Bears Get Another Shot at Taking Stocks Down

The last S&P 500 updates highlighted support around 2,040 and why the S&P is likely to seesaw across this support to fool investors (S&P 500 Abuses Popular Pattern to Fool Investors).

Following the faux break below 2,040, the May 22 Profit Radar Report observed that: “Stocks delivered the fakeout move we anticipated. The recovery from Thursday’s low was strong enough to lead to further gains. A move beyond 2,066 could lead to 2,085+/-.”

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

The S&P obviously surpassed the initial up side target, and is now near the next resistance cluster, which gives the bears another shot at taking control.

The chart below shows a number of interesting developments:

  1. The S&P is following a pattern similar to May – July, and November – December, 2015 (blue boxes).
  2. The S&P reached the upper Bollinger Band for the first time since its April high.
  3. The S&P is overbought based on 2-day RSI (see vertical red lines).
  4. The CBOE Equity Put/Call Ratio dropped to 0.51, the lowest reading since July 30, 2015 (not shown).

None of the above patterns guarantee a break down, but they show that risk is rising. Rising risk translates into opportunity for bears.

Misconceptions

According to two CNBC headlines, June is a dangerous month for stocks:

  • May 31, 2016: “June is the worst month for markets” – CNBC
  • June 1, 2016: “This should have you worried about stocks in June” – CNBC

This is only half the truth however. June is also the S&P’s best month during election years.

The percentage of bullish investors polled by Investors Intelligence (II) jumped from 35.40% to 45.40%, one of the biggest one-week increases in 30 years.

At first glance, this appears to be bearish from a contrarian point of view, but history says it isn’t.

Similar optimism surges (as long as the percentage of bullish investors stayed below 50%) led to positive returns two months later 12 of 14 times (according to SentimenTrader).

Summary

Courtesy of the latest rally near overhead resistance, bears get another shot at taking control. In fact, there are two possible reversal zones.

Although odds favor (near-term) bearish bets, not all indicators point towards a deep correction. Therefore, precise trade execution and risk management are important to protect against a possible shakeout move.

Continued S&P 500 analysis is 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 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.

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

 

Should We be Worried about ‘Smart Money’ Leaving Stocks?

Uh-oh. The ‘smart money’ is selling stocks. It rarely pays to bet against the smart money, which includes insiders and hedgers with deep pockets and big research budgets. Should we be worried about their stock market exodus?

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.”

Charles Dickens classic novel “A Tale of Two Cities” describes London and Paris during the French Revolution, but it could also be applied to Wall Street post 2009.

It is the ‘best of times’ as the S&P 500 (NYSEArca: SPY), Dow Jones (NYSEArca: DIA) and Russell 2000 (NYSEArca: IWM) move from one all-time high to the next. Even the Nasdaaq (Nasdaq: QQQ) is within striking distance of its all-time high.

It is also the ‘worst of times’ for many permabears, who continue to trash talk every rally … and get crushed.

Some of you may remember my inflammatory message for stock market bears published in the July 13, 2014 Profit Radar Report:

Here’s a message for everyone vying to be the next Roubini: A watched pot doesn’t boil and a watched bubble doesn’t burst. The stock market is not yet displaying the classic warning signs of a major top. There will be a correction, but the bull market won’t be over until most bears turn into bulls or the media stops listening to crash prophets.”

My bullish conviction was rooted primarily in extreme investor pessimism (reflected by the following July 2013 headlines) and the absence of the one ingredient that foreshadowed the 1987, 2000 and 2007 crashes (more details here).

  • MarketWatch: “If ever there were a time for a stock sell signal, it’s now”
  • CNBC: “Market will crash, just don’t know catalyst: Faber”
  • Reuters: “Billionaire activist Carl Icahn says ‘time to be cautious’ on U.S. stocks?”
  • CNBC: “I’m selling 6 times more than buying: Wilbur Ross”

Today, we are back at (or near) all-time highs and read headlines such as: “Why the smart money is bailing out of the bull market.”

Indeed, the ‘smart money’ is selling stocks as the ‘dumb money’ is rushing in.

Is this bearish? If so, how bearish is it?

Here is a look at six different sentiment gauges consistently tracked by the Profit Radar Report.

Of the six Profit Radar Report staples only four show extreme optimism:

Newsletter writers polled by Investors Intelligence (II) are the most bullish since June 2014 and active investment managers (polled by NAAIM) haven’t been as bullish since November 2013.

The VIX is low, but needs to shed another 20% before reaching last year’s extreme.

The CBOE equity put/call ratio and CBOE SKEW are only in midly bearish territory.

The media seems somewhat suspicious of new highs, but not nearly as bearish as in June/July 2014.

To be fair, a number of ancillary sentiment gauges match the kind of sentiment extremes seen in December 2010 and 2013.

My interpretation is that current gains will soon be given back, but any correction now or in the near future is likely to be followed by new recovery highs later on.

What’s the benefit of following the above six sentiment gauges?

Here is a more detailed track record published in the the December 2014 Sentiment Picture (the biggest reason to worry about stocks right now is listed at the bottom of this article):

Throughout 2014 many analysts, market timers, the media and ‘experts’ opined that the bull market is on borrowed time, largely because investor sentiment has been extremely bullish. Here are two examples:

  • Title: The boys who cried wolf: Crash prophets on the rise – Yahoo on May 2:

    Article excerpt: “The Dow Jones closed at an all-time high, which doesn’t change the views of the collection of Cassandras calling for a stock market crash. This group, including esteemed figures like Jeremy Grantham and Marc Faber have been emerging from their bomb shelters with relative frequency over the last month to reiterate their bearish views and insist they weren’t wrong with earlier calls, just early.”

  • Title: If ever the stock market flashed a ‘sell’ signal, it’s now – MarketWatch on July 9

    Article excerpt: “Sentiment indicators such as Investors Intelligence are at historic highs (that is bearish), and the RSI Wilder indicator is telling us the market is seriously overbought. Yes, the market can still go higher, but it’s on borrowed time. Don’t believe me? When you are standing 17,000 points in the air at the top of Dow Mountain, and the market is priced for perfection, there is nowhere to go but down.”

This widespread display of pessimism has been baffling and unfounded based on our set of sentiment gauges. At no point in 2014 did optimism reach levels suggestive of a major top. As the small selection of recent Sentiment Picture observations shows, an objective and in depth analysis of investor sentiment has persistently pointed to higher prices.

November 30 Sentiment Picture: “Investor sentiment is not at the kind of extremes usually associated with major market tops. Seasonality may draw prices lower temporarily, but the majority of sentiment gauges point towards higher prices later this year and/or early next year.”

October 31 Sentiment Picture: “In short, investor sentiment allows for further up side.”

September 25 Sentiment Picture: “Few sentiment gauges were at extremes on September 19, when the Dow Jones, S&P 500 and Nasdaq reached their new highs. If this selloff is commensurate to the lack of sentiment extremes at the actual high, it should be on the shallow side.”

August 29 Sentiment Picture: “The overall sentiment picture is fractured, and void of the ‘all in’ mentality seen near major market tops. Isolated extremes cause only small pullbacks here or there.”

The December Sentiment Picture shows a small up tick in ‘dumb money confidence’ (AAII, NAAIM) and complacency by option traders (CBOE Equity Put/Call Ratio). The CBOE SKEW is elevated.

Those readings could contribute to a pullback, but optimism is not pronounced enough to be indicative of a major top.”

The Biggest Reason to Worry about Stocks Right Now

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.

This Chart Should SCARE Every BEAR

Bears finally got 18 days of hope as the S&P 500 lost as much as 9.8% and expectations of the long-awaited market crash seemed to finally pan out. However, this may be just a cruel déjà vu. Here’s a chart that should scare every bear.

People often look for strength in numbers, but on Wall Street, ‘strength in numbers’ – also known as crowd behavior – tends to backfire.

Here is a look at one interesting chart. The chart plots the S&P 500 against the average exposure to US equity markets reported by members of the National Association of Active Investment Managers (NAAIM).

I’m a chart and numbers guy, but the message of this chart is probably more powerful if we emphasize the emotions behind the numbers, rather than just the numbers.

Last week, active money managers slashed their US equity exposure to 9.97%, the lowest reading since September 28, 2011.

In 2011, the S&P 500 fell as much as 21%. Last week money managers bailed before the S&P even lost 10%. They flat out panicked.

Why did money managers panic?

Were they right to panic?

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There may be a myriad of reasons why money managers decided to heavy-handedly hit the sell button, … but here is my interpretation (valued at 2 cents or more):

Obviously money managers were scared. Scared of what? The ‘big one!’

Tucked away in their memory banks were sell in May headlines such as:

  • CNBC: “This chart shows the market is a ticking time bomb” – June 11
  • Yahoo Finance: “Beware: 2014 is looking a lot like 2007” – May 22
  • CNBC: “I’m worried about a crisis bigger than 2008: Dr Doom” – May 8

The S&P 500 rallied as much as 200 points following those doom and gloom headlines. The normal reaction would be to dismiss crash calls as wrong, but money managers simply must have labeled them as ‘premature.’

The level of panic seen at the October 15 low was enough to propel the S&P as much as 140 points.

Was their panic justified? In other words, despite this bounce, did the ‘big bad bear market’ start at the September highs?

Has the “Big Bad Bear Market’ Started?

The easy and straight-forward conclusion based on the fact that money managers appear to have expected this ‘bear market’ is this:

Sure, there are plenty of reasons why stocks should roll over, but a watched pot doesn’t boil. Bear markets are rarely anticipated by the masses.

There are also persuasive reasons why this bull market has more time left. We just discussed one. Another is bullish seasonality and the absence of the most reliable bear market trigger I’m aware of.

After extensive research, I found an indicator that correctly warned of the 1987, 2000 and 2007 tops, and at the same time projected new highs in 2010, 2011, 2012 and 2013. More details here.

It is possible that the October panic lows will be tested once more, but the weight of evidence suggests that the bull market is not yet over. Short-term, the S&P 500 and Dow Jones are bumping against important resistance levels. A move above those levels is needed to unlock higher targets.

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.

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.

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: When Will the Trading Range Break?

There’s a time to buy, a time to sell and a time to be patient. Most of 2014 falls into the ‘be patient’ category. What’s causing this extended trading range and how much longer can it go on?

Since the beginning of the year, the S&P 500 hasn’t gone anywhere. Here’s why:

Limited Up Side

The S&P 500 has been struggling to break through technical resistance. The dashed red trend channel and solid red Fibonacci resistance have clipped the wings of the S&P 500 every time it staged an attempt to fly above resistance.

The first chart shows that aside from the January/February dip, the S&P 500 has been restricted to a range defined by predetermined support/resistance levels.

The second chart provides the long-term context needed to make sense of the highlighted support/resistance levels.

Limited Down Side

Obviously, the S&P 500 (NYSEArca: SPY) has bounced from technical support several times, but there’s been another reason why the S&P 500 hasn’t broken down.

It’s the ‘media put.’ Unlike the ‘Bernanke put’ (now Yellen put), which is cash driven, the ‘media put’ is information driven.

The media is the last entity qualified to dispense financial advice, but that’s exactly what they do. Unfortunately, enough investors are listening making the media a contrarian indicator.

Here’s some of the ‘advice’ (headlines) the media has been giving:

Yahoo Talking Numbers: “Why sell in May adage makes sense this year” – April 28
CNBC: “This chart says we’re in for a 20% correction” – May 1
CNBC: “Bubble talk catches fire among big-money pros” – May 5

The S&P 500 rarely dances to the tune of the media’s whistle, that’s why the Profit Radar Report expected a pop and drop combo to fool the ‘here comes the crash’ crowd.

The May 7 Profit Radar Report stated that: “A false pop to 1,900 – 1,915 would shake out the weak bears and set up a better opportunity to go short.”

When Will the Range Break?

The pop to S&P 1,902 on May 13 certainly rattled the cage of premature bears. A break below key support (key levels outlined in the most recent Profit Radar Report) may usher in the long-awaited 10%+ correction.

Could the correction morph into something bigger?

One indicator with the distinct reputation of signaling the 2000 and 2007 meltdowns is at the verge of triggering another ‘crash signal.’ But there’s one caveat.

Here’s the full intriguing story:

A Look at the Risk Gauge that Correctly Signaled the 2000 and 2007 Tops

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.

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

Have you been infected yet by the media’s crash talk? Most major financial media outlets predict a correction or outright crash. There are reasons to be worried about the ‘May Blues’ (sell in May and go away), but there’s also reason not to worry, yet.

According to CNBC, Dr. Doom is worried about a crisis bigger than 2008, and so should you.

There truly are reasons to expect some weakness (aka the ‘May Blues’), but perhaps just not yet.

Why Look for May Blues

1. Seasonality: S&P 500 seasonality for midterm election years is bearish. Click here for S&P 500 seasonality chart.

2. The Nasdaq-100 may be carving out a head-and shoulders pattern.

3. Stock market breadth is deteriorating. A truly rising tide lifts all boats, this rally isn’t. Large caps are in, small caps are out.

The chart below plots the S&P 500 (SNP: ^GSPC) against the IWM:IWB ratio. The IWM ETF represents the small cap Russell 2000, the IWB ETF represents the large cap Russell 1000.

The IWM:IWB ratio shows small caps quickly erasing an 11-months performance advantage.

Although this is a reflection of fragmentation, it should be said that, historically, this disparity does not foreshadow major immediate weakness.

Why Look for May Blues … Later

Simply because the media is looking for a crash right now.

CNBC: “I’m worried about a crisis bigger than 2008: Dr Doom”
MarketWatch: “Risk of 20% correction highest until October”
Investors Business Daily: “Why investors expect to ‘sell in May and go away’”
CNBC: “Wells Fargo strategist presents scary chart”

Based on various cycles, technical indicators and seasonal patterns, the Profit Radar Report proposed a May high back in January when it published the 2014 Forecast.

This outlook continues to be valid, however, it has now become the crowded trade.

The market will likely find a way to shake out the weak and premature bears, and fool the herd (the May 4 Profit Radar Report outlined the most likely route of this head fake).

In terms of technicals, the S&P 500 (NYSEArca: SPY) remains above important support and still within a chopping zone, obviously designed to hurt impatient investors. As long as this support holds, it’s dangerous to go short.

Even the weak Russell 2000 remains above an important support cluster (yes, more important than the 200-day SMA).

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.

If You Think the Market is About to Crash, Buy Stocks

What? Something’s wrong with this headline! Why would you buy if the market is about to crash? Look again. When investors think the market is about to crash, may actually be a good time to buy, if …

A watched pot doesn’t boil and a ‘watched’ market doesn’t crash.

Are investors watching signs for an impending market crash? It seems like they are.

Today and 1929

In February, charts like this one published by The Atlantic under the headline “That Viral Chart Predicting Another 1929 Stock-Market Crash?” made their rounds.

The chart compares the Dow Jones Industrial of the late 1920s with the Dow Jones of the early 2010s.

Today and 1987

Today, the S&P 500 chart shown below is stoking people’s imagination. It was published by USA Today under the headline “Is a 1987-type Market Crash 37 Days Away?”

Admittedly, articles like the ones mentioned above are anecdotal in nature, but they are published because that’s what people want to read right now (Barron’s just asked again: “Bubble or No Bubble”).

Just because it’s anecdotal doesn’t mean it’s garbage. Back in 2013, the March 10 Profit Radar Report looked at the Dow’s new all-time high and observed the following:

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.”

Once every month the Profit Radar Report takes a detailed look at investor sentiment (this report is called the ‘Sentiment Picture’). The Sentiment Picture plots various sentiment gauges against the S&P 500 (SNP: ^GSPC)  to illustrate how current extremes (if there are any) affected the S&P 500 in the past.

This comprehensive look at sentiment raised two red flags in 2013. One in May and one in December, when the Sentiment Picture warned that: “Bullish sentiment will catch up with stocks in January. This should cause a deeper, but also temporary correction.”

The correction came in January/February and basically reset investor sentiment.

Current Sentiment Reading

Although the S&P 500 (NYSEArca: SPY) is back near all-time highs, investor sentiment isn’t. The chart below, courtesy of the March 20, 2014 Sentiment Picture, illustrates sentiment.

There are no real extremes, which means there are enough potential buyers out there that could drive prices higher.

The lack of sentiment extremes doesn’t mean stocks must move higher. In fact, seasonality is soon turning bearish and the S&P 500 is butting against key long-term resistance.

The S&P 500 has peeled away from this resistance several times. Obviously if the S&P thinks this resistance important, so should we.

Here are two charts that illustrates the S&P’s most respected resistance (warning: the charts will probably change the way you look at the S&P 500):

S&P 500 – Stuck Between Triple Top and Triple Bottom – What’s Next?

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.