3 Strike Wall Street Law – QE Bull Market Only One Strike away From Knock Out

We all know the ‘three strikes and you’re out’ rule. Historic data (based on the 1987, 2000 and 2007 tops) strongly suggests that every bull market also follows the three strikes rule. This bull is one strike away from being over and out.

“Dead man walking” is an expression used by prison guards as the condemned were led to their execution.  Is the stock market a ‘dead bull walking’?

I asked that question back in February right after completing my 2014 S&P 500 forecast.

At the time there was no sign of a major top yet, but since no bull market goes on forever, I published a 3-step quick guide on how to discern a dying bull market (or the formation of a major market top).

Based on historic data, a bull market dies in three stages:

3 Stages of A ‘Dying’ Bull Market

Psychological process: Finding value becomes a challenge and investors become pickier.
Technical manifestation: The number of stocks hitting new 52-week highs or the percentage of stocks above the 50-day SMA slides lower, while prices climb higher.

Psychological process: Finding value becomes more challenging and investors feel attracted to safer large cap stocks.
Technical manifestation: Small-and mid-cap stocks are lagging large cap stocks.

Psychological process: ‘Smart money’ is selling stocks to ‘dumb money.’
Technical manifestation: Selling pressure increases behind a façade of rising large cap indexes. Declining stocks outnumber advancing stocks.

Back in February the S&P 500 was in stage 1. It was basically graying around the temples, but still a safe distance away from the coffin.

How About Today?

Here’s the pulse of today’s market:

Value is harder to find  and investors are becoming pickier. On January 14, 2013, 89.54% of NYSE stocks traded above their 50-day SMA. Only 46.24% of NYSE stocks traded above the 50-day SMA at the most recent S&P 500 high on September 19.

Stage 1: Complete

Small cap stocks are under performing. The chart below plots the S&P 500 against the IWM:IWB ratio. IWB represents the iShares Russell 2000 (small cap) ETF. IWB represents the iShares Russell 1000 (large cap) ETF.

The ratio shows just how badly small caps lag behind large caps, but it also shows why this is only stage 2 of 3 of a dying bull market: Despite small cap weakness, the S&P 500 is still trading near its high.

Stage 2: Complete

Stage 3 – One Foot in the Coffin?

During the third and final stage, stocks move from strong hands (smart money) to weaker hands (‘dumb’ money).

This gradual shift takes many months and may still deliver sizeable gains and even blow off frenzies.

Nevertheless, the internal deterioration of stage 3 divergences are terminal.

Being familiar with the three stages of a dying bull market protects investors against turning bearish too soon. Premature bears leave money on the table and/or lose their pants going short.

My favorite ‘third stage indicator’ correctly foreshadowed the 1987, 2000 and 2007 bear markets. It also telegraphed that any correction since 2010 was to be followed by new bull market highs.

This indicator currently shows a fledgling multi-week divergence, which – if not reversed – may have put an expiration date on this bull market.

A detailed look at this historically accurate ‘third stage indicator’ is available here:

The Missing Ingredient for a Major Bull Market Top

Simon Maierhofer is the publisher 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.

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

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Major Investor Sentiment Divergence Confuses S&P 500

More than ever before, investors are looking at various sentiment gauges to get a pulse on the market. After all, excessive optimism correctly foreshadowed every recent crash or correction. But, there’s a big sentiment divergence right now.

The 2000 and 2007 market crashes, and even the 2010 and 2011 corrections were preceded by excessive investor optimism.

Well, once bitten, twice shy. Investors are trying their darndest not to make the same mistake again. Nobody wants to get left holding the bag … again.

That’s why investor sentiment indicators are more closely monitored and written up today than at any other time (at least it feels that way).

How optimistic or pessimistic are investors right now?

Frankly, it depends on who you ask.

If you ask investment advisors and newsletter writers (as Investors Intelligence – II – does every week), you’ll get bullish forecasts from 60.2%.

If you ask retail investors (as the American Association for Individual Investors – AAII – does every week), you find that only 37.20% of ‘average Joe’ investors are bullish.

This is unusual. How unusual?

The chart below plots the S&P 500 against the percentage of bullish advisors (II), the percentage of bullish investors (AAII) and the difference between the two (II – AAII).

We saw a similar discrepancy between retail investors and advisors in April 2014, but the current spell of differing opinions is the longest stretch since at least the 2007 market top.

Prior instances since 2012 led to smaller pullbacks followed by continued gains.

However, the sample size is too small to draw any high probability conclusions.

Here are two additional factors worth considering:

  1. Overall investor sentiment (a composite of six different sentiment indicators) is at or near a bullish extreme (today’s Sentiment Picture – published by the Profit Radar Report – contains a detailed look at six different sentiment gauges).
  2. The S&P 500 is struggling to move above major resistance around 1,955. In fact, this resistance is so significant that the 2014 S&P 500 Forecast (published by the Profit Radar Report) projected a May/June high at 1,955 on January 15, 2014.

We have yet to see sustained trade above 1,955. Obviously, the market considers this resistance cluster important.

What are the odds of the S&P 500 reversing here? Could this be a major market top?

More details are available here: Updated 2014 S&P 500 Forecast

Simon Maierhofer is the publisher 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.

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

This Curious Development Keeps The Bull Market Alive (Hint: It’s Not QE)

To say that this QE bull market is persistent would be an understatement. Stocks have rolled over bearish setups again and again. In fact, such bearish forecasts, promoted by the media, are a key reason why the bull is still alive.

On September 27, 2013, I wrote an article titled “QE haters are driving stocks higher.” It started out like this:

Stubborn bearish sentiment is one of the key reasons why stocks continue to rally, essentially giving bears the finger. Bears can’t stop the QE liquidity waves. Perhaps it’s time to stop fighting them and learn how to surf them. Bears, if you are looking for someone to blame for having been on the wrong side of the trade – look in the mirror.”

The same article featured the chart below, which shows the S&P 500 (SNP: ^GSPC) rising and the number of stock market bulls falling. Yes, this could be considered a ‘wall of worry,’ and we know what markets do with a wall of worry (they climb it).

From September 27, 2013 to today, the S&P 500 has tagged on 250 points.

Fast forward to May 2014. Here’s what the media said:

  • CNBC: “This chart says we’re in for a 20% correction” – May 1
  • CNBC: “I’m worried about a crisis bigger than 2008: Dr Doom” – May 8
  • MarketWatch: “Stocks are telling you a bear market is coming – May 15
  • Bloomberg: “Tepper: ‘Hold cash, market’s dangerous’” – May 15

Since May the S&P 500 (NYSEArca: SPY) has rallied as much as 100 points. There’s a pattern developing: Fear mongering = higher stock prices.

Here’s what the media says today:

  • Barron’s: Just how overbought is the S&P 500? – June 10
  • MarketWatch: 3 reasons why the Dow shouldn’t be at 17,000 – June 10
  • CNBC: Cramer: Prepare for stock declines – June 11
  • CNBC: This chart shows the market to be a ‘ticking time bomb’ – June 12

Persistently bearish media sentiment continues to extend this bull market’s life span. Will the S&P 500 rally another 100, 200 or 300 points from here?

Such a move would certainly fool the financial press (which the market loves to do), but there’s one reason why stocks, despite the media’s fear mongering, may take a breather here.

The 2014 S&P 500 forecast projected a more significant high at 1,950, which is where trade stalled this week. Why is S&P 1,950 significant?

The details of the original 2014 S&P 500 forecast at a recent update are available here:

Updated 2014 S&P 500 Forecast

Simon Maierhofer is the publisher 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.

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

Is it Too Late to Jump into Stocks? Watch S&P Reaction to This Inflection Point

The S&P 500 has rallied strong and most professional money managers missed that move. Is it too late to jump back on? How the S&P 500 reacts to this inflection point should provide helpful clues.

45% of airplane accidents occur during takeoff or landing. Why?

That’s when the airplane is in closer proximity to the ground, the speed is slower and more airplanes are in the immediate airspace.

Similarly, most S&P 500 (SNP: ^GSPC) reversals (minor and major) occur at support or resistance levels. Why?

That’s when stocks are in close proximity to ‘supply and demand hubs,’ areas prone to additional buying or selling pressure.

The S&P 500 is about to hit such a ‘supply/demand hub’ or resistance level.

The S&P 500 chart below shows a trend channel that has contained prices for 28 months.

The black arrows mark the anchor points of this channel. The red arrows highlight prior meetings of this channel.

The two biggest corrections (if you can call them big) of the last year occurred in May 2013 and January 2014 right after meeting (or nearly meeting) the upper channel line.

In late December 2013, the S&P exceeded the channel by ten points and closed above it for four days, so we need to allow some wiggle room. The channel is at S&P 1,883 today and ascends about 0.75 points per day. Round number resistance is around S&P 1,900.

The yellow line is the ideal S&P 500’s path outlined by the Profit Radar Report’s 2014 S&P 500 Forecast (published on January 15, full 2014 Forecast available to subscribers).

Although the timing wasn’t perfect, in terms of form the forecast is on track.

A longer-term S&P 500 analysis independent of this particular channel suggests that the S&P 500 rally is not yet over.

In fact, unbelievably though, it is even possible that the rally may accelerate. Another option sees a shakeout correction followed by a resumption of the rally.

The ‘supply/demand hub’ (and stocks’ reaction to the hub) around trend channel resistance should provide further clues about the next move.

A detailed projection of the two near-term scenarios along with the full 2014 Forecast is available via the Profit Radar Report.

Simon Maierhofer is the publisher 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.

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

An Updated Look at The Full 2014 S&P 500 Forecast

Publishing any type of actionable market forecast always provides easy ammunition for criticism. Nevertheless, what use is there for all kinds of indicators if they aren’t used to formulate a forecast? Here’s an update to the normally exclusive 2014 S&P 500 forecast.

On January 15, I published my full and complete 2014 S&P 500 forecast for subscribers of the Profit Radar Report.

It is impossible to get a full-year forecast correct, so publishing a detailed forecast with an actual projection of the ideal S&P 500path really provides easy ammunition for ‘you were so wrong’ criticism.

But, if you can’t take criticism as a market forecaster, you are in the wrong business.

Since I follow so many indicators (technical analysis, chart patterns, Elliott Wave Theory, support/resistance levels, investor sentiment, money flows, seasonalities, cycles, etc.) it would be a cowardly waste of research not to ‘puzzle’ them together for a full-year big picture forecast.

Obviously, it wouldn’t be fair to paying subscribers to publish the entire forecast for free, but below is an interesting tidbit of the 2014 forecast.

The S&P 500 chart shows important support (green) and resistance levels (red).

The key resistance level for the first quarter of 2014 was S&P 1,855.

The January 5 Profit Radar Report stated: “Sentiment and midterm election year seasonality suggest stocks are ripe for a multi-week correction, but technicals have yet to turn bearish. Elliott Wave Theory would easily allow for another small down – up sequence and larger scale high, later on in January. Fibonacci projection resistance going back to 2002 is at S&P 1,855.”

The S&P 500 topped at 1,851 on January 15 and fell below 1,740, exactly as outlined by the yellow projection, published in the 2014 forecast. Thereafter the S&P 500 rallied to new all-time highs, also as outlined by the yellow projection.

For the past week again the S&P 500 has struggled to overcome 1,855 and now has to prove it can stay above. This particular Fibonacci resistance is a Fibonacci projection level that goes all the way back to the 2002 lows.

As you can see, the form (and corresponding price levels) of the V-shaped correction/recovery pattern has been spot on, but the timing was off.

I didn’t expect the low until around mid-March.

The eventual high could mark a major top. Why? Two monster long-term stock market cycles actually cross paths this year and suggest a strong double-whammy market top (all details and charts discussed in the 2014 forecast).

Once we get to new all-time highs, we’ll have to see if any such high sports the tell-tale signs of a major top (I’ll be looking at certain bearish divergences that have helped identify similar tops in the past).

What about the short-term?

Up until last week the S&P and Dow Jones adhered to my short-term outlook, which proposed a strong rally from S&P 1,740 to 1,830, quite well.

However, the new all-time highs required an adjustment. The original short-term projection along with the adjusted short-term outlook for the S&P 500 (NYSEArca: SPY) and Dow Jones is available here, for free.

A Revised Short-term S&P 500 Outlook

Simon Maierhofer is the publisher 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.

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