S&P 500, Bitcoin, Treasury Update

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S&P 500

Are you going to talk about the expanding diagonal again?

If a simple pattern works so beautifully in an incredibly challenging environment, you ride it and milk it as long as it works (if you haven’t read about the expanding diagonal yet, you can do so here:

S&P 500 Path is Deceptively Simple

The October 12 Profit Radar Report that: “This week’s new S&P 500 low meets the minimum requirement for a wave 5 low, and RSI-2 is nearing over-sold again.”

Starting on October 13, the S&P soared almost 300 points.

Obviously there are still a ton of economical and political cross currents, but the KISS approach is to look higher as long as double support (shown on the monthly chart) holds.

Treasuries

“Distrust in government is a global mega trend. The US Treasury market may just have carved out a key reversal and perhaps major market top.” March 15, 2020 Profit Radar Report

30-year Treasury bonds just suffered the worst one-year decline on record and are down 35% from their all-time high. The last 2 1/2 years have erased about 43% of the gains racked up during a 40-year bull market.

But, as mentioned in the October 23 Profit Radar Report, there is long-term support near current price, short-term RSI-2 is over-sold, RSI-35 is around support, and a furious rally is becoming likely.

The daily chart shows TLT up some 6% since October 24, now nearing over-bought and resistance, but price is compressed from almost 9 month of steady losses, so further up side (perhaps after a pullback) is very possible.

Bitcoin

October 23, Profit Radar Report: “Bitcoin futures are trading above trend line resistance. RSI-35 has been rising over the past 4 months where price was range bound. This is not a screaming buy signal, but the development is overall positive.

Aggressive investors may consider either 1) buying bitcoin with a stop-loss below either of the support trend lines or 2) buy after a break above resistance around 20,400. One ETF alternative for bitcoin is the Grayscale Bitcoin Trust (GBTC).”

Bitcoin has since broken out, and previous resistance is now support (and potential stop-loss) for longs.

Continuous updates for the S&P 500, Treasuries, Bitcoin are available via the Profit Radar Report.

If you want to be the best-informed investor you know, and have access to always relevant and purely fact-based research, sign up for 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.”

The Stock Market Has Spoken – Even Government’s Biggest Bailout Success is a Failure

Fact and fiction are often separated by nothing more than a thin line. Some consider GM as a government bailout success story and the performance of the Consumer Discretionary Select Sector SPDR (XLY) seems to suggest that this claim is legit. What does the final authority – the stock market – say?

General Motors is once again number one in car sales worldwide. For this and other reasons GM is often heralded as the biggest success story of government bailouts. Is that really so?

According to a September 23, 2010 Wall Street Journal article, the U.S. must sell GM shares at $133.78 to fully recoup the $49.5 billion it spent to rescue the auto maker. The United States owns about one third of General Motors.

Shares of General Motors are currently trading at $22.50, 35% below its IPO price. GM saw a 41% profit decline in the last quarter. Production for the Chevy Volt, anointed to be the car maker’s financial savior a couple years ago, is being suspended due to poor sales.

One Step Forward and Two Steps Back

In an effort to make GM cars more attractive, GM is making it easier to own its product. How? With “attractive” loans, otherwise known as subprime loans.

According to an auto report published by Standard & Poor’s, the weighted average FICO scores for GM owners is only 579. 78% of all GM loans are for more than 5-years and the average loan-to-value on new cars is 110% (the average loan-to-value on used cars is 127%).

Haven’t we seen this movie before? Isn’t that what contributed to GM’s bankruptcy in 2009? Isn’t that what caused the real estate collapse in 2005?

Consumer Anomalies

The Consumer Discretionary Select Sector SPDR (XLY) is trading at an all-time high while consumer confidence shows little confidence.

It’s ironic that the consumer discretionary sector trades at all-time highs even though consumers didn’t get bailed out. The recipient of literally tons of bailout money on the other hand, the financial sector represented by the Financial Select Sector SPDR (XLF), trades 60% below its all-time high.

What’s the moral of the story?

1) The government’s definition of success is likely different from the common sense definition of success.

2) The government can give money to the financial sector. Financial conglomerates turn around and buy consumer discretionary stocks and even though American’s are hurting it looks like consumers are buying. It’s a win/win scenario for everyone but the consumer.
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Apple Bullies the Nasdaq and S&P 500 But May Soon Disappoint Investors

The S&P 500, Nasdaq-100 and Technology Select Sector SPDR ETF are rallying to new multi-year recovery highs spurred by Apple’s record setting performance. As Apple goes, so goes the market, so what’s next for Apple?

Monday, August 20, 2012 is the day when Apple became the most valuable publicly traded company ever. That day the stock closed at $665.15 a share, giving it a market capitalization of $623.52 billion.

The previous record was set by Microsoft in 1999 when it was valued at $616.34 billion.

Apple is most certainly the biggest fish in the pond. How big? Apple accounts for 4.73% of the S&P 500 Index tracked by the SPDR S&P 500 ETF (SPY). The closest second is Exxon Mobil with a weighting of 3.22%.

All by itself, Apple’s share price matters almost as much as that of IBM, Microsoft and General Electric combined. While Apple dominates the S&P 500, it outright bullies the Nasdaq-100.

At $665 a share Apple controls 19.65% of the Nasdaq-100 and the ETF that tracks this index, the PowerShares QQQ (QQQ). Even more lopsided is AAPL’s share in the Technology Sector SPDR ETF (XLK), where it accounts for 20%.

Apple is so big that when Apple sneezes the U.S. stock market gets a cold. So how is Apple’s health?

Fundamental Analysis – New iPhone, New iPad … New Highs?

Consumers and investors are highly anticipating the new iPhone 5, the new iPad mini and Apple TV. With the holiday season coming up there are plenty of reasons to expect new all-time highs and record valuations for AAPL.

Apple trades at only 13 times earnings and many analysts consider Apple stock cheap.

Technical Analysis – Strong Resistance in Sight

The chart below shows AAPL on a log scale since 2000. I have shown the chart before, most recently in the July 22 Profit Radar Report, which stated that: “The upper red resistance channel will be around 660 later this week. A final push to kiss this trend line good bye would provide a beautiful technical picture and a solid sell signal.”

On Tuesday, August 21, the upper trend line resistance is at 679. Shares weren’t quite able to touch the line, which allows for new highs in the coming days.

If Apple shares follow the path of seasonal patterns in election years, we should see a top in Apple in late August followed by another seasonal high in November/December.

 

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Will Small Cap Stocks Catch Up and Trigger a Buy Signal for the S&P 500?

“The stock market is doomed because small cap stocks are trailing behind the S&P” has been the financial media’s message. Obviously the market is doomed eventually, but for now this piece of Wall Street “wisdom” hasn’t paid off. Here’s what the Russell 2000 is telling us.

Small Cap stocks represented by the Russell 2000 and ETFs like the iShares Russell 2000 Index ETF (IWM) have received their fair share of media attention lately.

The focus has been on the under performance of the Russell 2000. This has been considered bearish for the S&P 500 (SPY), Dow Jones (DIA), and Nasdaq (QQQ) since small cap stocks are often viewed as a barometer for the market as a whole.

The Profit Radar Report has been promoting an individual and independant analysis of small caps, financials (XLF) and the Nasdaq to get a better read on the big picture.

Myth Buster

One detailed piece of analysis has shown that under performance by the Russell 2000 is not necessarily negative for the stock market.

There have been nine occasions over the last 20 years where the S&P was within 1% of a multi-month high (1,392 on July 30) while the Russell 2000 was more than 5% below a multi-month high (820 on July 5). This led to small negative returns only three times.

Above Resistance

Even though the whole lagging Russell doom scenario is busted, the Russell broke above key resistance. This happened on August 7, with a close above 800 (a day before XLF broke above resistance at 14.85).

Although the Russell was still lagging the S&P, this break was important and signaled more gains for small caps (financials) and the overall market.

The chart below plots the S&P 500 (SPY) against the Russell 2000 (IWM) and reveals divergences at various degrees.

In May 2011 the Russell 2000 Index recorded an all-time high. The S&P did not. Since then the S&P has nearly reclaimed its 2012 high while the Russell 2000 is about 5% away.

The S&P 500 is about 10% away from its 2007 all-time high, while the Russell 2000 is only 6% away from its 2011 all-time high.

If you are looking for a divergence between the S&P 500 and Russell 2000, you’ll find more than just one, some bullish, some bearish.

The chart below shows immediate resistance for the Russell 2000 and S&P 500 Index (red lines) and short-term support. There are indicators that suggest an upcoming sell off, but as long as prices remain above short-term support (green lines) the trend is up.

 

The Dow Jones – Close to a Once-in-a-Lifetime Signal?

The Dow Jones sports perhaps the most unique constellation of our generation. Constellations don’t make money, buy or sell signals do. The Dow’s constellation may double as a signal and is of importance for investors.

Since the year 2000 we’ve seen the tail end of a technology boom without parallel, the lost decade, the biggest decline and recession since the Great Depression, record monetary intervention and the strongest rally since the Great Depression.

Bulls and Bears can probably agree that we live in unique times. A look at a long-term chart (with long-term I mean going back all the way to 1896) of the Dow Jones Industrial Average (DJIA – corresponding ETF: Dow Diamonds: DIA) shows just how unique.

The chart below shows the Dow Jones in a monthly log scale. Here are the most salient points:

·      There are two long-term trend channels (dotted grey lines). One stretches from 1903 as far as 1954. The other one starts in 1937 and is still active today.

·      The 50 and 200-month moving average (blue and red line) are on track to cross each other for the first time since the Great Depression.

I find the Dow’s interaction with its trend channel very intriguing. The 1903 – 1954 channel offered support and resistance at no less than seven major turning points.

Most notable is sequence of trend line interaction that occurred following the bust of the 1929 bubble. The Dow sliced back below the upper channel line and continued tumbling below the lower channel line.

This led to a strong rally that once again tested the upper channel line (red arrow). The same thing is happening now. The strong post 2009 rally has lifted the Dow high enough to test trend channel resistance.

In fact, the Dow has been flirting with this upper channel line off and on since late 2010, but hasn’t been able to stay above it for long. Channel resistance is currently around 13,200.

What does this unique constellation mean for investors? Since we are looking at a multi-decade trend line, we can’t use it as a short-term investment tool or signal.

Long-term investors should closely watch the Dow 13,200 range. Based on the 1938 analogy, the likely current is a counter trend and long-term investors should use current prices to unload equities and nibble on short positions.

What A Difference Would QE3 Have Made?

“No QE3 for you” the Federal Reserve said on Wednesday. The market showed it’s disappointment. What a difference would QE3 have made?

“Central bank interventions are like sausages. They taste better if you don’t know what’s in them.” – Some German guy who writes a Newsletter.

The Federal Reserve and European Central Bank have cooked up a smorgasbord of ‘financial sausages’ since the 2007 bust. Stuffed in appealing high performance casings, the Fed was able to sell all kinds of smelly sub-par trimmings (QE1, QE2, etc.) as prime beef.

Few people cared because stocks were up and the sausages looked good. After a few cases of financial food poisoning however, people are starting to wonder what the Fed and ECB have been mixing in their QE sausages.

Still, for some “odd” reason Wall Street is begging for more of the same. This week the Fed played hardball and didn’t allow more than a sniff of the next sausage. That’ll have to do for now.

No Accountability to a Higher Authority

The chart below emulates the label central banks have been putting on their faulty products. The slogan is something like this: “Financial sausage consumption increases wealth.” At first glance, who could argue? QE1 resulted in higher stock prices, so did QE2 and LTRO I + II. The Dow Jones Industrial Average (DIA) trades only 9% lower today than 58 months ago at its all-time high.

But the DJIA is not the only measure that matters. People can’t eat DJIA, and the kind of indicators that measure prosperity (or lack thereof) of average American’s look pretty dismal.

Below is the one chart that shows what QE can and cannot do and who QE does and doesn’t benefit (hint: Wall Street bankers still get to celebrate their bonuses at Ruth’s Chris).

2007 vs. 2012

The Dow Jones today is only 9% below it’s 2007 peak reading.

Unemployment is about 85% higher today than in 2007.

U.S. debt (based on Treasury issuance) has roughly doubled since 2007 and is about 4 times higher than in 1995.

Starting in 2008, the U.S. has consistently been running monthly deficits.

The number of Americans on food stamps is almost twice as high as in 2007.

The balance sheet of the European Central Bank has ballooned by about 100%.

The Dow measured in the currency that’s hardest to manipulate (gold) is lower today than in 2007.

Election Year “Bonus”

This year is an election year. The incumbent party will do what it takes to stay in the drivers seat and the Fed (and ECB) won’t hesitate to resuscitate.

Is it money well spent? Wall Street will tell you yes. 46 million Americans on food stamps will beg to differ. Wall Street feasts on prime rib while the average Joe is stuck with the “Fed’s sausage.” No food stamps needed.

Bernanke – 5 Minutes Away From Losing Your Trust?

Bernanke is the most powerful man in the financial world, but is he also the smartest of them all? A look at his bloopers shows that he’s respected not for his smarts but for his …

Ben Bernanke is an American economist.

Ben Bernanke is a self-proclaimed student of the Great Depression.

Ben Bernanke was a tenured professor at Princeton University.

Ben Bernanke is the chairman of the Federal Reserve.

Ben Bernanke is the most powerful man in the financial universe.

But is Ben Bernanke smart? The kind of smart that’s needed to get the U. S. and global economy back on track?

Trust and a reputation are built on one’s track record. Let’s take a look at Mr. Bernanke’s track record. All we need is to compare history with Mr. Bernanke’s past assessment.

Bernanke in July 2005: “We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”

Bernanke in October 2005: “House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.”

Bernanke in November 2005: “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.”

Bernanke in February 2006: “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

Bernanke in March 2007: “All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

Bernanke in October 2007: “It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”

Bernanke in January 2008: “The U.S. economy has a strong labor force, excellent productivity and technology, and a deep and liquid financial market that is in the process of repairing itself.”

Bernanke in January 2008: “The Federal Reserve is not currently forecasting a recession.”

Mr. Bernanke’s track record doesn’t exactly inspire confidence. He’s been wrong so often, how come everyone trusts his decisions?

The trust is obviously not in his decisions as much as in the tools available to him. Here’s how Mr. Bernanke described the powers of the Federal Reserve in November 2002:

“The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”

Aha, Ben’s ability to print gives him respect kind of like a gun slinger gets respect because of the gun and not because of what’s between his ears.

But then Bernanke claims he’s not using the printing press:

Bernanke in December 2010: “One myth that’s out there is that what we’re doing is printing money. We’re not printing money.”

Seems like even Bernanke is confused about what exactly he’s doing.

If you’ve read Andrew Ross Sorkin’s “Too Big To Fail,” the inside story of how Wall Street and Washington fought to save the financial system – and themselves, you’ll get a glimpse of Bernanke’s often overwhelmed ad hoc approach to the problems of 2008.

In all honesty, Ben Bernanke has done a good job of preventing Wall Street and the stock market from becoming unglued. Despite all of his bloopers, he’s no dummy … and he has a financial bazooka.

Unfortunately his allegiance is to the financial system, not to the average Joe. And after decades of overleveraging, the financial system seems too big to let fail and too big to bail by one man and his bazooka.

Is The S&P Carving Out a Super-Sized Major Top?

Are stocks in the late stages of a bull market rally, in a bear market rally, rolling over, or getting ready for another leg up? Regardless of the actual state, the conclusion and outlook seems to be basically the same.

Are we in a bull market, bear market, or go nowhere market? I guess we can all agree that we are in a rigged market, but that doesn’t answer the question. A bit more research may help though.

According to Lowry’s, bull markets historically last an average of 39 months. Assuming that the March 2009 low at S&P 666 was the beginning of a new bull market, it was 37 months old at its April high of 1,422. If that bull is still alive, it’s 40 months old today. The bull is old and gray (perhaps already bald).

Although the S&P gained 113% from March 2009 – April 2012, there’s one problem with categorizing the rally from the March 2009 low as a bull market.

Since 1940 no bull market has ever experienced more than one decline of 10% or more. The alleged post 2009 bull saw two major declines. One in 2010 (-17%) and another in 2011 (-21%). Make it three (-11% from April – June 2012) if you consider the bull is still alive.

Statistically (using the commonly accepted 20% decline equals bear market rule) the 2011 decline was actually deep enough to usher in a new bear market, but we know that’s nonsense because the S&P, Dow Jones, Nasdaq and other broad indexes completely recovered their losses.

A Less Confusing Alternative

How about this for an explanation? A new bear market started in 2007 and has been in force ever since. All the rallies we’ve seen since then have been counter trend or bear market rallies.

Obviously, this 3-year rally is not your average garden-variety rally either. In hindsight, the character of seemingly ever rising prices makes sense. After all, the world’s central banks have spent trillions of dollars propping up stocks.

In the middle of May I wrote about the timing component of the topping process and noted the time it took to carve out the 2007 top (about 9 months) and the 2011 top (about 6 months). Based purely on timing, stocks shouldn’t have been ready to fall hard without looking back in May.

Today the picture looks a bit different. Stocks popped, topped, and dropped but 5 months later the S&P 500 (SPY) is still hanging around in the mid 1,300s. Based on timing, selling pressure could accelerate from now on.

Chart Lessons

The chart below frames the 2009 and 2011 topping processes and highlights the 17%, 21% (and 11%) “bull market” declines. But there’s much more to this chart.

The October 2007 – March 2009 decline erased 909 S&P points within 18 months (50.5 point per month). The ensuing rally is now 40 months old but has recovered only 755 points (19 points per month).

Declines have been swift and sudden, while rallies have been drawn out and gooey with much sideways churning in between.

Regardless of whether the rally from the March 2009 lows is considered a new bull market or a bear market rally, it is already over or close to being over.

Odds are when the bear comes back it will be fast and furious once again.

The Approaching Ultimate Bear Market Signal – Is it as Scary as it Sounds?

A long-term S&P 500 moving average crossover is about to trigger the first sell signal in 73 years. What does this mean for stocks and investors?

Certain events – like the 2008 market crash – are once in a lifetime experiences for investors. Unfortunatly, we might be in for a double whammy.

The S&P 500 (SPY) is about to get hit by the ultimate sell signal, some have dubbed it the “ultimate death cross” (UDC).

A death cross is when the 50 period moving average drops below the 200 period moving average. A golden cross (exactly the opposite) occurs when the 50 moving average moves above the 200 moving average.

We’ve seen various golden and death crosses – 12 since the beginning of 2000 to be exact – based on daily moving averages.

But now the S&P’s 50-month moving average is threatening to fall below the 200-month moving average (the two averages are about 7 points apart). The chart below provides a visual of the SMA crossover.

History of Monthly SMA Crossovers

The 50-month, 200-month crossover is a rare occasion, which means that the sample size to base any conclusions on is small.

The chart below shows the S&P since 1887 (datasource: Robert Shiller).

The last monthly 50/200 SMA crossover was 66 years ago in April 1946. This was a bullish crossover or golden cross and the S&P has rallied from 19 points to as high as 1,576 since. Not bad for a long-term buy signal.

The third chart zooms in on 1915 – 1946, the time frame that hosts the last cluster of monthly SMA crossovers.

The most recent UDC triggered in August 1939 (73 years ago), but was quickly reversed by a golden cross six months later.

The last clean UDC happened May 1934. It preceded a 10% decline followed by a 100% rally.

A golden cross in 1925 correctly foreshadowed the 300+% bull market ahead of the Great Depression.

From 1915 – 1925 the 50 and 200-month SMA traded very close to each other with no significant signals.

What Does it Mean?

Like any SMA crossover, the UDC is a lagging indicator. Looking at the trajectory of the 50-month SMA, the UDC may not trigger until late 2012.

The great bull market of the 20^th century topped in 2007. The UDC sell signal will be about five years late but may come just in time to warn us of the second bear market leg.

Regardless of its spotty track record, the UDC emphasizes that we’re living in unique times and its long-term message agrees with the big picture bearish outlook painted by my indicators.

New York Fed Research Reveals That FOMC Drove S&P 55% Above Fair Value

Why do stocks typically outperform short-term government bonds? It’s a question of risk and reward. Brand new research from the New York Fed shows that the Federal Open Market Committee (FOMC) is the cause for a 55% overvaluation of the S&P 500.

Conspiracy theories are fun, but unfortunately they are often just that – theories – grown on the fertile soil of biased bloggers, journalists, or conspiracy groups.

Here’s a super enlightening piece of research published right on the website of the Federal Reserve Bank of New York. It comes straight from the horses mouth so to speak and tackles a very controversial subject.

The Fed – Stuck with the Hot Potato

The research talks about the equity premium. The equity premium is usually measured as the difference between the average return of the stock market and the yield on short-term government bonds (corresponding ETF: iShares Barclays 1-3 Year Treasury Bond ETF, SHY).

Analysts agree that the return of stocks should be greater than that of bonds to compensate for the volatility of stocks.

However, analysts can’t agree on the reason why the return of stocks is greater than that of short-term government bonds and what the return margin between stocks and government bonds should be to compensate for the extra risk linked to owning stocks.

This disagreement has given birth to the term “equity premium puzzle.”

David Lucca and Emanuel Moench (research posted on the New York Fed’s website) prove that: “80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements.” The researchers call this phenomenon a “drift.”

More than just a Drift

The pre-FOMC announcement drift is best summarized by the chart below, which provides two main takeaways:

– Since 1994, there has been a large and statistically significant excess return on equities on days of scheduled FOMC
announcements.

– This return is earned ahead of the announcement, so it is not related to the immediate realization of monetary policy actions.

The chart shows average cumulative returns on the S&P 500 stock market index (related ETF: S&P 500 SDRS – SPY) over different three-day windows.

The solid black line (the chart is not as clear as it should be, but it’s taken directly from Lucca and Moench’s research) displays the average cumulative return starting at the market’s opening on the day before each scheduled FOMC announcement to the market’s close on the day after each announcement.

The dashed black line (at the bottom), which represents the average cumulative return over all other three-day windows, shows that returns hover around zero.

This implies that since 1994, returns are essentially flat if the three-day windows around scheduled FOMC announcement days are excluded. What does that mean?

The 55% FOMC Overvaluation

Let’s take a look at another chart to visualize the effect of the pre-FOMC announcement spike.

The chart below shows the S&P 500 (SPY) in blue and red. The blue line is the actual S&P 500 performance, the red line (that’s where it gets interesting) is where the S&P would be if you exclude the returns on all 2 pm – 2 pm windows ahead of the FOMC announcement.

Excluding those returns the S&P would trade around 600, 55% below current prices.

Surprising Conclusion

The conclusion – after seeing the evidence Lucca and Moench have kindly provided – seems pretty obvious. But perhaps more surprising than the actual research itself is the ending statement of Lucca and Moench’s analysis: “The drift remains a puzzle.”

The original article published on the New York Fed’s website can be found here.