The Missing Ingredient for A Major Bull Market Top

This article reveals the single most powerful stock market indicator in recent history. It not only protected investors from many past bear markets, it also predicted higher stock market prices throughout this bull market.

I am in a predicament. I want you to know about the one indicator that will be more useful in the year ahead than any other stock market related indicator (you’ll see why this indicator is essential for any investor in a moment).

But (and that’s a big but), I want to be fair to my subscribers. Since it wouldn’t be right to share research reserved for paying subscribers, I came up with this solution:

You will see the indicator in its full power and glory, but I won’t disclose the name of the indicator. It will simply be dubbed ‘secret sauce.’

I’ve been following secret sauce for many years. What makes this indicator unique is that it has protected those ‘listening’ from many bear markets, while keeping investors on the right side of the trade (long and strong) throughout this bull market.

Although I wasn’t aware of it when I first learned about secret sauce, my research shows that secret sauce correctly telegraphed the 1987, 2000 and 2007 market tops.

How it Works

Secret sauce reveals a terminal condition often hidden by price action: Internal stock market deterioration (for a detailed description go here).

The charts below show how the market lost steam internally (black line) even though the S&P 500 (blue line) continued higher … right until it hit the ceiling in 1987 and 2000.

The same thing happened prior to the 2007 top. Secret sauce stopped confirming the S&P 500 highs on June 4 (dashed red line). The market topped on October 11 and rolled over.

The dashed green lines in the above chart show that secret sauce confirmed every new S&P 500 high since the bull market took off in 2009, telegraphing that every correction was eventually to be succeeded by new highs.

Obviously, secret sauce isn’t necessarily a short-term indicator, but the advance notice of the market’s intention is invaluable to almost every type of investor.

Knowing whether short-term draw downs will eventually be recovered is incredible insight not offered by any other indicator.

Secret sauce is the main reason why the Profit Radar Report has continually looked for new highs, even in April/May 2014 when the media strongly advertised a market crash.

At some point secret sauce will not confirm new S&P 500 highs and send a warning signal. In fact, there is a fledgling bearish non-confirmation right now.

The Profit Radar Report continuously monitors and updates secret sauce. Sunday’s special Profit Radar Report includes a detailed analysis of this fledgling bearish divergence and how it should affect the S&P 500 for the remainder of 2014.

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.

Advertisements

S&P 500 Short-Term Forecast

The S&P 500 has been without significant correction for over 1,000 days. According to many, a deep correction is ‘just around the corner’ (and has been around the corner since April). Here’s the only thing that actually may trigger a correction.

The S&P 500 is showing some weakness this week. Will this morph into a full-blown sell off?

Here’s a look at an indicator that’s been spot on – percentR. percentR is a momentum indicator that can be used to determine entry and exit points.

Never heard of it? That’s because you won’t read about this indicator on CNBC, MarketWatch or Bloomberg. That’s is a good thing. Just recall how many charts and indicators the media has used in recent months to warn of a major crash (too much media coverage spoils any good indicator).

The chart below shows the recent correlation between percentR and the S&P 500.

There are different ways to use percentR. I like to use it to help confirm a change of trend. Here’s how that works:

Allow me to ease into the explanation with a practical application, an excerpt taken from the June 18 Profit Radar Report:

“percentR doesn’t tell us how far this rally will go, but it may help us determine when it’s over. A failed low-risk entry would signal a change in character of this rally leg, as every low-risk entry since May has been bought.”

An initial percentR dip below 80 is called a ‘bullish low-risk entry’.

The arrows mark all bullish low-risk entries since February. There have been eight bullish low-risk entries.

Six of them (black arrows) marked a short-term low. One (red arrow) was a false alarm and one (dashed area) turned into a failed low-risk entry and (slightly) lower prices.

What is a failed low-risk entry? When the S&P 500 closes below the level (daily low) that triggered the low-risk entry (dashed red box).

In other words, an S&P 500 (NYSEArca: SPY) close below Tuesday’s low at 1,959.46 (bold green line) would be a failed bullish low-risk entry and the initial sign of a change of trend.

The 1,959 area seems significant, because it is compounded by the 20-day SMA (1,959) and a long-term Fibonacci support/resistance level (1,955).

Therefore, a close below 1,959 – 1,955 would be a warning signal.

There are a number of reasons why the S&P 500 should correct, but as long as it doesn’t close below 1,959 – 1955, they don’t matter.

However, one ‘wild card’ needs to be watched carefully, even if the S&P 500 closes below 1,955. This ‘wild card’ is obvious to everyone, but recognized by few. It also predicted the most recent 100+ S&P rally.

Here is more fascinating details about this must watch wild card:

Media Wild Card: The Only Indicator That Foresaw a Rally with No 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.

Quirky but Accurate Indicator: Housing Sector Troubles Likely to Continue

Sometimes the oddest correlations make the best forward-looking indicators. This is certainly the case with lumber and the housing market. Here’s what this odd but accurate indicator ‘sees’ ahead for U.S. real estate.

Several times in the past we’ve looked at the correlation between lumber and housing – related ETF: iShares US Real Estate ETF (NYSEArca: IYR).

It’s an off the wall kind of an indicator, but it’s proven more accurate than any other housing indicator.

To get the correlation right, we need to set lumber futures forward by about 14 months.

The chart below does just that, as it plots lumber against the PHLX Housing Sector Index.

Lumber 514

As the gray oval on the right shows, lumber saw a big pop and drop in 2012/2013.

The two gray ovals to the left illustrate that the magnitude of such sizeable pops and drops tends to appear muted in the housing sector, nevertheless it suggested an eventual slowing of the housing market.

Lumber is currently at an interesting juncture, as lumber prices were unable to break above resistance and just fell to test support.

As of right now, lumber suggests that the housing market is not ‘out of the woods’. The housing blues may start all over if support for lumber fails.

This would not only affect multi-billion dollar ETFs like the Vanguard REIT ETF (NYSEArca: VNQ), or SPDR Dow Jones REIT ETF (NYSEArca: RWR), but also millions of Americans.

A proprietary analysis of supply and demand for the SDPR S&P Homebuilders ETF (NYSEArca: XHB) also shows that demand for homebuilding stocks is deteriorating.

 

Another 2014 Warning: December Low Violation Leads to 11% Average Decline

Early warnings that 2014 will be a tough year are piling up quickly. Here is another warning that suggests additional losses. Since 1950, the average additional loss once the signal triggered has been 10.9%.

Lucien Hooper, a Forbes columnist back in the 1970s, devised the Dow Jones December low indicator.

According to the December low indicator, danger lies ahead when the Dow Jones violates the December low in the first quarter of the New Year.

Why are we talking about this now? Because the Dow Jones and Dow Jones Diamond ETF (NYSEArca: DIA) broke below the December closing low last week (see first chart below). Is this really a bad omen?

Since 1950, there have been 31 prior first quarter December low violations.

All but two (1996 and 2006) led to further losses, averaging 10.9%.

The streak of 2007, 2008, 2009, and 2010 December low violations is illustrated via the Dow Jones chart below.

The December low indicator doesn’t tell us how much down side is unlocked when it’s triggered, but based on the 2008 and 2009 declines it can be significant. A number of indicators suggests the 2014 down side could be significant as well (see below).

Although there is no official S&P 500 December low indicator, the S&P 500 (SNP: ^GSPC) did also slice below its December low (see S&P 500 chart below).

Unfortunately for bulls (and based on various sentiment gauges there were a ton of bulls in early January), this isn’t the only bearish development for stocks.

Three solid reasons why a longer correction is likely are disclosed here:

3 Reasons Why a Larger Correction is 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.

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

Reliable Statistic Shows 73% Probability 2014 Will be a Bad Year for S&P 500

There are helpful statistics and there are bogus statistics. This is a helpful one and it actually confirms the message of a variety of other indicators. In the process we also clear a big misconception.

It’s official, the S&P 500 lost 3.6% in the first month of 2014, the Dow Jones (DJI: ^DJI) closed 5.3% lower.

According to the January Barometer (as January goes, so goes the year), that’s bad news for the entire year of 2014.

There is a lot of truth, but also a lot of misconceptions about the January Barometer (JB).

Here are the facts, and nothing but the facts, based on S&P 500 (SNP: ^GSPC) data going back to 1970.

JB Truths

1) The JB has been correct 27 out of the last 44 years, or 73.3% of the time. As far as investment odds go, that’s pretty good.

2) In addition to the JB, I also track the Santa Claus Rally (SCR) and First 5 Days of January (F5J) indicators. In 2013/14 the SCR had a positive return, F5J and JB were down.

As the S&P 500 return table below shows (rows shaded red), there have been three such instances since 1970 (1974, 1977, 1981) when the F5J and JB were down, but the SCR up. All three early warning signals were followed by sizeable full-year losses (29.7%, 11.5%, 9.7%).

JB Myths

3) Stock Trader’s Almanac, which does a good job tracking various seasonal patterns, claims that: “Most remarkable is the record following down Januarys. Every down January on the S&P 500 since 1938, without exception, has preceded a new or extended bear market, a 10% correction, or a flat year. This is the only Stock Trader’s Almanac indicator with a perfect record.”

Let’s take a look at that ‘perfect record.’ Since 1970, there have been 17 prior down Januarys. Only eight of them were followed by full-year losses, an accuracy ratio of only 47%.

January losses in 1982, 2003, 2009, and 2010 were all followed by 10%+ corrections and full-year gains of 12.8% – 26.4%. To call this an indicator with a perfect track record doesn’t seem quite right.

It’s also possible to run the numbers based on the Dow Jones and/or go back to 1950, but the basic takeaway remains the same: Statistics suggest the S&P 500 (NYSEArca: SPY) and Dow Jones (NYSEArca: DIA) have a tough year ahead.

Statistics like this are interesting and they are a piece of the market forecasting puzzle, but they aren’t a stand-alone indicator.

Nevertheless, even if we cast a wider net, we’ll get similar feedback. Here are three more indicators and their messages:

Watch for a Bounce! But 3 Reasons Why a Larger Correction is 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.

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

The 3 Worst Pieces of News So Far in 2014

2014 is still young, but some of the very recent developments have the potential to be more than quick glitches and really ding the economic recovery and derail the stock market rally.

2014 hasn’t exactly started off with a bang for stocks.

The S&P 500 and Dow Jones are in the red so far and there’ve been three down right negative and unrelated news items.

1) According to FactSet, 94 out of 107 companies on the S&P 500 that have issued an earnings outlook for the fourth quarter have fallen below Wall Street consensus. This 88% ‘over promise’ rate is the most pessimistic reading since FactSet started tracking the data in 2006.

2) The official U-3 unemployment rate fell from 7% to 6.7% in December. How is that bad news?

Unfortunately, U.S. employers added only 74,000 jobs in December while 347,000 ‘workers’ left the workforce. For every 1 person that found a job, 5 people left the workforce.

The chart below plots the S&P 500 (NYSEArca: SPY) against the unemployment and labor force participation rates.

In a normal environment the participation rate and unemployment rate do not move in the same direction, just as the cost of living and ones disposable income do not move in the same direction (if one goes up, the other goes down and vice versa).

3) The ‘dumb money’ is getting foolishly giddy about stocks. This data point is not a poll, it’s an actual money flow indicator.

Sometimes there’s a discrepancy between what investors say (polls) and what they do (money flow). Investors not “putting their money where their mouth is’ existed for much of 2013.

Not so now. This indicator shows a clear commitment to stocks with very little fear. This indicator is close to a reading that preceded the 2010 Flash Crash, which shaved 1,000 points off the Dow Jones (DJI: ^DJI) in one day.

The chart that shows exactly how concerning this extreme reading is, along with a fascinating nutshell analysis, can be found here: Flash Crash Indicator Nearing Flash Crash Signal

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.

Don’t Be Fooled by This Tall Santa Claus Rally Tale

The most dangerous truths are half truths and as it turns out, the most widely quoted Santa Claus Rally cliché is as much of a myth as Santa Claus himself. If you bet on this piece of ‘Wall Street wisdom,’ you’ll be wrong 8 out of 11 times.

The biggest Santa Claus Rally (SCR) cliche doubles as the tallest holiday tale on Wall Street.

Since 1970 the SCR occurred 32 out of 43 years (74.4%). The SCR includes the last five days of December and first two days of January.

What happens when there is no SCR?

As the saying goes, “if the SCR should fail to call, bears may come to Broad and Wall.”

Is that really true?

Absolutely not!

The table below shows all SCRs and subsequent full-year returns for the S&P 500.

Since 1970 the SCR has failed to call eleven times. Only three of those times (1994, 2000 and 2008) were followed by losses for the S&P 500 and S&P 500 ETF (NYSEArca: SPY).

As an overall barometer for the year ahead, the SCR sports a better track record: 62.8% of the time the S&P 500 followed the directional tone set by the SCR.

As the chart above shows, the SCR was positive the last three years (the January 2, 2013 spike saved the 2012/13 SCR), as was the S&P 500.

The coming weeks will be interesting as various barometers will provide clues about what’s cooking for 2014.

One of those barometers sports a 76.7% accuracy ratio and another, believe it or not, sports a 100% accuracy ratio. The “100% barometer” triggered 16 times since 1950 (including 2013) and was followed by full-year gains every single time. Will it trigger again in 2014?

More details about the 76.7% and 100% accurate full-year indicators is available here:

The 100% Accurate Year Ahead Market Barometer

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.