How Stocks Escaped from 3 ‘Unavoidable’ Bear Markets

This bull market has been counted out many times. Just over the past few years, stocks faced three – allegedly – unavoidable bear markets … and escaped all of them.

Here are the three ‘unavoidable’ bear markets, and why stocks escaped:

Unavoidable Rate Hike Bear Market

Starting in 2015, the Federal Reserve let it be known that interest rates will be rising.

According to the pros, rising rates would sink stocks. After all, that’s why the Fed kept them near zero for so long.

However, history simply doesn’t agree with this conclusion. The April 26, 2015 Profit Radar Report used the chart below to illustrated that rising rates are not bearish.

In fact, 9 of the 13 periods of falling rates (since 1954) saw stocks rally. That’s why the Profit Radar Report concluded that: “A rate hike disclosed at the April, June, July or even September or October FOMC meetings is unlikely to coincide with a major S&P 500 top.”

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

Unavoidable Oil Slump Bear Market

Falling oil prices were the hot topic as prices dropped 50% from June – December 2014.

The general opinion was that falling oil prices would send stocks lower, like in 2008.

The December 14, 2014 Profit Radar Report ousted this bogus reasoning with the chart and commentary below:

This year’s oil price collapse differs from the 2008 collapse relative to the S&P 500. In 2008, the S&P 500 topped before oil did. In fact, the S&P 500 recorded its all-time high in October 2007 and was already down 21% by the time oil topped on July 11, 2008. In 2014, the S&P 500 recorded new all-time highs five months after oil started to decline.

The chart below plots oil against the S&P 500 and shows that falling oil prices are not consistently bearish for stocks. If history can be used as a guide, stocks are likely to hold up despite the oil meltdown.”

Unavoidable QE Bear Market

In 2008, the Federal Reserve unleashed it’s first round of Quantitative Easing (QE). A couple trillion dollars later, QE came to an end in October 2014.

Investors feared the withdrawal of QE would sink stocks (just like a junkie will crash without new fix).

The simplified logic (QE started this bull market, the end of QE will finish the bull market) seemed logical, but it wasn’t factual.

The October 5, 2015 Profit Radar Report plotted the QE money flow against the S&P 500 and concluded that: “We expect new bull market highs in 2015.”

Why?

The correlation between QE and stocks (at least in 2013/2014) did not support the notion of a bull market end. More importantly, our major market top indicator said the bull market is not over.

2016 Bear Market?

At the beginning of the year, when the S&P traded near 1,900, the media found countless of reasons why the bear market is finally here (many of them are listed here).

About six months and a 15% rally later, it’s obvious that the bull market is alive and well.

Short-term, the S&P has reached the lower end of our up side target range, so a pullback becomes more likely (more details here). However, any pullback should serve as a buying opportunity.

If you are looking for common sense, out-of-the-box analysis, check out the Profit Radar Report. It may just make you the best-informed investor you know.

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.

Is the Stock Market Rigged? … and a More Important Question

Is the stock market rigged? Many believe it is … and rightfully so.

However, there are more interesting and pertinent questions, such as:

  • To what extent is the market rigged, and how does it affect me?
  • Why do allegations of a rigged market sprout up right now?

Different Ways to Rig the Market

There are different ways to ‘rig’ the market, and there are different entities to do so.

  • High frequency traders attempt to gain a time advantage.
  • Inside traders try to get information ahead of the crowd.
  • The Federal Reserve and central banks around the globe aim to prop up equity markets via various types of quantitative easing or low interest rates. The chart below plots the S&P 500 against the actual QE liquidity flow to illustrate the correlation (or lack thereof, may the reader judge) between stocks and QE.

Regardless of the exact correlation between QE and stocks, even the Federal Reserve’s own research admitted that FOMC meetings drove the S&P 55% above fair value (more details here).

But none of the above is new or shocking.

Why Now?

Perhaps more interesting than who and how is why now?

Isn’t it curious that articles and charts (like below) about central bank liquidity driving up stocks are popping up just as the S&P 500 is breaking to new all-time highs?

There were no such claims last August or early this year when the S&P traded below 1,900. Seems like investors (and fund mangers) are fishing for excuses.

As the chart below shows, investors and fund managers were clearly under-invested at the recent lows. 3 out of 4 large cap fund managers got beaten by the S&P 500 in 2015. How to explain such dismal performance?

Central bank liquidity is a welcome scapegoat. Fund managers could (and do) essential argue: “Our research suggested lower prices, but central banks stepped in and unexpectedly buoyed stocks.”

Boycotting Yourself Out of Profits

This is the most hated stock market rally ever, that’s why it’s gone on for so long.

Today’s market hater is tomorrow’s buyer (disgruntled, but ‘better late than never’). As long as this cycle perpetuates, there’s more up side. We observed this back in 2013: QE Haters are Driving Stocks Higher

Boycotting the market by avoiding stocks may feel like the ethical thing to do, but it hurts the portfolio.

There is no question the market is rigged to some degree, but that’s not necessarily a disadvantage for open-minded investors.

Rigged or not, the stock market has responded reasonably well to time-tested indicators. A number of them pointed to a strong stock market rally.

The key question is not whether the market is rigged, it’s how do you handle a rigged market? Now is the time to be the best informed investor you know.

The latest indicator-based S&P 500 forecast is available here: Stock Market Melt-Up Alert?

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.

 

History Says: Rising Interest Rates Rarely Sink Stocks

The news-reporting powers to be have determined that rising interest rates are the bull market’s worst enemy.

In fact, the looming threat of rising rates is as unwelcome as the dreaded QE taper used to be. But wait, QE ended many months ago, and stocks are still near their all-time high (see here for detailed analysis of QE effect on stocks).

Could rising interest rates be a moot point (just like the end of QE was)? As we will see in a moment, rising rates are not as scary as many believe.

But first off, how does the Federal Reserve raise interest rates and which interest rate is the one being ‘manipulated’?

What’s the ‘Interest Rate’?

When the Federal Reserve (or the media) talks about raising (or lowering) interest rates, it is talking about the federal funds rate.

The federal funds rate is the central interest rate in the U.S. financial system. It is the interest rate at which depository institutions trade balances held at the Federal Reserve with each other overnight.

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How Does the Fed ‘Manipulate’ the Interest Rate?

The Federal Reserve sets the target rate. The target rate is currently 0 – 0.25%. The Fed ‘manipulates’ this rate via government bond purchases (i.e. the Federal Reserve reduces liquidity and raises the federal funds rate by selling government bonds).

The actual rate is determined by trading between banks. The weighted average of bank transactions is considered the effective federal funds rate (currently 0.11%).

What Really Matters: How Do Interest Rates Affect Stocks

But what really matters is how the federal funds rate affects stocks.

Here’s what the data says:

The chart below plots the S&P 500 (NYSEArca: SPY) against the federal funds rate going back to 1954.

Periods of rising interest rates are highlighted in green.

More often than not, the S&P 500 moved higher (or didn’t decline significantly) when interest rates rose. The few exceptions are marked with a red box.

Most recently, the S&P 500 rallied when rates were buoyed starting in 2004 and 1998.

The green areas clearly show that rising rates are not bearish for stocks.

However, it needs to be pointed out that when the stock market rolled over in 2000 and 2007, the Federal Reserve had a lot of room to lower rates and stimulate growth.

That is not the case today. If this economic recovery does not stick, and stocks fall, the Federal Reserve won’t have much room to lower rates. It would take several rate hikes to build up a ‘cushion,’ that would allow the Fed to lower rates if the economy relapses.

Perhaps that’s why the Federal Reserve has been so hesitant to raise rates, and thereby spook the market.

Rather than focusing on rate hikes, I will continue to monitor the indicator that correctly foreshadowed the 1987, 2000 and 2007 market tops. It also ‘told’ us consistently since 2010 that this bull market is alive and healthy. Here’s what this indicator, which I dubbed ‘secret sauce’ is telling us right now. Is the S&P 500 Carving Out 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 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.

 

Dare to Compare – Could the End of QE Crash Stocks Like in 2010 and 2011?

The S&P 500 dropped 17% right after QE1 ended and 20% right after QE2 ran out? Will stocks crash again now that QE3 and QE4 have been completed? Here is the only visual QE history chart along with an unexpected conclusion.

QE1 ended on March 31, 2010. Shortly thereafter the S&P 500 dropped as much as 17.12%.

QE2 ended on June 20, 2011. Shortly thereafter the S&P 500 dropped as much as 20.76%.

Fed officials are expected to end asset purchases (QE3 and QE4) at the next FOMC meeting on October 28-29. Will stocks crater like they did in 2010 and 2011?

QE History & Comparison

QE1 started in December 2008 with $660 billion, was expanded by $1,050 billion in March 2009, and ended in March 2010.

QE2’s $600 billion asset purchase injection started in November 2010 and lasted until June 2011.

QE3 started in September 2012 at a rate of $40 billion per month.

QE4 started in December 2012 at a rate of $45 billion per month.

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Starting in January 2014, QE3 and QE4 have been reduced gradually by $5 billion per month.

QE3 and QE4 have already been wound down to combined monthly purchases of $15 billion, and Fed officials said they expect to end asset purchases after the October 28-29 meeting.

Will the QE3 and QE4 withdrawal shock the system (aka stock market) as QE1 and QE2 did?

QE After Shock?

I’m a visual person and find that a picture (or chart) really says more than a thousand words.

Here is a simple, visual explanation of the various QE programs. This is the only QE history chart on the web, and was originally published in the October 5 Profit Radar Report. QE1, QE2, QE3 and QE4 are illustrated by various shades of green, because green is the color of money (chart courtesy of the Profit Radar Report).

Illustrated are the monthly dollar purchases. Exact monthly asset purchase data for QE1 and QE2 is not readily available, so the amounts shown are based on total committed funds divided by the number of months the program was in effect.

QE3 and QE4 differ from QE1 and QE2 and two important ways:

1) The asset purchases under QE1 and QE2 were more significant than the asset purchases under QE3 and QE4.

2) QE1 and QE2 stopped cold turkey. The Federal Reserve obviously learned from the almost instant S&P 500 (NYSEArca: SPY) selloffs and equipped QE3 and QE4 with the ‘taper’.

Purely theoretical, the actual end of QE3 and QE4 could be a non-event, and should be much less noticeable than the end of QE1 and QE2.

Why Did the S&P 500 Just Lose 200 Points?

But, if that’s the case, why did the S&P 500 just lose as much as 200 points?

Investors may have simply sold stocks in anticipation of QE ending. Sometimes it’s all about mind of matter. If investors mind (that QE is ending) it matters, at least temporarily. In addition, the Dow Jones reached an important technical resistance level on September 17. The Profit Radar Report predicted that this resistance level would increase the risk of a correction.

It is undeniable that the various QE programs have driven asset prices higher. It would be intuitive to conclude that the absence of QE (at least sterilized QE) will send stocks lower.

But the stock market is not always intuitive and doesn’t conform to investors’ expectations.

Furthermore, despite the end of QE, the stock market has not yet displayed the classic pattern of a major market top, the kind of pattern that foreshadowed the 1987, 2000 and 2007 highs. Here’s what I mean: The Missing Ingredient for a Major Bull Market Top

In summary, I wouldn’t sell stocks just because QE is ending.

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.

Yawn and Pop or Drop – How the S&P 500 Reacts to FOMC Meetings

The most consistent side effect of the Federal Reserve’s FOMC meeting is a gigantic yawn … followed by an unpredictable pop or drop. Here’s how the S&P 500 reacted to all FOMC meetings over the past year.

The 12-member monetary policy making body of the Federal Reserve gets together eight times a year for a secret 2-day conclave.

Wall Street eagerly anticipates a carefully selected string of canned comments by the Federal Reserve chairman disbursed at the end of the meeting (usually Wednesday around 2:15pm EST).

Life on Wall Street is on hold until the Fed chairman (for the first time Janet Yellen) serenades the audience with her assessment of the economy.

The S&P 500 chart below highlights all FOMC meetings since the beginning of 2013 (yellow lines).

Do FOMC meetings affects stocks in a predictable manner?

The S&P 500 (SNP: ^GSPC) chart below shows all the FOMC meetings since the beginning of 2013 (yellow lines).

The most predictable pattern actually occurs before and during the FOMC meeting. What pattern? It’s about a two-day long yawn.

The blue boxes show prolonged sideways trading leading up to the conclusion of the meeting. There have only been two declines into the FOMC meeting (red boxes).

After the meeting the S&P 500 may pop, drop, or grind higher. There’s no direct link between FOMC decisions and the S&P 500 (aside from the obvious fact that QE is good for stocks over the long-term).

Here’s one interesting factoid you may sink your teeth into: When the S&P rallied into FOMC Tuesday, it was down on Wednesday 5 out of 6 times.

The S&P’s actual post-FOMC performance seems to depend more on other factors, such as the technical structure of the chart.

The green lines show that technical support stabilized or buoyed the S&P 500 at least three times, while the inability to stay above support contributed to the January/February correction.

The current technical picture is interesting as the S&P 500 dropped below support and the 20-day moving average on high volume last week, but struggled back above this week (on anemic volume).

Here’s a detailed analysis of what this – normally bearish price/volume pattern – means for the S&P 500 and SPDR S&P 500 ETF (NYSEArca: SPY) along with the resistance level, that – once broken – will unlock higher targets.

Short-Term S&P 500 ETF Analysis

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.

$7 Trillion Corporate Cash Pile – Can it Set Stock Market on Fire?

Based on recent Thomson Reuters data, corporations around the globe hold a record $7 trillion worth of cash on their balance sheets. This has to be bullish for stocks, right? Not necessarily. Here’s everything you’ll ever need to know about the effect of corporate cash piles on stocks.

Reuters just reported that companies around the world hold almost $7 trillion of cash and cash equivalents on their balance sheets.

The Federal Reserve pumped about $3 trillion into the U.S. economy. This has propelled the S&P 500 ETF (NYSEArca: SPY) by over 175%. Should we imagine what $7 trillion could do?

Let’s take a look at some basic numbers and concepts before we start drooling over the potential stock market profits.

Corporate Cash 101

It is somewhat difficult to find coherent corporate cash figures that allow consistent charting and tracking. Most estimates exclude financial corporations (NYSEArca: XLF), other don’t. Some estimates are limited to domestic cash piles, other are global.

The analysis provided here is based on data from the Federal Reserve for non-farm and non-financial companies.

Based on the latest available data, non-financial U.S. corporations had caches worth $1.76 trillion. As figure 1 illustrates, this is the highest corporate cash pile in history.

Two Sides of the Balance Sheet

However, there are two sides to the balance sheet: Assets and liabilities. Wherever there are assets, there are also liabilities.

Figure 2 shows that corporate liabilities have grown along with the assets. The data suggests that a fair portion of the corporate cash pile is mortgages by liabilities.

Figure 3 pegs the difference between U.S. non-financial corporate assets and liabilities – U.S. corporate net worth – at $1.1 trillion.

The ‘Corporate 1%’

According to the Financial Times (which analyzed the S&P Global 1200 Index), 32% of corporations hold 82% of the aggregate global cash hoard.

Figure 4 shows the top 5 cash richest corporations of 2013. Apple, Microsoft, Google, Verizon, Samsung.

Effect of Corporate Cash on Stocks

Basic logic suggests that corporate cash – if invested – is bullish for the economy and, by extension, major stock indexes like the S&P 500 and Dow Jones (NYSEArca: DIA).

Figure 5 plots the S&P 500 (SNP: ^GSPC) against U.S. corporate ‘net worth.’

The correlation between corporate ‘net worth’ and S&P 500 peaks contradict the assumption that corporate wealth is good for stocks.

The red lines show that major S&P 500 peaks coincided with prior, albeit smaller, corporate cash stockpiles.

Corporations have more money because they are paying less taxes despite record profits.

‘Legal’ tax evasion has become one of the biggest contributors to the growing cash pile.

Here’s how companies do it and how many billions they save (or cost Uncle Sam):

Corporate Profits – Born in the US, Taxed Elsewhere or Nowhere

Simon Maierhofer is the publisher of the Profit Radar ReportThe 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. 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.

Insider Trading just Became Legal

Only a small group of Americans is allowed to legally trade based on insider information. Fortunately for the rest of us, there is a perfectly legal trick to get an edge. All that’s needed is a computer, a set of eyes and some study time.

Congressmen are legally permitted to trade based on insider information.

There’ve been cases where even the Federal Reserve leaked information to Wall Street before it hit the newswires and average mortal investors.

High Frequency Trading (HFT) is not considered insider trading, but – like insider trading – HFT is based on information not yet received by ‘the herd.’

Legal ‘Insider Information’ for Everyone

Unbeknownst to many, investors also have access to legal ‘insider information,’ but most don’t take advantage of it. All it takes is a computer and watchful eyes.

Allow me to illustrate the power of legal insider info (do not peek ahead to the second chart). Take a look at the S&P 500  chart below. Do you see anything suspicious?

You should, because all the information you need to pocket a 15%+ profit is right there.

Now take a look at the same S&P 500 chart.

One single line changes the complexion of the entire chart. More than that, trading based on the red line break down resulted in a gain of 200+ S&P 500 (NYSEArca: SPY) points to the upside (green ovals) and 200+ S&P 500 points on the down side (red oval).

The red line provided strong support on several instances (green ovals) and a break below support (red oval) was an obvious sell signal. In my actual July 28, 2011 (one day before the red oval break down) note to subscribers, I warned that: “A break below the red trend line may trigger panic selling”.

The legal ‘insider information’ available to everybody is support/resistance (S/R) levels.

S/R levels work like subway stations. Imagine a New York subway, it can stop anywhere but is most likely to stop at the next station. S/R levels are the most likely place for the market to turn around and reverse trend.

When the market moves beyond one S/R level, it is likely to move on to the next “station.” Once resistance has been broken, it becomes support and once support has been broken it becomes resistance.

The Biggest Benefit of S/R Levels

S/R levels allow us to pinpoint low-risk buy, sell, and stop-loss levels.

The real beauty of S/R levels is that they let us know exactly when we are wrong. There is nearly no guesswork and we can enter any trade with confidence that even the worst-case scenario would be only a small loss. Nearly every trade against S/R levels is a low-risk trade.

Here’s a very recent example.

The Dow Jones  chart below shows the recent collision of the Dow Jones with long-term trend line resistance.

The initial attempt to move above resistance was met with selling. After re-grouping, the Dow Jones was able to move above resistance and accelerated from there. Prior resistance is now support for the Dow Jones (NYSEArca: DIA).

The Profit Radar report went short at Dow Jones 16,100, covered the short position at 15,745 and noted that a move above the trend line means that the rally is ready to resume and quite possibly accelerate (unfortunately we didn’t get to go long the Dow or S&P 500 as the reversal after the Dec. 18 Fed meeting was just too quick).

This strategy doesn’t just work on paper. The worst trade (in terms of performance) recommended by the Profit Radar Report in 2013 is a 1.02% loss.

Simon Maierhofer is the publisher of the Profit Radar ReportThe 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).

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