How Stocks Escaped from 3 ‘Unavoidable’ Bear Markets

This bull market has been counted out many times. Just over the past few years, stocks faced three – allegedly – unavoidable bear markets … and escaped all of them.

Here are the three ‘unavoidable’ bear markets, and why stocks escaped:

Unavoidable Rate Hike Bear Market

Starting in 2015, the Federal Reserve let it be known that interest rates will be rising.

According to the pros, rising rates would sink stocks. After all, that’s why the Fed kept them near zero for so long.

However, history simply doesn’t agree with this conclusion. The April 26, 2015 Profit Radar Report used the chart below to illustrated that rising rates are not bearish.

In fact, 9 of the 13 periods of falling rates (since 1954) saw stocks rally. That’s why the Profit Radar Report concluded that: “A rate hike disclosed at the April, June, July or even September or October FOMC meetings is unlikely to coincide with a major S&P 500 top.”

Barron’s rates iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

Unavoidable Oil Slump Bear Market

Falling oil prices were the hot topic as prices dropped 50% from June – December 2014.

The general opinion was that falling oil prices would send stocks lower, like in 2008.

The December 14, 2014 Profit Radar Report ousted this bogus reasoning with the chart and commentary below:

This year’s oil price collapse differs from the 2008 collapse relative to the S&P 500. In 2008, the S&P 500 topped before oil did. In fact, the S&P 500 recorded its all-time high in October 2007 and was already down 21% by the time oil topped on July 11, 2008. In 2014, the S&P 500 recorded new all-time highs five months after oil started to decline.

The chart below plots oil against the S&P 500 and shows that falling oil prices are not consistently bearish for stocks. If history can be used as a guide, stocks are likely to hold up despite the oil meltdown.”

Unavoidable QE Bear Market

In 2008, the Federal Reserve unleashed it’s first round of Quantitative Easing (QE). A couple trillion dollars later, QE came to an end in October 2014.

Investors feared the withdrawal of QE would sink stocks (just like a junkie will crash without new fix).

The simplified logic (QE started this bull market, the end of QE will finish the bull market) seemed logical, but it wasn’t factual.

The October 5, 2015 Profit Radar Report plotted the QE money flow against the S&P 500 and concluded that: “We expect new bull market highs in 2015.”

Why?

The correlation between QE and stocks (at least in 2013/2014) did not support the notion of a bull market end. More importantly, our major market top indicator said the bull market is not over.

2016 Bear Market?

At the beginning of the year, when the S&P traded near 1,900, the media found countless of reasons why the bear market is finally here (many of them are listed here).

About six months and a 15% rally later, it’s obvious that the bull market is alive and well.

Short-term, the S&P has reached the lower end of our up side target range, so a pullback becomes more likely (more details here). However, any pullback should serve as a buying opportunity.

If you are looking for common sense, out-of-the-box analysis, check out the Profit Radar Report. It may just make you the best-informed investor you know.

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 profile 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, and 24.52% in 2015.

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Russell 2000 and Transports at Crossroads?

The Russell 2000 (RUT) and Dow Jones Transportation Average (DJT) racked up some pretty significant losses since their 2015 all-time highs.

From the 2015 peak to the 2016 trough, the RUT lost as much as 27.23%, DJT as much as 31.22%. The S&P 500 lost ‘only’ 15.20%.

It was the prevailing opinion for much of 2015 and early 2016 that the RUT and DJT would lead U.S. stocks into the next bear market.

It is correct that small cap underperformance is one of the stages of an aging bull market, and in line with our analysis (view 3 Stages of a ‘Dying’ Bull Market). However, the timing for an immediate bear market didn’t seem right.

The February 11 Profit Radar Report listed six reasons why stocks are likely to rally. The ‘six reason buy signal’ is also discussed here.

After almost three weeks of rising prices (RUT up 11%, DJT up 17%), the RUT and DJT have arrived at their first inflection point.

Russell 2000 (RUT)

The RUT is back-testing the ascending green trend line (currently at 1,045), which originates at the March 2009 low. Sustained trade above this trend line is bullish until the signal is reversed.

Dow Jones Transportation Average (DJT)

The DJT is threatening to break above the 7,400 – 7,500 zone. This zone served as support a few months ago.

This is not only price resistance for DJT, it’s also momentum resistance as DJT’s prior rallies failed at similar RSI readings.

Conclusion

When the Profit Radar Report issued a buy signal at S&P 1,828, it wasn’t clear whether this rally would only move to the initial up side target at 1,950 or beyond.

Based on investor sentiment, there was a distinct chance that a runaway rally (with higher targets) would develop.

The S&P is not in the clear yet, but the RUT and DJT charts may help gauge the broad market’s prospects. RUT and DJT above their respective resistance levels is a positive for the S&P and other indexes.

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, 17.59% in 2014, and 24.52% in 2015.

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

Stock Market Liquidity is Drying Up

Money makes the world go round and vice versa.

We’ve all had a front seat watching the Federal Reserve pump up stocks with QE cash.

Money is like a lubricant. Lack of money, is like ‘sand in the works.’

For the first time since 2007, we are actually seeing signs of liquidity shrinkage.

A while ago I was wondering if there is enough strength behind the latest rally leg to drive stocks to new all-time highs. And if so, could stocks sustain trade above all-time highs?

To get the answer, I turned to the same indicator that foreshadowed the 1987, 2000 and 2007 market tops, and virtually ‘guaranteed’ new bull market highs after the 2010, 2011, 2012 and 2014 correction. I call this powerful gauge ‘secret sauce’ (more later).

New All-time Highs?

Since the beginning of the 2009 bull market, the S&P 500 suffered five corrections of 9% or more (based on closing prices). The summer 2015 meltdown was the most recent one (-12.35% from high to low).

To gauge the longevity of the rally from the August 2015 panic low (S&P 1,867), we will be comparing the current rally with the rallies from the 2010, 2011, 2012 and 2014 bottoms.

With four weeks of gains in the rear-view mirror, we can do just that. As of Friday, October 23, 2015, the S&P 500 recovered slightly more than a Fibonacci 78.6% (78.85%) of the prior losses. This will be our benchmark.

To gauge the strength of the various rallies from their original low, we need more than just a price chart. We need a pulse on internal strength, buying power and liquidity.

Price and internal strength go together like horsepower (or kilowatts) and battery life. You can only judge an electric cars capability once you know horsepower and battery life. The same is true for stocks. To make a decent assessment we need to get a good feel for price and internal strength.

As mentioned earlier, my preferred strength and liquidity indicator is ‘secret sauce.’ Why ‘secret sauce’ is so potent, and why it’s called secret sauce is discussed here.

Again, we will use ‘secret sauce’ to measure and compare the strength of the S&P 500 after having retraced about 78.8% of the losses that led to major lows in 2010, 2011, 2012 and 2014.

The chart below plots the S&P 500 against ‘secret sauce.’ The blue boxes start at the pre-correction high, and end at the 78.8% S&P retracement level.

As the ascending green lines indicate, there was a ton of liquidity behind the 2010, 2011 and 2012 rallies. “Secret sauce’ retraced 119.75 – 193.47% by the time the S&P retraced 78.8% of its losses. Not surprisingly, the bull market continued plowing higher thereafter.

The rally from the 2014 low was not quite as dynamic. Although it led to new all-time highs, this particular rally turned very choppy and eventually gave back all gains.

The table lists the exact details of each rally.

In one way, the rally from the August 2015 panic low is similar to the 2014 rally (‘secret sauce’ retraced barely 70% in 2014 and 2015).

However, unlike in 2014, secret sauce is flashing the same signals now as it did before the 1987, 2000 and 2007 market tops. More details here. S&P 500 Threatening to Follow 2007 Topping Pattern

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 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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Is the Bull Market Over?

It’s time for an update on the most powerful stock market indicator in recent history – the major market top indicator.

This indicator (dubbed ‘secret sauce’) correctly foreshadowed the 1987, 2000 and 2007 market tops. The same indicator also ‘told us’ that the bull market will continue after the corrections of 2010, 2011, 2012 and thereafter.

A detailed explanation of this indicator (and why we call it ‘secret sauce’) is available for review here.

The October 8 column “The Missing Ingredient for A Major Market Top” mentioned a fledgling bearish non-confirmation (the first one since 2007).

Non-confirmations between the S&P 500 and ‘secret sauce’ are the first indication of a major market top. Here is how the October 5 Profit Radar Report assessed this fledgling divergence:

There is a small bearish divergence between the S&P 500 and the [indicator name replaced with ‘secret sauce’]. 
It is conceivable that this small divergence could mark a major top, but it is unlikely. Prior tops were preceded by multi-month divergences. Based on strong Q4/Q1 seasonality and the ‘need’ for a multi-month divergence, we expect new bull market highs later in 2014 or 2015.”

As proposed, strong seasonality and the ‘need for a multi-month divergence’ erased the fledgling divergence, and the S&P 500 moved to new all-time highs in 2015.

The May 17 Profit Radar Report noted a renewed bearish non-confirmation.

The May 31 Profit Radar Report observed the following:

At the latest all-time closing high for the S&P 500 (May 21), 27% of S&P 500 stocks traded within 2% of a 52-week high, while 13% of S&P 500 stocks already lost 20% or more since their latest high.
28% of S&P MidCap 400 stocks were within 2% of a 52-week high. 17% already lost more than 20%
16.8% of S&P SmallCap 600 stocks were within 2% of a 52-week high. 23% already lost 20% or more.
This internal deterioration and indication of buying selectivity is confirmed by [indicator name replaced with ‘secret sauce’] and the percentage of NYSE stocks above their 50-day SMA. 
Negative divergences like this tend to draw stocks lower. This doesn’t have to happen immediately, but this particular divergence has lasted longer than any other in the last years, and is likely to turn into a drag eventually.”

Eventually turned out to be August 19 – 24, when the S&P 500 lost 229 points in four days.

Is the Bull Market Over?

The updated chart below highlights the bearish non-confirmation noted in various Profit Radar Reports.

The 2015 divergence is more pronounced than the October 2014 divergence, but not as obvious as divergences seen prior to past major tops (4 – 24 months).

Based on the ‘secret sauce’ major market top indicator, the May 21 S&P 500 closing high could mark the last day of the post-2009 bull market. However, the bearish divergence is shorter than all recent historic precedents, so bulls and bears should be careful.

Old Bull or New Bear Market – It Doesn’t Matter (for now)

Just because the market hasn’t given a conclusive answer to the bull/bear market debate (yet) doesn’t mean we are in the dark.

Quite to the contrary, the S&P 500 has been following the path we identified months ago (we call it ‘our script’). What is ‘the script’?

The script is a comprehensive forecast (based on literally dozens of indicators and historical statistics) illustrated with one simple chart (read about it here and here).

The script pointed towards new lows (or at least a test of the August low at S&P 1,867). In fact, the September 20 Profit Radar report listed five reasons why stocks should head lower:

  • History: Panic declines, like in August, tend to be followed by a period of testing and another low, or at least a test of the low. Historical evidence: Since 1928, the S&P 500 dropped 10% or more from a 52-week high to a 3-month low, followed by a 3% bounce over 3 days (as was the case as of August 28) 21 times. 10 out of 21 times the S&P 500 tested or violated the low before going higher. 5 times the S&P staged a V-shaped recovery, and six times it eventually moved into a new bear market (3 of those 6 times the S&P rallied first before heading lower).
  • Seasonality: Late September/early October is one of the worst times for the S&P 500 in terms of seasonality (click here for S&P 500 seasonality chart).
  • The S&P 500 ended August with a loss of more than 5%. Since 1928, that’s happened 13 times (not including August 2015). The September after a 5% loss August was positive only 4 out of 13 times.
  • The 2011 script foretold a July/August sell off followed by weeks of sideways trading and another low.
  • Elliott Wave Theory combined with analysis of ‘rogue waves’.”

In short, our dashboard of indicators suggested that 2015 will follow the script of 2011.

A picture says more than a thousand words. For continued updates and out-of-the-box analysis, sign up for 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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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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Is the S&P 500 Carving Out a Major Market Top?

This indicator is so valuable, I don’t want to keep it to myself. Unfortunately, I’m a bit in a pickle though.

I want to be fair to my subscribers. It just wouldn’t be right to share research reserved for paying subscribers for free, so I came up with this compromise:

You will see the indicator in its full power and glory, but I won’t disclose its name. It will simply be dubbed ‘secret sauce.’

As the charts below will show, ‘secret sauce’ correctly telegraphed the 1987, 2000 and 2007 market crashes.

Perhaps even more importantly, ‘secret sauce’ told investors to stay invested throughout this 6-year old bull market. Although there’ve been corrections along the way, ‘secret sauce’ has consistently pointed to new (all-time) highs.

What is Secret Sauce?

‘Secret sauce’ is basically a market breadth and liquidity indicator. Here’s how it works:

You know something’s wrong if the S&P 500 is at new highs, but ‘secret sauce’ isn’t.

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That’s what happened prior to the 1987, 2000 and 2007 crashes. ‘Secret sauce’ failed to confirm the new S&P 500 highs, which was an early indication of internal deterioration.

Like a ceiling fan that keeps going after it’s switched off, the market tends to keep going for a little while after liquidity and breadth peaks. ‘Secret sauce’ is a good reflection of when liquidity peaks and momentum slows before stocks roll over.

The first chart plots the 1987 and 2000 top against the S&P 500 (NYSEArca: SPY). The vertical red lines show the ‘incubation period’ between peak liquidity/breadth and peak price.

The second chart highlights the 2007 bearish divergence, which essentially marked the beginning of the end for stocks. It also captures the bullish green confirmations that kept pointing to continual new highs following the 2009 low.

I stumbled upon ‘secret sauce’ in 2013, and first introduced it to subscribers in the December 1, 2013 Profit Radar Report. Ever since then we’ve known to expect higher prices.

Obviously ‘secret sauce’ isn’t a short-term timing tool, but knowing whether a correction will morph into a full-fledged bear market or not has been incredibly helpful.

Especially since the media and self-proclaimed market pros have been calling for a market crash for years.

  • December 30, 2013: Why the market could see a 17% drop in 2014 – CNBC
  • May 15, 2014: Stocks are telling you a bear market is coming – MarketWatch

Imagine knowing when to simply ignore headlines as baseless fear-mongering. Is the recent pullback the beginning of the end?

All the details about ‘secret sauce’ are 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.

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.