Goldflation and the S&P 500

Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on February 16, 2023. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

The last Market Outlook discussed the S&P 500 breakout, which was good for 200 points … before fizzling. What happened?

Via the February 1, Profit Radar Report, I pointed out a wedge (purple lines) and that a break below the wedge would caution the rally is due to pause.

The chart below shows the longer-term breakout above the green trend line. The chart insert zooms in on the wedge following the breakout.

In short, the potential for a bearish wedge conflicted with the breakout follow through.

As the chart (especially insert) shows, the S&P 500 broke below the purple wedge on February 9. What does that mean?

“The S&P 500 broke below wedge support, which allows for lower prices. The weight of evidence suggests an eventual rebound, but as long as below 4,160 it’s prudent to allow down side to develop” (February 12, Profit Radar Report).

The situation becomes clearer when looking at the IWM (Russell 2000 Index of small cap stocks) chart.

Resistance at 197.60 and 200 was mentioned in the February 1 and 5, Profit Radar Reports along with this comment:

“That resistance is comprised of the trend channel, trend line, and equality between 2 of the 3 legs coming off the October low. A reaction at this level is normal. A number of recent studies suggest stocks will ultimately work their way higher, but IWM did reach an inflection zone that at minimum allows for a deeper pullback.”

Summary: The S&P 500 is below support, which allows for lower prices. However, a majority of my studies and indicators suggest higher prices (two studies conducted last week have a historic success rate of 100%). Unless there’s a break below support, higher prices deserve the benefit of doubt.

Gold and silver were taken behind the woodshed for a beating. Hopefully that wasn’t a surprise for you.

Silver’s refusal to confirm gold’s January high suggested risk for both metals.

I published the chart below in the January 25, Profit Radar Report and warned: “Gold continues to grind higher as silver moves sideways without taking out its prior highs. While above 1,905 gold can continue to grind higher, but risk appears elevated, especially while silver stays below its prior reaction high.“

In terms of Elliott Wave pattern, the gold chart allowed for two diametrically opposed interpretations. Despite being total opposites, they had one thing in common. A sizable short-term drop.

I showed the chart below in the January 22, Profit Radar Report and warned that: “both options have a near-term pullback in common.”

Since then, gold has dropped from 1,975 to 1,836. This may meet the minimum requirement for a wave 2 pullback (green projection), but cycles and seasonality suggest that we should see further weakness.

Continuous updates for the S&P 500, gold, silver and other assets are available via the Profit Radar Report.

Not convinced yet? Now is a good time to find out what’s ahead for 2023.

2023 S&P 500 Forecast

The 2023 S&P 500 is now available! It includes 24 charts and covers the following indicators and topics:

– 2022 Review

– Supply & Demand, Breadth

– Support/Resistance Levels

– Elliott Wave Theory

– Inflation

– Socioeconomic Peace & Prosperity

– Investor Sentiment

– Seasonality & Cycles

– S&P 500 Barometers

– Valuations

– Money Flow

– Risk/Reward Heat Map

– Summary

– 2023 S&P 500 Projection

Some of the discussed indicators come with a 90% and 95% accuracy track record. All indicators and data points are combined into one forward projection (the S&P 500 is tracking it well thus far).

Below is last year’s projection compared to the actual S&P 500 performance.

The full 2022 S&P 500 Forecast is available here for your review.

Below are some of the warning signs mentioned in the 2022 S&P 500 Forecast BEFORE the stock market fell into a pothole:

– “The bearish divergence (NY Composite a/d lines) reappeared again at the January 2022 S&P 500 highs. This internal market deterioration is a concern and a warning sign.”

– “The 6-month average of Titanic signals exceeded 25. It’s been a good bear market indicator. Although the majority of breadth studies are positive, this is one that should not be ignored.”

– “We’ll focus on the commonality of all 3 (Elliott Wave Theory) scenarios: Up side is limited and down side risk is increasing.”

– “Trend line resistance is around 4,915. We do not expect the S&P to break above this trend line in 2022.”

– “Short-term, the January 10, 2022 low at 4,582 is important. Failure to hold above this level would be a warning signal with the potential for a quick drop into the 4,200 – 4,300 range. If the 4,200 – 4,300 support zone fails, a test of the 4,000 zone (as low as 3,700) is possible.”

– “2022 is the mid election year, which is the weakest of the 4-year presidential election year cycle. Historically (going back to 1950), the S&P 500 declines on average about 20% into the mid-term election year low.”

– “Since the Fed is planning to unwind and reduce purchases (and shrink its balance sheet) in 2022, the risk of a more serious correction this year is much greater than in 2021.”

To receive the 2023 S&P 500 Forecast and for continued updates and purely fact based research, sign up for the

Continued updates and factual out-of-the box analysis are available via the Profit Radar Report. 

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

S&P 500 and Inflation Update

Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on July 9, 2022. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

The last Market Outlook (June 16, how time flies) made only two observations regarding the S&P 500:

– There’s a massive chart gap at 3,900, which certainly will be closed.

– There’s support at 3,600 – 3,300, which could be tested.

In addition, the Profit Radar Report highlighted that 3,664 is where a potential S&P 500 C-wave would be a Fibonacci 1.382 x wave A (the most bullish S&P 500 scenario).

Since then, the S&P fell as low as 3,636 and bounced as high as 3,945 (reaching the up and down side ‘target’ mentioned above).

Investors are emotionally charged and it’s easy to get carried away with doomsday or overly optimistic expectations. I too have a bullish and bearish scenario. I favor the bullish scenario, but I’m not married to it.

I wrote in the June 29 Profit Radar Report that: “We will give the market some space to get itself together and wait for either a move above the 3,950 zone (red bar) or below the 3,720 zone (green bar).“

The S&P is still stuck in this zone, and it’s ‘watch and wait’ time as long as it stays stuck.

Now, the more important invalidation level for the most bearish option is not the red zone, it’s a different zone, and it must be cleared to take the doomsday option off the table (I’ve highlighted this level in the Profit Radar Report).

One positive study was featured in the June 19, Profit Radar Report. It showed every time when only 2% (or less) of NYSE-traded stocks closed above their respective 50-day SMA and only 12.8% (or less) above their 200-day SMA. There were 29 signals confined to 5 clusters.

In general, most sentiment and breadth-based studies project at least a short-term bounce while economic indicator-based studies project poor longer-term forward returns.

The best thing to do in a market like this is to look at the facts and don’t get carried away by the media’s attention grabbing coverage.

On a different note, I mentioned in the June 19 Profit Radar Report than inflation may well take a pause for a couple of months.

Since then, prime ‘inflation trades’ (assets that have benefit from inflation fears) have taken major haircuts.

EWZ (Brazil ETF), DBA (agriculture ETF), UNG (natural gas ETF) have suffered heavy double digit losses, gold and silver were summoned for a meeting behind the wood shed and even king oil is down. Many of those assets are over-sold, potentially ready for a bounce.

Continued updates and comprehensive, fact-based, out-of-the box analysis (and the invalidation level for the S&P 500 doomsday scenario) are available via the Profit Radar Report. 

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

Inflation, Gold, S&P 500 Update

Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on August 26. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

Stocks actually pulled back a bit last week, but last Wednesday’s Profit Radar Report showed the chart below (price has been updated) and stated the following (the chart was also included in last week’s Market Outlook):

“On Monday, the S&P made it as high as 4,480.26 and has fallen below some minor support levels since. RSI-2 is now over-sold, which has marked the end of any pullback since May (dashed gray lines). Since the 4,485 target was not fully met, the market has still the option to reach and perhaps briefly exceed it.“

While the bounce to tag our target around 4,485 was not unexpected, I was surprised to see such oomph behind that move.

On Friday, Monday, Tuesday (3 consecutive days), more than 68% of NYSE-traded stocks advanced and, more noteworthy, more than 75% of volume flowed into advancing stocks all 3 days.

The chart below highlights the 10 other days (since 2003) when the S&P 500 rallied into an all-time high, while a bearish NY Composite advance/decline divergence exists, with the 3-day SMA of up volume and advancers >77% and >70%. This has been bullish since the 2020 low, but a bit more mixed prior to that.

In my opinion, this mini breadth trust neutralizes some of the bearish divergences reported recently.

Nevertheless, my Risk/Reward Heat Map still projects risk for August/September, the up side target has been met, a small 5-wave rally may have concluded. At minimum a brief pullback is likely (such as today), but it still will take a break below support to dent the bull market.

Below is just a quick glance at some inflation metrics. What they mean for consumers and investors and how to hedge against inflation is discussed here: How Bad is Inflation?

The August 8 Profit Radar Report featured the gold chart above and stated that:

“If gold reaches the green target box, the decline from the August high could be counted as 5 waves, which would clarify the longer-term picture and set up some better trading opportunities (i.e. buy in the target range).”

Within hours of that update, gold tumbled 5%, touched the upper end of the target box, and bounced back. It all happened overnight. The rally from the low appears to have traced out 5 waves, which suggests another (brief) pullback before a more sustainable advance.

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Profit Radar Report. 

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.

Surprising New Fed Study – Is it Preparing Americans for a Market Crash?

This study by the Federal Reserve of San Francisco will have you scratching your head. The claims made defy common logic and are in direct conflict with a study published by the Federal Reserve of New York. Nevertheless, it might just be a brilliant setup for bearish future ‘events.’

The latest study by the Federal Reserve Bank of San Francisco (FRBSF) draws unexpected conclusions that almost make you believe a disgruntled Fed employee did it. But be assured, it’s an official study published on the FRBSF website.

The Federal Reserve study analyzes and quantifies the effect of large-scale asset purchases (LSAPs), also known as quantitative easing (QE) and lower interest rates, on the economy and inflation.

The results are uncharacteristically frank and seemingly self-defeating, but the intent of this study may just be brilliant (more below).

The study is about 5 pages long and can be summarized roughly by a few paragraphs.

The final conclusion is that: “Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation.”

How moderate? “A program like QE2 stimulates GDP growth only about half as much as a 0.25 percentage point interest rate cut.”

How much does a 0.25% rate cut boost the economy? “GDP growth increases about 0.26 percentage point and inflation rises about 0.04 percentage point.”

In other words: “QE2 added about 0.13 percentage point to real GDP growth in late 2010 and 0.03 percentage point to inflation.” (see chart)

Furthermore, the study states that: “Forward guidance (referring to the low interest rate policy) is essential for quantitative easing to be effective.”

In other words, QE only works in conjunction with a low interest rate policy. The federal funds rate, the rate banks charge each other to borrow money deposited at the Fed, is already near zero. The 10-year Treasury yield (Chicago Options: ^TNX) is just coming off an all-time low.

It is no longer possible to ‘supercharge’ QE with ZIRP.

A Brilliant Move?

A few days ago, the Federal Reserve came out with a report stating that leveraged ETFs may sink the market. View related article about leveraged ETFs at fault for market crash here.

Now the Fed is basically saying that QE didn’t do squat. The converse logic of the Fed’s report is that QE is not to blame should stocks tank (after all, if QE didn’t drive up stocks, tapering can’t sink stocks). The Fed is basically saying ‘if stocks tank it’s not because we spiked stocks and are now taking the punchbowl away.’

This is ironic, because even the Geico caveman knows that various QEs buoyed the S&P 500 (SNP: ^GSPC) and Dow Jones (DJI: ^DJI) to new all-time highs. Even economically sensitive sectors like consumer discretionary (NYSEArca: XLY) trade in never before seen spheres.

Did the Federal Reserve ever admit to manipulating the stock market higher?

Sometimes in cryptic terms without any direct admission of guilt, but there is one exception.

An official report by the Federal Reserve of New York actually puts a shocking number on how much above fair value the Fed’s QE drove the S&P 500.

A detailed analysis of the report can be found here: New York Fed Research Reveals That FOMC Drove S&P 55% Above Fair Value

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 

What’s Next? Bull or Bear Market? Try Gorilla Market

Right or wrong? The QE bull market will last as long as the Federal Reserve keeps QE going. A majority of investors say ‘Yes,’ but a curiously sophisticated experiment and powerful data suggest a surprise outcome.

In 2004 Daniel Simons of the University of Illinois and Christopher Chabris of Harvard University conducted a fascinating experiment.

If you want to be part of the experience take a minute (it literally only takes a minute) and watch this video before you continue reading.

To get the full effect, watch the video first and don’t read ahead.

If you don’t want to watch the video, here’s a quick summary:

Truth in Simplicity

The experiment is quite simple. There are two groups of three people each. One group is wearing black shirts, the other group white shirts.

The three people wearing black shirts are passing one ball to fellow black shirts; the ones wearing white shirts are doing the same. So there are six people, passing two balls.

The assignment is to watch how many times the players wearing white, pass the basketball.

It’s a simple assignment that requires some concentration and a clear mind.

The answer: The white shirts pass the ball 15 times.

But wait, there’s more. Many viewers get the number of passes right, but completely overlook a woman dressed in a gorilla suit. The gorilla walks slowly across the scene, stops to face the camera, and thumps her chest.

Half of the people watching the video did not see the gorilla. After watching the video for a second time, some of them refused to accept that they were looking at the same tape and thought it was a different version of the video.

“That’s nice, but what’s your point Simon?” Good question.

The Invisible 800-Pound Gorilla

The experiment was supposed to illustrate the phenomenon of unintentional blindness, also known as perceptual blindness. This condition prevents people from perceiving things that are in plain sight (such as the bear markets of 2000 and 2008).

Much of the media has zeroed in on one singular cause for higher or lower prices. Sample headlines below:

Reuters: Wall Street climbs as GDP data eases fear of Fed pullback
Reuters: Brightening jobs picture may draw Fed closer to tapering
Reuters: Wall Street slips amid Fed caution

The media is busy ‘counting passes,’ or watching Bernanke’s every word and interpret even the slightest variation of terminology.

The Fed’s action is the only thing that matters, but amidst ‘counting passes,’ many overlook the gorilla.

Gorilla Sightings

It’s believed that a rising QE liquidity tide lifts all boats. This was impressively demonstrated in 2010 and 2011 when various asset classes and commodities reached all-time highs. It only conditionally applies to 2012 and 2013 though.

In 2011 gold and silver rallied to nominal all-time highs. Why?

1. The Fed pumped money into the system (aka banks) and all that excess liquidity had to be invested somewhere, anywhere, including precious metals.
2. Fear of inflation. Gold is known is the only real currency and inflation hedge. Silver rode gold’s coattail and became known as the poor-man’s gold. From 2008 – 2011 gold prices nearly tripled and silver went from $8.50 to $50/ounce.

Since its 2011 high, the SPDR Gold Shares ETF (NYSEArca: GLD) has fallen as much as 38.29% and the iShares Silver Trust (NYSEArca: SLV) was down as much as 63.41%.

This doesn’t make (conventional) sense or does it. QE or the fear of inflation didn’t stop in 2011. In fact, QE (and the associated risk of inflation) is stronger than ever. Based on the above rationale, the gold and silvers meltdown is inconceivable and unexplainable.

The QE ‘Crown Jewel’

Initially QE was limited to government bonds or Treasury bonds. In other words, the Federal Reserve would buy Treasuries of various durations from banks and primary dealers with freshly printed money.

The effect was intentionally twofold:

1. The Fed would pay top dollars to keep Treasury prices artificially inflated and interest rates low.
2. The banks would have extra money to ‘play’ with and drive up asset prices, a process Mr. Bernanke dubbed the ‘wealth effect.’

With that thought in mind, take a look at the iShares 20+ year Treasury ETF (NYSEArca: TLT) chart above.

From the May peak to June trough TLT tumbled 14.56%, more than twice as much as the S&P 500 (7.52%).

Lessons

The lessons are simple:

1. QE doesn’t always work and can misfire badly.
2. We don’t see every gorilla (or looming bear).

All this doesn’t mean that the market will crash tomorrow. In fact, the stock market doesn’t exhibit the tell tale signs of a major top right now and higher highs seem likely.

Unintentional blindness is real and often magnified by the herding effect. The investing crowd (or herd) is convinced that stocks will go up as long as the Fed feeds Wall Street.

The above charts suggests that we shouldn’t follow this assumption blindly.

How Much is the Dow Worth in Real Currency

The Federal Reserve is devaluing the U.S. dollar. Contrary to popular belief that hasn’t resulted in outright or obvious inflation, but as the Gold Dow shows, it is eating away at the Dow’s value.

How do you define value and is value important today or is value just relative?

After all, as long as you buy low and sell high, the value of the underlying stock, index or ETF doesn’t matter, or does it?

If you buy the Dow (or Dow Diamonds – DIA) at 13,000 and sell at 14,000 you pocket a nice profit, but was it a good value buy?

Obviously profits are always right, but value often determines profits. At least that used to be the case before the Fed’s flooded the market with liquidity.

Old souls that remember the name Charles Dow and his saying “to know values is to know the market” may find the chart below of interest.

It measures the Dow in the only real currency – gold – that’s why I call it the Gold Dow.

The Dow in U.S. dollars is shown in black, the Gold Dow is shown in gold. At the 1999 Gold Dow peak, the Dow Jones was worth 42 ounces of gold. Today it’s barely worth 8 ounces.

The 81% drop in the Gold Dow is largely due to gold prices, which soared from 260 in 1999 to 1,600 and above.

Thus far the Dollar Dow has been able to resist the path of the Gold Dow. In fact, there’s been a divergence for most of the past decade, so this is not a short-term timing tool. Nevertheless, other valuation indicators suggest that the Dollar Dow will eventually follow the footsteps of its golden cousin.

Gold and Silver Plummet – Why and How Much Lower?

Gold and silver are the de facto “flight to safety” trade. Concerns about inflation (QE4) or the fiscal cliff were supposed to drive precious metal prices higher. This didn’t happen, here’s why:

It’s been a terrible week for gold and silver. Fundamentally precious metals should have rallied following the Fed’s announcement of QE4 (What is QE4?). Here’s the fundamental rationale.

The Fed’s plan to spend an additional $45 billion of freshly printed money (QE Tally – How Much Money is the Fed REALLY Spending?) is supposed to create inflation. In theory, gold and silver are “default inflation hedges”.

Investors trust this theory and put their money where their mouth is. How do we know this? Assets in the most popular gold ETFs – SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) – soared to an all-time high.

However, a theory (in this case the theory that QE will lead to higher gold and silver prices) remains only a theory until proven correct.

What Caused the Gold/Silver Mini Meltdown?

Contrary to this theory, the December 16, Profit Radar Report noted that:

“Holdings in gold-backed exchange-traded products reached a record 2,629.3 metric tons. However, all this gold buying hasn’t done much for gold prices. In fact, with so many buyers already committed, there are now fewer buyers out there. Despite seasonal tailwinds, the sentiment picture suggests at least a shakeout sell off.”

For those interested in trading gold, here’s the trade recommendation provided by the same update: “Unfortunately our UltraShort Gold ProShares (GLL) order wasn’t triggered last week. Now aggressive traders may go short gold with a move below 1,690 (around 163.80 for GLD). An approximate buy trigger for GLL (a 2x inverse gold ETF) would be 61.50.”

The corresponding trade setup for silver was as follows (updated chart shown below): “The dashed gray trend lines illustrate past instances where break downs and break outs resulted in low risk entry points. The green support line just below current prices (@32.30 – around 31.20 for SLV) may provide a low-risk entry to go short for aggressive traders. The only available short silver ETF is the 2x inverse UltraShort Silver ProShares (ZSL).” ZSL jumped from 45 to 52.

How Low Will Gold/Silver Fall

I honestly don’t know how much farther gold and silver will fall. However, the two charts below show that both metals reached respective support levels.

No one has ever gone broke taking profits and more often than not, it pays not to get too greedy.

Gold provided a nice 50-point drop and silver declined more than 10% in less than 3 days (nearly 20% for ZSL). We locked in all of our silver profits and half of our gold profits. The remaining half of short gold positions is equipped with a stop-loss that guarantees profits.

Semi-weekly updates and trade setups for gold, silver, the S&P 500, and other asset classes are provided via the Profit Radar Report.

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.