‘Black Swan Risk Canary’ Soars to All-Time High

Many times catchy headlines do not deliver any content even remotely as interesting as the title. But this catch headline is backed up by one of the most accurate stock market indicators in recent years.

What’s the ‘Black Swan Canary?’ It’s the CBOE SKEW Index.

The SKEW Index is calculated by the CBOE. The CBOE, the same outfit responsible for the CBOE VIX.

According to CBOE, the SKEW Index is designed to measure the tail risk (= risk of outlier returns two or more standard deviations below the mean) of the S&P 500.

The SKEW Index basically estimates the probability of a large decline or ‘Black Swan’ event.

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Similar to the CBOE VIX or VIX Volatility Index (NYSEArca: VXX), the price of the S&P 500 (NYSEArca: SPY) tail risk is calculated from the price of S&P 500 out-of-the-money options.

The SKEW typically ranges from 115 to 135. Readings of 135+ suggest a 12% chance of a large decline (2 standard deviations). Readings of 115 or less suggest a 6% chance of a large decline.

The highest SKEW reading was recorded on October 16, 1998 and was matched by last Friday’s spike to 146 (the chart below was originally published in Sunday’s Profit Radar Report).

Here are probably the two most salient points about the SKEW/S&P 500 relationship:

  1. The SKEW has established a sequence of higher highs. It has taken progressively higher SKEW readings to get the S&P 500 in trouble (134 in April 2010 was enough to ‘cause’ the ‘Flash Crash’. 143 in December 2014 only led to a minor eventual pullback).
  2. Nevertheless, an elevated SKEW has tripped the S&P 500 (at least to some extent) every time. If this track record continues, Friday’s SKEW spike should cause some choppiness.

Although the 2010 and 2011 corrections were quite nasty, the label ‘Black Swan Index’ has been misleading in recent years.

This time may be different, but the SKEW has been one of the most accurate indicators in an environment that’s fooled many other trusted gauges.

The SKEW suggests a bumpy ride ahead with limited gains and elevated risk.

I always recommend looking at more than one indicator (I personally monitor various indicators from three different categories: Sentiment, seasonality and technicals).

The SKEW’s meaning is nicely enhanced by a simple Dow Jones (NYSEArca: DIA) chart. Right now a rare Dow formation offers clear levels of ruin and opportunity.

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.

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Dow Jones Pulls Back After Completing Bearish Wedge

On Friday the Dow Jones hit the ideal target of a rising wedge formation. The rising wedge is a bearish formation that projects about a 10% decline for the Dow if the lower wedge line (see Dow Jones chart) is broken.

The August 24 Profit Radar Report published this Dow Jones chart and stated that: “The Dow Jones sports a possible wedge formation with resistance starting at 17,250 next week (17,400 by the end of September).”

This red line has been our up side target ever since.

On Friday the Dow reached its target and pulled back as quickly as a hand accidentally touching a hot stove.

What makes a wedge a wedge?

Although prices rise within the rising wedge formation, market breadth is gradually petering out, as the advance is progressively growing weaker.

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That’s what we saw on Friday. Even though the Dow ended 0.08% higher, 60% of stocks traded on the NYSE declined. This rare breadth/price divergence occurred only 7 other times since this QE bull market started in 2009.

What are the implications of a wedge breakdown?

The Dow already touched the upper wedge side (red line). Once prices break out of the wedge down side (solid green line) they usually waste little time before declining and retracing all of the ground gained within the wedge itself.

So, a drop below the solid green line (currently around Dow 16, 700) could unlock a target around Dow 15,000.

But let’s don’t get ahead of ourselves. The stock market has steamrolled over many bearish setups before and may do so again. The pattern could also get more complicated as was the case with the LQD Corporate Bond ETF earlier in April.

If you want to take baby steps, trade below 17,160 and 16,900 (dashed green support areas) would be initial confirmation of further down side.

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.

New Trend? Dump AAPL to Buy MSFT?

For most of the 21st century Apple has been cool, while Microsoft couldn’t do more than drool. But things are changing (at least for investors). Microsoft has gone from ‘drool to cool’ on Wall Street. Will this surprising trend last?

Apple is hip and cool. Microsoft is boring and outdated. Apple (Nasdaq: AAPL) is in, Microsoft (Nasdaq: MSFT) is out.

That’s been the case most of the 21st century, but there’s been an odd shift lately.

Investors are picking MSFT over AAPL.

If Microsoft’s Cortana had a voice in this article, she’d point out that investors are dumping Siri to be with Cortana.

The charts below show that Cortana may be right.

The MSFT:AAPL ratio chart shows the ratio bounce off a 1-year support level. If the ratio can overcome near-term resistance it is likely to climb further.

This would suggest MSFT will continue to outperform AAPL, at least for a little while.

A look at history, in particular recent history shows that September is a particularly painful month for AAPL investors. Click here to view a detailed look at AAPL seasonality.

AAPL and MSFT are the two biggest components of the PowerShares QQQ ETF (Nasdaq: QQQ), which sits right above important support (QQQ support level shown here).

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.

Market Pulse: Is Investor Sentiment Really ‘Dangerously Bullish’?

How bullish are investors really? There are different types of investors, individual investors, institutional investors, traders, smart money, dumb money … and there’s a gauge for each group. Here’s a look at six different investor sentiment indicators.

The market has been stuck in yet another waiting pattern, so we might as well use the time to look at the forces that may (or may not) jolt stocks out of their waiting loop.

According to many, overheated investor sentiment will break the stale mate and send stocks spiraling lower.

There’s just one flaw with this line of reasoning. Sentiment is not overheated.

The Profit Radar Report continuously analyzes how investors feel about stocks and publishes a comprehensive sentiment picture once a month.

The chart below, which plots the following six sentiment gauges against the S&P 500 (NYSEArca: SPY), was published in the August Sentiment Picture on August 29:

  • CBOE SKEW
  • Equity put/call ratio
  • CBOE Volatility Index (VIX)
  • NAAIM survey of active money managers
  • II survey of investment advisors
  • AAII survey of individual investors

Where are the sentiment extremes?

There’s only one: Last week 51.92% of individual investors were bullish. That’s the highest reading since December 24, 2013. The red lines highlight other 50%+ spikes and how the S&P 500 reacted.

Yes, the bullish December AAII reading was followed by a January pullback, but there’s a big difference between today and December: No other indicator is confirming August’s AAII spout of enthusiasm, and AAII bulls are back down to 44.70%.

There was one more extreme not illustrated by the chart: The percentage of bearish investment advisors polled by II dropped to 13.3%, the lowest reading since 1987. This is a legitimate extreme.

The August 29 Sentiment Picture summed up the big picture sentiment situation as follows:

Perhaps most noteworthy is that we continue to see isolated sentiment extremes, but the source of such extremes only rotates (the SKEW and put/call ratio in July, the AAII poll in August), it doesn’t compound. We see different gauges hit overheated levels at different times, but never all at the same time.

The overall sentiment picture is fractured, and void of the ‘all in’ mentality seen near major market tops.

Isolated extremes cause only small pullbacks here or there.

Based on sentiment, we could see 1) a continued grind higher interrupted by the occasional 3-10% correction or 2) a prolonged period of choppy sideways trading.”

Bottom line, sentiment is not extreme enough for a big scale market top.

The most important market breadth indicator, which correctly foreshadowed the 1987, 2000 and 2007 crashes, also doesn’t show the deterioration needed for another crash.

More details about this must-know indicator can be found here: How to Discern a Major Market Top

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.

AAPL Drops Right Before Annual ‘Shock’ Period

A bigger and better iPhone, the new iWatch and new AAPL all-time highs … Apple has a lot of good things going. But, ironically this exciting time of the year (in terms of product launches) is the most treacherous for Apple shareholders.

Autumn is an exciting time for Apple geeks, but a treacherous time for Apple (Nasdaq: AAPL) shareholders.

Product rumors are planted in the spring and ripen in the fall as rumors mature towards tangible reality. Apple fans are hoping to feel, touch and buy a big screen iPhone or even an iWatch.

Ironically the autumn excitement doesn’t spill over to AAPL shares. September 21, 2012 was the kickoff for a 45% correction and August 19, 2013 saw a 12% pullback.

The August 24 Profit Radar Report summed up Apple’s position like this: “AAPL rallied to new all-time highs. As the chart shows, AAPL is just above green trend line support and just below red trend line resistance. AAPL seasonality points higher for another few weeks before the biggest seasonal weak spot of the year (AAPL topped on Sep. 22, 2012 at 705, split-adjusted). In short, the path of least resistance is up, as long as AAPL doesn’t close below 100. Danger will rise in mid-September.”

A detailed full-year AAPL seasonality chart is available here.

The chart below shows the various trend lines and support/resistance levels mentioned.

AAPL sliced below 100 on Thursday. Support around 100 has now become resistance. Green trend line support is at 97.

Based on seasonality, risk is rising and the path of least resistance is down as long as trade remains below 100 – 101.

Apple’s ‘bad Thursday’ spilled over to the Nasdaq-100 as the PowerShares QQQ ETF (Nasdaq: QQQ) painted a big red candle.

Thus far, QQQ remains above support at 99. A close below 99 may elicit more selling.

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.

Bearish Financial Sector Divergence Stokes 2007 Crash Memory

Since their inception, the SPDR S&P 500 ETF has almost always confirmed new highs of its cousin, the Select Sector Financial ETF. The only time it didn’t was in 2007 … and today. Here’s what makes this potential repeat intriguing.

For all the Whac-a-Mole bears who’ve been getting clobbered by the omnipresent bull market mallet, there’s finally a faint ray of hope flickering out of the same black hole that caused the last financial meltdown – the financial sector.

True, the Financial Select Sector SPDR ETF (NYSEArca: XLF) is humming higher, but the SPDR S&P 500 Bank ETF (NYSEArca: KBE) is not.

To be exact, the KBE bank ETF is trading 6.5% below its March high while the XLF financial ETF has already edged out new recovery highs. That’s unusual.

The chart below shows that since its inception, KBE has confirmed every significant new XLF high (dashed gray lines). Only two exceptions (dashed red lines) created a bearish divergence:

  • May 2007
  • August 2014

Although we don’t need the aid of a chart to remind us of what happened post May 2007, the chart tells us anyway.

Obviously, it would be premature to bunker up and batten down the hatches based on a sample size of one.

Even if the 2007 scenario is playing out again, it’s too early to pencil in a market crash in your 2014 trading calendar. Why?

  1. There’s a grace period between the XLF high and the final S&P 500 (NYSEArca: SPY) high. In 2007, the S&P 500 rally continued five months after XLF topped and the market didn’t enter free fall territory until a year after XLFs all-time high.
  2. XLF just saw a technical breakout. This looks bullish on the chart until proven otherwise. However, the breakout mimics a prior pattern that failed (see “XLF Breaks above Resistance to New 6-year High” for more details).

A small detail many have already forgotten is that the S&P 500 dropped nearly 12% in July/August 2007 just before shooting to its final October hurray.

A similar pullback now would certainly make this financial sector divergence even more intriguing.

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.