S&P 500 Update: Will Excess Hopium Spark 2020 Replay?

Different year, same path. Below is a S&P 500 comparison between the first 18 trading days of 2020 and 2021.

It’s probably no coincidence that both years started with an epic tug-of-war. The tug-of-war leading into January 2020 was described here and the tug-of-war leading into 2021 was described here.

This seems like a crazy question, but based on the eery January similarity, one worth asking:

What are the odds of 2021 being a 2020 replay?

There are different ways of looking at this. 1) Based on historical precedents and 2) Based on the most recent developments.

Historical Precedents

Shown below is the S&P 500 performance of the years that most closely resemble the path of 2020. No doubt 2020 was more extreme than any other year, but the general trajectory of 1980, 1997, 2003, 2009 was pretty darn close that that of 2020.

Here is where it gets interesting: The next chart shows the performance of the years that followed: 1981, 1998, 2004, 2010. Here are two key takeaways:

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• There was no repeat of the prior year’s path
• Any gains were given up by August

Most Recent Developments

Sunday’s (January 24) Profit Radar Report featured the chart below and warned that: “The S&P 500 is at double trend channel resistance and the 138.2% projection level mentioned in the 2021 S&P 500 Forecast. There are RSI-35 divergences at multiple degrees and the cumulative NY Composite a/d line did not confirm Thursday’s all-time high. Stocks are near an inflection zone that could spark a pullback. For the S&P 500, that inflection/resistance zone is 3,850 – 3,880.”

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

One swallow doesn’t make a summer, and one down day doesn’t make a bear market. Tuesday was a big down down day, one that ‘came just in time’ and erased 3 weeks of gains for the S&P 500, but it wasn’t more then that. Not yet.

Based on the sentiment extremes seen in December and January, the down side potential is much greater, but it will take a break below the two purple wedge lines to do some actual chart damage. 

Yesterday’s Profit Radar Report stated that: “Today’s drop pulled the S&P 500 into a key support zone. RSI-2 is almost over-sold, so a bounce is possible. The weight of evidence, however, suggests more risk ahead, with or without bounce. A break below 3,725 – 3,650 is needed for bears to gain the upper hand.“

Summary

Historically, a replay of the 2020 path in 2021 is very unlikely. But the extreme hopium building up in recent weeks makes a bigger correction likely, and the positive breadth readings throughout 2020 suggest a cameback after a correction.

In short, a full 2020 replay is unlikely, but a drop below purple wedge support could spark a nasty drop and subsequent snap back rally, which is the ‘mini-me’ version of what happened in 2020.

Continuous updates 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. 

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

If you enjoy quality, hand-crafted research, sign up for the FREE iSPYETF e-newsletter & market outlook

2021 S&P 500 Forecast, Bitcoin, Gold

Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on January 21. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

Here’s your ‘broken record’ moment of the day: The tug-of-war between extreme sentiment and breadth continues as stocks grind higher (2 steps forward, 1 step back).

If you’re not yet familiar with this epic, never before seen tug-of-war, it was explained here on December 1 with the following conclusion:

“Normally the combination of historic investor optimism while stocks are pressing against long-term resistance is a recipe for disaster. But, as the above studies show, strong stock market internals are likely to over-power other risk factors.“

Our approach has been, and continues to be: Higher prices are likely as long as support holds.

But, extreme euphoria brings risk of a nasty pullback, so I’m also trying to discern where that risk potential might turn into reality.

The dashed trend channel center line could be a ‘pressure point’ for the iShares Russell 2000 ETF (IWM).

The detailed 2021 S&P 500 Forecast includes an actual S&P 500 price projection for 2021 based on the following factors:

• Breadth & liquidity
• Technical analysis (support/resistance & Elliott Wave Theory)
• Investor sentiment
• Seasonality & cycles
• Valuations
• Risk/Reward Heat Map

The latest gold analysis is available here.

The January 6 Profit Radar Report included the Bitcoin chart below along with this warning:

“Bitcoin has gone parabolic, and Bitcoin futures jumped another 16.7% on Sunday afternoon. If Sunday’s pop holds, price will open above the blue trend channel on Monday, which will then act as support (around 33,000). The rally has taken the shape of a bowl (green line) and I don’t recall a ‘bowl-shaped’ rally that didn’t end badly. Based on Elliott Wave Theory, any upcoming pullback could be ‘only’ a wave 4 and not as strong as in 2018, but nevertheless, any remaining gains come with the risk of a quick 20-40% pullback.”

Bitcoin Futures are down some 30% and price is threatening to fall below the blue channel. While there is more down side risk, there’s a good chance Bitcoin will recover to new highs once this correction is over.

Continued updates and the new 2021 S&P 500 Forecast are available via the Profit Radar Report. 

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”S&P

Gold Forecast

After quite a rollercoaster ride, gold prices are exactly where they were six months ago. More interesting than the 6-month trip to nowhere is that gold has given up all the (blow off top?) July/August 2020 gains (red box). 

Does that mean gold is ready to rally once again?

I did not expect to see gold surge over 250 points into the August 6 2020 high, but wan’t surprised to see the subsequent losses. 

I published the NYSE Gold Miners Index chart below in the July 29, 2020 Profit Radar Report along with the red resistance line and times when 90% of gold miner index stocks were above their 50-and 200-day SMAs with more than 50% of them at a 52-week high (dashed red lines). 2 months later, the Gold Miners Index was down 75% of the time.

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 August 19, 2020 Profit Radar Report compared the latest gold rally with the 10 most closely correlated gold rallies. The chart below plotted the corresponding forward returns. As the performance tracker (bottom bar) shows, 2 month later gold was up only 10% of the time, 3 and 6 month later only 30% of the time.

Past performance is no guarantee of future performance, but the correlation study has proven to be very insightful and accurate. 

Long-term, gold could be forming the handle (blue box) of a bullish cup and handle formation (like 1980 – 2009) as illustrated in this chart (published in the August 16, 2020 Profit Radar Report).

Mid-term, gold fell below the April 14, 2020 high, which invalidates a bullish 5-wave Elliott Wave Theory pattern from the March 16, 2020 low. 

While another bounce is likely once this leg lower is complete, confidence in a new all-time high within the first half of 2021 is sub-par.

Continuous updates 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.

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

Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on January 7. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

I enjoy helping people make educated investment decisions. To be educated one needs to have data (=knowledge) and interpret that data without being clouded by emotions or biases.

The Profit Radar Report filters a ton of data in an effort to discern the stock market’s next move. As this newsletter mentioned, there are times when future implications of the examined data are pointing in different directions.

This just happened in December. Almost every study based on stock market breadth projected rising prices and almost every study based on red-hot sentiment projected lower prices (I called this an epic tug-of-war).

Many of those studies were published in this December 1 article: Stock Market Risk is Clashing against Historical Strong Reward Potential.

My data-based conclusion at the time was as follows: “Normally the combination of historic investor optimism while stocks are pressing against long-term resistance is a recipe for disaster. But, as the above studies show, strong stock market internals are likely to over-power other risk factors.”

Since December 1, 2020, the S&P 500 has slowly risen from 3,660 to 3,800 … but internal breadth actually deteriorated.

The chart below (published in the December 30 Profit Radar Report) plots the S&P 500 against the NYSE up volume ratio (5-day SMA, which shows how much volume goes into advancing vs declining stocks).

Throughout December, the S&P moved higher while the up volume ratio declined. About 50% of the time that led to an immediate nasty pullback (red bars) but other times price continued higher (green boxes).

Interestingly, investors lost some of their bullishness the last 2 weeks of December (see gray graph, which is a composite of sentiment gauges). In other words, the tug-of-war tension eased a bit and allowed for further gains.

Even though overall bullish, the Risk/Reward Heat Map just saw an up tick in risk for January and February.

For this risk potential to turn into reality, however, the S&P 500 needs to drop below the green trend line. Price can continue to grind higher as long as it stays above.

Even though 2020 has brought unprecedented stock market action, there are actually a number of years that have shown a very similar general trajectory (see chart below).

The soon to be published 2021 S&P 500 Forecast will show how the S&P performed after years with a similar trajectory.

Continued updates and the new 2021 S&P 500 Forecast are available via the Profit Radar Report. 

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”