This Eerily Accurate Indicator is the Best at Being the Worst

Two positives makes a negative and too much success is the worst thing that can happen to a contrarian indicator. This particular ‘indicator’ is so accurate, because the underlying opinions are ‘the best at being the worst.’

  • “This chart says we’re in for a 20% correction”
  • “An overdue stock market selloff is looming”
  • “Stocks are telling you a bear market is coming”
  • “This chart shows why the market is in trouble”

Before you call me a fear monger, allow me to clarify that those headlines are from May 2014.

As it turns out, whatever stocks or charts were ‘telling’ us, wasn’t the truth. It probably wasn’t as much of a stock market lie, than the media getting the signals wrong. There was no bear market, no 20% correction and no real ‘trouble.’

Here are more recent headlines:

  • “Buyer beware? Investor sentiment at highest level of 2014”
  • “Why the stock market is weaker than it looks”
  • “Are you prepared if the market tanks in Q4?”
  • “Don’t get suckered by stock market winning streak”

Purely based on the second set of headlines, I wrote in the November 5 Profit Radar Report:

Media attention on bullish sentiment could be a contrarian contrarian  (two negatives make a positive) indicator and actually be net positive. Investment advisors and newsletter-writing colleagues (polled by Investors Intelligence) are embracing this rally. The percentage of bulls has soared from 35.3% on October 21 to 54.60%. This is the largest jump in nearly 40 years. Perhaps surprisingly, this is not as contrarian a signal as it appears. Furthermore, advisor optimism is somewhat neutralized by media pessimism and headlines such as: “This stock market rally is for suckers” – MarketWatch and “Don’t buy into stock market craziness” – CNBC. Media bearishness is not as extreme as it was in May/June, but it may be significant enough to continue propelling stocks higher.”

Too much success is the worst thing that can happen to a contrarian indicator (such as investor sentiment).

A contrarian indicator with mainstream appeal loses its effectiveness, just like a rare commodity that’s suddenly available in abundance (imagine what would happen to gold prices if everyone suddenly found a couple pounds of the yellow metal in their backyard).

The Profit Radar Report not only monitors dozens of sentiment indicators, it also gauges media exposure of any specific indicator and media sentiment in general.

Fortunately, media sentiment has been one of the most accurate indicators of the year. This indicator remains so right, because cover stories tend to be so wrong.

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 There Enough Gold Bears for a Major Gold Bottom?

Apparently it can only get worse for gold: CNBC: “Gold headed to $800” — Bloomberg: “Don’t catch a falling knife” – Yahoo!Finance: “More pain coming.” Is that enough bearishness for gold to carve out a major bottom?

Gold sports a bullish RSI divergence and reached our long-term target of ‘new lows below 1,178.6’. Gold seasonality for November is bullish. Sentiment, seasonality and the bullish technical divergence increase the odds of an upcoming buying opportunity. “

That’s what the Profit Radar Report stated on November 5.

It’s probably safe to assume that gold’s $70 rally caught many by surprise.

  • Bloomberg: “Don’t’ catch a falling knife! ABN sees gold at $800 next year” – November 6
  • Yahoo Finance: “Gold bulls beware: ‘More pain coming’ before the metal finds a bottom” – November 10
  • CNBC: “Here’s why gold could be headed to $800” – November 12

I’m not implying that any of the above sources are dumb by any means, but when a strong consensus builds, the market usually does the opposite.

In my humble opinion, such bearish sentiment (the above headlines are just a small selection, confirmed by other sentiment extremes) was worth to take a stab at ‘catching the falling knife.’

Risk management is crucial when dealing with ‘sharp knives,’ so via the November 5 Profit Radar Report I recommended the following: “We will dip our ‘toes in the water’ and buy gold (futures) if it dips below 1,130 and moves above 1,140.”

As the chart shows, a dip to 1,130 followed by a move back above 1,140 required trade to fall below the descending green trend line (target) and rally back above minor resistance.

If the market is able to rally strongly after hitting a down side target, it generally has the strength to rally further. This approach limits risk.

Since the above gold futures move happened overnight, I included this recommendation for ETF traders in the November 10 PRR: “Today’s pullback offers a low-risk entry for the SPDR Gold Shares ETF (NYSEArca: GLD), as it retraced 78.6% of the recent bounce, and filled an open chart gap at 110.49. If a low of some degree is established, GLD should move higher from here.”

Gold is currently one of my favorite trades, and there should be another opportunity to jump in for those who missed the initial up move. Additional buy trigger levels will be discussed via the Profit Radar Report.

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.

Time is Ripe to Get Dirty with This Out-of-Favor Sector ETF

The energy sector has been hammered by a 31% drop in crude oil prices. OPEC is a mere shadow of its prior glory days and analysts project further declines, as much as another 60%. Ironically, now might be the time to get dirty with oil/energy.

Baron Rothschild’s famous words encourage investors to buy when there’s blood on the streets. What about when there’s oil on the street?

Pull up the Hummer and Suburban, because oil (and gasoline) is the cheapest it’s been in well over four years.

According to many analysts, oil is doomed to fall much further. One price target pegged oil at $30/barrel, another 60% lower than today.

Unless you’re Russia, Saudi Arabia or perhaps a hardcore Prius driver, there’s nothing wrong with low prices, but some charts suggest that the oil/energy sector may be getting ready for a comeback.

The Energy Select Sector SPDR ETF (NYSEArca: XLE) has traversed within a defined trend channel from 2009 until today. As the weekly XLE bar chart shows, XLE recently dropped towards the lower end of the channel.

Essentially the same is true for the SPDR S&P 500 Oil & Gas Exploration & Production ETF (NYSEArca: XOP). XOP more deliberately tested channel support and is trading just above it.

Technical support areas, such as the ones shown above, don’t guarantee a change of trend, but they do highlight price levels where a change of trend is more probable.

The third chart shows the XLE:S&P 500 ratio. XLE underperformed the S&P 500 since April 2011. The gray trend channel suggests that the days of XLE’s underperformance may be numbered.

The November 5 Profit Radar Report wrote that: “We are looking for potential opportunities to buy large caps (Dow Jones, S&P 500) and possibly materials (XLB) and Energy (XLE).”

We got to pick up XLB, which has had a very nice run, and are waiting for a low-risk buy trigger for XLE. It looks like we’re getting close. Continued coverage will be provided via the Profit Radar Report.

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.

Up Next: Quantitative EATING Program – Chocolate Shortage ETFs

Here’s a matter of national importance. Chocolate prices are on the rise. The world’s largest chocolate manufacturers warn that the world is running out of cocoa. Is it really true, or just hype?

Here is an issue of national importance: A chocolate shortage.

“The world could be heading toward a global shortage of chocolate” – Time
“Cocoa shortage worries chocolate lovers” – NBC News
“Worlds largest chocolate manufacturer warns of potential cocoa shortage” – The Independent
“Is a chocolate shortage on the way” – USA Today

The price of cocoa soared 67% from March 2013 to September 2014.

Mars, the makers of M&M’s and Snickers, announced in July it would raise prices by an average of 7%.

However, since September, cocoa prices have fallen 17%.

Is this drop an opportunity to invest in cocoa or is the cocoa shortage all hype?

There are legitimate reasons for cocoa demand to outstrip supply:

  • Dry weather in West Africa. Africa is responsible for 70% of the world’s production
  • Deadly fungi like frosty pod and witches’ broom
  • A growing taste for chocolate by emerging countries
  • Ebola

We’ve seen a number of commodity ‘shortages’ in recent years. There was corn (ethanol as alternative fuel source) and wheat. Both are trading at or near multi-year lows today.

Based on the current media hype, I wouldn’t be surprised to see a bit more cocoa weakness.

The chart says that cocoa prices need to exceed 2,845 (that’s $2,845 a ton) and the descending red trend line to break the most recent down trend.

There are two cocoa ETF/ETNs:

  • iPath Dow Jones-AIG Cocoa Total Return Sub-Index ETF (NYSEArca: NIB)
  • iPath Pure Beta Cocoa (NYSEArca: CHOC)

Perhaps the Federal Reserve will unleash a quantitative eating program to increase liquidity. After all, Wall Street is a big consumer of cocoa, especially around the holidays.

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.

3 Perils of Chasing Red Hot ETFs

Few things are worse than watching an ETF that was on your mental buying list – but not in your actual portfolio – go up … and up … and up. It’s always tempting to chase performance, but here are three risks and one solution.

The seven most notorious words of the financial industry: “Past performance does not guarantee future results.”

In other words, anyone buying a hero and ending up with a zero has no one to blame but him or herself.

+65%, +55%, +38% are the digits of the three hottest ETFs right now (based on 3-month return). Does it make sense to chase those ETFs?

The trend is your friend until it bends, so chasing ETF hot shots isn’t always a terrible idea, but being aware of three common pitfalls may reduce embarrassment at the water cooler investment chat.

Peril #1: Leverage

Leveraged ETFs usually crowd out any ‘Top 10” performance list. Leveraged ETFs are ETFs on steroids. Currently 9 out of the 10 best performing ETFs are leveraged or leveraged short ETFs.

Leverage can be a blessing and a curse. It’s important to know that leveraged ETFs -like carnival mirrors – always skew the real condition of the underlying sector. For more details on the dangers and delights of leveraged ETFs click here: The Must Know Basics of Short and Leveraged ETFs

Weeding out all leveraged (short) ETFs and zooming in on ‘pure ETFs’ will offer a more accurate picture of the best performing sectors and their ETFs.

Peril #2: FOMO

FOMO (fear of missing out) is a powerful motivator, but it’s a terrible reason to buy. If the sole reason for buying a hot ETF is fear of missing out on more gains, it’s probably a bad idea. FOMO is not an investment strategy.

Strong momentum, persuasive fundamentals, or yet unreached up side targets are better reasons to buy an ETF that’s already trading well above its low.

Peril #3: Performance Chasing & Trend Reversals

Here’s a real life example of the perils of performance chasing.

Gold was one of the hottest assets in Q1 2014, but one of the worst performers in Q3.

The SPDR Gold Shares ETF (NYSEArca: GLD) was up as much as 15.13% in March. It’s fallen as much as 17.96% since. The VelocityShares 3x Long Gold ETN (NYSEArca: UGLD) was up as much as 50.69%, followed by a 46.95% drop.

Burnt trend chasers still hear the ringing of those chewed out Wall Street phrases in their ears:

“Past performance is no guarantee of future results”

“The trend is your friend until it bends”

The key question is how you can tell how long a trend is to last.

The gold chart features an observation made by the Profit Radar Report on March 12, three trading days before gold rolled over: “Gold has now reached our initial up side target at 1,365. RSI is lagging price and traders are quite bullish on gold. We are looking to short around 1,400.”

Bullish sentiment and chart resistance capped gold’s up side in March (blue circle).

It appears that bearish sentiment and chart support ended gold’s slide on November 7.

Having a pulse on investor sentiment and technical support/resistance levels does not guarantee winning trades, but it generally prevents against joining the performance chase at the worst of times.

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.

Simon Says: 3 Most Contrarian ETFs to Own Right Now

Here are three contrarian picks for die-hard contrarians and those who missed the latest stock market rally. Two trades are true bottom pickers, one trade is 2x contrarian, which almost makes it a mainstream trade.

If contrarian investing came with a label, it might as well be ‘no guts, no glory.’ It takes guts to bet against the crowd, but it can pay off big.

I use sophisticated software and crosscheck with basic media sentiment (headlines) to identify extreme sentiment delights for contrarians. Here are my top three choices:

Gold Anyone?

Gold prices have dropped almost $800 since September 2011, and according to many pros, gold will shed another $300 – $400. Here are a few recent doom and gloom headlines:

  • “A final purge to $700? What gold bulls surrender might look like” – Nov. 12
  • “Here’s why gold could be headed to $800” – Nov. 12
  • “Gold bulls beware: More pain coming” – Nov. 10

If gold is going to drop another few hundred bugs, why would anyone hold on to it? That’s the crux of contrarian investing. In the midst of extreme pessimism, there are not enough sellers left to drive prices much lower.

It appears that gold is at or near this point, often called the ‘puke point’. Gold ETFs like the SPDR Gold Shares (NYSEArca: GLD) and iShares Silver Trust (NYSEArca: IAU) are likely to surprise many to the up side.

Fill up The Car Honey

According to the U.S. Energy Department, low gas prices aren’t going away anytime soon. I don’t recall the Energy Dept predicting a 30% drop a few months ago, but that’s what happened.

According to one ‘pro’ interviewed on CNBC, gas may drop to $30.

Catching a bottom in oil prices is a bit like catching the proverbial falling knife, but simply based on investor/media sentiment, this slippery, oily knife is closer to the kitchen floor (a bottom) than the hand that dropped it (top).

The United States Oil Fund (NYSEArca: USO) and Energy Select Sector SPDRs (NYSEArca: XLE) are two ways to play a bounce.

The Ultimate 2x Contrarian Trade?

Back in May I noticed, and reported on, the unusual amount of bearish media coverage. Russ Koesterich (chief investment strategist at BlackRock), Wilbur Ross (billionaire investor), Carl Icahn (billionaire investor), David Tepper, Marc Faber and Peter Schiff predicted a serious correction or outright market crash.

In the spirit of no guts, no glory, I wrote back then: “Here’s a message for everyone vying to be the next Roubini: A watched pot doesn’t boil and a watched bubble doesn’t burst.”

Some of the recent headlines make we wonder if we’re in for a May/June repeat:

  • “Sentiment is ‘off the charts’ bullish” – Nov. 12
  • “Don’t get suckered by stock market winning streak” – Nov. 12
  • “Marc ‘Dr Doom’ Faber: I will soon be proven right” – Nov. 13

Yes, sentiment polls show excess optimism, but can it still be considered a contrarian indicator if everyone reads about it? Will two negatives make a positive?

Another factor to keep in mind is that actual money flow indicators do not confirm sentiment polls. Investors don’t seem to be putting their money where their mouth is.

Therefore, owning stocks into next year may be more of a true contrarian move than selling stocks. Instead of owning broad market ETFs like the S&P 500 SPDRs (NYSEArca: SPY), I would probably opt for certain sector ETFs that offer more up 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.

So You Missed this Rally? Is it Too Late to Get in?

The S&P 500 soared 12% since its October low and left many investors in the dust … wondering if there’ll ever be another pullback that can be bought. Here’s a low-risk strategy to get back in to the game.

If you feel like you’ve missed the boat, you are in good company.

The chart below plots the S&P 500 against the long exposure of active money managers.

The data shows that money managers panicked and hit the sell button the very day the S&P 500 bottomed. Many of the pros have been chasing the rally ever since, one of the reasons it’s been so relentless.

Is it too late to get in?

Short-term, stocks are stretched and could correct a couple of percent at any given time. But, they could also just grind higher.

Longer-term, higher prices are still likely, so owning stocks is a good idea.

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But nobody wants to buy right before a potential pull back.

How can you limit risk?

Look for sectors with the following characteristics:

  1. Bearish sentiment score
  2. Less overbought relative to its peers
  3. Attractive risk management levels and risk/reward ratio

The chart below shows the performance of the nine S&P 500 sectors compared to the S&P 500 (from the October 15/16 low until Monday’s close).

I’m not advocating buying laggards, but there is one lagging sector that sports a historically extreme sentiment score (which should be bullish) and a technical setup that allows for decent risk management.

The one sector that just made it on top of our shopping list is highlighted in Monday’s Profit Radar Report update.

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.