Quirky but Accurate Indicator: Housing Sector Troubles Likely to Continue

Sometimes the oddest correlations make the best forward-looking indicators. This is certainly the case with lumber and the housing market. Here’s what this odd but accurate indicator ‘sees’ ahead for U.S. real estate.

Several times in the past we’ve looked at the correlation between lumber and housing – related ETF: iShares US Real Estate ETF (NYSEArca: IYR).

It’s an off the wall kind of an indicator, but it’s proven more accurate than any other housing indicator.

To get the correlation right, we need to set lumber futures forward by about 14 months.

The chart below does just that, as it plots lumber against the PHLX Housing Sector Index.

As the gray oval on the right shows, lumber saw a big pop and drop in 2012/2013.

The two gray ovals to the left illustrate that the magnitude of such sizeable pops and drops tends to appear muted in the housing sector, nevertheless it suggested an eventual slowing of the housing market.

Lumber is currently at an interesting juncture, as lumber prices were unable to break above resistance and just fell to test support.

As of right now, lumber suggests that the housing market is not ‘out of the woods’. The housing blues may start all over if support for lumber fails.

This would not only affect multi-billion dollar ETFs like the Vanguard REIT ETF (NYSEArca: VNQ), or SPDR Dow Jones REIT ETF (NYSEArca: RWR), but also millions of Americans.

A proprietary analysis of supply and demand for the SDPR S&P Homebuilders ETF (NYSEArca: XHB) also shows that demand for homebuilding stocks is deteriorating.

 

The Only Free and Updated VIX Seasonality Chart

The VIX is trading near 7-year lows and two VIX ETFs are at all-time lows. Many are itching to buy the VIX and while such a trade may well be profitable, VIX seasonality provides another layer of information for a low-risk trade.

When is the best time to buy or sell the VIX or VIX ETFs/ETNs?

There are multiple ways to find decent entry points. The effectiveness of every single one of them can be enhanced by VIX seasonality.

Consider seasonality another layer of tradable information, just as you may use a mobile weather app to crosscheck what the meteorologist says on local TV.

The VIX seasonality chart below is based on daily VIX data from 1990 – 2013 and was featured in the May 21 Profit Radar Report (Profit Radar Report subscribers get complimentary access to carefully crafted seasonality charts for the S&P 500, Apple, gold and VIX).

A major seasonal VIX low is usually due towards the beginning of July. Major tops tend to form in October.

Currently the VIX is flirting with a 7-year low. The iPath S&P 500 VIX ETN (NYSEArca: VXX) and VelocityShares 2x VIX ETN just slid to (another) all-time low.

Based on the VIX’s depressed level and spread between current trade and the 50-day and 200-day SMA, it’s almost certain (based on historic precedences) that VIX will climb towards 15 sometime before September.

It is tempting to buy the VIX at current levels (someone actually bought $13 million worth of VIX calls around 12, more below). Is this a good idea?

The VIX is trading just around support at 12 and a number of indicators suggest a S&P 500 correction. Lower S&P 500 (NYSEArca: SPY) generally translates into higher VIX.

However, the VIX seasonality chart cautions that we may see even lower VIX prices in early July. This doesn’t mean the VIX can’t rally now (based on some indicators it should rally), but seasonality cautions that any rally may be muted and/or reversed.

Odds of a successful trade increase if we get another chance to buy the VIX at depressed levels in a month or so.

Regardless of seasonality, one trader decided now is the time to load up on VIX calls, $13 million worth to be exact.

Seasonality does not yet support the bullish bet, but there are three other reasons suggesting some sleepless nights for the $13 million trader. More details here:

Record Gamble: Trader Spends $13 Million on Bullish VIX Bet

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

Record Gamble: Trader Spends $13 Million on Bullish VIX Bet

This is at least the second double digit million dollar bet on the VIX this year. The first one paid off big, but the odds of this $13 million dollar trade turning profitable aren’t quite as good. Here are four reasons why:

Based on Bloomberg data, an unknown trader paid almost $13 million to buy VIX call options.

Options provide leverage not available via ETFs or ETNs like the iPath S&P 500 Futures ETN (NYSEArca: VXX) or VelocityShares 2x VIX ETF (NYSEArca: TVIX).

This is a bold bet for a number of reasons:

1. The trade will only be successful if the VIX rallies at least 56%.
2. Contango incrementally and persistently eats away at long VIX trades (see below for explanation of VIX contango).
3. The VIX broke below support at 12. The May 18 Profit Radar Report stated that: “Key support for the VIX is at 12. A move below 12 would suggest further up side for stocks.”

At the beginning of the year, on January 28, an unknown trader placed an even bigger $18 million bet on a falling VIX. At the time the VIX traded around 19.

In an article titled: “Record Bet: Trader Sells $18 Million in VIX Calls,” I outlined three reasons why this was a smart bet.

1. As the January 28 Profit Radar Report highlighted, VIX resistance was at 18.60 – 20.20. Going short against resistance always provides a low-risk entry (assuming a stop-loss is set above resistance).
2. Contango: Contango provides head wind against bullish bets, but tail wind for bearish bets (click above link for detailed explanation of contango, and how much profit it erodes each day) .
3. S&P 500 lows are often accompanied by VIX divergences, which means that the VIX often does not spike to new highs even if the S&P 500 (NYSEArca: SPY) drops to new lows.

Obviously, the bearish $18 million bet in January paid off handsomely. I don’t think the odds of this bullish VIX trade paying off are as good.

VIX seasonality has not yet bottomed and projects even lower readings. The VIX seasonality chart pinpoints the seasonal bottom and best time to buy the VIX.

More information along with the only free and updated VIX seasonality chart on the web is available here:

The Only Free and Updated VIX Seasonality Chart

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

Nasdaq Back Above 50-day SMA – Bull Trap or Buy Signal?

It’s been rare for the Nasdaq to spend an extended period below the 50-day SMA. On Thursday the Nasdaq Composite closed back above the 50-day SMA for the first time since April 4. Is this bullish or a bull trap?

On Thursday the Nasdaq Composite (Nasdaq: ^IXIC) closed back above the 50-day SMA for the first time since April 4. Is this bullish or a bull trap?

Since the 2009 low the Nasdaq hasn’t spent much time below the 50-day SMA. In fact, there were only four instances where it traded below its 50-day SMA for more than 30 days.

The prior three occurrences are highlighted in the Nasdaq chart below. To be specific, the blue boxes show the time spent below the 50-day SMA including the first day back above.

All three times saw an almost immediate pullback followed by higher prices. Twice the Nasdaq tested the prior low.

A move above 4,180 for the Nasdaq Composite or 3,665 for the Nasdaq-100 (Nasdaq: QQQ) would invalidate a bearish technical formation and allow for higher prices.

Perhaps more important than the 50-day SMA is an indicator that correctly signaled the 2000 and 2007 market tops. This trusty indicator is on the verge of boasting another sell signal. Are the implications the same as in 2000 and 2007?

More details here: A Look at the Risk Off Gauge That Correctly Signaled the 2000 and 2007 Tops

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

S&P 500: When Will the Trading Range Break?

There’s a time to buy, a time to sell and a time to be patient. Most of 2014 falls into the ‘be patient’ category. What’s causing this extended trading range and how much longer can it go on?

Since the beginning of the year, the S&P 500 hasn’t gone anywhere. Here’s why:

Limited Up Side

The S&P 500 has been struggling to break through technical resistance. The dashed red trend channel and solid red Fibonacci resistance have clipped the wings of the S&P 500 every time it staged an attempt to fly above resistance.

The first chart shows that aside from the January/February dip, the S&P 500 has been restricted to a range defined by predetermined support/resistance levels.

The second chart provides the long-term context needed to make sense of the highlighted support/resistance levels.

Limited Down Side

Obviously, the S&P 500 (NYSEArca: SPY) has bounced from technical support several times, but there’s been another reason why the S&P 500 hasn’t broken down.

It’s the ‘media put.’ Unlike the ‘Bernanke put’ (now Yellen put), which is cash driven, the ‘media put’ is information driven.

The media is the last entity qualified to dispense financial advice, but that’s exactly what they do. Unfortunately, enough investors are listening making the media a contrarian indicator.

Here’s some of the ‘advice’ (headlines) the media has been giving:

Yahoo Talking Numbers: “Why sell in May adage makes sense this year” – April 28
CNBC: “This chart says we’re in for a 20% correction” – May 1
CNBC: “Bubble talk catches fire among big-money pros” – May 5

The S&P 500 rarely dances to the tune of the media’s whistle, that’s why the Profit Radar Report expected a pop and drop combo to fool the ‘here comes the crash’ crowd.

The May 7 Profit Radar Report stated that: “A false pop to 1,900 – 1,915 would shake out the weak bears and set up a better opportunity to go short.”

When Will the Range Break?

The pop to S&P 1,902 on May 13 certainly rattled the cage of premature bears. A break below key support (key levels outlined in the most recent Profit Radar Report) may usher in the long-awaited 10%+ correction.

Could the correction morph into something bigger?

One indicator with the distinct reputation of signaling the 2000 and 2007 meltdowns is at the verge of triggering another ‘crash signal.’ But there’s one caveat.

Here’s the full intriguing story:

A Look at the Risk Gauge that Correctly Signaled the 2000 and 2007 Tops

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

A Look at the Risk Off Gauge That Correctly Signaled the 2000 and 2007 Tops

Here is a look at an indicator that has the distinct reputation of signaling the 2000 and 2007 meltdowns. This indicator obviously has a decent track record, but is today’s environment the same is in 2000 or 2007? Is another crash likely?

Here is a look at an indicator that has the distinct reputation of signaling the 2000 and 2007 meltdowns – the XLY: XLP ratio.

XLY (Consumer Discretionary Select Sector SPDR ETF) represents a dynamic and economically sensitive sector of the S&P 500.

XLP (Consumer Staples Select Sector SPDR ETF) represents a stable, boring and supposedly recession proof sector of the S&P 500.

The XLY:XLP ratio shows which sector investors prefer, and as such serves as a historically accurate risk on/risk off indicator.

The first chart plots the S&P 500 against the XLY:XLP ratio (I’ll call it XXR from here on). The green lines show that XXR respects trend line support.

In fact, a break below this trend line support in 2000 and 2007 is what foreshadowed trouble for the S&P 500 (SNP: ^GSPC).

This week, the XXR is exactly at trend line support once again. Extrapolating the past into the future would suggest another meltdown (assuming XXR will go on to drop below support).

However, there are some differences.

The second chart adds the percentage of bullish investors polled by AAII into the equation.

For the past several weeks the Profit Radar Report has been pointing out that retail investors along with the media (or investors influenced by the media) have turned quite bearish.

For example, when the S&P traded around 1,860 on May 7, the Profit Radar Report stated that: “The weight of evidence suggests the onset of a larger correction in May, but we are not the only ones expecting a correction. A false pop to 1,900 – 1,915 would shake out the weak bears.”

Last week’s spike to 1,902 may have been this ‘false pop.’

Is Today’s Environment the Same as in 2000 and 2007?

I’ve added the % of AAII bulls to show that today’s environment differs from what we saw in 2000 and 2007.

In 2000 and 2007 most market participants were bullish. Today they are not.

It should also be noted that XXR’s 2007 break below trend line support came a few weeks too early and could have resulted in some annoying short-term losses as the S&P 500 (NYSEArca: SPY) staged its final rally leg.

Summary

The XLY:XLP Ratio has done a decent job foreshadowing the 2000 and 2007 crashes, but the overall environment suggests that this time is different.

There is not enough fuel (aka bullish investors) to drive the S&P 500 down substantially (more than 20%) and keep it down.

As mentioned above though, in the 2014 S&P 500 Forecast (published on January 15 via the Profit Radar Report), I projected a correction in May or June. This forecast remains valid.

Here is the key must hold short-term S&P 500 level that – once broken – would trigger further selling along with key short-term resistance:

Short-term S&P 500 Analysis

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

Contrarian Take: Did Doomsday Prophets Scare the Bear?

Bears are powerful creatures, but they can get scared easily and may suffer from a fear similar to stage fright. Many media outlets have reported sightings of bears, but when everyone expects its appearance, it fails to show.

Baron Rothschild’s famous adage, that the time to buy is ‘when there’s blood in the streets’, is timeless.

History has also shown that the old adage is reversible, meaning that the time to sell is when there’s no sight of ‘blood in the streets’ or extreme optimism.

Is there extreme optimism right now?

Allow me to introduce my very own, non-scientific media sentiment indicator.

A couple of weeks ago value investing icon Jeremy Grantham published his first quarter 2014 newsletter. The topic was a statistical approach to market bubbles.

The Glass Half Empty Interpretation

According to the letter, Grantham believes that the S&P 500 will form a bubble that will eventually burst. The conclusion in his words is as follows:

“But I believe it [the bubble] will not end for at least a year or two and probably not before it reaches a level in excess of 2,250 on the S&P 500 (SNP: ^GSPC). I am not saying that this time is different. I am sure it will end badly.”

The financial media (not sure if they read the entire report or not) spun the following headlines out of Mr. Grantham’s analysis:

“Jeremy Grantham on Bubbles: ‘I am sure it will end badly’” – Wall Street Journal
“Jeremy Grantham: Stocks set to crash around November 2016” – Moneynews
“When Jeremy Grantham sees bubbles, it’s worth paying attention” – The Globe and Mail
“Jeremy Grantham makes a very specific call about when the bubble will burst” – Business Insider

This may have gotten lost in translation, but Grantham ‘predicted’ two developments:

1. The S&P 500 will rally to 2,250
2. It will end badly

Yet, I could not find a single article that even mentioned, let alone highlighted, S&P 2,250, which is a pretty bold call.

In fact, bearish financial headlines were so pervasive in early May that Yahoo Breakout ran a segment called: “The boys who cried wolf: Crash prophets on the rise.”

Is someone (hint: media) trying to spill blood on the street?

It Happened Before

This environment reminds me of what we saw about a year ago, when I wrote in the March 10 Profit Radar Report that:

“The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point that stocks are only up because of the Fed. We know this is a phony rally, but so does everyone else. We know this will probably end badly eventually, but so does everyone else. The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number.”

My research (S&P 500 2014 Forecast, published on January 15, 2014, available to subscribers of the Profit Radar Report) proposed a rally towards S&P 1,950 followed by a 10%+ correction back in January.

However, the recent spell of bearish headlines (caused by sideways trading not a correction) made me suspicious. It was time for the market to fool the crowded trade again. I proposed this head fake scenario in the May 7 Profit Radar Report (S&P was as low as 1,860 that day):

“The weight of evidence suggests the onset of a larger correction in May, but we are not the only ones expecting a correction. A false pop to 1,900 – 1,915 would shake out the weak bears and set up a better opportunity to go short.”

We got an S&P 500 (NYSEArca: SPY) pop to 1,902.17 on May 13, but the headlines continue to be bearish. We’ll have to see if the pop was enough to fool the bears and set the stage for a deeper correction.

I will be looking at key support and resistance levels for valuable directional clues.

The most important near-term support/resistance levels are disclosed here for free:

S&P 500 Analysis: The ‘Chopping Zone’ Explained

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

Are Stocks Cheap or Overpriced? Here’s Why Analysts Passionately Disagree

Stock market valuation is one of the most passionately fought arguments on Wall Street: Are stocks cheap or expensive? They can’t be both. Here’s why analysts are disagreeing, and why their valuations may not matter anyway.

A standard is defined as a rule set by an authority to measure quantity, quality, weight or value. In short, standards are established to limit confusion.

By what standard are analysts measuring stock market valuation?

There must be different ‘standards,’ because stock market valuation is a passionately fought and never-ending debate.

Some analysts say that stocks are overvalued, others argue they are cheap. How can that be and who is right?

This article will review three different valuation metrics, each plotted against the S&P 500 (time frame: from 1881 – 2013; datasource: Robert Shiller) and two variables that make P/E analysis almost worthless.

Valuation Metric #1: 12-month Trailing P/E

Figure 1 shows the S&P 500 P/E ratio based on 12-month trailing ‘as reported’ earnings.

As of December 31, the 12-month trailing as reported P/E was at 18.19 (18.91 today).

The 134-year average is 15.81. The highest reading was 123.79 (May 2009), the lowest reading was 5.31 (December 1917).

Based on this P/E metric, the S&P 500 is 19.6% overvalued (compared to its 134-year average).

Valuation Metric #2: Cyclically Adjusted P/E

Figure 2 shows the S&P 500 Cyclically Adjusted P/E ratio (CAPE). The CAPE is based on average inflation-adjusted earnings from the previous 10 years (formula: take the annual EPS of S&P 500 for the past 10 years. Adjust EPS for inflation using the CPI. Take the average of inflation adjusted EPS figures over the 10-year period. Divide the current level of the S&P 500 by the 10-year average EPS).

As of December 31, the CAPE was at 24.86 (25.62 today).

The 134-year average is 16.61. The highest reading was 44.20 (December 1999), the lowest reading was 4.78 (December 1920).

Based on the CAPE, the S&P 500 and S&P 500 ETF is 54.24% overvalued.

Is P/E Ratio Analysis Worthless?

There are two problems with P/E ratio based valuation analysis:

1) Corporations can and often do fudge their balance sheets (such as FASB rule 157). More details about one of the biggest loopholes here: The Simple Trick that Ruined the P/E Ratio for Everybody

2) Multiple expansion: Multiple expansion is a fancy term for investors’ willingness to overpay for stocks. Some research suggests that 70% of bull market returns are based on multiple expansion.

To wit. In January one high-flying tech stock was trading with a P/E ratio of 1,403. The January 5 Profit Radar Report featured this little tidbit:

“Trivia: Which high-flying tech leader has a P/E ratio of 1,403? Tip: This stock is the fourth biggest component of the Nasdaq-100. Answer: Amazon (AMZN). Amazon founder Jeff Bezos is a true visionary and Amazon is working on amazing technology, but ultimately earnings are more important than pure vision. A close below 380 would open the door for much lower targets.”

From January to May AMZN lost as much as 30%. Willingness for ‘multiple expansion’ creates bubbles, and there’s no telling when bubbles start or end. It’s a wild card. Ultimately a stock is worth as much as investors are willing to pay for it, regardless of its P/E ratio.

The ‘Non-Fudgeable’ Valuation Metric

Investors are irrational and corporations can cook the books, but one gauge that can’t be fudged are dividends. Dividends are either paid, or not.

The S&P 500 dividend yield was at 1.94% on December 31 (1.91% today).

The 134-year average is 4.32%. The highest yield was 13.84% (June 1932), the lowest yield 1.11% (August 2000).

Based on dividend yields, the S&P 500 is 55.79% overvalued.

Conclusion

Each of the above charts are plotted against the S&P 500, providing a clear visual that valuations don’t work as short-term market timing tools. What does work as short-term timing tool?

Here is a closer look at a fascinating type of analysis that’s pegged the recent S&P 500 moves:

S&P 500 Analaysis: The Chopping Zone Explained

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

S&P 500 Analysis: The ‘Chopping Zone’ Explained

S&P 500 analysis: Since late 2013, the S&P 500 has been ‘boxed in’ by well-defined support/resistance levels. This explains 4-months of range bound trading activity. Here is the S&P 500 ‘chopping box zone’ along with key near-term support and resistance.

Buy-and hold investors know that the S&P 500 (SNP: ^GSPC) hasn’t gone anywhere since the beginning of 2014. Why and when will this aimless back and forth stop?

Here are four charts that will progressively shed some light on the issue:

The first chart is a plain weekly S&P 500 bar chart. At the top we see an index that has stalled.

The second chart is the same S&P 500 chart with some simple annotations.

1. Solid black trend channel going back to March 2009
2. Dashed black trend channel going back to October 2011
3. Green support/resistance line going back to April 2010
4. Green support line going back to November 2012
5. Fibonacci projection level going back to 2002

The third chart is a daily bar chart going back to October 2011.

The fourth chart zooms in on the most recent market action in correlation to the various support/resistance (S/R) levels mentioned above.

The blue lines show an S&P 500 that has been boxed in by its own S/R levels.

Each blue circle represents a tidbit of ‘insider information’ available to investors familiar with such levels.

S/R conscious investors didn’t chase the S&P 500 when it touched the upper resistance rim and didn’t sell when it touched the lower boundary.

The Profit Radar Report combines those simple S/R levels with technical analysis, seasonality patterns and sentiment analysis.

Here’s an actual recent example of sentiment analysis combined with S/R levels and seasonality:

In the beginning of May, the financial media delivered a wave of bearish headlines, such as:

“Why investors expect to sell in May and go away” – Investors Business Daily
“This Chart Says we’re in for a 20% correction” – CNBC
“I’m worried about a crisis bigger than 2008: Dr Doom” – CNBC
“Risk of 20% correction highest until October” – MarketWatch

Merely based on those headlines, it became clear that the market will shake out premature bears with a drop and pop punch. Via the May 4 Profit Radar Report, I shared this outlook:

“The ‘chart detective’ inside of me favors a shallow dip (1,874 – 1,850) followed by a pop to 1,900 or 1,915 before we see a 10%+ correction. This bold prediction is mainly based on what the ‘chart detective’ thinks will fool the maximum number of investors.”

Resistance at 1,900 was composed of short-term pivots and a long-term Fibonacci projection level. The brief pop above 1,900 no doubt stopped out all the weak bears that followed the media’s doom-and gloom talk. Was it enough of a pop?

Thus far the S&P 500 has followed our script, however it continues to trade within the ‘blue box chopping zone’ and above double trend line support.

This week’s high and today’s low are now the new short-term support/resistance box for the S&P 500.

I often get asked: “But what about valuations?”

Do valuations matter? Quite possibly. But how do you determine whether stocks are cheap or expensive? Not even the so-called pros can agree on valuations. Here’s an objective look at three objective valuation metrics and why the pros passionately disagree about valuations.

Are Stocks Cheap or Overpriced? Here’s why Analysts Passionately Disagree

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

Fed Fund Rate Suggests S&P 500 Rally

Here’s yet another indicator that the Federal Reserve legally ‘manipulates’ the stock market. This chart shows the correlation between the S&P 500 and the 30-day Fed Fund Rate. Based on this unique correlation, stocks should rally (at least temporarily).

Market correlations are never married for better or for worse or until death do they part, but they are valuable tools for market forecasters.

There are dozens of correlations. Some are logical and make sense, others are exotic and off the wall.

This piece is about the correlation between the S&P 500 (SNP: ^GSPC) and the 30-day Federal Funds Rate (30 FFR).

The Federal Funds Rate (FFR) is the interest for which a depository institution lends funds maintained at the Federal Reserve to other depository institutions.

The 30 FFR reflects the average daily FFR in a particular month and is investable via the 30-day Federal Funds Futures.

The Commitment of Traders Report (COT) provides a glimpse of how traders feel about the 30 FFR, and that’s where it gets interesting.

The COT tracks positions of commercial, non-commercial and non-reportable traders. Commercial traders are considered the ‘smart money.’

Commercial traders have been piling into the 30-day Federal Funds Futures, basically betting on a higher FFR.

The FFR essentially acts as the base rate that determines all other interest rates in the US.

There generally is a direct correlation between Treasury rates and stock prices. That’s what makes the 30 FFR an interesting forward-looking indicator.

How is it forward looking?

The chart below plots the S&P 500 against the 30 FFR shifted forward approximately 30 days or four weeks (the COT reports weekly).

The green portion of the 30 FFR chart reflects the outlook for the next four weeks.

The second chart shows the long-term correlation between the S&P 500 and 30 FFR.

It’s worth noting that commercial traders’ 30 FFR long positions are near an all-time high. Therefore, up side could be limited.

For now, the Fed Funds Rate confirms what we foresaw already last week: Higher prices.

My thoughts, shared via the May 4 Profit Radar Report, were as follows: “The chart detective inside of me favors a shallow dip to 1,874 – 1,850 followed by a pop to 1,9xx (exact level reserved for subscribers) before we see a 10%+ correction.“

I expected higher prices not because the charts telegraphed it, but because of a non-scientific yet incredibly effective indicator. More details can be found here:

Too Many Bears Spoil the Crash (or Correction)

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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