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.”

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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.

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Why Stocks are Crashing

The S&P 500 lost as much as 229 points or 10.92% in three days. The Nasdaq lost as much as 763 points or 16.77% over the same three days.

Wow. To be honest, I did not see that one coming, at least not as intense.

However, there were tell tale signs – a writing on the wall – that a big selloff is a real possibility. There was no reason for us to own stocks.

Here are three factors that caused (or certainly contributed) to this 3-day meltdown, and what they mean going forward:

‘Bad Breadth’

We have looked at the market’s internal deterioration (‘bad breadth’) many times in recent weeks (the last time was here).

The July 19 Profit Radar Report published this chart and warning (the S&P closed at 2,126 that day):

Although investors are buying, the surge in demand (appearance of buyers) has not been commensurate to the surge in price. The percentage of stocks above their 50-day SMA graph shows that investors are very selective right now. Only 41% of NYSE stocks are above their 50-day SMA, compared to 71% in April and 61% the last time the S&P was near 2,130 (late May). There’s a short-term bearish divergence, as the S&P 500 moved higher on Friday, but the percentage of stocks above their 50-day SMA lower.”

Mutual Fund Cash Levels

The August 2 Profit Radar Report looked at mutual fund cash levels and noted the following: “One of the bigger worries could be mutual fund cash levels, which just dropped to 3.2%, an all-time low. If a large number of investors decide to sell, fund managers will be forced to sell fund holdings, which has the potential to turn into a chain reaction.”

Elliott Wave Theory

Elliott Wave Theory. Some love it, others hate it. I’ve found that there are times where EWT is very helpful, if interpreted correctly.

The August 16 Profit Radar Report said this about the bearish potential of EWT:

A break below 2,052 may indicate a wave 3 lower.”

What is a wave 3? The third wave of an Elliott Wave pattern is always the most powerful one. It generally goes further than expected.

What’s Next?

Elliott Wave Theory may hold the most clues about what’s next for stocks. Based on the intensity of this selloff, it is likely to turn into a 5 wave decline with a more lasting low in October, similar to 2011. Here is how things looked and turned out in 2011.

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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Investors are Record Neutral on Stocks

The latest American Association for Individual Investors (AAII) poll showed that 49.79% of investors are neither bullish nor bearish.

This is the highest neutral reading since June 2003.

Considering that the S&P 500 (NYSEArca: SPY) is trading at all-time highs, that’s quite remarkable. Is this bullish or bearish?

The chart below plots the S&P 500 against the percentage of neutral AAII investors, and marks similar prior readings.

It’s always tough to stuff a few decades of history into one chart, but extreme levels of apathy are usually shown after some sort of correction.

The AAII poll is one of the more noisy sentiment indicators, and I never put too much weight on it.

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When viewed in isolation, and considering that the percentage of bullish investors is also at a 2-year low, the AAII poll results are more bullish than bearish.

Three similarly unusual sentiment readings in early May prompted the May 10 Profit Radar Report to make this comment: “The above-mentioned sentiment readings are contrary to seasonality and breadth. Nevertheless, they increase the odds of a breakout to new highs.”

The S&P 500 attained three consecutive all-time (intraday) highs since. New highs appear to have been needed to flush out premature bears (again).

Although there may be more ‘flushing’ to do, other indicators suggest risk is rising.

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.

Is this Bull Market Circling the Drain?

Bill Gross just wrote that the bull market supercycle for stocks and bonds is approaching an end. Gross has made similar warnings before and acknowledges they were premature.

Eventually Mr. Gross will be right, but when?

Here are two indicators that have kept us on the right side of the trade for years.

The chart below plots the S&P 500 against the percentage of NYSE stocks above their 50-day SMA, and a liquidity gauge I call ‘secret sauce’ (actual name available to subscribers of the Profit Radar Report).

‘Secret sauce’ is an incredibly reliable long-term major market top indicator. It essentially measures liquidity and demand. All recent major market tops (1987, 2000, 2007) were foreshadowed by a down turn in the ‘secret sauce’ indicator. Throughout 2010, 2011, 2012, 2013, 2014 and 2015, ‘secret sauce’ has been pointing higher.

On average, ‘secret sauce’ starts turning south about six months before the final S&P 500 high. The recent S&P 500 (NYSEArca: SPY) high was confirmed by ‘secret sauce,’ so the final top still seems months away (more details about ‘secret sauce’ is available here: Is the S&P 500 Carving Out a Major Market Top?).

The percentage of NYSE stocks above their 50-day SMA is a shorter-term measure of market breadth.

Although the S&P 500 is settled withing 0.2% of its all-time closing high yesterday, there were only 59.8% of NYSE stocks above their 50-day SMA, compared to 71.7% on April 15.

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This condition of internal weakness doesn’t prevent further gains – in fact I’d love to see another flameout spike – it suggests that this rally is not sustainable.

Based on this set of indicators – which I consider quite reliable – there should be a correction followed by another rally to new highs.

Continuous updates will be 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 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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Under the Hood: S&P 500 Deteriorating

We observed on April 21, that the stock market was actually stronger than the S&P 500 (NYSEArca: SPY) chart led to believe (Article: Under the Hood is more Strength than the S&P 500 Chart Shows).

Subsequently, the S&P 500 moved to a new all-time high on April 27 (2,126.92).

However, this condition of underlying strength quickly morphed into underlying weakness.

The April 26 Profit Radar Report observed this: “Interesting, 1-2 weeks ago, the percentage of NYSE stocks above their 50-day SMA was actually higher than the S&P 500 chart would suggest. Now, the percentage of NYSE (and S&P 500) stocks above their 50-day SMA is visibly lagging the new all-time highs. RSI is also lagging.”

The chart below shows that bearish divergences between the S&P 500 and the percentage of NYSE stocks above their 50-day SMA tend to lead to weakness (only 2 out of 8 corrections since 2014 were not preceded by this divergence).

Although the Nasdaq-100, QQQ and AAPL (Nasdaq: AAPL) staged a bullish breakout (as reported here: Nasdaq QQQ ETF Break out of Bull Flag and here: Fascinating AAPL Formation Telegraphed Bullish Breakout), the Profit Radar Report did not issue an official buy signal for the following reason:

Based on breadth and seasonality, this rally is not built on a solid foundation. Also, the Nasdaq-100 has gapped up 1% to at least a once-year high 50 other times besides Friday. Over the next three sessions, it added to its gains only 38% of the time, averaging a return of 0.6%. Its maximum gain during the next three days averaged +1.3%, the maximum loss -3.2%.”

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The above-mentioned articles warned that: “The trend is up, but lagging breadth and the open chart gap suggest an eventual pullback is likely,” and “In terms of Elliott Wave Theory, any new AAPL high could complete a 5-wave move and result in a larger-scale reversal.

AAPL spiked to a new all-time high on Tuesday (April 28) and has fallen 10 points since.

This week’s down side reversal of the S&P 500, Nasdaq and AAPL after a bullish breakout (according to technical analysis) emphasize why it is helpful to monitor multiple indicators.

That’s why the Profit Radar Report looks at supply & demand, technical analysis, investor sentiment, seasonality and price patterns for a comprehensive outlook.

How a combination of the above indicators is used to spot high probability trades is shown here (with an actual recent example): How to Spot High Probability Setups

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.