S&P 500 Update: Epic Tug-of-War

Two of the most powerful stock market forces are facing off in an epic tug-of-war. Momentum vs sentiment.

On October 25, 2019, the S&P 500 broke above the blue triangle shown below. Although this break suggested higher prices, I did not – at first – expect such relentless momentum.

But in late November it became clear that we are dealing with a rare momentum market and I warned via the November 24 Profit Radar Report that: “Momentum markets tend to move higher than expected.”

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.

Here is one example of why momentum markets do not die easily: On December 12, the NY Composite hit a new high for the first time in 20 month. Since 1970, the NYC hit a 20-month high 8 other times. 3 month later, it was higher every time. 1 year later, it was higher 7 times.

Of course, a by-product of persistent gains is increase optimism. In fact, in mid-December we started seeing some legitimate extremes of enthusiasm. The equity put/call ratio set a number of extremes, one of them being a 1-year low. When this happened in the past, the S&P 500 was higher 1 and 3 month later only 33% of the time.

Here is the chain reaction extreme optimism tends to trigger:

  • Most investors have converted into buyers
  • There are few buyers left to bid up price
  • Sellers outnumber buyers and price falls, often rapidly

The Stage is Set

The stage has been set and the battle between momentum (bullish for stocks) and excessive optimism (bearish for stocks) has begun.

To better assess and gauge the risk/reward potential going forward, I introduced the risk/reward-meter or risk/reward heat map in December.

Risk/Reward Heat Map

Here is how this heat map is compiled: I look at various indicators, studies, signals (ISSs) and calculate their statistical forward return over the next 1, 2, 3, 6, 9, 12 month.

The ISSs include the two examples mentioned above, as well as other ISSs related to sentiment, momentum, money flow, technical break outs (or break downs), certain economic indicators (like the yield curve), seasonality, cycles, etc.

  • ISSs with positive forward returns 80% (or more) of the time are added to the green reward side.
  • ISSs with negative forward returns 50% (or less) of the time are added to the red risk side.

The result is a visual heat map. Below is the first heat map published back in December. Since then, the visual has been refined and dozens of additional ISSs have been added.

The continuously updated heat map is available via the Profit Radar Report.

Technical Analysis

The risk/reward heat map allows us to properly and objectively assess current risk, but it is not a stand alone tool. Why? Risk only becomes reality when price follows.

The S&P 500 futures chart shows that price has been advancing within a trend channel. I am showing the futures chart because it includes over-night activity and reveals price action not seen in the S&P 500 cash chart.

For example, on Tuesday night, S&P 500 futures fell over 70 points or 2% to test trend channel support (this move happened overnight and is ‘invisible’ on the S&P 500 cash chart), but support held and the trend remains up.

Based on the risk/reward heat map, risk outweighs reward for the January/February period, but a break below support is still needed to trigger a deeper pullback.

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.

Comprehensive S&P 500 Update

The S&P 500 has arrived at major trend line resistance (see chart). Will it relapse lower or climb above?

To answer this question, we’ll look at various indicators:

  • Investor sentiment
  • Market breadth & liquidity
  • Seasonality & cycles
  • Technical analysis

Investor sentiment – Obsession with Recession

The August 25 Profit Radar Report pointed out various bearish sentiment extremes – including that google searches for ‘recession’ spiked to the highest level since 2008 – and warned that stocks are likely to rally to flush out investors’ obsession with recession (for more details and chart go here: “Today’s stock market pessimism is a reliable sign of a stock market rebound“).

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 >150-point rally since certainly alleviated recession fears and turned investors more bullish.

The chart below plots the S&P 500 against 6 longer-term sentiment gauges.

The second chart plots the S&P 500 against 4 shorter-term sentiment gauges.

Sentiment summary: Sentiment is not frothy enough where it eliminates the possibility of further gains, but it now is more of a headwind than tailwind and more likely to curb gains and cause a pullback.

Market Breadth & Liquidity

The S&P 500 reached new all-time highs on four of the last eight trading days (November 5 – 14). But, on six of the eight days, more stocks declined then advanced.

There’s weakness ’under the hood,’ and it caused a number of bearish divergences shown on the chart below.

Bearish divergences can be erased quickly, but while they exist, they reveal a measure of weakness often seen prior to pullbacks.

Seasonality & Cycles

In terms of seasonality, the S&P 500 has passed the riskiest period of the year. However, cycles do not agree with the bullish year-end seasonality.

Technical analysis

The chart below highlights all the levels highlighted by the recent Profit Radar Reports:

  • Blue trend line: Potential resistance, but move above will lead to test of purple trend line
  • Purple trend line: Potential resistance, but move above will unlock higher targets
  • Red trend line: Potential resistance, but move above allows for further gains.
    Although the yellow triangle formation cautions that a move above red trend line resistance will not last.

Initial target for any pullback will be the purple trend line. A break below the purple trend line is needed to get lower targets.

Summary

The S&P 500 is at red trend line resistance. A temporary move above (post triangle spike) seems likely, but the risk of a relapse and test of purple trend line support (at minimum) is high. A break back below red trend line resistance (assuming there will be a spike above it) is needed to signal a reversal.

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.

Crowd Psychology: Bears Needed to Get Burned

The Profit Radar Report monitors dozens of indicators to compile a broad-based and educated forecast. All those indicators fall into one of the following four categories:

  • Supply & Demand (Liquidity)
  • Technical Analysis
  • Investor Sentiment (Crowd Psychology)
  • Seasonalities, Cycles & Patterns

The September 2 Profit Radar Report included a detailed analysis of investor sentiment (called the Sentiment Picture). Based on sentiment, the September 4 Profit Radar Report stated that: “A fakeout breakout would burn a lot of premature bears, and may be just what is needed to clear the air for another leg lower.”

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.

Below is a reprint of the entire Sentiment Picture:

August Sentiment Picture (Published September 2, 2019)

The July Sentiment Picture (published August 3) concluded that: “Short-term sentiment gauges are nearing a point where a bounce becomes likely. We’ve seen many bounces turn into spirited rallies (and this may happen again), but longer-term bullishness allows for additional losses after any bounce.”

The S&P 500 found a low the next day, but bounces (thus far) lacked escape velocity and remained within a trading range.

The following longer-term sentiment polls went from bullish to bearish (bearish considering how close the S&P 500 is to its recent all-time high):

  • National Association of Active Investment Managers (NAAIM)
  • Investors Intelligence (II)
  • American Association for Individual Investors (AAII)

The dash green arrows highlight when any of the above-mentioned polls showed similar readings over the past 56 months. Most of them occurred near a significant low.

Since inception of the AAII poll, sentiment (as measured by the AAII bull/bear ratio) was as bearish when the S&P 500 was within 5% of a 52-week high 9 other time (the only such instance in the 21st century was in April 2005). The worst return was 1 month later (S&P 500 down 44% of the time), the best return was 3, 6, and 12 month later (S&P 500 up every time).

According to Lipper, investors yanked more than $40 billion from equity funds over the past weeks (that’s 0.3% of total equity assets) and 2% over the past year. This is the biggest exodus out of stocks since 2016 and nearly as pronounced as in 2002. This is not a short-term timing tool, but strongly suggest that a deeper correction would be a buying opportunity.

The sentiment-based conclusion made last month (“longer-term bullishness allows for additional losses after any bounce”) has become less likely.

A change of character would have to occur for stocks to fall further despite a number of bearish (bearish relative to how close the S&P 500 is to its all-time high) sentiment gauges.

Short-term sentiment indicators are neutral.

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 – Are New Highs Sustainable?

The June 2 Profit Radar Report featured the chart below and stated that: “S&P 500 Futures are down some 15 points in Sunday night’s session and already reached their first target. Aggressive investors afraid of missing out on a bounce (which could turn into something more) may put some money to work.”

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.

Well, the bounce turning into a full fledged rally and it did so quickly. In the process the S&P 500 delivered some impressive price and breadth patterns along the way. For example:

Bullish Developments

  • Yesterday’s (Tuesday, June 4) rally was supported by exceptional breadth, with 81.48% of NYSE stocks advancing. In addition to Tuesday’s strength, Monday saw more stocks advancing (65.03%) despite a 6-point loss. This is generally a positive for stocks.” – June 5, Profit Radar Report
  • Sunday’s PRR showed the spike in new 52-week highs (116 for the S&P 500). Defensive sectors (like staples, utilities, and health care) saw about twice as many new highs as non defensive sectors. Some may interpret this as a bearish ‘risk off’ rally, but historically that’s not been the case.” – June 12, Profit Radar Report
  • Retail investors polled by the American Association of Individual Investors (AAII) are unusually bearish (below 30% bulls for 5 consecutive weeks). When this crowd has been this bearish during a bull market, the S&P 500 was higher 3 months later every time.” – June 16, Profit Radar Report
  • By one measure, hedge funds have the smallest exposure to equities since 2013. This is highly unusual considering that the S&P 500 is only 2% from its all-time high. Since 2009, when hedge funds were this bearish, the S&P 500 was higher 3 months later 90% of the time.” – June 16, Profit Radar Report
  • My favorite liquidity indicator reached new all-time highs this week. Since the beginning of this bull market in 2009, the NYC a/d line reached new all-time highs before the S&P 500 eight other times. On average, it took the S&P 45 days to reach a new high or all-time high (the 2007 all-time high was not exceeded until April 10, 2013). 1 year later, the S&P 500 was higher every time. 2, 3, 6 months later, the S&P was higher 7 out of 8 times.” – June 16, Profit Radar Report

Bearish Factors

The Elliott Wave Theory pattern is still not distinctly bullish. I published four different scenarios in the June 2 Profit Radar Report. The most bearish one was eliminated on June 5. Two of the three remaining ones projected new all-time highs, and the third allowed for new all-time highs.

Shown below is one of the 3 possible scenarios (published in the June 2 Profit Radar Report). The second one has a trajectory similar to this one, and the third one is much more bullish.

Short-term Factors

As the first chart shows, RSI-2 is over-bought and RSI-35 is lagging, so technical indicators allow for some short-term risk. The May all-time high should provide some resistance, but a rally towards and into 3,000 is possible.

I’ll be watching the next inflection zone to see if the bullish developments outlined above will overpower the lack of a clearly bullish Elliott Wave Theory pattern.

Continued updates and projections 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

Last week, the Profit Radar Report stated that: “We would be interested to buy if the S&P 500 drops below 2,810 and subsequently rallies back above 2,830. Although we don’t know how much the S&P would rally, we want to have some skin in the game.”

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.

Considering that the S&P closed at 2,891.31 last Friday, a buy limit at 2,810 seemed ridiculous, but Monday saw the S&P drop 90 points.

Here is why 2,810 was an important level to watch:

  • Long-term trend channel support (going back to 2009)

  • Short-term trend channel support

On Monday (May 13), S&P 500 Futures briefly dipped below and right away snapped back above the lower trend channel line (at 2,810, green arrow). This price pattern along with the bullish RSI-35 divergence suggested some kind of low was struck.

Based on Elliott Wave Theory, this bounce should run into trouble somewhere around 2,900.

Price and momentum studies are not nearly as bearish as Elliott Wave Theory, so stocks could also move higher than expected.

The elevated CBOE Equity Put/Call Ratio (5-day SMA currently at 0.76, see chart above) certainly allows for further up-side (readings above 0.7 are generally seen near lows).

Regardless of the longevity of this bounce, the reversal at the long-and short-term trend channels at 2,810 provided an opportunity to gain some exposure at low prices (our actual buying price ended up being 2,820.21), which is better than being tempted to chase price at higher and riskier levels.

Continued 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. 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.

 

Finding an Edge in a Dull Stock Market

How to gain an edge:

A bear jumps out of a bush and starts chasing two hikers. They both start running for their lives, but then one of them stops to put on his running shoes. “What are you doing? You can’t outrun a bear!” says one hiker, the other one replies: “True, but I don’t have to outrun the bear; I only have to outrun you!”

What’s the point? The market is the composite opinion of all other investors. In essence, you beat ‘the market’ (aka the ‘bear’) by knowing more than your fellow investors (aka the other ‘hiker’). Knowledge is the edge.

I consistently follow dozes of different indicators, which fall into one of these four categories:

  • Supply & demand (liquidity)
  • Technical analysis
  • Investor sentiment
  • Seasonalities & cycles

When all or most indicators point in the same direction, there’s a good chance stocks will move in that very direction. I call this a high probability trade.

The last such signal occurred in December, when liquidity, sentiment, technicals and seasonality pointed higher. The bullish weight of evidence, at that time, was discussed in this article: Is the Bear Market Over?

Since then, the S&P 500 has gained more than 20%. How much further can stocks rally?

Investor Sentiment

Some sentiment gauges show elevated optimism, but considering the strong Q1 2019 performance, overall sentiment is surprisingly subdued. Shown below is a selection of six different sentiment indicators. None of them shows an extreme reading. Without extremes, sentiment doesn’t provide an edge. It is possible for stocks to move higher.

Technical analysis

Short-term: The S&P 500 is nearing over-bought and is facing mild resistance. The chart below highlights trend line resistance and horizontal volume resitance (volume by price not date) for the S&P 500 futures. Now doesn’t appear to be the time to chase price.

Longer-term: The trend is your friend, but the risk of being ‘un-friended’ exists, and it’s difficult to find low-risk entries in an market that’s driven by momentum, but on the edge of being over-extended.

Elliott Wave Theory, the most exotic tool in the technical analysis tool box, is up to interpretation and of little help (more details here).

Supply & demand

Liquidity continues to flow into US stocks. Uncertainty in the European Union and money on the sidelines in the US are a likely cause for the continued inflows. My favorite liquidity indicator suggested throughout 2016, 2017, and 2018 that new all-time highs will be reached, and that message continues to be the same.

Seasonality & cycles

Bullish mid-term election year seasonal forces, discussed here, appeared late, but they did show up.

Based on mid-term seasonality, more gains are likely, but general S&P 500 seasonality is entering a higher risk window.

Cycles are conflicting.

Summary

There are times when most indicators point in the same direction (as in December), making a directional forecast easy.

And there are also times when indicators are in conflict, such as now.

That doesn’t mean we are left entirely clueless. Based on the market’s pattern in early March, we expected the S&P 500 to see-saw across obvious resistance at 2,815 and secondary resistance at 2,830. The S&P spent two weeks doing just that. But in order to unlock lower targets, it would have had to break below 2,785, which it didn’t.

Periods of relative uncertainty are always frustrating, but two things should be kept in mind:

  1. It’s good to know when visibility is limited and act accordingly. Would you trust on Uber driver who’s speeding in the fog? Can you trust an analysts who’s ignorant of ,or over confident in periods of uncertainty? Knowing there is no edge, is an edge in itself.
  2. Periods of uncertainty always end!

And when certainty returns, the Profit Radar Report will be there.

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.

US Treasury bonds and notes have been range bound for over six months.

There is reason to believe that Treasuries, especially 30-year Treasuries bonds, will soon break higher. Why?

Smart Money

Commercial hedgers – a group of traders considered the ‘smart money’ – are buying Treasuries across the bond curve in anticipation of higher prices.

The chart below shows commercial hedgers’ aggregate net exposure to 5, 10, 30-year Treasuries (blue graph).

As the green arrows show, hedgers’ bullish bets are generally vindicated by a period of rising prices.

Below is a list of ETFs likely to benefit from the bullish developments seen by commercial hedgers. Long-term maturities are more dynamic and subject to bigger price moves.

  • iShares Short Treasury Bond ETF (NYSEArca: SHV)
  • iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY)
  • iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI)
  • iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF)
  • iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT)

Seasonality

The green chart insert shows that seasonality is generally bullish for the remainder of the year.

A move above the red resistance lines is necessary to unlock an up side target of 129 – 133. This up side target is based on Fibonacci retracement levels (50% and 61.8%) and an open chart gap.

Sustained trade below 120 would put any rally on hold.

Above analysis was initially published in the August 26 Profit Radar Report. 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.

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 profile 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 Newsletter to get actionable ETF trade ideas delivered for free.