Short-term S&P 500 Forecast

Here is a brief excerpt from Sunday’s (November 15) Profit Radar Report (PRR), which highlighted the key short-term S&P 500 level to watch … and much more:

“The S&P 500 chart is painting a truly fascinating constellation. First we’ll take a look at the two most likely outcomes, than we’ll discuss probabilities.

The S&P couldn’t get off the mat at 2,040, which resulted in a drop to 2,022, as proposed in the November 12 PRR.

2,021 is a special support level. Why? (see blue bubbles)

  • It’s the September spike high
  • It acted as support/resistance in October
  • It is the 38.2% Fibonacci retracement level of the rally from the August 24 low to the November 3 high.

Elliott Wave Theory is another facet adding to the allure of the 2,021 level. The S&P rallied in a discernable 3-wave pattern from the August 24 low (black numbers).

If the rally from the August low is a counter trend move, it likely ended on November 3 at 2,116.48. If that’s the case, the S&P should work its way towards and perhaps beyond the August low (red arrow).

If the rally from the August 24 low wants to turn into a 5-wave move, the rally is likely to continue next week. If that’s the case, the decline from the November 3 high is a wave 4 correction, followed by a wave 5 rally to new highs (green number + green arrow).

Based purely on chart analysis, both scenarios are equally viable.

The CBOE Equity Put/Call Ratio (dark blue – bottom graph) shows that option traders are bearish to an extreme.

S&P 500 seasonality (light blue – top graph) is predominantly bullish for the remainder of the year.

S&P 500 futures are currently down 8 points and were down as much as 20 points in Sunday night’s trade. If weakness continues overnight, the S&P 500 cash index may open below 2,020 in the morning.

Stocks are oversold and a gap down open could easily be reversed. Just as it wasn’t smart to chase the up side in early November, it isn’t prudent to chase the down side at this moment.

We will consider going long the S&P if it drops below 2,020 and subsequently closes above 2,020.”

The green bars show the performance since Sunday. As suggested by the CBOE equity put/call ratio and seasonality, the S&P 500 bounced from key support at 2,020.

The simplified conclusion is that the path of least resistance is up as long as support at 2,020 holds.

A break below 2,020 does not necessarily have to be bearish, but it would complicate the structure and possibly result in a whipsaw across 2,020

Continued updates are available via the Profit Radar Report.

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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Equity Put/Call Ratio Near Multi-Year High

On Friday, the equity put/call ratio rose to the second highest reading in years. This means that option traders are loading up on put protection, an indication of unusual fear (consider that the S&P 500 is within two percent of its all-time high).

Sunday’s Profit Radar Report update featured the chart below and stated the following:

The S&P 500 is in the middle of its trading range, just above the 200-day SMA. The equity put/call ratio (5-day SMA) is near one of the highest readings in years (0.78). This has lead to gains, or at minimum limited down side in the past. Based on sentiment (in particular the equity put/call ratio), it is hard to believe that stocks will drop hard. A bounce is more likely.”

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 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.

Market Pulse: Is Investor Sentiment Really ‘Dangerously Bullish’?

How bullish are investors really? There are different types of investors, individual investors, institutional investors, traders, smart money, dumb money … and there’s a gauge for each group. Here’s a look at six different investor sentiment indicators.

The market has been stuck in yet another waiting pattern, so we might as well use the time to look at the forces that may (or may not) jolt stocks out of their waiting loop.

According to many, overheated investor sentiment will break the stale mate and send stocks spiraling lower.

There’s just one flaw with this line of reasoning. Sentiment is not overheated.

The Profit Radar Report continuously analyzes how investors feel about stocks and publishes a comprehensive sentiment picture once a month.

The chart below, which plots the following six sentiment gauges against the S&P 500 (NYSEArca: SPY), was published in the August Sentiment Picture on August 29:

  • CBOE SKEW
  • Equity put/call ratio
  • CBOE Volatility Index (VIX)
  • NAAIM survey of active money managers
  • II survey of investment advisors
  • AAII survey of individual investors

Where are the sentiment extremes?

There’s only one: Last week 51.92% of individual investors were bullish. That’s the highest reading since December 24, 2013. The red lines highlight other 50%+ spikes and how the S&P 500 reacted.

Yes, the bullish December AAII reading was followed by a January pullback, but there’s a big difference between today and December: No other indicator is confirming August’s AAII spout of enthusiasm, and AAII bulls are back down to 44.70%.

There was one more extreme not illustrated by the chart: The percentage of bearish investment advisors polled by II dropped to 13.3%, the lowest reading since 1987. This is a legitimate extreme.

The August 29 Sentiment Picture summed up the big picture sentiment situation as follows:

Perhaps most noteworthy is that we continue to see isolated sentiment extremes, but the source of such extremes only rotates (the SKEW and put/call ratio in July, the AAII poll in August), it doesn’t compound. We see different gauges hit overheated levels at different times, but never all at the same time.

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.

Based on sentiment, we could see 1) a continued grind higher interrupted by the occasional 3-10% correction or 2) a prolonged period of choppy sideways trading.”

Bottom line, sentiment is not extreme enough for a big scale market top.

The most important market breadth indicator, which correctly foreshadowed the 1987, 2000 and 2007 crashes, also doesn’t show the deterioration needed for another crash.

More details about this must-know indicator can be found here: How to Discern a Major Market Top

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.

Obvious Yet Hidden – The Long-Awaited S&P 500 Correction Already Happened

A lot can happen when you’re not looking, but a lot can happen even when you are looking. While everyone’s been waiting for the illusive correction, the S&P 500 ‘Richter scale’ actually shows the correction has come and gone.

If you define correction as a 10% drop, the S&P 500 hasn’t had one in well over 1,000 days.

This is the longest correction-free streak since the 1,127-day run from July 1984 to August 1987.

But, corrections are not like annual holidays, they are more like earthquakes. Corrections don’t appear on schedule and they are not always felt the same way.

Although the Richter scale may register a magnitude 3.5 earthquake, it may not be felt by all residents.

The same is true with market corrections. Not all corrections are created equal, and the ‘S&P 500 Richter scale’ may have registered a correction that wasn’t felt by every investor.

In fact, the chart below shows a perfectly legitimate correction period. How so?

Via the May 14 Profit Radar Report, I explained the ‘covert’ correction as follows:

I’d like to take a moment to talk about the potential for an extended rally. For many months analysts have emphasized (and continue to emphasize) the need for a 10% correction. There are two ways stocks can correct: 1) Price 2) Time.

A price correction is straight-forward and easy to spot as stocks simply shed value. Time corrections are often overlooked by the investing masses as prolonged sideways trading covertly digests oversold readings and excessive sentiment.

What we’ve seen since February delivers both. The S&P 500 and Dow Jones have treaded water while the Nasdaq-100 and Russell 2000 already lost as much as 8.67% and 8.71%, the biggest correction in well over a year.

As pointed out in a number of prior Profit Radar Reports, investor sentiment has dropped quite a bit. The percentage of AAII bears is down to 28.34% and various media outlets have boldly gone on record predicting a crash or severe correction.

The chart below plots the S&P 500 against the CBOE Equity Put/Call Ratio. Prior corrections were preceded by a put/call ratio around 0.5 or below (= option traders buy two calls for every put). Today the put/call ratio is at 0.72, a level that’s indicative of a low more than a top.”

Below is the chart referenced in the May 14 Profit Radar Report. It shows that the S&P 500 corrected internally. 3 ½ months of sideways trading created enough of an oversold condition (based on option trader sentiment) to serve as a foundation for the next rally.

In addition, the Russell 2000 lost as much as 10.75% from March 4 to May 15.

In short, there was a correction. For the S&P 500 it was a correction by virtue of time, not price.

From April to July the S&P 500 tagged on 160 points. Now we ask if the market is due for another correction or if it will keep grinding higher?

To help discern, we look at the same indicator that projected a rally without price correction months ago. This is probably one of the most unique (und recently accurate) indicators you’ll ever see:

The Only Indicator that Foresaw a Persistent S&P 500 Rally Without 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.

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

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

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

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

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

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

Is the Put/Call Ratio Warning of a Crash?

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

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

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

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

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

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

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

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

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

A complimentary look at the updated 2014 S&P 500 Forecast is available here:

Updated 2014 S&P 500 Forecast

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

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

Two Sentiment Gauges Reach Multi-Year Bullish Extremes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is the S&P 500 Overvalued?

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

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

Did the Strong 2013 Market Cannibalize 2014?

2013 ended on a high note as the S&P 500 closed at the highs for the year and so did investor sentiment. So many investors are bullish; it’s worth asking how many buyers are left? Did the 2013 gains cannibalize 2014 performance?

2013 is in the bag and I’m probably not the first one to tell you that it was the best annual performance for the S&P 500 since 1997.

But that’s in the past, here’s what’s important today: Did the 2013 strong S&P 500 mortgage 2014? This probably depends on how many buyers are still out there.

A stock market without new buyers fizzles out like a fire without wood. Are there enough buyers left to drive prices higher in 2014?

The chart below plots the S&P 500 against four different sentiment measures:

  • CBOE SKEW Index (10-day SMA)
  • Percentage of bullish advisors polled by Investors Intelligence (II)
  • CBOE Equity Put/Call Ratio (inverted, 10-day SMA)
  • Percentage of bullish investors polled by AAII

To filter out some of the noise created by six years of daily data, I’m using the 10-day simple moving averages (SMA) for the CBOE SKEW Index (click here for a detailed explanation of the SKEW Index) and CBOE Equity Put/Call Ratio. The put/call ratio has been inverted to provide a better visual.

How committed are investors to the current rally?

  • The SKEW is at a 15-year high.
  • The percentage of bullish advisors is nearly as high as in October 2007.
  • The put/call ratio is the lowest since December 2010.
  • Individual investors are the most bullish in two years.

In short, buyers are already committed, which means there are not many individual buyers left (of course the Federal Reserve is still out there).

Buyers Beware

Sentiment was equally frothy only twice in the past ten years: October 2007 and December 2010 (purple boxes).

We all know what happened in 2007. In 2010 the S&P 500 (NYSEArca: SPY) and Dow Jones (NYSEArca: DIA) continued higher for several weeks before giving back a year’s worth of gains in a matter of weeks.

Summary

At this point we do not know how much upside is left (I believe it’s limited), but that there should be a correction, quite possibly a nasty correction, in the not so distant future.

Rather than hitting the sell everything button right now, it may be smarter to equip equity holdings with a trailing stop loss.

This allows you to milk the upside and limit down side risk.

The most effective stop-loss levels for stocks in general, and Dow Jones in particular, is revealed here. It’s so effective; I call it legal insider information.

Insider Trading just Became Legal – The Perfect Stop-loss Level

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.