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.”

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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.

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The Only Indicator That Foresaw a Persistent S&P 500 Rally with No Correction

MarketWatch reports that most people missed the recent rally? Why? Obviously because nobody saw it coming. Here is one indicator that persistently suggested further gains (this indicator also explains why so many missed the rally).

I spend a lot of time plotting intricate charts illustrating technical patterns and developments, sentiment extremes and seasonal biases.

Perhaps my most impactful chart this year was featured in the 2014 S&P 500 Forecast (published by the Profit Radar Report on January 15).

This chart combined all my analysis into one simple S&P 500 projection for 2014 (view S&P 500 projection chart here).

If you click on the link above you’ll notice that the projection was about as accurate as anything in the financial world can be.

I’d like to think that charts have value, but the effectiveness of any chart crafted since early May pales in comparison to this rudimentary and unscientific, but uncannily accurate indicator.

Headline Indicator or ‘Blind Guides’

The headline indicator is simply an assessment of media sentiment. Unfortunately, many retail investors listen to the media, making this a helpful contrarian indicator.

Below is a brief chronicle of the media’s uncanny prowess to support the wrong side of the trade along with commentary by the Profit Radar Report.

You’ll be surprised to read just how wrong the financial press has been (the S&P 500 chart below includes even more media headlines).

April 30, 2014 – S&P 500 at 1,884

April 30, Profit Radar Report: “The old and chewed-out ‘sell in May and go away’ adage is getting a lot of play these days. I get suspicious when our carefully crafted outlook becomes the trade of the crowd and a crowded trade. How will the market fool the crowded trade?

The media’s take:

  • CNBC: “Why sell in May adage makes sense this year: Strategist”
  • IBD: “Why investors expect to sell in May and go away”
  • MarketWatch: Risk of 20% correction highest until October

May 11, 2014 – S&P 500 at 1,878.48

May 11, Profit Radar Report: “How will the market fool the crowded trade? A breakout to the up side with the possibility of an extended move higher.”

The media’s take:

  • Bloomberg: “The next liquidation crisis: What are the signals?”
  • CNBC: “I’m worried about a crisis bigger than 2008: Dr Doom”
  • Bloomberg: “U.S. markets on brink of 11% correction”

June 11, 2014 – S&P 500 at 1,944

June 11, Profit Radar Report: “Different day, same story: Stocks are near their all-time highs, but the media treats this advance with outright contempt. Below is a small selection of today’s headlines. We can’t dismiss media sentiment as retail investors (unfortunately) listen to the media.

The media’s take:

  • CNBC: “Cramer: Prepare for stock decline”
  • WSJ: “How long can stocks maintain all-time highs?”
  • MarketWatch: “3 reasons why the Dow shouldn’t be at 17,000”

June 25, 2014 – S&P 500 at 1,959

June 25, Profit Radar Report: “It only took one small down day (Tuesday) to reinvigorate media fear mongers.”

The media’s take:

  • Yahoo: “S&P’s Stovall says be careful before jumping into stagnant market”
  • Yahoo: “’It looks like a peak:’ Robert Shiller’s CAPE is waving the caution flag”
  • CNBC: “Wall Street’s biggest bull calls for a correction.”

Irony at its Worst

A correction would actually be healthy, but a watched pot doesn’t boil.

The June 25 Profit Radar Report explains: “The media’s continuous market top calling, artificially extends every rally. We saw this in April/May. Although media pessimism isn’t as pronounced today as it was in April/May, it’s enough to be considered a bullish wild card.

Bull markets die or correct because of ‘starvation.’ The market needs potential buyers to fuel rallies. That’s why good news tops are dangerous, because they suck in so many buyers and leave few sellers. Where there’s no buyer, there’s no price increase. ‘Scary’ media headlines disturb this cycle and provide continuous ‘ammunition’ for the bull.”

Today – S&P 500 at 1,973

On Monday the S&P 500 closed at 1,973. What does the media say?

  • CNBC: “Why this could be as good as it gets for stocks”
  • Yahoo: “Common sense says look out for a market top”
  • USA Today: “History says July is cool time to own stocks”
  • WSJ: “Dow nears 17,000 as rally gains steam”

Yes, you saw correctly, there are actually two headlines with a bullish connotation, but the most fitting headline comes from MarketWatch.

Dow flirts with 17,000, but most people missed the ride

Hmmm, let’s see if the media can crack the mystery behind the missed rally.

It is obviously premature to order a coffin for this rally (or the entire bull market), but several indicators – one of them is the ‘sudden drop’ indicator – suggest caution.

This ‘sudden drop’ indicator has a flawless record since the beginning of the QE bull market in 2009. Is it reason to worry.

Here is a detailed look at the ‘sudden drop’ index: S&P 500 ‘Sudden Drop’ Index at Historic Extreme

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.

Too Many Bears Spoil The Crash (or Correction)

his article takes a look at a non-scientific, but often effective indicator: Media headlines. Investors’ decisions are often based on the media’s take on the market. This makes it a potentially potent contrarian indicator.

Too many bears spoil the crash (or correction) just as too many cooks spoil the meal.

Investors are expecting a correction. In fact, too many investors are expecting a correction. Below are a few very recent headlines:

The ‘Non-Scientific Headline Indicator’

“This chart says we ‘re in for a 20% correction” – CNBC
“Risk of 20% correction highest until October” – MarketWatch
“Are U.S. markets on brink of an 11% correction?” – Bloomberg
“A deep correction’s on the horizon” – TradingFloor.com
“This chart is ‘ominous’ for S&P” – CNBC
“Wells Fargo strategist presents scary chart” – CNBC

The market rarely does what the masses expect. Quite to the contrary, the market likes to surprise the investing herd. The ‘non-scientific headline indicator’ suggests some kind of a pop is needed to fool the crowd.

After all, if the S&P 500 dropped 11% or 20% right now, where would be the surprise effect?

The Profit Radar Report’s 2014 Forecast (published on January 15) predicted an S&P 500 (NYSEArca: SPY) high sometime in April/May/June (see forecast excerpt below).

Unfortunately, this outlook has now become the crowded trade.

Interestingly, the media has gotten so bearish that it even reports on it’s own gloom-and doom bias. To wit:

“The boys who cried wolf: Crash prophets on the rise” – Yahoo Breakout

Based on the ‘non-scientific headline indicator’ the bear’s best hope for an immediate crash might be that two negatives (the media reporting on its own bearish bias) make a positive.

What’s the message of real tried-and-true sentiment indicators?

Here’s a detailed analysis of five sentiment indicators (plotted against the S&P 500) and their message:

Should We Worry about the 1987 Crash Parallel?

PS: The 1987 crash parallel is in reference to a recent USA Today article that essentially included a countdown to an imminent crash.

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.