Surprising Bearish Sentiment Extremes are Popping Up

Stocks have been trading in a tight range near all-time highs, but an increasing number of investors wouldn’t want to touch stocks even with a ten-foot pole.

This is somewhat unusual, but is it bullish for stocks?

Here are three sentiment gauges worth noting, and how to make sense of them:

  1. The percentage of retail investors polled by the American Association for Individual Investors (AAII) has shriveled to the lowest reading since April 2013.

    The chart below plots the S&P 500 (NYSEArca: SPY) against the % of bullish investors. The red lines mark similar levels, and how such readings affected the S&P 500.

  2. The four biggest index ETFs – S&P 500 (NYSEArca: SPY), Nasdaq QQQ ETF (Nasdaq: QQQ), iShares Russell 2000 (NYSEArca: IWM), Dow Jones Diamonds (NYSEArca: DIA) – suffered $16 billion worth of withdrawals in April, one of the worst months (for index providers) on record.
  3. According to the Commodity Futures Trading Commission’s (CFTC) commitment of traders (COT) report, the ‘smart money’ has reduced short equity exposure while ‘dumb money’ is selling stocks.

When viewed in isolation, the above-mentioned sentiment developments are bullish for stocks. However, they are contradicting the bearish message conveyed by seasonality and market breadth.

For now, we probably shouldn’t blow such bearish sentiment messages out of proportion. Stocks are still stuck in a range, and the contradiction between indicators may just perpetuate the range, or stretch it.

I would watch S&P 2,118 as line in the sand. A break above 2,118 would likely reel in buyers. Although it may not be long before ‘buyers remorse’ sets in again.

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.

 

Smart Fed Fund Money Projects New S&P 500 Lows

The 30-day Federal Funds Rate (FFR) is the rate that banks charge each other for overnight loans to meet their reserve balance requirements. The FFR, in essence, acts as the base rate for all other U.S. interest rates.

With a couple of tweaks the stale FFR can be turned into a forward-looking indicator. Here are the tweaks:

  • We look at FFR sentiment provided by the commitment of traders (COT) report. We are mainly interested in the net positions of commercial traders (considered the ‘smart money’).
  • We shift the COT sentiment data forward by 4 weeks.

We used the FFR to spot onset of last year’s May rally (when everyone was looking for ‘sell in May and go away’). Fed Fund Rate Suggests S&P 500 Rally

The January 4 Profit Radar Report drew attention to the following:

Commercial traders slashed their bullish 30-day Federal Funds Rate (FFR) bets by 37,812 contracts, the largest drop since December 2012. The correlation doesn’t always work, but the biggest drop since December 2012 is noteworthy. The FFR warns of a correction.”

The chart below is an updated version of the one featured in the January 4 Profit Radar Report. It plots the S&P 500 (NYSEArca: SPY) against the net FFR position of commercial traders.

Last week’s COT report showed a solid uptick in commercial’s long positions, but 1) it remains to be seen if the trend continues up and 2) there appears to be more down side before any up tick.

The FFR harmonizes with most other indicators I follow. A more detailed S&P 500 forecast is available here: Short-term 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.

Fed Fund Rate Suggests S&P 500 Rally

Here’s yet another indicator that the Federal Reserve legally ‘manipulates’ the stock market. This chart shows the correlation between the S&P 500 and the 30-day Fed Fund Rate. Based on this unique correlation, stocks should rally (at least temporarily).

Market correlations are never married for better or for worse or until death do they part, but they are valuable tools for market forecasters.

There are dozens of correlations. Some are logical and make sense, others are exotic and off the wall.

This piece is about the correlation between the S&P 500 (SNP: ^GSPC) and the 30-day Federal Funds Rate (30 FFR).

The Federal Funds Rate (FFR) is the interest for which a depository institution lends funds maintained at the Federal Reserve to other depository institutions.

The 30 FFR reflects the average daily FFR in a particular month and is investable via the 30-day Federal Funds Futures.

The Commitment of Traders Report (COT) provides a glimpse of how traders feel about the 30 FFR, and that’s where it gets interesting.

The COT tracks positions of commercial, non-commercial and non-reportable traders. Commercial traders are considered the ‘smart money.’

Commercial traders have been piling into the 30-day Federal Funds Futures, basically betting on a higher FFR.

The FFR essentially acts as the base rate that determines all other interest rates in the US.

There generally is a direct correlation between Treasury rates and stock prices. That’s what makes the 30 FFR an interesting forward-looking indicator.

How is it forward looking?

The chart below plots the S&P 500 against the 30 FFR shifted forward approximately 30 days or four weeks (the COT reports weekly).

The green portion of the 30 FFR chart reflects the outlook for the next four weeks.

The second chart shows the long-term correlation between the S&P 500 and 30 FFR.

It’s worth noting that commercial traders’ 30 FFR long positions are near an all-time high. Therefore, up side could be limited.

For now, the Fed Funds Rate confirms what we foresaw already last week: Higher prices.

My thoughts, shared via the May 4 Profit Radar Report, were as follows: “The chart detective inside of me favors a shallow dip to 1,874 – 1,850 followed by a pop to 1,9xx (exact level reserved for subscribers) before we see a 10%+ correction.

I expected higher prices not because the charts telegraphed it, but because of a non-scientific yet incredibly effective indicator. More details can be found here:

Too Many Bears Spoil the Crash (or Correction)

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.

Insiders Expect Higher Copper Prices

Here’s a myth that just won’t die: As copper goes, so goes the economy. For those who believe that’s true, there’s hope. Insiders have rarely been as motivated to own copper. Here’s what it means for copper prices and stocks.

“Copper awaits further decline on global economic worries” was one of many copper-related headlines on and around March 18.

Financial reporting makes it appear as if anything ‘Dr. Copper’ does has either an effect on the economy or the S&P 500.

We’ll show later that this isn’t the case, but there’s hope for all the ‘sell everything because copper is down’ doomsday sayers. Why?

Because the smart money is gobbling up copper.

The chart below plots copper prices against the number of copper futures contracts held by commercial hedgers (data source: Commitment of Traders Report – COT).

Copper COT 3 14

Commercial hedgers include copper miners and distributors. They are considered the ‘smart money’ because they are actually involved in the copper trade.

Commercial hedgers have rarely shown more desire to own copper.

That should be good for copper prices, as long as support holds.

What does this mean for stocks in general and the S&P 500 (SNP: ^GSPC) in particular?

Here is a detailed analysis of the correlation between the S&P 500 (NYSEArca: SPY) and copper, along with an important near-term support level for copper: Is Copper Really a Leading Indicator for the S&P 500?

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.

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Gold ETF Assets Tumble To 5-Year Low, but Lack Tell-Tale Sign of Major Low

Two gold sentiment gauges have plunged to 5-year lows as investors can’t get out of gold ETFs fast enough. Extreme sentiment often sends prices higher, but the big tell-tale sign of a major low is still missing.

Is gold sentiment bearish enough for a sustainable snap back rally?

There are dozens of sentiment indicators related to broad stock market indexes like the S&P 500 (NYSEArca: SPY), but there are few for precious metals.

We looked at one of them – the Commitment of Traders Report – on December 6. Large speculators had dialed down their long futures exposure to the lowest level in five years (see chart and article here: COT Report: Large Speculators are Giving up on Gold).

Large speculators (whether it’s S&P 500 or gold) generally find themselves on the wrong side of the trade, so today’s gold bounce makes sense. But is it just a relief rally or the beginning of something big?

Here’s another, in the past reliable, sentiment gauge: Investors commitment to own gold ETFs like the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU).

According to data from State Street (SPDRs) and BlackRock (iShares), GLD and IAU held over 1,550 tons of gold earlier this year, an all-time high.

Since then however, investors have been rushing out of GLD and IAU as the combined total of gold held dropped to 1,004 tons.

Is there a correlation between GLD and IAU’s combined assets and gold price lows?

The chart below plots the price of gold against the combined total tons of gold held by GLD and IAU.

In times past, there’s been a high correlation between gold assets and gold price lows.

However, since early this year gold ETF assets have been declining without letup.

Almost every week/month has seen a new low.

Sure, when viewed in hindsight the actual gold asset low may mark a gold bottom, but unfortunately hindsight isn’t an investment strategy.

There hasn’t been a gold bear market in well over a decade. We don’t have any bear market gold ETF data, so at this point guessing how much more money investors will yank out of gold ETFs is tougher than identifying solid support for gold.

Based on the COT report and gold asset data, sentiment is bearish enough for a bounce, but we are still lacking the tell-tale sign of a lasting bottom.

This tell-tale sign accompanied all gold market lows since 2005 (see chart).

An enlarged chart and full explanation of this tell-tale sign is available here:

The Missing Tell Tale Sign of a Lasting Gold Market Low

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. We are accountable for our work, because we track every recommendation (see track record below).

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

Commercial Money is Loading Up on Short Nasdaq Positions

Commercial investors, the ‘big boys of investing’ are considered the smart money on Wall Street. It generally pays to follow their lead. Right now commercial traders are short the Nasdaq-100 to an historic extreme.

For a moment picture a boat, the kind of boat you’d take on a fishing trip or island excursion.

Now imagine your favorite football team on the boat. Everything is fine as long as all 53 players are evenly spread out over the boat.

All of a sudden a gray whale shows up and all players are moving starboard.  Now the captain screams to avoid capsizing the boat and swimming with the whale.

Right now, almost all investors are on the same side of the trade. To be exact, investors love stocks, the S&P 500, Dow Jones and particularly the Nasdaq.

Since mid-October the tech-heavy Nasdaq-100 has been on quite a streak, gaining almost 10% in less than a month.

The Nasdaq chart below plots the PowerShares QQQ (Nasdaq: QQQ), the Nasdaq-100 tracking ETF – against commercial traders net short positions in the Nasdaq e-mini futures.

Commercial Nasdaq money is now short to a rare extreme.

Commercial traders are considered the ‘smart money.’ They are not a contrarian indicator.

As the red lines bring out, the Nasdaq QQQ ETF hits a ‘rough spot’ more often than not after similar extremes (especially in the last two years).

The above Commitment of Traders (COT) data in itself should not act as a sell signal.

But the COT is confirmed by other sentiment extremes.

In fact one of them as a flawless track record of predicting S&P 500 corrections. Click here for more details on this accurate S&P 500 Correction Indicator

 

Crude Oil Speculators Are All-time Bullish – Will This Sink Oil Prices?

Large crude oil speculators have amassed a record amount of long crude oil positions. This may mean that there are few buyers left, which may be troublesome for oil prices. Furthermore, oil prices are at technical crossroads.

The latest Commitment of Traders (COT) report shows that large speculators have never been more bullish on crude oil and are holding an all-time high exposure to the ‘black gold’ (hopefully it won’t disappointment them like actual gold).

The Commodity Futures Trading Commission (CFTC) COT reports holdings data for various energy contracts and most of them show large speculators are record long.

What does that mean for oil and gas prices?

There are two key components to the short-term oil outlook. Both of them are illustrated in the chart below, which plots WTI crude oil prices against the COT large speculator data.

When large speculators were ‘all in’ in 2011 and 2012 oil prices corrected. Not immediately but inevitably.
The red trend line magnifies the potential impact of the current sentiment extreme. Oil prices are at technical crossroads as trade hovers around this support/resistance level.
ETFs that are affected by this sentiment/technical analysis combo include:
United States Oil Fund (NYSEArca: USO)
PowerShares DB Oil Fund (NYSEArca: DBO)
Ultra DJ-UBS Crude Oil ProShares (NYSEArca: UCO) – 2x leveraged long ETF
UltraShort DJ-UBS Crude Oil ProShares (NYSEArca: SCO) – 2x leveraged short ETF
The trend line suggests that bullish and bearish forces are fighting a battle over short-term supremacy right around the 103 level.
As long as trade stays above trend line support, higher prices deserve the benefit of the doubt, but sentiment suggests that the we should see a notable correction eventually.
There’s one support level that absolutely must hold and a price target that – if reached – should be very damaging to the stock market.
A more detailed analysis of oil titled ‘Will $100+ Oil Be a Problem For Stocks & The Economy” offers an insightful longer-term outlook for oil along and reveals key support and resistance levels.