Can We Still Trust the Investors Intelligence Sentiment Poll?

Doing the same thing over and over again, but expecting a different outcome is often considered insanity.

By that definition, some analysts are legitimately insane. Why?

Because they’ve doomed the stock market based on bullish investor sentiment, and have been doing so for many months, even years.

You will see what I mean upon further inspection of the chart below.

Since late 2013, the Investors Intelligence (II) survey of advisors and newsletter writers has shown (extreme) bullish sentiment.

Illustrated via the chart is the percentage of bearish advisors. This percentage has been around 14 since late 2013, which happens to be the lowest since 1987.

And since late 2013 (and way before that), Elliott Wave International (one of many market forecasting services that’s been spreading doom and gloom) has been warning that a 2008-like meltdown is directly ahead.

The cold fact is that the S&P 500 has tagged on another 20%+ since 2013.

This is not the data’s fault. It’s the interpreter’s fault … and an unfortunate symptom of tunnel vision. Perhaps the II poll has just become too popular to be effective as contrarian indicator, and lost its mojo.

II is not the only sentiment data available, and it’s the analyst’s responsibility to determine the validity of the II survey in context with other sentiment data. Now more than ever, it’s important to widen the horizon and look at other sentiment gauges.

The Profit Radar Report monitors dozens of sentiment indicators and consistently publishes at least six every month.

For example, the February 19 Profit Radar Report Sentiment Picture summed things up as follows: “In short, sentiment is elevated, and may be a short-term drag, but is not indicative of a major market top.”

Throughout 2013 and 2014, the Profit Radar Report pointed out the lack of excessive optimism and likelihood of higher stock price (click here for a more complete record or the 2014 sentiment analysis).

Here is a look at the latest Sentiment Picture, published on May 29.

The two charts categorize various sentiment gauges as either opinion poll (what investors say) or money flow (what investors do).

The American Association for Individual Investors (AAII) and National Association of Active Investment Managers (NAAIM) opinion surveys do not confirm the bullish (bearish for stocks) tone of the Investors Intelligence poll.

Three other sentiment gauges more closely related to actual money flow do not show any real extremes.

What’s the moral of the story?

Don’t trust fear mongers or ‘one trick pony’ predictions based on any single sentiment gauge.

We live in a complex world. We need complex analysis.

Oh, on by the way, purely based on sentiment, stocks could continue to grind higher.

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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I Spy … A Rare VIX Signal for the S&P 500

The 30-day VIX (VIX) is trading 23% lower than the 90-day VIX (VXV). This means VIX traders are less concerned about shorter-term (30-day) volatility than longer-term (90-day) volatility.

You may be thinking short-term complacency is a contrarian indicator … and you are right.

To provide a visual of short-term complacency, I’ve calculated the ratio between VIX and VXV and plotted it against the S&P 500.

For only the second time since April 2013, the VIX:VXV ratio dropped below 0.78 (view a long-term version of the VIX:VXV ratio chart here)

Prior sub 0.79 readings are highlighted with a dashed red line.

 

The conclusion is more or less self-explanatory.

This indicator has a pretty good track record and increases the odds of a S&P 500 (NYSEArca: SPY) pullback and VIX rise. Long VIX ETFs include the iPath S&P 500 Short-term VIX Futures ETN (NYSEArca: VXX) and VelocityShares Daily 2X ST VIX ETN (NYSEArca: TVIX).

Two things to keep in mind:

  • This is likely to be a short-term (3 – 10 days) trade.
  • In terms of risk management; a VIX close below support at 12.70 would temporarily (as long as it stays below 12.70) suspend the potential for a spike.

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.

One Measure of Investor Optimism Hits Extreme Low

The latest American Association for Individual Investors (AAII) poll shows a significant drop in optimism.

Only 27.2% of individual investors are bullish on stocks. That’s the lowest reading since April 2013.

How powerful of a contrarian indicator is this?

The chart below plots the S&P 500 against the percentage of bullish AAII investors.

The dashed green lines mark bullish reactions to similar readings in the past, the red lines bearish reactions and the gray lines neutral (at least short-term) reactions.

 

Well, there are six prior instances with two bullish, two bearish and two neutral outcomes. Not much of an edge.

The AAII survey generally delivers noisy data and hardly ever works as a stand-alone contrarian indicator.

Compared with the many other investor sentiment gauges I follow, this reading stands out as a rogue extreme.

It’s one of those data points that should be taken with a grain of salt, but as long as the S&P 500 stays above 2,100, it shouldn’t be ignored either.

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.

Contrarian Indicator? Longer-term VIX Fears Far Outweigh Short-term Concerns

Investors are more concerned about implied 3-month S&P 500 volatility than 1-month volatility. How do we know that?

The ratio between the CBOE Volatility Index (VIX) and CBOE S&P 500 3-month Volatility Index (VXV) was just at 0.79, the lowest reading in 2015.

It is a sign of complacency when investors are more concerned about 3-month than 1-month volatility. Is it also a contrarian indicator?

The chart below plots the VIX:VXV ratio against the S&P 500 (NYSEArca: SPY). The dashed red lines mark all sub 0.80 readings since 2010. There were only four similar signals since the beginning of 2013. While not flat out wrong, the signals came either a bit too late or didn’t result in noteworthy weakness.

The VIX:VXV ratio is more valuable for bottom fishers than top pickers. Spikes above 1.1 have been more predictive of tradable lows than sub 0.8 readings of tradable tops.

What about overall investor sentiment? Is overall investor sentiment worrisome? Here is a detailed look at six different investor sentiment gauges:

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

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 Eerily Accurate Indicator is the Best at Being the Worst

Two positives makes a negative and too much success is the worst thing that can happen to a contrarian indicator. This particular ‘indicator’ is so accurate, because the underlying opinions are ‘the best at being the worst.’

  • “This chart says we’re in for a 20% correction”
  • “An overdue stock market selloff is looming”
  • “Stocks are telling you a bear market is coming”
  • “This chart shows why the market is in trouble”

Before you call me a fear monger, allow me to clarify that those headlines are from May 2014.

As it turns out, whatever stocks or charts were ‘telling’ us, wasn’t the truth. It probably wasn’t as much of a stock market lie, than the media getting the signals wrong. There was no bear market, no 20% correction and no real ‘trouble.’

Here are more recent headlines:

  • “Buyer beware? Investor sentiment at highest level of 2014”
  • “Why the stock market is weaker than it looks”
  • “Are you prepared if the market tanks in Q4?”
  • “Don’t get suckered by stock market winning streak”

Purely based on the second set of headlines, I wrote in the November 5 Profit Radar Report:

Media attention on bullish sentiment could be a contrarian contrarian  (two negatives make a positive) indicator and actually be net positive. Investment advisors and newsletter-writing colleagues (polled by Investors Intelligence) are embracing this rally. The percentage of bulls has soared from 35.3% on October 21 to 54.60%. This is the largest jump in nearly 40 years. Perhaps surprisingly, this is not as contrarian a signal as it appears. Furthermore, advisor optimism is somewhat neutralized by media pessimism and headlines such as: “This stock market rally is for suckers” – MarketWatch and “Don’t buy into stock market craziness” – CNBC. Media bearishness is not as extreme as it was in May/June, but it may be significant enough to continue propelling stocks higher.”

Too much success is the worst thing that can happen to a contrarian indicator (such as investor sentiment).

A contrarian indicator with mainstream appeal loses its effectiveness, just like a rare commodity that’s suddenly available in abundance (imagine what would happen to gold prices if everyone suddenly found a couple pounds of the yellow metal in their backyard).

The Profit Radar Report not only monitors dozens of sentiment indicators, it also gauges media exposure of any specific indicator and media sentiment in general.

Fortunately, media sentiment has been one of the most accurate indicators of the year. This indicator remains so right, because cover stories tend to be so wrong.

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 is Suffering From Most Unique Conundrum Ever! 3 Charts Why

The S&P 500 is not only stuck in a trading range. It’s also stuck in a conundrum of historical proportions. Analysis paralysis suffered by a variety of investors has rarely widespread. Why and what does it mean?

The S&P 500 is incapacitated by a sentiment tug of war.

Every trading day awakens to doomsday prophets, spreading their bearish gospel.

Ironically, doomsday prophets are right. Many trustworthy indicators have indeed pointed to a sizeable correction … and yet they’ve been so wrong.

When Will This ‘Broken Clock’ Be Right?

Even a broken clock is right twice a day, but the S&P 500 headline chart below shows that the media at large has been wrong, very wrong, for very long.

Fear the Fear Mongers, Not the VIX

One of the reasons many have been expecting a market crash is because of the VIX, which was recently at an 88-month low. The ‘original VIX’ even dropped to an all-time low. The chart below plots VXO against the S&P 500 (NYSEArca: SPY).

The original VIX – VXO – is now known as the CBOE S&P 100 Volatility Index. In 2003, the original VIX was renamed VXO and replaced by the VIX as we know it today. VXO is essentially the VIX for the biggest large cap stocks.

By now every novice investor and their grandma ‘knows’ that a low VIX leads to major market tops. But that reasoning couldn’t be more flawed.

On June 16, the Profit Radar Report ousted this false line of reasoning with three powerful charts in a controversial report: “The VIX is too LOW for a major market top”.

Regardless of the VIX implications for the S&P 500, it reflects a level of complacency that contradicts the financial press’ pessimism.

Sentiment Divergence

Investor sentiment is a powerful contrarian indicator, but current sentiment gauges are all over the map.

The image below quantifies the level of analysis paralysis among investors better than any other chart.

It plots the S&P 500 against the spread between two different sentiment polls. The Investors Intelligence (II) survey of investment advisors and the American Association for Individual Investors (AAII) survey of retail investors.

Advisors are predominantly bullish, investors neutral to bearish. The divergence between both opinions has rarely been more visible and is more persistent than at any other time in recent history.

Who should we trust? The media? Investment advisors? Retail investors?

Conclusion

No doubt, hindsight will bring the answer. Based on the current fragmentation, both bulls and bears will likely have a tough time to stage a sustainable move.

It will probably take a ‘tiebreaker’ to unlodge the trading range. A break of support should give bears the upper hand in this struggle (otherwise expect a grind higher).

The Profit Radar Report used an unconventional indicator to identify key support more than two weeks ago. Since then it’s been tested (and proven correct) five times.

Here’s a free look at key support and the analysis usually reserved for subscribers of the Profit Radar Report.

S&P 500 Outlook: S&P Bounces from Support

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.