Simon Says: Here is Big Support for Small Cap Stocks

Some say if it’s too obvious, it’s obviously wrong, but when it comes to the Russell 2000 you may ask: How could you have missed this? The media proclaimed the Russell 2000 in a ‘correction’ just before it bounced from key support (three times).

Sometimes the financial media sacrifices accuracy (or neutrality) to deliver the WOW effect.

That’s why we read headlines like this:

“Scary October Start for Stocks; Russell in Correction.”

Perhaps this particular WOW-focused media outlet felt it was close enough to Halloween to paint a 1.32% S&P 500 and 1.54% Russell 2000 drop as ‘scary.’

A correction is often (arbitrarily) defined as a 10% decline. From March to May and once again from July to September, the Russell 2000 lost 10%. A correction? Maybe.

The chart below shows why labeling anything Russell related as ‘scary’ or ‘correction’ was premature.

Every pullback, or ‘correction’ since November 2013 ended at support at 1,080.

I picked on this fear-mongering headline in the October 1 Profit Radar Report and commented that:

“The Russell remains above support around 1,080. I suppose that even novices are able to spot this support level by now, so it probably doesn’t mean as much as it did in February and May. Nevertheless, the odds for some sort of bounce from here are above average.”

Well, I was kind of wrong. 1,080 meant just as much last week as it did the prior three times it was touched.

At some point this support will become too obvious for its own (or investors) good, but one thing is for certain:

Correction or not, bears cannot make any real progress unless the Russell 2000 breaks below 1,080.

The corresponding support level for the iShares Russell 2000 ETF (NYSEArca: IWM) is 107.

Will the Russell 2000 break below 1,080 in October? Sunday’s special Profit Radar Report includes detailed analysis on what new lows would mean for the stock market and whether the market is carving out a major top.

The conclusion is not ‘scary’, but probably surprising for most people.

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 up, but Russell 2000 up More – Is this Role Reversal Significant?

Here’s the definition of a bandwagon: “A particular activity or cause that has suddenly become fashionable or popular.” Here’s the latest bandwagon idea: Short the Russell and S&P 500, because the market is going to crash.

Here’s the broken record story from last week: Small cap stocks are down hard, which allegedly means a market crash is straight ahead.

This story infected the financial media like a contagious virus. To wit:

“Small caps’ slide reflects a market in trouble” – MarketWatch
“More pain ahead for small caps” – Barron’s
“Small caps flash warning” – Wall Street Journal
“Hedge funds short small caps most since ‘04” – Bloomberg
“Small cap stocks send bear-market signal” – MarketWatch

Fact vs. Myth

True Fact: The Russell 2000 lost as much as 10% while the S&P 500 traded within striking distance of its all-time high.

True Fact: The Russell 2000 closed below its 200-day SMA for the first time in 17 months.

Myth: This foreshadows a market crash. A look at similar historical patterns, where the S&P 500 (NYSEArca: SPY) trades well below the Russell 2000, shows only a mild bearish bias.

The May 7 Profit Radar Report featured the above chart along with the following commentary:

Today, for the first time since November 21, 2012, the Russell 2000 closed below the 200-day SMA.

Many investors follow the 200-day SMA. A close below it is generally considered a sell signal and/or bear market. The path of least resistance would be to jump on the sell signal bandwagon, but that’s premature in my humble opinion.

The Russell support cluster at 1,100 – 1,080 seems more important than the 200-day SMA at 1,115.

The R2K recovered most of its intraday losses today, which created a hammer candle As the chart insert shows, a similar hammer candle preceded the prior two bounces.

The odds for a bounce – at least enough of a bounce to fool premature bears – are decent.”

It wouldn’t be prudent to chase the bounce. Why?

– This bounce only needs to be enough to fool shorts.

– Once the weak shorts are flushed out, the financial media may actually be right about a bigger correction (but by the time the shorts are flushed out, the media will probably have turned bullish).

– There are 3 strong reasons  to expect the ‘May blues’ or ‘summer doldrums,’ just not quite yet. More details here:

S&P 500: 3 Reasons to Expect the May Blues … But Not Yet

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.

What Triggered the Stock Market Rout? How Long Will it Last?

The S&P 500 has corrected more than 5% and the financial media is quick to pretend that it saw the lousy 2014 start coming. Here’s the media’s real time (embarrassing) assessment of the ‘expected’ rout along with what’s next.

Hindsight is 20/20 and the financial media is quick to point out that the ‘long awaited correction’ has finally arrived (financial tabloids morphed from stock market cheerleader to doomsday sayers in less then a week).

Here’s the media’s actual real time wisdom expressed in five headlines:

Reuters: “Big Year Ends with Wall Street Hopeful for 2014” – December 27, 2013
MarketWatch: “Wall Street Sees S&P 500 rising 10% next Year” – December 27, 2013
Barron’s: “Morgan Stanley’s Adam Parket: 2014 in 2014 for the S&P 500 – December 27, 2013
CNBC: “Jeremy Siegel: Dow Jones to 18,000 in 2014” – December 31, 2013
CNBC: “Dr. Doom Roubini Gets Bullish on Global Economy” – January 2, 2014

It is still possible that the S&P 500 will rise 10% this year. The S&P may even rally to 2,014 as the Dow Jones (DJI: ^DJI) climbs to 18,000.

But, nothing goes straight up. A German saying warns that: “Everything’s got an end, only sausages have two” (only Germans can wrap up wisdom and sausages in the same sentence).

Running Out of Fuel

Like a fire, a stock market rally needs fuel in the form of new buyers. Stocks can’t rally without buyers.

The December 20 Profit Radar Report featured the composite sentiment / S&P 500 chart shown below and warned:

The problem with excessive bullishness is that it causes investors to go all in. Based on the above polls, investors are fully invested, or nearly so. A fully invested person can only do one of two things: hold or sell. Neither action buoys prices. Based on current data, it looks like bullish sentiment will catch up with stocks in January. This should cause a deeper correction.”

The January 15 Profit Radar Report stated that: “The S&P 500 is closing in on technical resistance at 1,855 and we are alert for a reversal.

Will the Rout Last?

A number of early indicators suggest that 2014 will be a tough year.

The tough year is just beginning, but the Profit Radar Report’s 2014 Forecast stated that: “A Q1 correction may find support at 1,746 – 1,730,” which is where the S&P 500 (NYSEArca: SPY) closed on Monday.

This may spark a counter trend rally, but will likely lead to even lower levels.

From Rout to Bear Market?

Since the mid 1970s the S&P 500 and Dow Jones have precisely adhered to two very reliable long-term cycles. Every cycle has seen a major high or low. For the first time in 14 years, both cycles coincide and project a major high in 2014 (we all know what happened 14 years ago). Here’s a detailed look at the two cycles and their message:

7-and 14-year Cycle Project Major Market Top in 2014

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.

Will the 3 Best Investing Tricks of 2013 also Work in 2014?

The best investment strategy in 2013 was: “Stay long until you are wrong.” This sounds easier than it actually is, but there were 3 specific patterns and tricks that continually kept investors on the right side of the market.

Every dog or cat has its own little personality. Like most animals, every bull market too has its own personality. Sometimes even every individual bull market leg has its own character and features.

Being aware of those idiosyncrasies may make the difference between making and losing money.

For example, the first installment of the QE bull market saw some violent corrections, such as the May 2010 Flash Crash and 21% S&P 500 correction in 2011.

Since 2012 however, the S&P 500 and its other index cousins have been on cruise control with just minor speed bumps.

2013 sported some very clear and repetitive patterns. Those patterns have kept aware investors on the right side of the trade. What were those patterns?

3 Most Predictable Patterns of 2013

1) “Persistence wears down resistance.” This was probably the Profit Radar Report’s most commonly used phrase in 2013.

Persistence around resistance basically means that sideways trading generally serves as a launching pad for the next rally leg. This point was illustrated by the S&P 500 chart below (published by the Profit Radar Report on September 20, 2013).

2) Investors begrudgingly accept the bull market, and vocal bears are driving the bull market higher.

Although a number of sentiment bulls waived a warning sign early in 2013, the Profit Radar Report shared this observation and conclusion previously back in March 2013:

The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point out the ‘elephant in the room’ – stocks are only up because of the Fed. Below are a few of last week’s headlines:

CNBC: Dow Jones Breaks Record, But Party Unlikely To Last
Washington Post: Dow Hits Record High As Markets Are Undaunted By Tepid Economic Growth, Political Gridlock
The Atlantic: This Is America, Now: The Dow Hits A Record High With Household Income At A Decade Low
CNNMoney: Dow Record? Who Cares? Economy Still Stinks
Reuters: Dow Surges To New Closing High On Economy, Fed’s Help

We know this is a phony rally, but so does everyone else. We know this will probably end badly eventually, but so does everyone else. The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number. Excessive optimism was worked off by the February correction. Sentiment allows for further gains.”

According to the financial media, the S&P 500 (NYSEArca: SPY) should have tumbled many times in 2013, but it didn’t.

Obviously there were still plenty of bears left to be converted into bulls, a process that drives up prices. It wasn’t until very recently that sentiment has become bullish to a degree that’s worrisome.

The simple investment trick to profit from these patterns has been easy. Stay long until you’re wrong.

When Are the Bulls Wrong?

3) But how do you know when you’re wrong? In other words, how do you maximize gains with the least amount of risk?

Here’s where an evergreen pattern comes into play. This pattern is so powerful, I call it insider trading.

Click here for a fascinating explanation of this insider trading trick along with brief visual trivia and the key ‘insider trading’ level for the Dow Jones. Insider Trading Just Became Legal

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. 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.

Trusted German Newspaper Asks: “Will the Financial System Collapse?”

A reputable German newspaper asks the question forgotten by many domestic media sources: With or without tapering, will the financial system collapse? The answer may be surprising to many.

Have you ever gotten tired of the same old financial news coverage dispensed by the likes of CNBC, Fox, Wall Street Journal, Reuters, and other US media outlets?

I’m not saying it’s bad information, but like eating the same meal over and over again, the same slant on financial developments could become a bit stale.

In my last trip to Germany I made a conscious effort to pick up and read a number of reputable German finance/economy magazines.

I’ll write more about interesting tidbits discussed in the German financial media in the coming days, but here’s more detail about a headline that caught my attention?

“Is A Financial Collapse Approaching?” 

This question was featured on the front page of the September 4 edition of the Focus Money magazine.

As a contrarian investor, my first thoughts were that prominently discussing the odds of a financial collapse minimizes the chances of just such an event. But this changed after I read the article.

Focus magazine asked legendary emerging markets investor Mark Mobius for his feedback on various investment themes. The MIT educated Mobius is 77 years old and heads the emerging markets team for Franklin Templeton.

Tapering Yes – Collapse No

Mobius expects Bernanke to start tapering, but says that this will have virtually no effect on stocks (NYSEArca: VTI) as liquidity remains in the system (although he admits QE’s role in driving up stock prices).

Mobius asserts that banks (NYSEArca: KBE) have cleaned up their balance sheets and will funnel more money in the real economy. “The fear of tapering is overdone – it will barely affect stocks,” he says.

Mobius believes that QE by the Bank of Japan will be successful and ultimately affect world markets (NYSEArca: EFA). In fact, liquidity provided by the BOJ will make up for the liquidity withdrawn by the Federal Reserve.

Time to Buy US Stocks?

Focus magazine: “As an emerging markets (NYSEArca: EEM) specialist, would you recommend buying US stocks?”

Mobius: “Diversification is important and investors shouldn’t put all their eggs in one basket, but it’s certainly a good idea to buy US stocks.”

A Bear in Bull’s Clothing

The financial collapse headline and Mobius’ views struck a cord with me as I see the odds of a major market top forming around current prices greater than 50%.

After reading the Focus Money article it became clear that – according to Mobius – there is no risk of a financial collapse. From a contrarian point of view that’s more bearish than bullish.

Mobius has strong opinions about other emerging markets issues, such as:

1) China’s government completely (as in 100%) controls its banks and has the ability to successfully implement any and all financial policies.

2) The most attractive place to invest is Africa, in particular Nigeria.

I don’t agree with Mr. Mobius’ outlook, but he does offer a perspective not available to many US investors.

Another somewhat shocking forecast is featured in Germany’s Handelsblatt, the German economy and finance newspaper.

The front page of an August edition touts another gold rush caused by China.

For more information read: According to Reputable German Newspaper, New Gold Rush Lies Ahead

Simon Maierhofer is the publisher of the Profit Radar Report.

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Financials at 22-Month High – What Does this Mean for The S&P 500?

Pssst, no one is talking about it, but one industry sector has quietly climbed to new 22-month highs – Financials. Will their run continue, how can you tell when it’s over and how will it affect the stock market?

The financial media can’t see the forest for the trees or the stairs for the cliff.

So much ink is being spilled reporting Obama’s and Boehner’s latest comments, hints and lunch menu, that the media missed the financial sector’s march to new 22-month highs.

Will financials continue to edge higher, and what does the financial sector strength mean for the S&P 500 and other broad market indexes?

The chart below provides a nutshell summary of the Financial Select Sector SPDR ETF (XLF).

1) Marks the technical breakout from a multi-week trading range. The Profit Radar Report expected this breakout on August 5, when it said:

“Financials are currently under loved. Of the $900 million invested in Rydex sector funds, only $18 million (2%) are allocated to financials. With such negative sentiment a technical breakout above 14.90 could cause a quick spike in prices.”

2) Shows that XLF never broke below the bold October 2011 trend line and never triggered a sell signal.

The strength in financials was one reason the Profit Radar Report maintained that the down side of the post September correction was limited and exited all short positions at S&P 1,348 and S&P 1,371 (and went long at S&P 1,424 last week).

3) Volume over the last couple of days has been solid.

4) RSI is lagging the September 14 high water mark and will be running into resistance. RSI may also set up a longer-term bearish divergence if it isn’t able to beat the September high.

XLF accounts for 15.42% of the broad SPDR S&P 500 ETF (SPY) and has the power to be the tail that wags the dog.

This price/RSI divergence in XLF might harmonize with my expectation for a large-scale market top sometime in Q1/Q2 2013.

There’s a newly formed support line (not shown in chart), which should be used as stop-loss for long positions.

No doubt by the time the media moves the spotlight on financials’ performance, the lion’s share of the gains will be already over.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

GDP – A Purposely Misleading Economic Indicator?

Last Friday’s GDP report came in 26% lower than the previous estimates, but Wall Street, the media, and investors didn’t seem to care and stocks barely reacted. Why? The GDP reporting mechanism may be purposely misleading.

GDP. Up until recently those were the best known initials in economics and stand for Gross Domestic Product (today the best known initials are QE).

Still, GDP – calculated by the Bureau of Economic Analysis (BEA) – is the mother of all economic indicators and viewed as the best broad economic barometer.

Needless to say, calculating the price tag of all goods and services made in the U.S. is no easy task to begin with, but the BEA has devised a GDP reporting system that makes the data more confusing than necessary. How so?

GDP is a quarterly data point, yet the BEA releases new GDP estimates every month. Why?

The BEA prepares three vintages of quarterly GDP growth:

  • The advance estimate (released about a month after the quarter ends)
  • The second estimate (released about 2 months after the quarter ends)
  • The third estimate (released about 3 months after the quarter ends)

Even the third estimate is subject to many revisions. Annual revisions are usually done in July. The regular revision period is 13 quarters, but about every 5 years the BEA does comprehensive revisions which impact the entire historical period back to 1929. Revisions can be drastic as the two examples below show:

Q3 2008

Advance estimate (October 2008): 0.3%
Second estimate (November 2008): 0.4%
Third estimate: (December 2008): 0.5%
Revision on July 2009: – 2.7%
Revision in July 2010: – 4.0%
Revision in July 2011: – 3.7%

Q1 2011

Advance estimate (April 2011): 1.8%
Second estimate (May 2011): 1.8%
Third estimate (June 2011): 1.9%
Revision in July 2012: 0.1%

The chart below graphically illustrates the advance, second, third estimate and the most recent revision. It’s somewhat hard to tell on the chart, but out of the 19 quarters from Q1 2002 to Q3 2006 the third estimate was higher or about equal to the advance estimate 17 times (89%).

Since Q3 2006, the third estimate has been lower than the advance or second estimate 12 out of 23 times (52%). The most recent revision is lower (often by a large margin) than the advance estimate 66% of the time. I don’t know the reason for this, but the data would support a notion that the advanced estimate (the data that receives most media attention) is purposely inflated.

GDP’s Effect on Stocks

The BEA has a tendency to be more “generous” with its advance estimates while the third estimates are generally disappointments. The most recent revision often deviates so much from any of the first three estimate that one wonders why anyone even pays attention to GDP numbers.

For some reason Wall Street and the media focus more on the advance estimates and sweep bad revisions under the carpet.

Case in point, last Friday’s third estimate came in 26% lower than the second estimate (1.25% instead of 1.7%), but it was hardly reported on. Stocks closed lower, but the damage for the S&P 500 and Dow Jones was less than half a percent.

A Big Fat Flaw

A big fat GDP flaw is embedded in the GDP formula:

GDP = private consumption + gross investment + government spending + (exports – imports)

GDP includes government spending, which has steadily risen since 2008. GDP does not recognize how government spending is financed; therefore all the government spending that’s brought the U.S. to the brink of insolvency is reflected in GDP.

Government entitlements (such as unemployment benefits, etc.) account now for over 35% of personal income. Personal income accounts for about 75% of GDP. This means that government spending makes up over 26% of GDP. What would GDP be without the government’s finger on the scale?

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.