Post FOMC Meeting Effect Tends to Kill S&P 500 Mojo

The Federal Reserve announced that the ‘big bad taper’ will stay in the closet. That’s good news. The Fed announced the same thing on September 18, which led to a three-week correction. The same thing happened in late July.

You know the spiel. When there’s a Federal Reserve meeting on Wednesday, the stock market (NYSEArca: VTI) takes a hiatus until Mr. Bernanke makes his announcement.

There’s a Federal Open Market Committee (FOMC) meeting about every 45 days or eight times a year.

More often than not the S&P 500 has a positive bias going into the FOMC meeting, but the S&P 500 ETF has lost its mojo after each of the last three FOMC meetings.

The S&P 500 chart below illustrates the S&P’s performance after the last 10 FOMC meetings.

This chart covers an incredibly bullish time period, but it’s interesting to note that – since September 2012 – the S&P 500 dropped below the FOMC meeting high every single time within the next few weeks.

More remarkable than the S&P’s post FOMC performance history is the S&P’s pre FOMC performance history.

An official Federal Reserve study shows that the ‘pre FOMC drift’ (optimism leading up to the FOMC announcement) accounts for all S&P 500 gains over the last two decades.

In other words, pre FOMC gains inflated the S&P 500 to an unbelievable degree. A full analysis (with shocking charts) of the Federal Reserve study is available here:

New York Fed Research Reveals That FOMC Drove S&P XX% Above Fair Value

Can the S&P 500 Rally another 20%?

The S&P 500 just gained 100 points in 10 days. Some suggest that further gains from an overbought condition are unlikely. This may well be correct, but with or without correction, can the S&P 500 rally another 20% from here?

The S&P 500 is trading at all-time highs and just even entertaining the idea of another rally leg makes me think of this quote:

“Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.”

I’m not an economist and I’d like to think that I’m no madman, but I’m starting to warm up to the idea of another sizeable rally leg.

This is partially because QE wasn’t around when Kenneth Boulding, an economist born in 1910, uttered the above words.

Although absurd when considering the economic backdrop, based on a factual and objective examination of the S&P 500 (NYSEArca: IVV) chart and investor sentiment, considerably higher stock prices are possible, even likely.

Why Now?

Stocks are nearing an overbought condition, isn’t now the wrong time to talk about another 20% rally?

The timing of this discussion is based solely on the fact that the S&P 500 (NYSEArca: SPY) has reached my long-term target around 1,750.

Technical Target Price Captured

The target was based on a 55-month long trend channel (shown in chart below) and first mentioned in the July 14 Profit Radar Report, which stated the following:

“The May 22 high did not look like a major top and the current rally doesn’t have the attributes of a major high yet either. It would be reasonable to expect some weakness with support at 1,635 followed by the next rally leg to 1,700 – 1,750.”

The October 7 Profit Radar Report confirmed the prior forecast like this: “The scenario that appears to make most sense is a quick trip into the 1,660s or 1,650s followed by another rally to new all-time highs.”

The S&P 500 chart below shows the S&P trading as high as 1,765 and Monday, tapping the upper trend channel line and capturing my long-standing target for this rally.

 

If this trend channel is going to repel the S&P 500, it needs to do so soon. Otherwise ‘persistence wears down resistance.’ Persistent trade around current levels increases the odds of higher prices.

Sentiment Analysis

Famous investor John Templeton said that: “Bull markets are born in pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

Based on Templeton’s rhetoric, bull markets have four stages: Pessimism, skepticism, optimism, and euphoria.

For good reason the artificial QE bull market has been called the ‘most hated rally ever.’ Not a day goes by without banter against the Federal Reserve or Ben Bernanke.

Everyone and their grandmother knows that the Fed can’t print an economy out of trouble and that this experiment will end badly.

There’s no scientific way to prove this, but skepticism seems to be the predominant emotion of the market’s current stage.

However, to keep this analysis objective, we need to mention some rather bullish sentiment readings that popped up lately.

Bullish sentiment readings (bearish for stocks) include the equity put/call ratio, bullish asset allocation of Rydex traders, near record-high margin debt and perhaps, most importantly, a very elevated SKEW Index reading.

The SKEW Index was created by the makers of the VIX and – unlike the VIX (NYSEArca: VXX) – has been a trusted indicator this year.

To read about the implications of the current SKEW extreme go here: Watch Out! The S&P 500 Just got ‘SKEWed’

I personally believe that QE has changed the dynamic and the meaning of pretty much all sentiment gauges, but I also believe that understanding the composite sentiment picture holds the key to identifying the next investable low and the major top so many investors are waiting for.

Profit Radar Report subscribers know that I’ve been chronicling various sentiment indicators and actual money flow gauges for a long time. The correct interpretation of investor sentiment has kept us on the right side of the trade since the beginning of the year.

For a quick summary of how sentiment has affected trading thus far this year and an updated look at various current sentiment gauges and indicators click here: Assessing QE Bull Market Longevity Based on Current Investor Sentiment

Simon Maierhofer is the publisher of the Profit Radar Report.

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Assessing QE Bull Market Longevity Based on Investor Sentiment

The Federal Reserve’s liquidity policy has changed the game. Those who don’t adjust to the new rules will become dinosaurs. The interpretation of sentiment indicators is one of the things that changed. Changed yes, but obsolete no.

Is investor sentiment still a valid contrarian indicator in the Fed-manufactured liquidity rally?

The short answer is yes, but …

But what?

I believe that investor sentiment (as contrarian indicator) is an important piece of the puzzle of the market-forecasting picture, but it needs to be recognized that QE has altered money flow and how investors feel about stocks (NYSEArca: VTI).

The QE domino effect changes how sentiment should be used and interpreted.

Here’s the value sentiment indicators bring to the table in a QE market. See if you can find a pattern.

Excerpts are taken from the monthly Sentiment Picture, published by the Profit Radar Report:

The beginning of 2013 saw some slight sentiment poll extremes, but actual money flow indicators reflected indifference. In other words, investors didn’t ‘put their money where their mouth’ was.

This changed in May. The May 19 Sentiment Picture noted growing optimism, particularly among money flow indicators, and warned that: “Risk is rising and the tipping point where the market is running out of buyers is nearing.”

For easy comparison, the S&P 500 (SNP: GSPC) below shows S&P 500 daily bars along with Sentiment Picture forecasts.

The S&P 500 corrected after the May Sentiment Picture and came back to new highs on August 2.

The August 18 Sentiment Picture focused on whether the August 2 high marked a major market top and concluded that: “A major August top is possible, but not probable.”

The S&P 500 (NYSEArca: SPY) rallied to a new high in September, and the September 27 Sentiment Picture asked if the September high marked a major top?

September 27 Sentiment Picture conclusion: “Although current sentiment doesn’t preclude lower prices, the lack of bullishness at the September highs suggests higher prices ahead eventually.”

The chart below shows the actual September 27 Sentiment Picture (without the commentary). The S&P 500 is plotted against five different sentiment gauges to provide a comprehensive sentiment analysis.

It shows the VIX (Chicago Options: ^VIX) near the lower end of the range. But that’s meaningless. Various 2012 Sentiment Pictures put the VIX (NYSEArca: VXX) on probation since it has lost its contrarian indicator mojo.

The other four gauges (CBOE Equity Put/Call Ratio, SKEW Index, % of bullish advisors and % of bullish investors) showed no notable extremes.

The October Sentiment Pictures (forgive me for keeping this chart exclusive for Profit Radar Report subscribers) shows an obvious up tick in bullishness, especially for the SKEW Index and the percentage of bullish investors.

Previous bullish extremes weren’t enough to trigger a market top call. Is last week’s significant up tick enough?

The companion article to the subject matter of sentiment addresses this question:

Do Current Sentiment Extremes Allow for Another 20% Rally?

Simon Maierhofer is the publisher of the Profit Radar Report.

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Watch Out! The S&P 500 Just Got ‘SKEWed’

This week the S&P 500 set new all-time highs and got ‘SKEWed’ in the process. Recent history shows that SKEWed for the S&P 500 can mean getting screwed for investors. Here’s what the SKEW is all about.

On Tuesday the S&P 500 rallied to new highs, on Wednesday and Thursday the S&P 500 (NYSEArca: SPY) got ‘SKEWed.’

What’s SKEWed? Is it the same as screwed? It could be.

The SKEW or SKEW Index is calculated by the Chicago Board Options Exchange (CBOE), the same exchange that publishes the VIX (Chicago Options: ^VIX).

The SKEW is an index derived from the price of the S&P 500 tail risk and attempts to quantify the odds of S&P 500 tail risk.

Like the VIX (NYSEArca: VXX), the SKEW is calculated from prices of S&P 500 out-of-the-money options. The SKEW Index basically attempts to quantify the odds of a black swan event (or S&P 500 tail risk).

CBOE identifies a black swan event as a two or more standard deviation move below the mean.

According to the CBOE, a level of 135 suggests that there’s about a 12% chance of a two-standard deviation decline within 30 days. The risk of a two-standard deviation decline drops to 6% at a reading of 115.

In simple terms, SKEW readings around 135 tend to warn of highs or tops, readings around 115 tend to go along with lows or bottoms.

Here’s where it gets interesting.

Yesterday, the SKEW Index spiked to 135.47, the highest reading since March 16, 2012. What happened in March 2012? Not much, but …

The chart below plots the S&P 500 (NYSEArca: IVV) against daily SKEW readings since 2010.

The March SKEW spike didn’t cause any immediate trouble, but starting in April stocks entered a multi-month correction.

In fact, the chart shows that future gains were always given back at some point shortly after the SKEW moved above 134.

Is the S&P 500 screwed just because it got SKEWed?

The high SKEW reading takes on additional significance as the S&P 500 also hit a long-term target and resistance level. The combination between this resistance and the SKEW may well cause trouble.

This key resistance level goes back to the origin of this rally in 2009 and is important. It is discussed in detail here: S&P 500 Hits 2009 Projection Target – Resistance or Springboard?

The Profit Radar Report monitors technical patterns, seasonality and various sentiment gauges and has been looking for S&P 1,760 as target for this rally. Now that sentiment is starting to become frothy, it’s time to become cautious.

Simon Maierhofer is the publisher of the Profit Radar Report.

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German Central Bank Warns of Severe Correction

Germans are conservative and central bankers are by nature careful about their choice of words. So we should take note when German Central Banks sound an alarm about a severe correction, right? Maybe not completely.

“Central Bank Sounds Alarm” said the front page of a German financial newspaper.

The article continues (translated from German into English): “Central bankers choose their words carefully. Central bankers avoid dramatizations or exaggerations. Danger is at hand when the good old German Central Bank (Bundesbank) warns of severe real estate losses caused by price corrections.”

According to calculations by the German Central Bank, home prices in some metropolitan areas (such as Munich, Duesseldorf, Hamburg and Berlin) are up to 20% overvalued.

“The rapid price increase is not justified,” says the German Central Bank. But, “despite of an overheated market, the Central Bank does not expect a real estate bubble like seen in the USA.”

According to the newspaper (Handelsblatt) only a small portion of German real estate is financed. Real estate loans grew only moderately since 2010, currently at euro 1.1 trillion.

Measured by size, Germany is a small country, but it’s been the engine that kept European markets (NYSEArca: VGK) going. Germany’s economy also has a notable effect on international markets represented by the iShares MSCI EAFE ETF (NYSEArca: EFA).

Not Like Las Vegas

Germany is not like Las Vegas, what happens in Germany doesn’t stay in Germany (NYSEArca: EWG).

The chart below – which plots the German DAX against the S&P 500 (SNP: ^GSPC) – shows a close correlation between the DAX and S&P 500 (NYSEArca: SPY).

Germany isn’t an island, and if Germany gets into trouble, it will ‘export’ its problems along with Porsches and BMWs.

In fact, adding a few simple trend lines to the above DAX chart shows that the DAX has arrived at a crucial inflection point. Click here to see the chart with trend lines: Germany’s DAX Index Defined by Two Lines

Is Central Bank Alarm Bullish?

Perhaps the German Central Bank has ripped a page out of the Federal Reserve’s book.

It’s not common knowledge, but two recent Federal Reserve studies basically warned of a market crash and said it won’t be caused by QE. Click here for a quick and insightful summary of the bizarre studies: Federal Reserve Study

One thing is for sure, the persistent supply or ‘market crash alerts’ has provided the ‘wall of worry’ needed for stocks to climb higher. There is actual evidence for this.

To read why ‘false’ warnings and political chaos have provided the perfect environment for stocks, click here: Is the Mix of QE and Political Chaos the Perfect Environment for Stocks?

Simon Maierhofer is the publisher of the Profit Radar Report.

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Germany’s Stock Market Defined by Two Simple but Powerful Lines

Germany’s 30-stock blue chip index – the DAX – is trading at an all-time high. At the same time the DAX is butting against a 55-month ‘invisible fence.’ Can the DAX ‘jump the fence’ and break free?

The DAX – Germany’s blue chip index – is trading at an all-time high. Like the Dow Jones (DJI: ^DJI), the DAX is made up of 30 blue chip stocks, and many of them are firing on all cylinders.

Unlike most U.S. equity indexes, the DAX is a total return index. The final index number therefore includes dividends ‘reinvested’ into the index. The S&P 500 (NYSEArca: SPY) and Russell 1000 (NYSEArca: IWM) are market-weighted indexes.

There is no U.S. traded DAX ETF, but the iShares MSCI Germany ETF (NYSEArca: EWG) represents a basket of 54 stocks.

Regardless of the index methodology, the DAX is at a major long-term inflection point.

This is illustrated well by the chart below.

Since 2009 the DAX has been traveling higher in a broad trend channel. This week it reached the upper end of the trend channel, which serves as natural resistance.

As long as prices stay below resistance, there is an increased chance for a correction. A move above resistance would be bullish (as long as prices stay above).

Obviously, the DAX is important for German and European markets. German stocks also have a prominent weighting in the international MSCI EAFE ETF (NYSEArca: EFA).

Perhaps more importantly, foreign investors own 55% of the DAX, with U.S. investors making up a big chunk (related article: U.S. Investors Own XX% of Germany).

Also of interest, the German Central Bank just warned of a severe market correction.

We know that Germans are reserved people and central bankers choose their words wisely, so how serious is such a warning?

A quick but insightful take on the German Central Bank Warning can be found here:

German Central Bank Warns of Severe Correction

Simon Maierhofer is the publisher of the Profit Radar Report.

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S&P 500 Hits 2009 Projection Target – Resistance or Springboard?

The S&P 500 has finally reached its up side target outlined by a trend channel going all the way back to 2009. Is this the bull market’s final destination or just a ‘layover’ before departing for new bull market highs?

The S&P 500 (SNP: ^GSPC) has rallied 100 points in the last 10 days.

That’s nice trivia, but the weekly S&P 500 bar chart (figure 2) shows something more significant.

The S&P 500 (NYSEArca: SPY) has finally reached trend channel resistance going all the way back to the March 2009 low.

This trend channel served as a natural magnet for prices, that’s why the Profit Radar Report has been following the channel since early 2013.

The July 14, Profit Radar Report featured two possible paths the S&P 500 could take to ultimately reach the channel.

1. “A brief correction followed by the next rally leg to 1,700 – 1,750 (purple projections). Somehow my gut tells me it won’t be that easy.”
2. “A prolonged period (4 – 8 weeks) of frustrating and unpredictable range bound up and down moves (blue projections) may be the markets way to play cat and mouse with investors and digest the strong gains since November 2012 and June 24, 2013. The longer the sideways action, the higher the next target (due to the ascending trend channel).”

The S&P 500 (NYSEArca: IVV) chose option #2, the cat and mouse path. But regardless of the path, the destination has been reached. What now?

Mission Accomplished

The S&P 500 has captured the long-standing Profit Radar Report’s up side target and accomplished this mission.

As the chart shows, the upper line of the trend channel has acted as natural resistance for the S&P 500 (NYSEArca: VOO) in the past and repelled stocks.

But past performance is no guarantee of future results.

If the S&P 500 is going to reverse, it should do so right around trend channel resistance. In fact, the effect of the channel resistance is being felt today.

However, I am seeing a number of indicators that suggest any reversal will be only temporary in nature, with the growing potential of higher price targets.

One indicator that suggests continued (although not uninterrupted) strength for the S&P 500 is VIX (Chicago Options: ^VIX) seasonality. In fact, VIX seasonality is quite pronounced.

A simple but comprehensive VIX seasonality chart is available here: VIX Seasonality Chart

As always, I will share my findings and buy/sell signals via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report.

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US Assets are Falling in the Hands of Foreign Owners at Record Pace

America is no longer known as a manufacturing and export powerhouse. There is one exception, however, America is the leading exporter of wealth. Every year the United States exports hundreds of billions of wealth overseas.

‘Negative compounding’ is how Warren Buffett described the process of paying ever increasing dividends, interest (and rent) to the world outside of the U.S.

Buffett explains his concern with this analogy: The United States has been behaving like a rich family that possesses an immense farm. Not wanting to work, they sell pieces of the farm and increase the mortgage. They improve their cash flow by depleting their assets.

In particular, from the mid-1990s onward Americans consumed far more than they produced, financing the deficit via cheap credit facilitated by the dollar’s world reserve currency status.

By default, this economical and societal shift invites international investors. American sellers are eager to sell and global investors are ready to buy.

Foreigners are able to own a ‘piece of America’ one of two ways:

– Buy U.S. government debt
– Buy U.S. assets

Who Owns U. S. Government Debt?

The chart below provides a quick visual of U.S. debt holders. China and Japan own about $2.5 trillion of U.S. Treasuries, from short-term bonds (NYSEArca: SHY) to long-term Treasury Bonds (NYSEArca: TLT).

Foreign governments and investors own about $5.7 trillion of U.S. debt.

The biggest holder of U.S. debt is actually the Social Security Trust Fund and Federal Disability Insurance Trust Fund (about $2.8 trillion). Other government agencies own another $2 trillion.

The Federal Reserve holds about $1.8 trillion of Treasuries. The remaining $4.7 trillion are owned by mutual funds, pension funds, insurance companies and investors.

The United States Treasury debt amounts to about $17 trillion.

Every country needs investors to finance its operations like a corporation needs shareholders. Beggars can’t be choosers and the U.S. government is happy to take all the money it gets, including the money of international investors.

But owing money to out-of-country investors has its drawbacks as interest payments leave the country. Essentially wealth is being transferred out of the country, or exported. The export of wealth is not beneficial for a country’s balance sheet and health.

Who Owns U. S. Asset

As the chart below shows, foreign ownership of U.S. assets has increased 47.5% to $21.44 trillion since Q1 2009.

The foreign ownership data comes straight from the Federal Reserve’s Z.1 Financial Accounts of the United States report.

Foreign asset ownership (labeled ‘rest of world’ assets in the Z. 1 report) includes financial assets such as deposit accounts, savings accounts, money market accounts and stock holdings such as the SPDR S&P 500 ETF (NYSEArca: SPY), Dow Diamonds (NYSEArca: DIA), Nasdaq (Nasdaq: QQQ) and other funds and individual stocks.

It’s important to note that ‘rest of world’ assets does not include real estate holdings. As international investors continue to buy U.S. real estate, tenants are literally sending their rent checks to landlords overseas.

The export of wealth is significant. Excluding rent payments, the U.S. has transferred somewhere between $550 – 800 billion of interest/income/dividend payments to recipients outside the country.

Based on Buffett’s analogy, American’s are ‘selling the farm’ to finance their spending. The question is how much of the farm is left, or how much is the entire United States worth?

How Much is the United States Worth?

Is it possible to put a price tag on the United States of America? It is, and the article below does just that using asset data from the Federal Reserve. For a detailed analysis on how much the entire United States is worth, click here:

How Much is the Entire United States of America Worth?

Simon Maierhofer is the publisher of the Profit Radar Report.

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How Much is The Entire United States of America Worth?

Nobody in his right mind would by a car based solely on color or a stock based just on EPA. Surely you’ve heard of the U.S. GDP, but nobody really talks about how much the entire United States of America is actually worth. That’s a number worth knowing.

GDP is the best known and most misunderstood acronym in economics. There’s an advance GPD estimate, a second GDP estimate, and the third estimate.

Even the third estimate is subject to periodic revisions (every year in July and/or every 5 years).

Fact is, the GDP number you hear today may be entirely different from the final revised figure, yet the financial media can’t wait to report the latest obsolete GDP digits.

U.S. Assets More Important than GDP?

The United States Gross Domestic Product for 2012 was $15.68 trillion.

Judging a country only by its GDP is like buying a car based on its color or a stock only based on its EPA.

GDP is like a country’s income statement, but where’s the balance sheet?

Only the balance sheet tells us about assets, liabilities, and the actual worth of the country. No bank would approve a corporate loan without a balance sheet.

How Much is the United States of America Actually Worth?

Every quarter the Federal Reserve releases the Z.1 Financial Accounts of the United States Report.

The report is about 170 pages long and somewhat cryptic in nature (we don’t expect anything less from the Federal Reserve).

The Z.1 report is essentially a balance sheet capturing all the assets of the United States of America.

But for some reason the Federal Reserve publishes only balance sheets for some sectors of the economy and makes us dig for the rest.

If you are willing to dig though, you can find the approximate value of all U.S. assets.

The first charts shows the asset value of all U.S. household and nonprofit organizations (blue columns) along with an overlay of the S&P 500 (SNP: ^GSPC).

Total U.S. household and nonprofit assets amounted to $88.37 trillion as of September 2013.

This includes real estate holdings (NYSEArca: IYR), deposits, savings, and money tied up in stocks, mutual funds and ETFs like the S&P 500 SPDR (NYSEArca: SPY), QQQ (Nasdaq: QQQ), Dow Diamonds (NYSEArca: DIA), etc.

The Z.1 report also provides asset figures for nonfinancial businesses, the domestic financial sector (commercial banks, insurance companies, pension funds, etc.), state and local governments, the federal government and holdings of foreign owners).

The second chart shows the assets of the various segments covered by the Z.1 report.

Total U.S. assets amount to about $225 trillion.

The Z.1 report does not disclose tangible holdings (such as real estate) owned by the financial sector, state and local governments, federal government and foreigners.

In fact, foreign ownership of U. S. assets has exploded. More American’s are essentially sending their rent checks to their landlord overseas.

According to Warren Buffett, that’s problematic for the U.S. economy. Here’s what Mr. Buffett said ten years ago:

“I’m about to deliver a warning … our country’s net worth is now being transferred abroad at an alarming rate. A perpetuation of this transfer will lead to major trouble.”

Which foreign countries ‘own’ American and their alarming buying rate is discussed in detail here:

U.S. Assets are Falling in the Hand of Foreign Investors at Record Pace

Simon Maierhofer is the publisher of the Profit Radar Report.

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VIX Ratio Shows Less Short-term Than Long-term Fear

Just about every investor is familiar with the VIX. What many don’t know is that there is a short-term VIX and a longer-term VIX. Calculating the ratio of the short-and long-term VIX shows us if volatility traders are more concerned about the short or long-term.

Here’s a unique take at the CBOE Volatility Index or VIX in correlation with its lesser-known cousin, the CBOE S&P 500 3-month Volatility VXV (Chicago Options: ^VXV).

The VIX (NYSEArca: VXX) is a gauge of expected volatility for the next month.

The VXV is a gauge of expected volatility for the next three month.

The VIX / VXV ratio lets us know if volatility traders are more concerned about the short-term (1 month) or long-term (3 month).

As with most everything VIX related, this works better as a contrarian indicator.

The S&P 500 / VIX / VXX Ratio chart below plots the S&P 500 (SNP: ^GSPC) against the VIX/VXV Ratio.

As of Friday, the VIX/VXV Ratio dropped to 0.87. This basically means that volatility traders expect less volatility over the month compared to the 3 month.

The ratio is not yet extreme, but it’s close to the 0.856 reading that coincided with the September high.

Since 2011, the S&P 500 (NYSEArca: SPY) has struggled when the VIX/VXV ratio was around and below 0.82.

Based on the VIX/VXV Ratio, the S&P 500 is approaching a level where caution is warranted. Further insight is provided by VIX seasonality.

VIX Seasonality

The last time we looked at our proprietary VIX seasonality chart was on October 8. At the time, VIX seasonality suggested a minor VIX (NYSEArca: TVIX) high and a bounce for stocks.

VIX seasonality kept us on the right side of the trade in early October, but the real big seasonal VIX turning point is still coming up.

The VIX seasonality chart (available here: VIX seasonality chart) highlights the second-best seasonal VIX trade of the year.

Simon Maierhofer is the publisher of the Profit Radar Report.

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