Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on May 13. 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).
Based on the Risk/Reward Heat Map, May was likely to bring increased risk. The May 3 Profit Radar Report warned that: “May continues to be a pressure point, resistance in terms of time.”
If you’re not yet familiar with the Risk/Reward Heat Map, the chart below highlights its merits.
The red/green/yellow columns at the bottom project either risk/reward/caution.
Right after I first created the Risk/Reward Heat Map in December 2019, it showed immense risk for January/February/March 2020 followed by significant reward starting in April 2020.
Ever since April 2020, stocks have only paused during periods of caution. A ton of work (currently 613 different studies) goes into the Risk/Reward Heat Map. How it is compiled and how it works is explained here.
Within 3 days of last Friday’s all-time high, the S&P 500 has dropped to a 1-month low. Since 1970, this happened only 8 other times. The chart below highlights when.
In terms of price action, there’s little technical damage thus far for the S&P 500. The futures chart shows that price tagged double support yesterday.
In the past, the S&P may have pierced below support briefly but quickly jumped back above, so a close below support for more than a day or two is needed to get lower targets.
The Risk/Reward Heat Map suggests there’s a good chance this can happen, but it’s prudent to wait for confirmation.
Continued updates (including the Risk/Reward Heat Map) and factual out-of-the box analysis 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.
The Risk/Reward Heat Map (RRHM) is a complex tool I created to identify whether risk or reward will dominate in any of the upcoming 12 months. I made the Risk/Reward Heat Map available to subscribers of the Profit Radar Report in December 2019.
As of right now, the Risk/Reward Heat Map is the compound message of 613 individual studies, indicators and signals.
Turning individual studies into a forward-looking Risk/Reward Heat Map is a 2-step process:
1) Develop each individual study. Here is how it’s done:
– Identify a unique market development. Example: Last Friday, the S&P 500 and 32% of its component stocks closed at a 52-week (or all-time) high.
– Identify past precedents that meet the same (or similar) criteria. Example: Since 2000, the S&P 500 and >31% of its component stocks closed at 52-week high 7 other times (total of 8 signal dates). The orange line in the chart below highlight all the signal dates.
2) Turn individual study into a forward-looking component of the Risk/Reward Heat Map. Here is how it’s done:
– Calculate the S&P 500 returns and odds of positive returns for 1, 2, 3, 6, 9, 12 months after past precedents (signal dates). Example: After the above-mentioned signal dates, the S&P 500 was down 1 month later 6 times (86%) with an average loss of 2.2% (using only 1st signal in 30 days). 12 month later, the S&P 500 was up 5 times (71%) with an average gain of 10.5%.
– When the odds of positive returns are 80% or higher for a certain month, it is counted as bullish study for that month (+1 is added for that month).
– When the odds of positive returns are 50% or lower for a certain month, it is counted as bearish study for that month (-1 is added for that month). Example: The above study is bearish for June.
The proof is in the pudding
Shown below is one of many bullish studies published in April 2020 (others are available for review here). Explanatory annotations are made in yellow.
The unique development at the time was that the S&P 500 delivered two 90% up volume days (when 90% of volume flowing into advancing stocks) in a 3-day period.
2 out of 3 90% up days happened 7 other times in the past. The colored graphs show returns after the 7 prior signal dates.
The performance tracker (table at bottom of chart) shows that returns for the next 3, 6, 9, 12 month were wildly bullish with 83% – 100% odds of positive returns. +1 (bullish odds) were added for the months of July 2020, October 2020, January 2021, April 2021.
Repeating the above process of identifying a unique event and its precedents and then cataloguing forward returns 613 times results in the up-to-date Risk/Reward Heat Map.
Does the Risk/Reward Heat Map work?
The chart below plots the S&P 500 against net signals (bullish – bearish) since inception, which allows us to visually assess if the Risk/Reward Heat Map works.
The outright bearish implications for January/February/March 2020 (red columns) were echoed by the stock market during the February/March 2020 meltdown.
Starting in March 2020, the vast majority of studies implied significant future reward with little risk (green columns).
Throughout 2020 and 2021 there were only a few periods of weakness, and all of them occurred when the number of bullish studies was less than 20 (orange bars).
Sell in May and go away?
For May, the Risk/Reward Heat Map is in caution mode, and the May 3 Profit Radar Report warned that: “May continues to be a pressure point, resistance in terms of time.”
The Risk/Reward Heat Map is unique because it’s actually a predictive forward looking tool. To filter out false signal, I use real time data to validate the Heat Map’s message. Right now, it will take a good close below 4,090 to unlock a deeper pullback.
The Risk/Reward Heat Map is constantly updated and shows riks/reward for each of the next 12 months. The Risk/Reward Heat Map is available to subscribers of 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.
Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on May 6. 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).
Let’s face it, S&P 500 performance has been strong but ugly … and downright boring to watch. Despite the yawn environment, I just discovered a historic pattern that played out 90% of the time (see below).
Yes, while markets are grinding I’m running dozens of screens to gain an edge for the next move.
For example, the last S&P 500 all-time high (last Thursday) also saw:
– Cumulative NY Composite a/d lines at all-time highs
– 88% of S&P 500 stocks above their 50-day SMA
– 95% of S&P 500 stocks above their 200-day SMA
– Only 58% of volume flowing in advancing stocks (10-day SMA)
Running a screen based on the above parameters yields no hits, which means it never happened before.
We can’t learn much from a sample size of 1, but lowering the threshold gives as more precedents to work with.
The yellow lines highlight when less restrictive criteria (see chart) were met. Unfortunately the sample size couldn’t be more conflicting (don’t shoot the messenger). We have some signals right before the 2007 and 2020 crash and others during the 2013 and 2020 melt-up.
Let’s take a different approach. Instead of scanning for similar past occurrences based on breadth we’ll look at performance.
Here is our baseline:
From January – April 2021, the S&P 500 was up 11.32%
In 2020 (prior year), the S&P 500 recorded a 16.26% gain
2021 was a post election year
Going back to 1970, we now identify the following:
– Years S&P 500 was up more than 10% on April 30
It happened 14 other years
– Years S&P 500 gained 16% +/-5% the year before
It happened 5 other years
– Years that were a post election year (like 2021)
It happened 1 other year
– Years with a similar chart trajectory (correlation)
Based on the above criteria, the gray graphs reflect the January – April performance of the 10 years most similar to 2021 (in red).
The logical next step is to chart the forward performance of the 10 most similar years, which is exactly what I did. After doing that, I look for common themes.
This study revealed an interesting commonality: 3 month later (which corresponds to August 1), the S&P 500 had the same directional bias 90% of the time. The full study was published in yesterday’s Profit Radar Report.
Even dull markets can offer clues about future performance … if you look hard enough … or have someone who does the searching for you.
Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Profit Radar Report.