Commercial Traders Abandon Silver at Record Pace

Commercial traders have dropped their silver exposure to the lowest level in years, according to the latest commitment of traders report.

Many commercial traders use futures to hedge existing exposure to silver. The reason many commercial traders have existing exposure is simply because they are ‘in the business’ of mining or buying/selling silver (unfortunately banks also fall into this category).

Many commercial traders could be considered insiders, and thus the ‘smart money.’

Smart investors often follow the smart money.

The chart below shows what the smart is money doing.

It was originally published in the May 25 Profit Radar Report, and plots the price of silver against the net short position of commercial traders (hedgers are generally short to hedge their existing long position).

The smart money is holding a record 62,485 contracts, the highest in years.

The dashed red lines show what effect similar short exposure had on silver prices in the past. It wasn’t good.

The last time silver was able to shrug off the same degree of short bets was early 2011, when the silver bull market was alive and well.

If silver can rally despite this extreme, it may be an indication that the bear market is over.

 

However, seasonality suggests lower prices (full silver seasonaliy chart is available to Profit Radar Report subscribers).

Sentiment and seasonality are two major driving forces. Technicals is the third. The short-term chart actually looks constructive, and would allow for higher prices.

However, if trade breaks down, sentiment and seasonality suggest (much?) further down side.

Continued analysis of the three major driving forces (technicals, sentiment & seasonality) for silver and other asset classes is available via the Profit Radar Report.

The iShares Silver Trust (NYSEArca: SLV) is the easiest way to gain silver exposure. The ProShares UltraShort Silver ETF (NYSEArca: ZSL) is one way to bet on lower silver prices.

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 and 17.59% in 2014.

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Stocks Overvalued Compared to Bonds

There was a minor bond scare as prices tumbled and yields soared.

The drop in bond prices makes bonds more attractive relative to stocks, at least that’s what the SPY:TLT ratio says.

SPY represents S&P 500, and TLT the iShares 20+ Treasury ETF (NYSEArc: TLT).

The chart below, first published in the May 20 Profit Radar Report, plots the SPDR S&P 500 ETF (NYSEArca: SPY) against the SPY:TLT ratio.

 

The SPY:TLT ratio soared to a new all-time high last wee, facilitated by a strong SPY and weak TLT.

The red lines show that SPY:TLT extremes tend to have a wet blanked effect on the S&P 500, although it doesn’t necessarily translate into a buy signal for bonds.

There is strong technical support for 30-year Treasury futures around 152. This should pause the decline and quite possibly spark a (sizeable?) bounce.

As far as the S&P 500 goes, the SPY:TLT wet blanked effect might be enhanced by the biggest ‘window of opportunity’ for stock market bears to take charge.

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 and 17.59% in 2014.

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Investors are Record Neutral on Stocks

The latest American Association for Individual Investors (AAII) poll showed that 49.79% of investors are neither bullish nor bearish.

This is the highest neutral reading since June 2003.

Considering that the S&P 500 (NYSEArca: SPY) is trading at all-time highs, that’s quite remarkable. Is this bullish or bearish?

The chart below plots the S&P 500 against the percentage of neutral AAII investors, and marks similar prior readings.

It’s always tough to stuff a few decades of history into one chart, but extreme levels of apathy are usually shown after some sort of correction.

The AAII poll is one of the more noisy sentiment indicators, and I never put too much weight on it.

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When viewed in isolation, and considering that the percentage of bullish investors is also at a 2-year low, the AAII poll results are more bullish than bearish.

Three similarly unusual sentiment readings in early May prompted the May 10 Profit Radar Report to make this comment: “The above-mentioned sentiment readings are contrary to seasonality and breadth. Nevertheless, they increase the odds of a breakout to new highs.”

The S&P 500 attained three consecutive all-time (intraday) highs since. New highs appear to have been needed to flush out premature bears (again).

Although there may be more ‘flushing’ to do, other indicators suggest risk is rising.

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 and 17.59% in 2014.

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Crude Oil Analysis Update

It’s been a while since the last free crude oil analysis (March 23: Next? A Crude Awakening for Oil Bears?).

The March 23 article noted that: “Commercial traders are starting to prepare themselves for further gains. Oil seasonality also suggests higher prices. Probably more important is a trend line that’s been important for oil prices for nearly two decades (this proprietary trend line and detailed oil seasonality chart reserved for subscribers of the Profit Radar Report). A move above this trend line is likely to trigger a rally.”

This important trend line is now in the rear view mirror, and I’m able to disclose it without conflict to my paying subscribers.

The green bold line in the crude oil futures chart below represents this trend line. It originates all the way back in 1998.

Since overcoming the bold green trend line, oil prices rallied as much as 33%.

Below is a summary of observations made in the Profit Radar Report since March:

March 29: “For aggressive traders, playing the long side (buy on dips) should ultimately prove profitable.”

April 8: “A close above 54.30 should bring more follow through gains.”

 

April 15: “Crude oil broke above 54 today. The breakout has legs as long as it stays above 54.”

May 6: “Oil prices are now gnawing on the resistance zone around 60. Yesterday’s red candle high may cause a pause. Next support is around 58.50, which could be an opportunity to buy.”

Oil is trading around 58.50 right now. Based on seasonality, price may test support at 56 or 54.30 between now and mid-June (proprietary oil seasonality chart available to Profit Radar Report subscribers).

Overall, I anticipate oil prices to move higher as long as support at 54.30 holds.

Based on seasonality, buying oil ETFs like the United States Oil Fund (NYSEArca: USO) or iPath Crude Oil ETN (NYSEArca: OIL) before mid-June and/or around 54 – 56 (based on crude oil prices) is a trade worth watching.

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 and 17.59% in 2014.

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Watch RSI for a Possible S&P 500 Breakout

Here is a chart frequently seen in recent Profit Radar Report updates.

In my humble opinion, it is the best visual nutshell summary of the stock market right now. Here is what we see:

1. The S&P 500 (NYSEArca: SPY) is at the top of its trading range, just below key resistance. The bold red trend line goes back almost two decades. No wonder the S&P has stalled here.
2. The percentage of stocks above their 50-day SMA has been lagging significantly. Buyers are obviously getting picky.

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3. RSI (Relative Strength Indicator) is bumping against its very own trend line resistance. Every attempt to move above has been repelled, thus far.

Summary: The S&P 500 and RSI are at key resistance. A breakout here should reel in more buyers. However, the lack of participation (indicated by the % of stocks > 50-day SMA) cautions that buyer’s remorse will set in eventually and limit up side potential. Failure to break out may lead to lower prices.

Detailed target levels for a breakout (if it occurs), and continued out-of-the-box analysis are available via the Profit Radar Report.

Some recent sentiment readings increased the odds of a (temporary?) ‘pop.’

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 and 17.59% in 2014.

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Surprising Bearish Sentiment Extremes are Popping Up

Stocks have been trading in a tight range near all-time highs, but an increasing number of investors wouldn’t want to touch stocks even with a ten-foot pole.

This is somewhat unusual, but is it bullish for stocks?

Here are three sentiment gauges worth noting, and how to make sense of them:

1. The percentage of retail investors polled by the American Association for Individual Investors (AAII) has shriveled to the lowest reading since April 2013.

   The chart below plots the S&P 500 (NYSEArca: SPY) against the % of bullish investors. The red lines mark similar levels, and how such readings affected the S&P 500.

   

2. The four biggest index ETFs – S&P 500 (NYSEArca: SPY), Nasdaq QQQ ETF (Nasdaq: QQQ), iShares Russell 2000 (NYSEArca: IWM), Dow Jones Diamonds (NYSEArca: DIA) – suffered $16 billion worth of withdrawals in April, one of the worst months (for index providers) on record.
3. According to the Commodity Futures Trading Commission’s (CFTC) commitment of traders (COT) report, the ‘smart money’ has reduced short equity exposure while ‘dumb money’ is selling stocks.

When viewed in isolation, the above-mentioned sentiment developments are bullish for stocks. However, they are contradicting the bearish message conveyed by seasonality and market breadth.

For now, we probably shouldn’t blow such bearish sentiment messages out of proportion. Stocks are still stuck in a range, and the contradiction between indicators may just perpetuate the range, or stretch it.

I would watch S&P 2,118 as line in the sand. A break above 2,118 would likely reel in buyers. Although it may not be long before ‘buyers remorse’ sets in again.

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 and 17.59% in 2014.

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This is the First Time the Dow Jones has Done This in 105 Years

Assuming this hasn’t put you asleep, you know that the Dow Jones (NYSEArca: DIA) has been taking a giant dirt nap.

In fact, by one measure, it’s the longest dirt nap since 1910, and soon to be the longest ever.

The Dow Jones has not recorded a 1-month high or low (based on closing prices) for 42 days.

According to Lyons Fund Management, the longest such stretch dates back to 1910 and lasted 45 days.

In itself, this is remarkable, but the next stat makes it even more remarkable.

For the past 26 trading days, the Dow has been stuck in a 2% trading range (based on closing prices). This is one of the tightest ranges of the last 25 years, and the tightest range without a new 1-month high or low ever.

 

If you read the Profit Radar Report, this range comes as no big surprise. Back on March 29, the Profit Radar Report observed that: “S&P 500 today is exactly where it was November 18, and there’s no indication that the up and down zig-zagging is coming to an end.”

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 and 17.59% in 2014.

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Short-term S&P 500 Forecast

We’ve been tracking the triangle formation that kept the S&P 500 range bound for several weeks.

The last free S&P 500 forecast (April 15: S&P 500 Trapped in Range – Why and How Long?) summarized the situation as follows:

“If the S&P is not strongly rejected by the upper triangle boundary, it will probably continue ‘triangling’ around and eventually break higher. Even if stocks break higher though, they may soon come back … perhaps to test the lower end of the range.”

Here is an updated look at the triangle, seasonality and supply & demand:

The S&P tried to break above the triangle, but ultimately failed, and is now just below prior triangle support.

As per the April 22 Profit Radar Report, this failed breakout was almost expected:

“Based on technical analysis, a break above S&P 2,112 and Nasdaq 4,465  – 4,485 would be bullish. The bearish S&P divergences suggest tight risk management to protect against a fakeout breakout. If the breakout is successful, up side appears limited. Aggressive investors may trade a break above resistance (such as QQQ above 109.10) or go short while resistance holds.”

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The RSI graph, included in the chart above, illustrates the bearish RSI divergence.

The percentage of stocks above their 50-day SMA also failed to confirm the latest S&P high and strongly suggested internal deterioration (view chart here).

MACD (shown above) triggered another sell signal on Tuesday.

Seasonality is turning bearish (my S&P 500 seasonality chart is shown on page 2 of this Forbes article).

Yesterday, the equity put/call ratio and VIX:VXV ratio spiked to levels that caused bounces in the past (chart below published in yesterday’s Profit Radar Report).

However, demand for stocks has been falling as supply picked up. Tuesday’s drop on heavy volume right after an attempt at new highs is a negative (high volume declines after a period of selling can be exhaustion moves, but high volume declines after new highs tend to be more of a ‘kick off’ move).

The S&P 500 is still in the chopping ranging, so pegging a reliable resistance level is tough, but I would watch S&P 2,090 and the red resistance line on the RSI graph. A move above RSI resistance would make another S&P all-time high possible.

In summary, selling the bounces seems to be the best approach right now. The question is, how big will the next bounce be?

Continued S&P 500 analysis is available 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 and 17.59% in 2014.

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Is this Bull Market Circling the Drain?

Bill Gross just wrote that the bull market supercycle for stocks and bonds is approaching an end. Gross has made similar warnings before and acknowledges they were premature.

Eventually Mr. Gross will be right, but when?

Here are two indicators that have kept us on the right side of the trade for years.

The chart below plots the S&P 500 against the percentage of NYSE stocks above their 50-day SMA, and a liquidity gauge I call ‘secret sauce’ (actual name available to subscribers of the Profit Radar Report).

‘Secret sauce’ is an incredibly reliable long-term major market top indicator. It essentially measures liquidity and demand. All recent major market tops (1987, 2000, 2007) were foreshadowed by a down turn in the ‘secret sauce’ indicator. Throughout 2010, 2011, 2012, 2013, 2014 and 2015, ‘secret sauce’ has been pointing higher.

On average, ‘secret sauce’ starts turning south about six months before the final S&P 500 high. The recent S&P 500 (NYSEArca: SPY) high was confirmed by ‘secret sauce,’ so the final top still seems months away (more details about ‘secret sauce’ is available here: Is the S&P 500 Carving Out a Major Market Top?).

The percentage of NYSE stocks above their 50-day SMA is a shorter-term measure of market breadth.

Although the S&P 500 is settled withing 0.2% of its all-time closing high yesterday, there were only 59.8% of NYSE stocks above their 50-day SMA, compared to 71.7% on April 15.

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This condition of internal weakness doesn’t prevent further gains – in fact I’d love to see another flameout spike – it suggests that this rally is not sustainable.

Based on this set of indicators – which I consider quite reliable – there should be a correction followed by another rally to new highs.

Continuous updates will be available 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 and 17.59% in 2014.

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Investor Sentiment Polls Show Serious Conflict

Anyone wanting to ‘massage’ data is in heaven right now.

Bulls can point out that retail investors, polled by the American Association for Individual Investors (AAII), are very bearish (bullish for stocks).

Bears can point out that investment advisors and newsletter writers, polled by Investors Intelligence (II), are very bullish (bearish for stocks).

There’s a stat for everyone.

In fact, the spread between the AAII and II group is at the top end of its range, and the highest it’s been since July 2014.

Perhaps that’s the graph we should focus on. The chart below does just that:

The red lines indicate that extreme viewpoint differences, like we’re seeing right now, led to some short-term S&P 500 (NYSEArca: SPY) weakness in the past.

A long-term analysis of the opinion spread is available here: Retail Money is Much More Bearish Than Investment Pros

What’s the lesson? Don’t trust anyone who says stocks must go up or down, because investor sentiment is bullish/bearish this or that.

 

The fact is, that some of the individual sentiment extremes offset each other.

My March Sentiment Picture (part of the Profit Radar Report), which graphs six different sentiment gauges, concluded that: “There are no real extremes, and sentiment doesn’t foreshadow any large and sustainable moves in the immediate future.”

The ‘immediate future’ has come and gone, but the trading range remains.

A comprehensive analysis shows that overall sentiment is currently slightly more bullish than bearish. If I had to illustrate sentiment on a scale from 1 – 10 (10 being most bullish), we’d be at a 6 or 6.5.

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 and 17.59% in 2014.

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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