S&P 500 Update

Last week, the Profit Radar Report stated that: “We would be interested to buy if the S&P 500 drops below 2,810 and subsequently rallies back above 2,830. Although we don’t know how much the S&P would rally, we want to have some skin in the game.”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Considering that the S&P closed at 2,891.31 last Friday, a buy limit at 2,810 seemed ridiculous, but Monday saw the S&P drop 90 points.

Here is why 2,810 was an important level to watch:

  • Long-term trend channel support (going back to 2009)

  • Short-term trend channel support

On Monday (May 13), S&P 500 Futures briefly dipped below and right away snapped back above the lower trend channel line (at 2,810, green arrow). This price pattern along with the bullish RSI-35 divergence suggested some kind of low was struck.

Based on Elliott Wave Theory, this bounce should run into trouble somewhere around 2,900.

Price and momentum studies are not nearly as bearish as Elliott Wave Theory, so stocks could also move higher than expected.

The elevated CBOE Equity Put/Call Ratio (5-day SMA currently at 0.76, see chart above) certainly allows for further up-side (readings above 0.7 are generally seen near lows).

Regardless of the longevity of this bounce, the reversal at the long-and short-term trend channels at 2,810 provided an opportunity to gain some exposure at low prices (our actual buying price ended up being 2,820.21), which is better than being tempted to chase price at higher and riskier levels.

Continued updates 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.

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

 

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Detailed Investor Sentiment Comparison Between 2007 and 2015

Once a month, the Profit Radar Report publishes a detailed analysis of investor sentiment (called Sentiment Picture).

The October 2015 Sentiment Picture tackled the question whether current investor sentiment is indicative of a major market top.

To find out, the Sentiment Picture provided a side-by-side comparison of investor sentiment at and leading up to the 2007 top with current sentiment.

Before we get to the 2007/2015 comparison, allow me to fine tune expectations. There are things sentiment analysis can and cannot do.

Sentiment analysis (like any single indicator) is not infallible and shouldn’t be used as stand alone indicator. The Profit Radar Report always looks at the combined message of supply/demand, technical analysis, seasonality and sentiment.

Sentiment, however can help gauge the probability of a major top or bottom. To illustrate, the July 24 Sentiment Picture attempted to answer the same question: Are there enough bulls to form a major market top?

It stated that: “Considering that stocks just were near all-time highs, sentiment is quite subdued. The lack of real investor enthusiasm, has continually pointed to new highs, and does so again this month. The question is when a bigger correction will occur.”

The ‘bigger correction’ started shortly thereafter, but stocks are trading near their 2015 highs once again.

The September 24 Sentiment Picture noted extreme bearishness and proposed that: “Sentiment is pointing towards a buying opportunity. In fact, purely based on overall sentiment, stocks should be closing in on a tradable low.”

That tradable low occurred three days later at S&P 1,871.

Are There Enough Bulls for a Major Market Top?

Below is the sentiment chart featured in the October 29, 2015 Sentiment Picture. This chart plots the S&P 500 against six different sentiment gauges (the actual sentiment analysis includes dozens more indicators):

  • CBOE SKEW Index
  • CBOE Equity Put/Call Ratio
  • CBOE VIX
  • National Association of Active Money Managers (NAAIM) equity exposure
  • Percentage of bullish advisors polled by Investors Intelligence (II)
  • Percentage of bullish retail investors polled by the American Association for Individual Investors (AAII)

The second chart highlights investor sentiment surrounding the 2007 high.

  • In 2007, the VIX was trading near 16. This was 50% lower than the August high (near 30), but 60% above the 2007 low (near 10).
  • The CBOE Equity Put/Call Ratio (5-day SMA) was towards the lower end of its range.
  • The SKEW wasn’t extremely high, but towards the upper end of its range.
  • Investment advisors and newsletter writers (polled by Investors Intelligence – II) were extremely bullish.
  • Retail investors (polled by the American Association for Individual Investors – AAII) were extremely bullish.
  • Active investment managers (polled by the National Association of Active Investment Managers – NAAIM) were bullish.

In October 2015, investors are not as bullish as they were in 2007. This becomes particularly obvious when looking at the AAII, II and NAAIM crowd.

Since the October sentiment picture was published, investors have become a bit more bullish. Perhaps even bullish enough for another pullback (there was also some significant internal weakness last week), but investor enthusiasm as not as pronounced as it was in 2007 or other historic market tops.

Investor sentiment is just one of the four powerful price movers monitored by the Profit Radar Report. Here is a (free) detailed look at supply and demand (or liquidity): Is the Stock Market Running out of Willing Buyers?

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.

 

I Spy … Put/Call Ratio Soaring to Highest Level since October

Option traders are acting irrational.

On March 30, the CBOE equity put/call ratio fell to the lowest level of 2015.

Just three days later (April 2), the put/call ratio soared to the highest level since October 2014.

In fact, the chart shows a near perfect ‘V’ with all three touch points representing some sort of extreme.

Sunday night’s Profit Radar Report published a similar chart and noted that: “The equity put/call ratio just spiked to the highest level since last October. Option traders are expecting lower prices. As the chart shows, usually when that’s the case, the S&P 500 does the opposite.”

The S&P 500 cash index (NYSEArca: SPY) doesn’t fully reflect the volatility since Friday’s job report, but the S&P 500 futures spiked from their 2,043 low on Sunday to 2,075 today.

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The S&P 500 may or may not be done punishing bearish option traders, but the volatility of the put/call ratio cautions that it may not take too much of a rally to work off last week’s bearish (bullish for stocks) put/call 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 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.

2 Contrarian Indicators Triggered Buy Signals Last Week

For much of 2014, contrarian indicators were stuck in the ‘Bermuda Triangle’ of technical analysis. They crashed, burned and drowned. However, the recent sell-off revived a number of them … with buy signals (how about that for irony).

As mentioned in the Short-Term S&P 500 Analysis, the S&P 500 nearly hit important support located at 1,902 – 1,885.

Just before the S&P 500 (NYSEArca: SPY) approached this key support cluster, there was a buy signal by two option-based indicators.

The charts and commentary below were published in the August 6 Profit Radar Report.

“The 5-day SMA of the CBOE Equity Put/Call Ratio just spiked to a two year high. Options traders are more bearish today than any other time since June 2012. Obviously 2012 and 2013 were unusual years and may not be the best benchmarks, but nevertheless this is a noteworthy extreme.”

“The VIX:VXV ratio briefly poked above 1 on August 1. This means that expected 1-month volatility (VIX) was higher than 3-month volatility (VXV). All 2012 and 2013 spikes above 1 marked lows for the S&P 500 and highs for the VIX.”

The message of various indicators was summarized as follows by the August 6 Profit Radar Report:

The longer-term S&P 500 chart shows key support at 1,885 – 1,902. This would be the ideal target for a tradable low (a drop to support at 1,850 is only a low probability). However, the 100-day SMA is at 1,913 and the August s1 pivot is at 1,910. In essence, support/resistance levels confirm the message of EWT: A low is either already in place or nearly so.”

Unfortunately, the above two indicators don’t tell us how long this bounce will last.

We will be looking at various other gauges to judge the longevity of this bounce.

One clue comes from the VIX. VIX seasonality triggered a major buy signal on July 9 (which has been spot on), but sports a brief bearish window right now.

More details here: VIX Seasonality Sports Brief Bearish Window

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.

Equity Put/Call Ratio at 41-Month Low, but Risk of ‘Black Swan’ Event Limited

Last week the CBOE Equity Put/Call ratio slipped as low as 0.43, the lowest level since January 2011. Similar readings in April 2010 and April 2012 led to nasty sell offs? But something is different this time.

Last week the CBOE Equity Put/Call ratio plunged to 0.43, the lowest reading since January 2011. This wasn’t just a one-day fluke as the 5-day SMA fell as low as 0.518, also a 41-month extreme.

A ratio of 0.43 means that option traders bought 2.3 calls (bullish option bet) for every put (bearish option bet). Option traders don’t have a ‘smart money’ reputation.

The chart below, featured in the June 11 Profit Radar Report, plots the S&P 500 (SNP: ^GSPC) against the 5-and 10-day SMA of CBOE Equity Put/Call ratio.

As the dashed red lines highlight, low put/call ratio levels led to S&P 500 (NYSEArca: SPY) weakness more often than not.

Is the Put/Call Ratio Warning of a Crash?

Lately, there’s been much talk about a crash or major correction. Does the current equity put/call ratio foreshadow such a crash or correction?

Looking at the put/call ratio in isolation one could conclude that there’s a high chance of a 1%+ correction. Why?

Similar equity put/call ratio readings in April 2010 and April 2012 were followed by nasty sell offs (see red shadows).

But let’s expand our analysis to include the CBOE SKEW Index. The SKEW Index basically estimates the probability of a large decline (2 standard deviations or ‘Black Swan’ event).

Readings of 135+ suggest a 12% chance of a large decline. Readings of 115 or less suggest a 6% chance of a large decline. In short, the higher the SKEW, the greater the risk for stocks.

Last week the SKEW finished at 127.78, which is above average, but well below its January peak of 139.62.

The April 2010 and April 2012 highs saw SKEW readings of 134 and 139 (shaded areas).

The relative SKEW anemia softens the generally bearish message of the put/call ratio, but it doesn’t eliminate all the risk.

The Profit Radar Report’s 2014 S&P 500 Forecast (published on January 15), projected a pre-summer high at S&P 1,950. Last week the S&P reached 1,950 and pulled back. What does this mean for the rest of the year?

A complimentary look at the updated 2014 S&P 500 Forecast is 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.

Two Sentiment Gauges Reach Multi-Year Bullish Extremes

It’s been a while since we’ve seen bullish sentiment conditions, but this week’s rally pushed two sentiment gauges to multi-year extremes. But, there is reason to view the two extremes in context with the larger sentiment picture.

We looked at various sentiment measures in April and May, and the common denominator was that investors were unusually bearish.

As happens so often, bearish sentiment turned into bullish price action (for an insightful read on foolishly bearish forecasts click here: Hey Bears! Where is the Promised Crash or Correction?).

Thanks to the cycle of sentiment mean reversion, rising prices (since late May) lifted bullish sentiment. In fact, two sentiment measures reached multi-year extremes this week.

One particular gauge that foreshadowed a stock market rally back in May was the CBOE Equity Put/Call Ratio.

The May 14 and 18 Profit Radar Report featured this chart of the equity put/call ratio and stated: “Prior corrections were preceded by a put/call ratio around 0.5 or below. Today the put/call ratio is at 0.72, a level that’s indicative of a low more than a top. The equity put/call ratio cautions of further up side.”

The second chart updates the equity put/call ratio and plots it against the S&P 500. On Wednesday the equity put/call ratio dropped to 0.43, the lowest reading sine January 2011.

In addition, the percentage of bullish investment advisors polled by Investors Intelligence rose to 62.2%, the second highest level in the survey’s history.

Readings above 60% generally result in a rally pause or correction. However, the survey’s all-time high water mark (62.9%) occurred in December 2004 and didn’t cause too much trouble.

The equity put/call ratio is more worrisome as it indicates very limited hedging activity. This means many investors are long and naked (long without put protection). If the S&P 500 starts falling, they have to sell their core holding.

I always look at more than just two sentiment gauges. A broadening of the sentiment scope reveals that other gauges are still in neutral territory (retail sentiment, CBOE SKEW Index, etc.).

Once a month, the Profit Radar Report publishes a comprehensive sentiment picture that plots six sentiment gauges against the S&P 500. The May 23 Sentiment Picture proposed that: “The market will grind or spike higher (whichever is necessary to turn more investors into bulls) before delivering a noteworthy correction.”

Clearly the S&P 500 (NYSEArca: SPY) has succeeded in turning many more investors into bulls. Whether it’s been enough to cause a correction remains to be seen, but risk is rising.

What about stock market valuation? Are stocks too expensive and ready for a mean reversion?

Here is an objective look at four different valuation metrics and what they mean for the stock market.

Is the S&P 500 Overvalued?

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.

Flash Crash Indicator Nearing Flash Crash Signal

Somewhat unwittingly I actually predicted the 2010 Flash Crash, which caused a 10% one-day drop. The same indicator that triggered a warning signal before the Flash Crash is inching closer to Flash Crash Territory.

The greater fool theory on Wall Street requires that the ‘dumb money’ buys from the ‘smart money’ at the top.

This implies that a ‘dumb money’ rush into stocks tends to precede some sort of down market.

Are there enough ‘great fools’ buying right now to trigger a down market, nasty correction or even flash crash?

Admittedly somewhat unwittingly (say that ten times fast) I predicted the 2010 Flash Crash using the CBOE Equity Put/Call Ratio.

The Flash Crash happened on May 6, 2010 and saw a 102-point one-day drop in the S&P 500 and 1,010-point drop in the Dow Jones.

In a special alert to subscribers on April 16, 2010 (now called the Profit Radar Report) I warned of the following:

The message conveyed by the composite bullishness is unmistakably bearish. The put/call ratio in particular can have far reaching consequences. Protective put-buying provides a safety net for investors. If prices fall, the value of put options increases balancing any losses occurred by the portfolio. Put-protected positions do not have to be sold to curb losses. At current levels however, it seems that only a minority of equity positions are equipped with a put safety net. Once prices do fall and investors do get afraid of incurring losses, the only option is to sell. Selling results in more selling. This negative feedback loop usually results in rapidly falling prices.”

We are now again in an environment where the option put/call ratio has been steadily declining for weeks.

A number of media outlets have discussed the bearish message of the currently low equity put/call ratio.

As with any indicator, the current put/call ratio needs to be viewed in context with the bigger picture. The chart below does just that.

The first chart plots the S&P 500 against the CBOE Equity Put/Call Ratio (daily data and 10-day SMA). The vertical dashed red line on the left marks the Flash Crash.

Four years of daily put/call data comes with a lot of noise.

The second chart plots the S&P 500 (NYSEArca: SPY) against the same data, but filters out some of the noise by separating the daily and 10-day SMA put/call data.

The daily put/call ratio dropped to 0.46 on 12/31 and 0.47 yesterday, which means call volume was more than twice put volume. This doesn’t happen often and has lead to corrections in the past.

The 10-day SMA put/call ratio was at 0.512 on Wednesday, the lowest reading since January 2011. Back then it didn’t affect stocks immediately, in fact the market kept moving higher (albeit not in a straight line) for three more months before giving back all gains and then some.

Three weeks before the Flash Crash, the 10-day put/call SMA fell as low as 0.445.

The Flash Crash on May 6 was a result of bullish enthusiasm and lacking put protection as explained above.

Is a Flash Crash possible in early 2014? It’s possible, but unlikely.

But it doesn’t take a Flash Crash to eat into profits. A garden-variety correction can do the same thing Chinese drip torture style.

Another data point shows that ‘Mom and Pop’ are piling back into stocks, which enhances the bearish message of the put/call ratio.

The biggest lesson of 2013 is not to sell indiscriminately just because sentiment becomes overheated.

Throughout 2013 the Profit Radar Report continued to anticipate higher prices despite elevated sentiment levels. Only in recent weeks sentiment has reached levels indicative of increasing risk for longs.

Nevertheless, to get a sell signal in this QE market we need to see extreme bullishness (which we now have) and a drop below support. To repeat: Only bullishness AND a drop below support = Sell signal. This combination is so powerful I call it ‘insider trading.’

Here’s a look at how this kind of ‘insider trading’ works and where key support for the Dow Jones is right now. Insider Trading Just Became Legal

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, 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.