S&P 500 Update – Will Panic Lead to Bear Market?

The market is bi-polar … and so are many pundits covering the market. I’ve never seen so many analysts flip bullish (in December/January) and flop back to bearish (in February).

Everything that was gold a few weeks ago has suddenly become fool’s gold. Yes, investing requires a measure of flexibility, but flip-flopping is not a methodical or intellectually honest investment approach.

Rather than being dominated by emotions, I developed a comprehensive and objective new risk forecasting tool, the Risk Reward Heat Map (RRHM – methodology explained here).

The RRHM is a very in depth risk assessment tool designed to project risk (and reward) over various time periods. The RRHM boils down an avalanche of data into one simple chart.

Below is the very first RRHM ever published for free on iSPYETF (on January 9, 2020). As you can see, it projected a ton of risk for January and February.

The January 15 Profit Radar Report stated that: “Based on our risk/reward heat map, we are approaching a pressure period, resistance in time so to speak, a period of increased risk in January and February).”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

The January 27 Profit Radar Report clear warned of the following:

“Here is what we know:

• Under normal conditions, current sentiment extremes result in pullbacks, but momentum can trump sentiment and drive prices higher than expected
• Markets that become over-extended to the up side, will eventually over-extend to the down side.”

The 2020 S&P 500 Forecast even mapped out the expected correction. The annual S&P 500 Forecast always includes a full year projection. While it wouldn’t be fair to subscribers to publish the full-year projection here, the chart below shows the projection up until now (S&P 500 performance updated) and for the next few weeks.

Obviously, this week’s pullback was quicker and deeper than expected. Only the kind of perma-bears who’ve been calling for a crash since the S&P was at 2,500 will claim that they saw this coming.

How Bad Will it Get?

As the weekly chart below shows, the S&P 500 created an enormous gap on Monday and kept going. Is this the biggest gap on the weekly chart ever? Not quite, there were a few in the 1940s and 1950s, but it’s the biggest gap since.

Support around 3,130 (2007 trend line) failed with next support around 3,030.

By many measures we are in uncharted territory and there’s no certainty about what’s next.

However, when looking at time periods similar to right now, I see the following common denominator:

• Short-term: Volatility with bounces and risk of further weakness
• Longer-term: Stocks market recovery, new highs still possible (even likely)

Since last Friday, I’ve run 15 new studies, indicators, signals (ISS), such as, what happens after:

• Stocks suffer two consecutive days where 90% of stocks are down
• Stocks drop from all-time high to multi-month low within 2 weeks
• Stocks fall sharply and ‘save haven’ assets (gold, Treasuries) rise to new highs

The purpose of the above ISSs is to isolate market environments similar to this week and see how stocks performed in such situations.

The chart below shows the net change of the Risk Reward Heat Map based on just those 15 studies. Reward trumps risk in the long-term.

Although stocks may fall further (another bigger up/down sequence perhaps), based on an objective long-term analysis, this pullback appears to be an opportunity to buy at lower prices.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation 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, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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

 

S&P 500 Update – Was Risk Flushed Out?

The last S&P 500 update introduced the risk/reward heat map (RRHM), which projected increased risk in January/February (see image below). How exactly the RRHM is produced is discussed here: Risk Reward Heat Map Methodology

The January 15 Profit Radar Report warned that: “Based on our risk/reward heat map, we are approaching a period of increased risk with an initial emphasis on late January.”

Just 4 days later, stocks suffered the biggest pullback since October 2019.

The pullback stopped on February 3, which makes the analysis from the February 2 Profit Radar Report (republished below) all the more interesting:

                                        * * * * *  February 3, Profit Radar Report * * * * *

“Based on preliminary data, 82.85% of NYSE-traded stocks ended Friday lower, the biggest down day since August 8, 2019. The chart below shows various breadth gauges. The bottom graph reflects down days. A cluster of down days (80% or 90%) tends to reflect selling exhaustion and is usually seen near bottoms, so we’ll be keeping an eye on that.

We’ve seen two 80%+/- down days already, so one could argue there’s already a measure of exhaustion.

Almost all of our short-term sentiment gauges perked up nicely and are already showing minor extremes. In times past, readings of similar degree have been enough to mark a bottom. Since we’ve seen some significant optimism extremes at the top, it is quite possible we need some more significant pessimism extremes. This, however, is not required.

The S&P 500 closed right on the green support trend line, which could be considered the minimum down side target for this pullback. Due to the sentiment extremes at the top and our RRHM, we would like to see lower prices, with 3,190 being the next and 3,130 +/- a more ideal down side target.”

                                      * * * * *  End February 3, Profit Radar Report * * * * *

The S&P 500 spiked 110 point this week. The chart below shows the resistance (red) and support (green) levels mentioned in the February 3 Profit Radar Report.

The S&P tagged the minimum down side target, which was based on a trend line going back to 2016. The S&P failed to reach the ideal target, which was based on a trend line going back to 2007, and would have reflected a more proportional correction.

Resistance is still at 3,336. A break above 3,336 would allow for a move to next resistance, but the CBOE equity put/call ratio is getting dangerously low once again, and the RRHM suggests we may not be out of the woods yet.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation 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, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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

Risk/Reward Heat Map Methodology

The Risk/Reward Heat Map (RRHM) is essentially a sophisticated ‘pros and cons’ list that visually expresses whether risk or reward will dominate over a specific time frame.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Process of Compiling RRHM

• The calculation starts with identifying a unique event, such as: The S&P 500 broke to a new all-time high for the first time in 1 year (more examples of events below are listed below).
• Once the event is identified, we look for past events (or occasions) that fit the same criteria.
• Once past events are identified, we calculate the forward performance (for each individual event) for the next 1, 2, 3, 6, 9, 12 month.
• Once the forward returns are calculated, we consider the result an indicator, study or signal (ISS).
• If 80% or more of a particular ISS show a positive return for a certain timeframe, it is added to the bullish column for that time period. One ISS can be bullish or bearish for multiple time frames (I.e. ISS is bearish for the next 2 and 3 month, but bullish for the next 6 and 12 month)
• If 50% or less of a particular ISS show a negative return for a certain period of time, it is added to the bearish column for that time period.

Here is an actual example of an event and corresponding ISS published in the December 15, 2019 Profit Radar Report:

Event: For the first time since January 26, 2018 (474 days ago), the NY Composite set a new all-time high.

ISS: The NYC reached a new high for the first time in more than 400 days 8 other times since 1970.

2 weeks later, the NYC was up 4 times (50%), 1 month later up 6 times (75%), 2 month later up 7 times (88%), 3 month later up 8 times (100%), 6 month later up 7 times (88%), 1 year later up 8 times (100%).”

Below is a sampling of events that have been considered in the past. The examples are listed to show the depth and variety of events used to compile the risk/reward heat map. “X” and “[]” indicate variables.

• [index] may refer to S&P 500, Nasdaq, Dow Jones, Russell 2000, NY Composite
• [high or low] may refer to all-time high, 52-week high, highest or lowest level in X days/weeks/month, X above or below a moving average, bollinger band, or other indicator.

• [indicator] may refer to RSI, MACD, CBOE put/call ratio, hedgers’ exposure, NY Composite a/d line, unemployment claims, yield curve, analyst estimates, sentiment polls, Hindenburg Omen signals, technical breakout or breakdown, period of time above/below certain threshold, or other sentiment, economic, breadth, liquidity indicator

Examples of Events

• [Index] registered a new [high or low]
• [Index] registered a new [high or low] for the first time in [X] days
• [Index] registered a new [high or low] for the first time in [X] days, while [indicator] set new [high or low]
• [Index] came within [X] percent of a new [high or low] while [indicator] stayed [X] above or below [high or low].
• [Index] registered a new [high or low] while [x] percent of [indicator] set new [high or low]
• [Index A] outperformed [index B] for [X]
• [Index A] outperformed [index B] for [X] while [indicator] set new [high or low]
• [Index] traded [X] consecutive days above [indicator]
• [Index] traded [X] consecutive days above [indicator 1] while above [indicator 2]

Analysis

There are 3 ways to categorize the RRHM:

1. Total signals (bullish and bearish)
2. Net signals only
3. Change (total or net) for a specific timeframe

Analysis #1 and #2 allow us to identify time periods of elevated risk or reward. Time is only one component of market forecasting, price is another – more important – one. A break below support or above resistance is usually required to start validating the message conveyed by the RRHM.

Analysis #3 allows us to identify changes. For example: The RRHM may project risk in February. If true to the projection, the S&P 500 drops X % in February, and ISSs start giving much more bullish signals, the RRHM change may indicate when a bottom is in.

The most recent RRHM will be available via the Profit Radar Report (along with a detailed interpretation and analysis of other factors), but below is a copy of the January 1 RRHM. Since January 1, an additional 56 ISS have been catolgued and included in the RRHM.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation 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, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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