Week Ahead for the S&P 500 – QE3 vs. Worst Week of the Year

Last Friday was triple witching and the week after triple witching is notoriously bearish. How bearish? The S&P 500 Index has closed down 22 out of 26 weeks since 1990 (82%) with average maximum losses about 5x as high as average maximum gains.

Historically short sellers of stocks have an 82% chance of making money this week. However, the S&P 500 Index failed to registered a bearish price/RSI divergence at its September 14 recover high.

All recent highs that were followed by a decline of around 10% or more were foreshadowed by a bearish RSI divergence (I use a unique RSI setting to spot divergences – see chart below). So even a bearish outcome this week would likely be followed by higher prices later on.

The purpose of the Profit Radar Report is to identify high probability trading opportunities. With the conflict between bullish technicals and bearish seasonality, there obviously is no high probability set up right now.

One of two things will have to happen to create a better set up:

1)   Prices decline to trend line support to present a possible buying opportunity.

2)   Prices spike quickly to a new high accompanied by a bearish price/RSI divergence to set up a possible shorting opportunity.

Non-leveraged ETFs that can be used to trade the above set up are the S&P 500 SPDR (SPY) and Short S&P 500 ProShares (SH).  Leveraged options include the Ultra S&P 500 ProShares (SSO) and UltraShort S&P 500 ProShares (SDS).

An early tip off to the next developing set up may be a developing triangle. A break out above or below triangle support/resistance should give us a measured target, which may quite possibly set up an even better opportunity than the actual triangle.

Continuous updates and trading opportunities are provided via the Profit Radar Report.

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QE3, Apple, and Rekindled Love for Stocks – How to Use Technicals to Navigate a Confusing Stock Market

This week is jam-packed with news. Apple, Bernanke, and Germany’s Constitutional Court are slated to make potentially market-moving announcements. Here’s one simple technical tip that will help navigate a confusing situation.

What does Apple’s Tim Cook, the Fed chairman Ben Bernanke, and Germany’s Constitutional Court have in common? They are all expected to announce much anticipated news this week.

Wednesday, September 12. Apple

Apple is putting the finishing touches on the Yerba Buena Center for the Arts in San Francisco. That’s where a select few will (or are expected to) lay eyes on the new iPhone 5.

Apple shares (AAPL) didn’t quite reflect fans’ excitement as shares dropped 2.6% on Monday.

This drop triggered a bullish percentR low-risk entry against the 20-day SMA. Just because this is called a “bullish” low-risk entry doesn’t mean it’s time to buy.

Apple shares tend to move higher when new products are revealed and correct thereafter (with the exception of the April 2012 iPad 2 unveiling, which coincided with a larger drop, instead of a rally).

A rally parallel to Apple’s event would likely provide a good set up to sell AAPL shares. A drop below the percentR trigger level will also suffice if we don’t see the customary Apple release spike.

Short selling a stock is not for everyone. But Apple accounts for 20% of the Nasdaq-100 index (corresponding ETF: PowerShares QQQ) and shorting the Nasdaq-100 via short ETFs like the Short QQQ ProShares (PSQ) is a more accessible way to benefit from falling Apple prices.

Wednesday, September 12. German Constitutional Court Ruling

The European Stability Mechanism (ESM) is the facility anointed to distribute European “bailout cash” to struggling euro zone members.

The ESM has many flaws (one of them is lack of funding) and one of them may prevent its VIP from playing “money ball.” The German Constitutional Court will rule over the legality of participating in the ESM on Wednesday.

Thursday, September 13. FOMC and QE3?

The Federal Open Market Committee (FOMC) will meet Wednesday/Thursday this week.

The S&P 500 Index (SPY) is points away from a 55-month high and I don’t think that launching QE3 right now makes sense, but I don’t know what’s going on behind closed FOMC doors and the general consensus is that the Federal Reserve will announce QE3 on Thursday.

Similar announcements have resulted in large moves for stocks, Treasuries, currencies, gold and silver.

Combat Uncertainty with Technicals

What does the S&P 500 chart tell us about stocks? If the chart could talk it’d say that now is “rubber meet the road” time.

The S&P is close to key resistance at 1,440 (this month’s r1 is at 1,437) which the Profit Radar Report has been harping about. 1,440 is the most important resistance in the neighborhood. It separates bullish bets from bearish ones and provides directionally neutral low-risk trade opportunities (my bias is to the down side, which may require waiting for a spike above 1,440 followed by a move below).

Various news events suggest that this week is important. Technicals agree. Use important support/resistance levels to put the odds in your favor.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

Using Asset Class Correlations to Predict Stock Market Moves

Every day about a billion shares of stocks exchange hands on the New York Stock Exchange , but stocks are not the only asset class on the planet. Currencies and bonds are part of the same financial eco system, and we shouldn’t ignore their effect on stocks.

There’s a Bavarian saying that encourages people to “look beyond the edge of their own plate.” Translated in investment terms this means to expand your horizon and look at more than just one asset class.

Several times over the last couple of months the S&P 500  (SPY) has been declared “dead”. In fact, a recent CNBC headline said that: “Bill Gross is latest to join ‘stocks are dead’ club.”

The Fed could have jolted the S&P back to life with a dose of QE3, but decided not to. Against all odds, rather than rolling over, stocks have sprung back to life – a case of “dead man walking.”

On July 25, with the S&P trading as low as 1,331, a special Profit Radar Report outlined why stocks are not ready to decline just yet.

The key to this bold forecast was found in the correlation between various asset classes. Below are excerpts from the special July 25 Profit Radar Report.

July 25, Special Report: Asset Class Correlations

Some asset classes boom while others bust and vice versa. For example, bond prices typically rise when stock prices fall. Those types of asset class correlations should be taken into consideration for any market forecast.

Individual outlook for long-term Treasuries: Long-term T’s are butting up against long-term resistance while relative strength (RSI) is lacking price. This suggests that long-term Treasuries are in the process of topping out. Falling Treasury prices typically means rising stock prices.

Individual outlook for the euro: The euro has been trending down since March 2008 and is currently trading just above the June 2010 low. Although euro prices dropped below the June 1, 2012 low, RSI is solidly above the June 1 low. This suggests that the euro is trying to find a bottom that lasts for more than just a few days. Any bounce could gather steam if the euro is able to move above resistance. A strengthening euro is usually good for stocks.

What this means for stocks: If the euro rallies and long-term Treasuries decline, stocks should move higher or at least have a hard time declining.

The chart below shows how the iShares Barclays 20+ Treasury Bond ETF  (TLT) and Currency Euro Trust (FXE) perform during times when the S&P is in an extended up or down trend.

With Treasuries near a top and the euro near a bottom, stocks should rally or at the very least have a hard time declining.

Sentiment Picture – Stocks are Not Ripe for a Prolonged Decline

Sentiment readings have sent conflicting messages. The VIX is near danger levels for the S&P 500 while the AAII crowd is almost record bearish (which is bullish for stocks). Here’s the current sentiment picture and what to make of it.

Investor sentiment is closely related to money flow and therefore an important indicator. How is sentiment related to money/cash flow overall liquidity?

Investor sentiment tells us how investors feel about stocks. If they are bullish, we assume that they own stocks. If bullishness reaches an extreme, we know there’s not much more cash left for buying.

If investors are bearish we assume they are sitting on a mountain of cash. The cash will go to work eventually and drive stocks up.

There are different ways to measure investor sentiment.

The CBOE Volatility Index (VIX) uses S&P 500 index options and projects the market’s expectation of 30-day volatility. Readings around 16 or below are indicative of investor complacency and tend to result in an up tick of volatility and lower stock prices.

The Equity Put/Call Ratio represents a proportion between all put and call options purchased on any given day. A low put/call ratio means that investors are buying more calls than puts. This is a reflection of bullish sentiment; therefore readings around 0.6 tend to coincide with market tops.

A high put/call ratio means that investors are buying more puts than calls. This is indicative of fear. Readings of 0.9 tend to occur at the end of down trends.

The sentiment survey conducted by the American Association for Individual Investors (AAII) reflects how individual investors feel about stocks: bullish, bearish or neutral.

Investors Intelligence (II) polls investment advisors and newsletter writers. Their opinions are categorized as bullish, bearish and correction.

There are other sentiment and cash flow measures, but those four offer a balanced few of sentiment.

The Profit Radar Report always monitors sentiment and publishes a detailed sentiment report at least once a month. The chart below was published (available to subscribers only) on July 20, 2012.

The VIX was trading below 16 (bearish for stocks) while AAII investors were extremely bearish (bullish for stocks). II investment advisors on the other hand were becoming more bullish as the AAII crowd turned bearish.

Unfortunately, sentiment did not provide a clear signal then (it still doesn’t), but it showed a) that stocks may not be able to decline for good and b) that there was no high probability trade set up. This prevented investors from making trades they might regret afterwards. Based purely on sentiment, choppy market action may continue.

 

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 20th 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.