2011 vs 2015 – Sentiment Comparison

Over the past two weeks we explored two developments:

1. Stocks had to rally to flush out premature bears
2. 2015 is looking a lot like 2011

A couple of sentiment indicators (such as AAII poll) showed extreme pessimism recently.

2011 saw an 18% drop starting in July.

The question for right now is this: Is there too much pessimism for a summer correction?

The first chart shows sentiment in 2011. The gray bar highlights June 2011.

By mid-June, investors polled by the American Association for Individual Investors (AAII) and Investors Intelligence (II) had become quite pessimistic. Only 24% and 37% of investors were bullish.

A 7.8% S&P 500 (NYSEArca: SPY) rally from June 16 – July 7 relieved much of that pessimism, but it didn’t take a spike into extreme optimism for stocks to plunge in July.

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A look at current sentiment shows a similar scenario.

Optimism was quite low (extremely low for the AAII survey), but recovered, no doubt due to the 58-point rally from the June 15 low.

Based on the 2011 analogy, stocks may rally into early July. An updated look at the 2011 vs 2015 analogy is available here: 2015 is Looking a Lot Like 2011

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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Post June Triple Witching Generally a Weak Week

If you are looking for a statistical edge, here is one:

The week after June triple witching (June 19) is quite weak. How weak?

The S&P 500 (NYSEArca: SPY) has been down 13 out of the last 16 years (81.25%). Investing rarely offers such strong statistical edges.

This morning’s 20-point jump and open gap at 2,000 likely increases this statistical seasonal edge.

Of course, any edge always needs to be viewed in context of the bigger picture.

Here is one way a weak week may fit into the bigger picture: 2015 is Shaping up to Look a lot Like 2011

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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Has the Market Fooled Enough Bears to Tank?

By some measures, investor sentiment turned extremely bearish last week.

Only 20% of retail investors surveyed by the American Association for Individual Investors (AAII) were bullish on stocks, the lowest level since April 2013.

Headlines like the following dominated financial news sites:

• “Wedbush: Stock market is at major top” – Yahoo!Finance
• “Stockman: Stocks and bonds will crash soon” – Yahoo!Finance
• “Low VIX points to tumble ahead for stocks: UBS” – Barron’s
• “Irrational exuberance is dooming the stock market” – MarketWatch
• “Beware: Bull market flashing warning signs” – CNBC
• “S&P 500 rally thins and it’s worrying market analysts” – Bloomberg
• “Why you should care that Robert Prechter is warning of a ‘sharp collapse’ in stocks” – MarketWatch

The June 10 Profit Radar Report commented regarding those developments (and especially the last two headlines):

“Prechter has predicted a sharp collapse literally every single month since late 2009, and it’s unlikely to occur when you see it featured on the Yahoo!Finance homepage.

We’ve been watching the rally thin and become narrower since April, but when the media starts to pick up on such nuances, the information usually isn’t worth too much anymore (an interesting bullish twist of this thinning market was discussed in this June 9 article).

There appear to be too many bears out there right now to send stocks significantly lower. A push to 2,140+ may be needed to flush them out.”

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Perhaps somewhat anecdotally, but nevertheless telling, my article titled “Will the market rally to flush out a horde of premature bears?” (published on July 12 on MarketWatch) got very little attention. It just wasn’t bearish enough to attract attention.

Two of my other articles (with neutral or somewhat bullish titles) on the other hand quickly made it into the top 5 most popular article list at MarketWatch.

I’m no genius, but I’m learning that the market is highly unlikely to crash when everyone expects it. A watched pot doesn’t boil.

After all, this is not the first time we’ve been there. I.e. Sep 18, 2013: Who or what can kill this QE bull Market? or July 25, 2014: Bears cry wolf – Everyone wants to be the next Roubini.

The 4-day, 50-point S&P 500 rally has no doubt caused an uncomfortable squeeze for committed bears. I would like to see additional gains, which would likely set up a nice opportunity to short the S&P 500 into July/August.

This opportunity will likely come at a time when fewer people expect it.

A recent article highlighted the similarities between 2011 and 2015 (2011 saw a 20% summer meltdown). Sunday’s Profit Radar Report featured a revealing investor sentiment comparison between June 2011 and June 2015.

You may access this comparison instantly here. It may also be the topic of an article for next week.

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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2015 is Shaping up to Look a lot Like 2011

I researched volatility the other day and made two interesting discoveries:

• Based on real volatility – actual price movements, not the VIX – 2015 is the most volatile year since 2009, and thus far mimics 2011.
• There are actually a number of similarities between the year 2011 and 2015.

Here is why those similarities could be interesting:

The S&P 500 fell 20% in July/August 2011. 18% of that loss happened within a 3-week meltdown.

Could the same happen in 2015?

Here are three striking similarities between 2015 and 2011:

• 2015, like 2011 is a pre-election year.
• Thus far, the 2015 chart looks like the 2011 chart (see below).
• Stocks are internally weak right now, like they were before the 20% drop in 2011. Internally weak in this instance means that more and more stocks are falling below their 50-day SMA despite new S&P 500 highs.

The first chart plots the S&P 500 against the percentage of stocks above their 50-day SMA in 2011.

The massive 2011 July/August summer drop was preceded by several months of bearish divergences.

The second chart shows that similar divergences exist right now.

The third chart compares the S&P 500 of 2011 with the S&P 500 year-to-date.

If the analogy holds up, we’re in for a wild ride (up, down, up), but no net progress at the end of the year.

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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Stock Market Money Flow Check

Every once and a while it’s a good idea to check equity money flows, kind of like a GPS for what the money is doing.

Here’s a series of three charts to help us do just that.

1) Asset Allocation

In March, exposure to stocks (according to the American Association for Individual Investors asset allocation survey) soared to the highest level since the 2007 financial crisis.

This sounds scary, but the long-term asset allocation chart helps put things into perspective. Leading up to the 2000 market top, investors had up to 77% of their portfolio in stocks, and up to 69% in 2007.

2) Commercial Traders

The chart below shows the net S&P 500 e-mini futures contracts held by commercial traders. On balance, commercial traders are more or less neutral.

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3) VIX, Put/Call Ratio, SKEW

Chart #3 plots the S&P 500 against three different sentiment indicators:

• CBOE SKEW: The SKEW was designed to measure the risk of a ‘Black Swan’ event. Higher SKEW = higher risk.
• CBOE Equity Put/Call Ratio: This ratio shows to what extent option traders favor call options over put option. Lower readings = more optimism = more risk.
• CBOE Volatility Index (VIX): The mix shows the market’s expectation of 30-day volatility. Lower VIX = Elevated risk. The VIX has lost much of its contrarian indicator mojo starting in 2012.

The CBOE SKEW (5-day SMA to smooth out daily swings) is near the lower end of a two-year range.

The CBOE equity put/call ratio dropped to 0.46 yesterday, a 1-year low. The 5-day SMA is not as low, but still at the lower end of an eight-month range.

The VIX is back to what used to be considered the ‘danger zone.’

Summary:

Money is flowing into equities, but there are no screaming investor sentiment extremes. Anyone claiming that stocks will crash because any one single sentiment gauge is at financial crisis levels is taking things out of context.

Detailed investor sentiment analysis is available to Profit Radar Report subscribers.

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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At Lowest Level of 2015, Breadth Gauge Shows Interesting Twist

Bad breath stinks (literally), so does bad breadth.

The stock market’s had bad breadth since late April, and gains are wilting.

One breadth measure I’ve been watching is the percentage of (NYSE) stocks above their 50-day SMA.

The May 31 Profit Radar Report showed that the percentage of stocks above their 50-day SMA did not confirm the latest S&P 500 highs and warned that:

“Negative divergences like this tend to draw stocks lower. This doesn’t have to happen immediately, but this particular divergence has lasted longer than any other in the last years, and is likely to turn into a drag eventually. “

The chart below shows when and how the market started to tire (red line).

Corrections don’t always happen immediately, but 6 of the last 8 corrections (since 2014) were preceded by such a divergence.

The % of stocks below their 50-day SMA has dropped to the lowest level of 2015, which makes for an interesting twist.

As the green lines show, when too many stocks drop below their 50-day SMA, the S&P 500 rallied every single time in 2015.

This cautions against turning too bearish. How stocks react around current levels may give an indication if we’re still in the ‘one step up, one step down’ market, or if a deeper correction will develop.

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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Energy Sector ETF (XLE) Drops To Triple Support

It’s not exactly been a high-octane year for oil and energy stocks. Here’s an interesting long-term chart for the Energy Select Sector SPDR ETF (NYSEArca: XLE).

After chopping back and forth for all of 2015, XLE has dropped down to long-and short-term support.

The black trend channel dates back to the March 2009 low, and the green trend line originates at the secondary January 14 low.

Both levels intersect around 77 this week.

Although XLE remains in a chop zone that’s watered down many support/resistance levels, 77 might be a number to keep in mind if you’re thinking about buying/selling XLE (don’t sell until support is broken, and vice versa).

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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Can We Still Trust the Investors Intelligence Sentiment Poll?

Doing the same thing over and over again, but expecting a different outcome is often considered insanity.

By that definition, some analysts are legitimately insane. Why?

Because they’ve doomed the stock market based on bullish investor sentiment, and have been doing so for many months, even years.

You will see what I mean upon further inspection of the chart below.

Since late 2013, the Investors Intelligence (II) survey of advisors and newsletter writers has shown (extreme) bullish sentiment.

Illustrated via the chart is the percentage of bearish advisors. This percentage has been around 14 since late 2013, which happens to be the lowest since 1987.

And since late 2013 (and way before that), Elliott Wave International (one of many market forecasting services that’s been spreading doom and gloom) has been warning that a 2008-like meltdown is directly ahead.

The cold fact is that the S&P 500 has tagged on another 20%+ since 2013.

This is not the data’s fault. It’s the interpreter’s fault … and an unfortunate symptom of tunnel vision. Perhaps the II poll has just become too popular to be effective as contrarian indicator, and lost its mojo.

II is not the only sentiment data available, and it’s the analyst’s responsibility to determine the validity of the II survey in context with other sentiment data. Now more than ever, it’s important to widen the horizon and look at other sentiment gauges.

The Profit Radar Report monitors dozens of sentiment indicators and consistently publishes at least six every month.

For example, the February 19 Profit Radar Report Sentiment Picture summed things up as follows: “In short, sentiment is elevated, and may be a short-term drag, but is not indicative of a major market top.”

Throughout 2013 and 2014, the Profit Radar Report pointed out the lack of excessive optimism and likelihood of higher stock price (click here for a more complete record or the 2014 sentiment analysis).

Here is a look at the latest Sentiment Picture, published on May 29.

The two charts categorize various sentiment gauges as either opinion poll (what investors say) or money flow (what investors do).

The American Association for Individual Investors (AAII) and National Association of Active Investment Managers (NAAIM) opinion surveys do not confirm the bullish (bearish for stocks) tone of the Investors Intelligence poll.

Three other sentiment gauges more closely related to actual money flow do not show any real extremes.

What’s the moral of the story?

Don’t trust fear mongers or ‘one trick pony’ predictions based on any single sentiment gauge.

We live in a complex world. We need complex analysis.

Oh, on by the way, purely based on sentiment, stocks could continue to grind higher.

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.