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.

 

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This is the First Time the Dow Jones has Done This in 105 Years

Assuming this hasn’t put you asleep, you know that the Dow Jones (NYSEArca: DIA) has been taking a giant dirt nap.

In fact, by one measure, it’s the longest dirt nap since 1910, and soon to be the longest ever.

The Dow Jones has not recorded a 1-month high or low (based on closing prices) for 42 days.

According to Lyons Fund Management, the longest such stretch dates back to 1910 and lasted 45 days.

In itself, this is remarkable, but the next stat makes it even more remarkable.

For the past 26 trading days, the Dow has been stuck in a 2% trading range (based on closing prices). This is one of the tightest ranges of the last 25 years, and the tightest range without a new 1-month high or low ever.

 

If you read the Profit Radar Report, this range comes as no big surprise. Back on March 29, the Profit Radar Report observed that: “S&P 500 today is exactly where it was November 18, and there’s no indication that the up and down zig-zagging is coming to an end.

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 … An Intriguing NYSE Composite Chart

Perhaps the most fascinating chart right now is that of the NYSE Composite. It features two developments worth exploring:

  1. Island reversal
  2. Bearish wedge

The NYSE Composite includes all stocks listed on the NYSE, about 1,900. Unlike the S&P 500 (NYSEArca: SPY) or Dow Jones (NYSEArca: DIA), the NYSE Composite actually reached a new all-time high on Thursday.

The new all-time high was short-lived and followed by a massive gap down the next morning.

Island Reversal

This gap lower created an island reversal. Some analysts consider island reversals indicative of a major trend change, but the Technical Analysis book by Edwards and Magee describes it as follows:

“The island pattern is not in itself of major significance, in the sense of denoting a long-term top or bottom, but it does as a rule send prices back for a complete retracement of the minor move which preceded it.”

It’s probably up to debate where the last minor move started, but at Friday’s low the NYSE Composite already touched minor support.

In addition, as Sunday’s Profit Radar Report pointed out, there’s an open chart gap, and the post-2009 bull market has filled every chart gap.

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Open gaps are like unfinished business, and with the gap closed this morning, the NYSE Composite doesn’t ‘have to’ move any higher.

Bearish Wedge

In fact, the NYSE Composite has formed a potentially bearish wedge formation (bold trend lines). It takes a break below the green trend line to activate lower targets, but last weeks island reversal throw-over top may be an early indication of an upcoming correction.

Trade Setup

Last week’s all-time high is important for the short term, and going short against it presents a low-risk trade setup with a favorable risk/reward ratio.

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.

 

Bullish or Bearish? Dow Jones Averages are All Over the Place

All for one and one for all may have worked for the Three Musketeers, but it’s not working for the Dow Jones Averages.

All three Dow Jones Averages are pulling in different directions.

The Dow Jones Industrial is near its all-time high. The Dow Jones Utility just came off a nine-month low and the Dow Jones Transportation Average has been stuck in neutral for four months.

Here’s a look at all three averages and an attempt to interpret the meaning of the broad Dow Jones disharmony.

Dow Jones Utility Average (DJU)

The Dow Jones Utility Average (DJU) lost as much as 14% from January 28 to March 11.

On March 11, the Profit Radar Report noted that: “Utility stocks are down 13% from their recent high, and every stock component of the Utility Select Sector SPDR ETF (NYSEArca: XLU) is trading below its 50-day SMA. RSI is at a level that sparked rallies in June 2013 and August 2014. XLU trend line resistance is just below today’s close. Unlike XLU, the Dow Jones Utility Average already close below its trend line. Nevertheless, utility stocks are compressed and should soon spring higher.”

The latest rally started on March 12, and as long as support at 585 – 574 holds, DJU may continue higher.

Dow Jones Transportation Average (DJT)

The Dow Jones Transportation Average (DJT) has been stuck in a multi-month triangle, and is threatening to close below triangle support.

A break down below the ascending green trend lines has to be graded bearish (unless it reverses). Next support is at 8,800 and 8,600.

The iShares Transportation Average ETF (NYSEArca: IYT) tracks the DJT.

Dow Jones Industrial Average (DJI)

The Dow Jones Industrial Average (DJI) just fell below long-term Fibonacci support/resistance at 18,004, which is also where the 20-day SMA is.

This allows for continued weakness.

The SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) tracks the DJI.

Bearish Divergences?

The lack of confirmation among the Dow Average isn’t a bullish development, but thus far the key U.S. indexes are not displaying signs of a major market top (for more details about the indicator that’s identified the 1987, 2000 and 2007 tops go here: Is the S&P 500 Carving Out a Major Market Top?).

Until we get the same kind of deterioration seen at prior bull market highs, divergences among the Dow Average may just be a distraction.

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.

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.

Dow Jones Averages Did Not (Yet?) Confirm S&P 500 Highs

The S&P 500 is at new all time highs, and, as the weekly bar chart shows, there’s some room until it hits next resistance.

However, the Dow Jones Industrial Average (NYSEArca: DIA) and Dow Jones Transportation Average (NYSEArca: IYT) failed to surpass their prior highs.

But, the Dow Jones Transportation Average (DJT) managed to close above red trend line resistance (blue circle), which is short-term bullish.

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Viewed in isolation, the S&P 500 (NYSEArca: SPY) breakout is bullish, but it has not yet been confirmed by other major market participants.

The trend is your friend … until it ends. Seasonality suggests a rally pause. Here’s a brand new and detailed S&P 500 seasonality chart.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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

3 Must Know Facts about the Most Economically Sensitive Company in the World

Many investors look at economic indicators to gauge what’s ahead for stocks, but price is always the final arbiter. Here is one stock that’s more heavily intertwined in the global economy that any other, it’s also the biggest Dow component.

What’s most likely the most economically sensitive company in the world? Here are three clues:

  • You probably carry it in your wallet
  • In 2008 it become the largest IPO in U.S. history (surpassed by Alibaba in 2014)
  • It is the most influential component of the Dow Jones Industrial Average

VISA (NYSE: V)

According to a 2008 Nilson report, Visa held a 38.3% market share of the credit card market place and 60.7% of the debit card market place in the U.S.

In 2009, Visa processed 62 billion transactions worth $4.4 trillion globally.

When consumers spend money, Visa makes money. When Visa makes money, the economy must be doing well. But, when Visa shares head lower, it may foreshadow trouble for the economy and the stock market.

Here are three must know facts about Visa:

  1. The Visa chart is showing a breakdown below a 3-year support line. Additional support is around 206. Resistance is around 219. Investors should know that Visa doesn’t issue cards or extend credit. Visa only provides the Visa-branded products and charges for processing transaction. Visa is not on the hook for delinquent or unpaid bills, but a decreasing volume of transactions (shy consumer) does affect its bottom line.
  2. There’ve been many calls for a market top, bubble burst and outright market crash. No doubt this QE rally is quite aged, but the final leg higher seems still ahead.

    The older bull markets get, the more selective investors become. In their search for value, investors tend to flock towards large cap stocks. Which are perceived to be safer in a late stage bull market. Visa should (once this correction is finished) benefit from this large cap preference.

  3. Unlike most other major market indexes, the Dow Jones is price-weighted. With a price tag of $210, Visa is the biggest component of the Dow Jones (NYSEArca: DIA).

Visa’s price affects the Dow Jones more than any other stock.

Visa is not just an economically sensitive company, its stock is also a big player on Wall Street.

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.