Has the Market Fooled Enough Bears to Tank?

By some measures, investor sentiment turned extremely bearish last week.

Only 20% of retail investors surveyed by the American Association for Individual Investors (AAII) were bullish on stocks, the lowest level since April 2013.

Headlines like the following dominated financial news sites:

  • “Wedbush: Stock market is at major top” – Yahoo!Finance
  • “Stockman: Stocks and bonds will crash soon” – Yahoo!Finance
  • “Low VIX points to tumble ahead for stocks: UBS” – Barron’s
  • “Irrational exuberance is dooming the stock market” – MarketWatch
  • “Beware: Bull market flashing warning signs” – CNBC
  • “S&P 500 rally thins and it’s worrying market analysts” – Bloomberg
  • “Why you should care that Robert Prechter is warning of a ‘sharp collapse’ in stocks” – MarketWatch

The June 10 Profit Radar Report commented regarding those developments (and especially the last two headlines):

Prechter has predicted a sharp collapse literally every single month since late 2009, and it’s unlikely to occur when you see it featured on the Yahoo!Finance homepage.

We’ve been watching the rally thin and become narrower since April, but when the media starts to pick up on such nuances, the information usually isn’t worth too much anymore (an interesting bullish twist of this thinning market was discussed in this June 9 article).

There appear to be too many bears out there right now to send stocks significantly lower. A push to 2,140+ may be needed to flush them out.”

If you enjoy quality, hand-crafted research, >> Sign up for the FREE iSPYETF Newsletter

Perhaps somewhat anecdotally, but nevertheless telling, my article titled “Will the market rally to flush out a horde of premature bears?” (published on July 12 on MarketWatch) got very little attention. It just wasn’t bearish enough to attract attention.

Two of my other articles (with neutral or somewhat bullish titles) on the other hand quickly made it into the top 5 most popular article list at MarketWatch.

I’m no genius, but I’m learning that the market is highly unlikely to crash when everyone expects it. A watched pot doesn’t boil.

After all, this is not the first time we’ve been there. I.e. Sep 18, 2013: Who or what can kill this QE bull Market? or July 25, 2014: Bears cry wolf – Everyone wants to be the next Roubini.

The 4-day, 50-point S&P 500 rally has no doubt caused an uncomfortable squeeze for committed bears. I would like to see additional gains, which would likely set up a nice opportunity to short the S&P 500 into July/August.

This opportunity will likely come at a time when fewer people expect it.

A recent article highlighted the similarities between 2011 and 2015 (2011 saw a 20% summer meltdown). Sunday’s Profit Radar Report featured a revealing investor sentiment comparison between June 2011 and June 2015.

You may access this comparison instantly here. It may also be the topic of an article for next week.

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 and 17.59% in 2014.

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

If you enjoy quality, hand-crafted research, >> Sign up for the FREE iSPYETF Newsletter

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.

S&P 500 up, but Russell 2000 up More – Is this Role Reversal Significant?

Here’s the definition of a bandwagon: “A particular activity or cause that has suddenly become fashionable or popular.” Here’s the latest bandwagon idea: Short the Russell and S&P 500, because the market is going to crash.

Here’s the broken record story from last week: Small cap stocks are down hard, which allegedly means a market crash is straight ahead.

This story infected the financial media like a contagious virus. To wit:

“Small caps’ slide reflects a market in trouble” – MarketWatch
“More pain ahead for small caps” – Barron’s
“Small caps flash warning” – Wall Street Journal
“Hedge funds short small caps most since ‘04” – Bloomberg
“Small cap stocks send bear-market signal” – MarketWatch

Fact vs. Myth

True Fact: The Russell 2000 lost as much as 10% while the S&P 500 traded within striking distance of its all-time high.

True Fact: The Russell 2000 closed below its 200-day SMA for the first time in 17 months.

Myth: This foreshadows a market crash. A look at similar historical patterns, where the S&P 500 (NYSEArca: SPY) trades well below the Russell 2000, shows only a mild bearish bias.

The May 7 Profit Radar Report featured the above chart along with the following commentary:

Today, for the first time since November 21, 2012, the Russell 2000 closed below the 200-day SMA.

Many investors follow the 200-day SMA. A close below it is generally considered a sell signal and/or bear market. The path of least resistance would be to jump on the sell signal bandwagon, but that’s premature in my humble opinion.

The Russell support cluster at 1,100 – 1,080 seems more important than the 200-day SMA at 1,115.

The R2K recovered most of its intraday losses today, which created a hammer candle As the chart insert shows, a similar hammer candle preceded the prior two bounces.

The odds for a bounce – at least enough of a bounce to fool premature bears – are decent.”

It wouldn’t be prudent to chase the bounce. Why?

– This bounce only needs to be enough to fool shorts.

– Once the weak shorts are flushed out, the financial media may actually be right about a bigger correction (but by the time the shorts are flushed out, the media will probably have turned bullish).

– There are 3 strong reasons  to expect the ‘May blues’ or ‘summer doldrums,’ just not quite yet. More details here:

S&P 500: 3 Reasons to Expect the May Blues … But Not Yet

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.

What Triggered the Stock Market Rout? How Long Will it Last?

The S&P 500 has corrected more than 5% and the financial media is quick to pretend that it saw the lousy 2014 start coming. Here’s the media’s real time (embarrassing) assessment of the ‘expected’ rout along with what’s next.

Hindsight is 20/20 and the financial media is quick to point out that the ‘long awaited correction’ has finally arrived (financial tabloids morphed from stock market cheerleader to doomsday sayers in less then a week).

Here’s the media’s actual real time wisdom expressed in five headlines:

Reuters: “Big Year Ends with Wall Street Hopeful for 2014” – December 27, 2013
MarketWatch: “Wall Street Sees S&P 500 rising 10% next Year” – December 27, 2013
Barron’s: “Morgan Stanley’s Adam Parket: 2014 in 2014 for the S&P 500 – December 27, 2013
CNBC: “Jeremy Siegel: Dow Jones to 18,000 in 2014” – December 31, 2013
CNBC: “Dr. Doom Roubini Gets Bullish on Global Economy” – January 2, 2014

It is still possible that the S&P 500 will rise 10% this year. The S&P may even rally to 2,014 as the Dow Jones (DJI: ^DJI) climbs to 18,000.

But, nothing goes straight up. A German saying warns that: “Everything’s got an end, only sausages have two” (only Germans can wrap up wisdom and sausages in the same sentence).

Running Out of Fuel

Like a fire, a stock market rally needs fuel in the form of new buyers. Stocks can’t rally without buyers.

The December 20 Profit Radar Report featured the composite sentiment / S&P 500 chart shown below and warned:

The problem with excessive bullishness is that it causes investors to go all in. Based on the above polls, investors are fully invested, or nearly so. A fully invested person can only do one of two things: hold or sell. Neither action buoys prices. Based on current data, it looks like bullish sentiment will catch up with stocks in January. This should cause a deeper correction.”

The January 15 Profit Radar Report stated that: “The S&P 500 is closing in on technical resistance at 1,855 and we are alert for a reversal.

Will the Rout Last?

A number of early indicators suggest that 2014 will be a tough year.

The tough year is just beginning, but the Profit Radar Report’s 2014 Forecast stated that: “A Q1 correction may find support at 1,746 – 1,730,” which is where the S&P 500 (NYSEArca: SPY) closed on Monday.

This may spark a counter trend rally, but will likely lead to even lower levels.

From Rout to Bear Market?

Since the mid 1970s the S&P 500 and Dow Jones have precisely adhered to two very reliable long-term cycles. Every cycle has seen a major high or low. For the first time in 14 years, both cycles coincide and project a major high in 2014 (we all know what happened 14 years ago). Here’s a detailed look at the two cycles and their message:

7-and 14-year Cycle Project Major Market Top in 2014

Simon Maierhofer is the publisher of the Profit Radar ReportThe 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.

Dow 16,000! Headline Indicator Sways Into Bearish Territory

Is Dow 16,000 possible. Sure. It’s less than 8% away from the April all-time Dow high. But, the mere fact that Dow 16,000 is predicted by one of the most followed money polls, suggests that (best case scenario) getting there won’t be easy.

How do fish get caught? They open their mouth. How do investors get hosed? They follow the crowd.

This rather reliable rule of thumb (don’t follow the crowd) has been distorted by the Fed’s quantitative easing. Yes, prior to QE, investor sentiment used to be a rather reliable contrarian indicator.

Nowadays some sentiment indicators have to be taken with a grain of salt and subjected to additional scrutiny as the Fed has taken the edge off extreme readings and their contrarian implications.

Personally, I like to take a look at the composite sentiment picture made up of sentiment polls, money flows and my own personal headline assessment.

My headline assessment includes projections like last weekend’s Barron’s “Dow 16,000” cover. Here’s what Barron’s wrote:

The stock market isn’t the only thing that has set records this spring. Barron’s semiannual Big Money poll of professional investors also is setting a record — for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks — an all-time high for Big Money, going back more than 20 years. What’s more, about a third of managers expect the Dow Jones industrials to scale the 16,000 level by the middle of next year.”

Barron’s publishes a magazine to make money and to make money you need to write about stuff people like to read. Bullish news does the trick right now. This suggests that a great many of investors are back into stocks, now hoping for higher prices and looking for ‘evidence’ confirming their bias.

That’s not good news for the bulls. In all fairness, it has to be said that Barron’s has gotten their forecasts right a few times recently.

In October 2012, Barron’s predicted new highs and the February 9, 2013 front cover shouted: “Stock Alert! Get ready for a record on the Dow,” and rubbed in the four words every investor likes to read. “We told you so,” and continued: “In October, we predicted the Dow would pass its 14,165 record by early this year. Now we’re just 1% short. Expect a breakthrough soon.”

But Barron’s had its ‘prime contrarian indicator moments,’ such as: “Is $5000/ounce the new target in gold’s run?” in August 2011 or its ueber bullish 2007 big money poll.

It has to be noted that despite bullish sentiment poll results earlier this year, the media was extremely bearish. The March 10, 2013 Profit Radar Report commented as follows on the lack of media enthusiasm:

The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point out the ‘elephant in the room’ – stocks are only up because of the Fed. Below are a few of last week’s headlines:

CNBC: Dow Breaks Record, But Party Unlikely To Last
Washington Post: Dow Hits Record High As Markets Are Undaunted By Tepid Economic Growth, Political Gridlock
The Atlantic: This Is America, Now: The Dow Hits A Record High With Household Income At A Decade Low
CNNMoney: Dow Record? Who Cares? Economy Still Stinks
Reuters: Dow Surges To New Closing High On Economy, Fed’s Help

We know this is a phony rally, but so does everyone else. We know this will probably end badly eventually, but so does everyone else. The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number. Excessive optimism was worked off by the February correction. Sentiment allows for further gains.”

From March 11 – April 11 the S&P 500 gained another 46 points. By April 11, the media started to embrace the idea of rising prices more fully:

Bloomberg: S&P 500 climbs to record on stimulus, earnings optimism
Reuters: Dow, S&P close at record highs in broad rally

In my admittedly unscientific estimation of headline sentiment, the media is still not as enthusiastic as it was in late 2010 or prior to the 2000 or 2007 highs.

Barron’s Big Money Poll results are nevertheless concerning and combined with weak seasonality, waning market breadth will probably lead to lower prices.

Dow 16,000 later on in 2013 doesn’t seem so far fetched though. Don’t get me wrong, now is not the time to be short (we went short at S&P 1,590), but I wouldn’t write off Dow 16,000 unless key support is broken.