dropped during the time the S&P fell hardest (November 7 – 16).

The table below shows the VIX closing price of the day before Thanksgiving and the pre-Christmas low (which has occurred between December 21 and 23 the past five years).

A measured 35% drop from this year’s pre-Thanksgiving close would draw the popular volatility measure below 10, a level last seen in February 2007. This isn’t impossible, but it’s improbable.

In short, the VIX trade doesn’t look like a high probability trade this season. Even at the best of times, it’s difficult to monetize moves of the fear index.

Tough to Profit from the VIX

That’s because the VIX itself can’t be traded. There are tradable vehicles that have been created, but they all have complex idiosyncrasies. Trading the VIX is almost like catching the wind. Many of those unseen idiosyncrasies cause price deterioration and make it difficult to capture profit.

The three vehicles that make trading the VIX possible are:

1) Options 2) Futures 3) ETFs/ETNs.

VIX options are subject to price decay. VIX futures usually find themselves in a state of contango or backwardation. VIX ETFs or ETNs are based on either VIX options or futures (futures are more commonly used).

Contango is a condition where the VIX futures (price of VIX in the future) trade at a higher price than the VIX spot price (current price). Contango is in essence a premium. The further away the expiration of the futures, the higher the premium.

Imagine buying a car and trying to sell it for a profit. As a private party you have to pay sales tax (7.25% in CA). If you buy a car for $10,000, you have to sell it for more than $10,725 (purchase price plus tax) to make a profit. Contango is like the sales tax.

Some research on the iPath S&P 500 VIX Short-term Futures ETN (VXX – the most heavily traded VIX ETN/ETF) suggests that the cost of contango is about 0.25% – 0.45% per day. Contango usually occurs when the VIX trades below 25.

When the VIX rises above 25 it usually suffers from backwardation. Backwardation is the opposite of contango, and happens when the spot price is higher than the front month futures. While contango eats into returns, backwardation can enhance the return of VXX.

VIX Lessons

While we likely won’t trade the VIX this year, the VIX research isn’t totally wasted.

The VIX suggests rising prices and some sort of a year-end rally.

This may provide trading opportunities for the S&P 500 and other equity indexes.

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 it Time to Buy Apple Again?

Instead of becoming the first 1 trillion dollar company, Apple’s market cap shrunk by more than $200 billion. Apple today is almost 30% cheaper than it was just a couple months ago. Is now the time to buy?

28 – If you follow Apple shares you probably know what this number stands for. 28% is how much AAPL dropped from September 21 to November 16.

That’s a terrible situation if you own AAPL, but great news if you are a bargain buyer – AAPL is now almost 30% cheaper than it was 40 trading days ago. Does that mean it’s time to buy AAPL?

The answer depends on your time horizon.

AAPL Long-Term Outlook

A November 15 CNBC article titled “Apple stock hit by panic selling:  Someone yelled fire” (that’s good for the short-term, more about that below) pointed out that more than 800 hedge funds and mutual funds counted Apple among their top ten holdings at the end of the third quarter.

“Apple was the classic case of no more incremental buyers of the stocks. No matter how bullish a story, you need new buyers of the stock or it will go down.”

Well no kidding Sherlock, that information would have been useful a few weeks ago.

In a March 16 research note to subscribers on record, I published the following research:

“About one-third of all U.S. stock mutual funds own Apple. One in five hedge fund managers holds Apple amoung their 10 largest bullish positions. Only 2 of 54 analysts have a sell rating on Apple.

40 dividend focused funds own Apple. Apple is the single biggest holding of Goldman Sachs’ U.S. Equity Dividend and Premium Fund. Yet Apple has never paid a dividend. 50 small and midcap funds own Apple. Yet Apple is the largest company in the world.

If and when Apple sneezes, the market will get a cold. A 20% drop in Apple shares would zap over $100 billion of liquidity and likely increase mutual fund redemptions and emphasize the need for cash. Apple shares and other high flying stocks will have to be sold to raise cash and the market will drop further.”

The financial market was more than just saturated with Apple stock, it gorged on AAPL and I doubt that – over the long-term – a 28% drop will cure the saturation hangover.

The September 28 Profit Radar Report issued one of the most contrarian recommendations for individual stocks ever:

“Aggressive investors may short Apple (or buy puts or sell calls) above 700 or with a close below 660. Obviously, there is no short Apple ETF and if you don’t have a margin account set up, you may consider using the Short QQQ ProShares (PSQ), which aims to deliver the inverse performance of the Nasdaq-100 (Apple accounts for 20% of the Nasdaq-100).”

AAPL Short-Term Outlook

After falling as low as 506 on Friday, AAPL staged a nice reversal and closed at 527. In the process it created a green reversal candle against a small bullish RSI divergence (price made a new low, RSI did not).

A similar constellation happened on November 9, but prices continued to fall lower. The difference between Friday’s (November 16) and the November 9 green candle is volume. Friday saw the most shares change hands since March 13.

In short, AAPL is showing signs of life and prices are likely to move higher, but I think an even better opportunity lies ahead in the near future.

The Profit Radar Report analyses the markets and the forces that drive the market. Such forces include technicals, sentiment, seasonality, and recently the performance of Apple. Sunday’s report includes a multi-month forecast for the S&P 500.

What’s Killing Stocks and What May Resurrect them?

It’s better to be out of stocks wishing you were in, than in wishing you were out. But it’s best to be short stocks when stocks are down. The short trade has worked well, but how much more down side is there?

Every kid knows you better eat your ice cream before it melts. Investors should know to lock in profits before they disappear.

The recent 8.6% drop in the S&P 500 and 12.6% fall in the Nasdaq-100 has certainly done some technical damage and erased a fair amount of profits.

What has caused the market’s sell off and how much worse can it get?

There’s never just one event that triggers a market sell off, but as far as the recent sell off is concerned there’s one reason that weighs heavier than any other: Apple.

Live by the Sword, Die by the Sword

Apple had an incredible run, soaring from $80 in 2009 to $705 in September 2012. Apple became the most valuable company in the world and in the process controlled 20% of the Nasdaq-100 and 5% of the S&P 500.

Apple was like a “dictator of the financial market.” As Apple goes, so goes the market. But that relationship is a two-edged sword, because when Apple sneezes the market will get a cold.

So how was Apple’s health?

According to the Wall Street Journal, “Wall Street analysts are increasingly bullish as Apple hits fresh highs” (August 27, 2012) and MarketWatch wrote “Apple seen as trillion dollar baby” (August 21, 2012).

In contrast, the August 22 Profit Radar Report warned: “The new iPhone will hit the stores soon, a mini iPad is in the pipeline, Apple TV will be in many living rooms near you soon and the holiday season is coming up. Based on fundamentals there’s no reason Apple stock shouldn’t rally, but technicals suggest that a top may be just around the corner.”

This warning was followed up by a specific trade recommendation via the September 12 Profit Radar Report: “Aggressive investors may short Apple (or buy puts or sell calls) above 700 or with a close below 660. Obviously, there is no short Apple ETF and if you don’t have a margin account set up, you may consider using the Short QQQ ProShares (PSQ), which aims to deliver the inverse performance of the Nasdaq-100 (Apple accounts for 20% of the Nasdaq-100).”

Apple has fallen over 25% from its September high and dragged every major U.S. index with it. If you’re looking for a scapegoat, look no further than Apple.

How Low Can Stocks Go?

The S&P started to tread on “thin ice” in late October. Why thin ice? Because it was trading perilously close to key support around 1,400 (see trend lines in the chart below). The thin ice finally broke when the S&P fell through key support at 1,396.

A break of key support is generally a precursor of lower prices, that’s why the November 7 Profit Radar Report stated that: “A move below 1,396 will be a signal to go short with a stop-loss around 1,405.”

The chart below was originally published in Sunday’s (Nov. 11) Profit Radar Report, which included the forecast for the week ahead. Below are a few excerpts from Sunday’s PRR.

“We are short with the S&P’s drop below 1,396. How low can stocks go?

The chart below shows two important levels: 1,371 and 1,346 (updated chart shown below).

Since there’s a good chance of an extended down move, I’m inclined to just let our short position run and see where it takes us. 1,371 is the first hurdle to be overcome to look lower.”

The S&P sliced through 1,371 on Wednesday, and Friday’s trade drew prices as low as 1,343. Since our weekly target has been met we’ve sold half of our short positions.

This doesn’t preclude lower prices, but a bounce is possible and it’s smart money management to eat your ice cream before it melts, or take some profits before they disappear. Continuous target prices and buy/sell levels will be provided by the Profit Radar Report.

Are Stocks Overvalued? Yes, According to Dividend Yields

In a world of iPhones, social media, and twitter, it’s easy to forget about time proven market forecasting techniques. But just because there isn’t an app for dividend-based value analysis doesn’t mean it’s not working anymore.

Nobody likes to get trapped. Animals don’t like traps, humans don’t like traps, and investors hate money traps. But how do you distinguish a profit opportunity from a profit trap?

From October 2011 to September 2012 the S&P 500 gained 37%. Was this the beginning of a new bull market or the final leg of the QE bull market?

From March 2009 to September 2012 the S&P 500 soared 121%. Is this rally a new bull market leading to new all-time highs or a monster counter trend rally?

Charles Dow, the founder of the Wall Street Journal and original author of the Dow Theory, said that: “To know values is to know the market.” Yes, valuations might well hold the key to the above questions.

I follow four metrics to determine fair value:

1) Dividend yields
2) P/E ratios
3) The Gold Dow
4) Mutual fund cash levels

A special report analyzing all four valuation metrics was sent out to Profit Radar Report subscribers on Thursday. This article will look at one metric: Dividend yield.

What Dividend Yields Teach about Value

What connection is there between fair value and dividend yields? To illustrate:

Company A trades at $100 a share and pays a dividend of $5 per share. Company A’s dividend yield is 5%.  If company A’s shares soared to $200 a share without dividend increase, the yield will fall to 2.5%.

There’s a direct correlation between a company’s share price and its dividend yield. Higher stock prices lead to lower yields. Low dividend yields are a result of pricey stocks.

Dividend yields are probably the purest measure of valuations. Unlike P/E ratios, they can’t be fudged and massaged (although the current dividend yield is likely inflated by the Fed’s low interest rate policy, which makes it easier for companies to accumulate the cash needed to pay dividends).

Since the year 1900 dividend yields for the S&P 500 have averaged 4.25%. The SPDR S&P 500 ETF (SPY) currently yields 2.02%, 52.5% below the historic average.

The current yield is much closer to the all-time low of 1.11% (August 2000) than the all-time high of 13.84% (June 1932).

The chart below juxtaposes the S&P 500 (log scale) against dividend yields and shows that every major market top coincided with a yield low, and every major market low coincided with a yield high.

Dividend yields aren’t currently at an extreme that requires an immediate drop in stocks, but they do suggest that stocks are overvalued.

What Does this Mean?

What do low yields mean for investors? Valuation metrics are long-term forecasting tools, they shouldn’t be used to enter or rationalize short-term trades.

The long-term message of dividend yields is that the down side risk is greater than the up side potential. The next big move will likely be on the down side.

The best entry point for long-term trades is usually discovered by shorter-term market timing tools. Every prolonged decline starts on the hourly and daily chart.

The Profit Radar Report monitors long-and short-term market timing indicators to identify low-risk high probability trading opportunities.

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 – Stuck Between Bullish Seasonality and Technical Breakdown

Technical analysis suggests lower prices, but seasonality points towards rising stocks. Is it possible to find a worthwhile trade in this conflicting environment? Yes it is. Find out how here.

The S&P is caught between a (seasonal) rock and a (technical) hard place. How so?

Seasonality for the remainder of the year is predominantly bullish, but the recent selloff has caused some technical damage. The technical picture is bearish unless the damage is “repaired” by a move back above resistance.

There’s an obvious conflict between indicators, which makes identifying high probability trades more challenging.

What is a high probability trade? A high probability trade signal (buy or sell) needs to be confirmed by the three pillars of market forecasting:

1) Technicals
2) Sentiment
3) Seasonality

When all three indicators are in alignment, there’s a high probability of a profitable trade/investment. That’s why I call it a high probability trade.

The Profit Radar Report continuously monitors technicals, sentiment, and seasonality to find high probability trades. Prior high probability trades include going short in April 2010 and May 2011 along with buy signals in March 2009, October 2011, and June 2012.

Putting the Odds in Your Favor

Bearish technicals currently disagree with bullish seasonality. Sentiment is more or less neutral. The three pillars don’t align. There  is no high probability trade set up right now, but that doesn’t mean there aren’t any good trades.

When indicators don’t align for high probability trades, the Profit Radar Report looks for the next best opportunity: A low-risk trade.

A low-risk trade has a higher reward than risk potential. In fact, the risk is limited by a well-defined support/resistance level used as stop-loss.

The chart below shows the most recent low-risk trade for the S&P 500 (SPY).

The thick horizontal red line is the 38.2% Fibonacci retracements of the points gained from June – September 2012 at 1,395. This level is reinforced by the ascending red trend line from the October 2011 low and S&P 1,396, which provided support several times in August/September.

In short, S&P 1,396 is a key support/resistance level. The S&P’s drop below 1,396 triggered a sell (as in go short) signal with a stop-loss a few points above. This makes it a low-risk trade.

Next support outlined in Sunday’s Profit Radar Report is at 1,37, which is made up of the 50% Fibonacci retracement and the April 2011 low. The S&P hit this support on the nose this morning and bounced 19 points.

A break below 1,371 will unlock more bearish possibility, with the potential for a steep decline.

Foot in the Door (with Steel Toe Shoes)

Regardless the size of the down move, going short at 1,396 keeps the trading “foot in the door” in case there will be a waterfall decline. All with minimal risk. The stop-loss just above 1,396 protects the “foot” against any bruising.

This is important because there are some bullish possibilities. For right now, the down trend is our friend, but we are fair weather trend friends willing to shift with a move above resistance.

The VIX seasonal pattern shows a clear seasonal opportunity right after Thanksgiving. This may make for a juicy VIX and stock trade if technicals confirm the message of seasonality.

The Profit Radar Report outlines high probability and low-risk opportunities along with the support/resistance levels needed to manage an active trade effectively.

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.

Can QE Bail Out the Stock Market Once Again?

Stocks faltered during QE1 and recovered. Stocks also tumbled during QE2 and rallied back to new recovery highs. From its September high the S&P 500 has already lost 100 points, will QE3 bail out the stock market again?

QE3 looks like the Fed’s biggest boomerang yet. Bernanke announced QE3 on September 13. The S&P closed at 1,460 on this faithful day and recorded a new multi-year recovery high the very next day (1,474.51). Since then the S&P 500 is down 6%, the Nasdaq-100 nearly 10%, and Apple about 23%.

Can QE3 bail out stocks once again?

Based on the QE track record the answer is a plain and simple: Yes.

However, this may not be the time to take a plain vanilla approach. QE3 is the same animal as QE2, but a different breed and even QE2 had some serious genetic flaws that showed up on stock charts as big gashes.

QE2 vs. QE3 – Same Animal, Different Breed

Back in November 2010, I wrote an article on the correlation between the Fed’s Permanent Open Market Purchases (POMO, also known as QE2) and the S&P 500.

Specific transactions, such as coupon purchases of $3.5 billion or larger (back then the Fed was buying Treasuries), resulted in positive S&P performance 89% of the time (when there were no POMO buys, the S&P was up 58% of the time).

Via QE2 the Federal Reserve bought an average of $75 billion worth of Treasuries a month. Via QE3 the Federal Reserve is buying $40 billion of mortgage-backed securities (MBS) per month.

In Addition, throughout November, the Federal Reserve will purchase $47 billion worth of long-term Treasuries (maturities from 2018 – 2042) and sell $37 billion worth of shorter-term Treasuries (maturities from 2013 – 2015).

The net amount of securities purchased by the Federal Reserve (in November and December) will be $50 billion, compared to about $75 billion during QE2 (I’m not sure if the Fed is still reinvesting maturing Treasuries and if it will extend Operation Twist, scheduled to expire at the end of the year).

QE2 – Not Everything That Shines is Gold

The thought of QE2 triggers images of relentlessly rising stock indexes. Sandwiched in between those “market on steroids” segments, however, were nasty selloffs. One in March 2011 (Japan earthquake) and one in May 2011 (the May 2010 and July 2011 meltdowns happened right after QE1 and QE2 ended).

From the beginning to the end of QE2 the S&P gained only 11%. The chart below shows exactly when the various QE’s started, when they ended, how much stocks gained, and the selloffs in between.

QE doesn’t guarantee higher prices, but thus far in this QE bull market stocks have always been able to recover from any decline and move on to bigger and better highs. Will this be the case again?

Technical Indicators

The S&P 500 and Dow Jones didn’t show any major breadth divergences at their September highs and there are some giant open chart gaps, which suggests that prices will indeed end up recovering some of the recent losses.

So the odds for an eventual year-end rally are good (not sure if it will reach new recovery highs), but we haven’t seen panic selling or bullish price/RSI divergences that would point to any sort of more permanent bottom (we may say a daily price/RSI divergence at today’s close).

At the Profit Radar Report we will simply continue to adjust the stop-loss level for our short positions. This virtually guarantees a profitable trade and exposes us to all the profit potential on the short side. We will take profits once indictors tell us a bottom is near.

The Profit Radar Report monitors money flow, seasonality, sentiment, technicals and other developments to identify low risk and high probability trades and investment opportunities for subscribers.

Romney or Obama – 7 Reasons Why the Next 4 Years Will be Lousy for Stocks Regardless

The U.S. presidential campaign is nearing its end and there are some compelling reasons to actually vote for the presidential candidate you like least.

This Bloomberg headline caught my attention: “Economy set for better times whether Obama or Romney wins.”

The commentary brings out that: “No matter who wins the election tomorrow, the economy is on course to enjoy faster growth in the next four years as the headwinds that have held it back turn into tailwinds.”

From Headwind to Hurricane?

Optimism without realism is just wishful thinking and unfortunately the article lacked any factual evidence pointing to a sustainably strengthening economy.

In fact, there are many reasons why the headwinds created by the 2008 near financial collapse will turn into a hurricane, not tailwinds.

1) Artificial Everything: The human body needs nutrients to function at its optimum. Real and organic foods are the best source of nutrients. The 2004 documentary “Super Size Me” shows the body’s reaction to a junk food only diet.

Like the human body, the economy needs real and organic growth to function at its optimum, but all it’s getting is junk food mixed with steroids. Artificial earnings growth, artificial GDP growth, and artificial jobs creation result in an artificial stock market. The sugar crash is coming.

2) Fiscal Cliff: Financial engineering has become the top U.S. industry sector, but despite the abundance of financial engineering talent, there are only two ways to reduce the U.S. deficit: A) Cut government spending and B) Increase taxes.

Both options are as necessary as they are counter productive to an expanding economy.

3) Baby Boomers: Baby boomers were born between 1946 and 1964. More than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years. There are 76 million of them and it is estimated that they account for about 50% of total U.S. spending.

4) Low Interest Rates: Retired baby boomers are reliant on interest rates and dividends to generate income. Interest rates are near all-time lows and generating retirement income is nearly impossible.

Imagine a retired couple with a $1,000,000 nest egg. At best you may find a 1-year CD with a return of 1%. That’s $10,000 a year or $833 a month. Not too long ago you could earn $50,000 a year or $4,166 a month. Retirees will be forced to clam up and hold on to their money if the nest egg is to last.

5) Flight to Junk Investments: Low interest rates force investors into higher yielding vehicles. Those include high yield bonds (more appropriately called junk bonds) and municipal bonds. But there’s no free lunch on Wall Street.

If you want higher returns, you have to take more risk. The iShares iBOXX High Yield Corporate Bond ETF (HYG) and the iShares S&P National AMT-Free Municipal Bond ETF (MUB) have been bid up to near all-time highs.

Financial liquidity is as much about money flow as it is about perception. We’ve seen in 2008 how fast perception can change and how fast junk, muni bonds and even investment grade corporate bonds can drop.

6) Deflation: Japan has been dealing with persistent deflation for decades. Money infusions by the Bank of Japan (Japan’s equivalent to the Federal Reserve) failed to resurrect the economy. Deflation suffocates an economy.

The fact that trillions of dollars worth of U.S. QE money hasn’t caused the expected inflationary environment warns how close the U.S. is to the deflationary spiral.

7) Systematic Problems: A ship with a leak in the hull requires a trip to the wharf. Replacing the captain may quiet uneducated passengers, but it doesn’t fix the problem.

The U.S.S. America (our economic ship) suffers from many “leaks.” A new president, regardless of who it is, can’t fix those leaks.

Like water, Wall Street and Washington always travels the path of least resistance. Unfortunately, the path of least resistance leads to a dead end littered with all the cans that have been kicked down the road.

Like water, the stock market finds small cracks and applies pressure until it bursts. The market has found the economic weaknesses; it’s just a matter of time until the wall of “extend and pretend” breaks.

How will Obama’s election affect stocks? Look at the ship, not the captain.
How will Romney’s election affect stocks? Look at the ship, not the captain.

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.

It’s Do or Die Time for Small and Mid Cap ETFs

Small and mid cap stock indexes are trading at key inflection points. How the indexes and ETFs react to support at current prices will likely set the bias (bullish or bearish) for the coming weeks.

“Do or die” scenarios don’t come around too often, but when they do they deserve our attention and often provide either a low risk or a high probability trading opportunity.

What elevates the current constellation for mid and small cap ETFs from willy nilly to do or die?

There are a number of reasons. The two charts below were originally published in the October 24 Profit Radar Report. The “in a nutshell” conclusion published that day was that: “The stock market is stretched like a rubber band and should bounce back. If it doesn’t, it will ‘snap’”.

Chart 1: S&P MidCap 400 Index

Corresponding ETF: SPDR S&P MidCap 400 ETF (MDY)

The trend line originating at the October 4, 2011 low has provided guidance and support for the S&P MidCap 400 Index. A close below this trend line would be concerning. Additional support is provided by the 200-day SMA at 964.

Chart 2: Russell 2000 Index

Corresponding ETF: iShares Russell 2000 Index ETF (IWM)

The interaction between the Russell 2000 and its October 4, 2011 trend line hasn’t been as pronounced, but the decline has thus far stalled at trend line support. A close below this trend line would also be concerning. Additional support is provided by the 200-day SMA at 807.

Conclusion

Unbroken longer-term trend lines like the ones mentioned above provide invaluable technical insight, often worth more than insider information.

As long as indexes remain above their respective trend lines – the S&P 500, Dow Jones, Russell 2000, MidCap 400 and many sector ETFs remain above at this time – the benefit of the doubt should be given to rising prices.

In addition to trend line support, the October 25 Profit Radar Report pointed out a buy signal for stocks (given by the VIX) and a bullish price/RSI divergence.

Yesterday’s strong rally is running into technical resistance triggered a bearish percentR low risk entry. It remains yet to be seen how long this bounce will last, but trend line support is now our stop-loss level for long positions. The beauty of using a rising trend line as stop-loss for long positions is that it virtually guarantees a winning trade.

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.