S&P 500 Update


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I enjoy helping people make educated investment decisions. To be educated one needs to have data (=knowledge) and interpret that data without being clouded by emotions or biases.

The Profit Radar Report filters a ton of data in an effort to discern the stock market’s next move. As this newsletter mentioned, there are times when future implications of the examined data are pointing in different directions.

This just happened in December. Almost every study based on stock market breadth projected rising prices and almost every study based on red-hot sentiment projected lower prices (I called this an epic tug-of-war).

Many of those studies were published in this December 1 article: Stock Market Risk is Clashing against Historical Strong Reward Potential.

My data-based conclusion at the time was as follows: “Normally the combination of historic investor optimism while stocks are pressing against long-term resistance is a recipe for disaster. But, as the above studies show, strong stock market internals are likely to over-power other risk factors.”

Since December 1, 2020, the S&P 500 has slowly risen from 3,660 to 3,800 … but internal breadth actually deteriorated.

The chart below (published in the December 30 Profit Radar Report) plots the S&P 500 against the NYSE up volume ratio (5-day SMA, which shows how much volume goes into advancing vs declining stocks).

Throughout December, the S&P moved higher while the up volume ratio declined. About 50% of the time that led to an immediate nasty pullback (red bars) but other times price continued higher (green boxes).

Interestingly, investors lost some of their bullishness the last 2 weeks of December (see gray graph, which is a composite of sentiment gauges). In other words, the tug-of-war tension eased a bit and allowed for further gains.

Even though overall bullish, the Risk/Reward Heat Map just saw an up tick in risk for January and February.

For this risk potential to turn into reality, however, the S&P 500 needs to drop below the green trend line. Price can continue to grind higher as long as it stays above.

Even though 2020 has brought unprecedented stock market action, there are actually a number of years that have shown a very similar general trajectory (see chart below).

The soon to be published 2021 S&P 500 Forecast will show how the S&P performed after years with a similar trajectory.

Continued updates and the new 2021 S&P 500 Forecast 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.”

Retail Money is Much More Bearish Than Investment Pros

There has rarely been such a gaping disparity between the level of bullishness displayed by investment advisors and retail investors. Who will be right, investment ‘pros’ or retail money? This chart shows how the S&P has reacted in the past.

I spend a fair amount of money on market data, research and interpretation. Not because I have too much time, but it takes a ton of information from different sources to form an educated and objective opinion.

At least two of the newsletters I subscribe to continue to refer to ‘extreme investor bullishness’ and extreme risk for Dow Jones (NYSEArca: DIA), S&P, etc.

Investor sentiment is one of the key components of my market forecasting formula. I track various sentiment measures consistently, but aside from ‘bullish pockets’ here and there, I just don’t currently see extreme bullishness.

Quite contrary to extreme optimism, there is a huge difference in opinion between investment advisors and newsletter-writing colleagues polled by Investors Intelligence (II) and the retail investor crowd polled by the American Association of Individual Investors (AAII).

55.8% of investment advisors are bullish, an outlook shared by only 28.3% of retail investors. This is one of the biggest opinion gaps in recent years.

Which of the two – investment advisors (II) or retail investors (AAII) – is usually right?

The chart below plots the S&P 500 (NYSEArca: SPY) against the difference between II bulls and AAII bulls (formula: % of II bulls – % of AAII bulls).

The dotted red lines highlight when the difference was greater than 23%.

This happened six prior times since 2007. Aside from the January 2008 occurrence, the S&P 500 was higher one week later every time. One month later the S&P 500 (NYSEArca: SPY) traded higher four out of six times.

It looks like when there’s a significant difference of opinion, investment advisors have a small edge over retail investors, but the one time retail investors were right (2008), it really paid off.

Could the current disparity foreshadow another major ‘event’ (meaning crash)? Here’s a look at three insightful factors:

3 Reasons Why 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.

New Spin on Old Indicator Gives Big Fat Buy Signal

Sometimes it takes out of the box thinking to shine new light on an old and dull indicator. This may be the case with the widely followed Investors Intelligence (II) investment advisor sentiment poll. Here’s a new spin and an interesting signal.

Here’s one example of how a different spin on a popular indicator can boost its meaning.

Investors Intelligence (II) reported that the percentage of bullish investors dropped to 41.8%.

At first glance this is a lukewarm reading, not too hot and not too cold. However, a closer look adds an intriguing layer of information.

The first chart plots the S&P 500 against the ‘plain’ percentage of bullish investment advisors.

The gray line marks the 41.8% level. The red lines highlight what happens every time the percentage of bullish advisors drops to about 41.8.

Six out of eight times it marked a low, but four out of eight saw a lower low not long thereafter.

We can see that the quick turnaround in bullishness has some significance.

But how can we quantify this most recent cooling of investor sentiment (from 61.6% bullish advisors to 41.8%) and compare it to past precedents?

The second chart calculates the percentage change of bullish advisors from significant high to low and low to high, and overlays it against the S&P 500.

For example, the drop from 61.6% bulls on December 31, 2013 to 41.8% on February 12 translates into a 32.14% change.

The gray and red lines indicate that a 35% +/- drop in bullishness generally buoys the S&P 500 and S&P 500 ETF (NYSEArca: SPY).

The second chart tells us that, based solely on II sentiment, the rather shallow 6.3% correction for the S&P 500 may have been enough to relieve the overbought condition present at the beginning of the year.

Exclusively based on the chart, one could argue that this is a big fat buy signal.

However, sentiment is not the only component to ascertaining the market’s correction (I personally don’t trust this signal yet).

There are other forces that suggest at least another leg down. One of them could be considered the oddball of technical analysis, but it correctly predicted the rally from 1,738 to 1,832 for the S&P 500.

Here’s a detailed look at this odd, but lately accurate indicator:

Stock Market is Fragmented and Confused – Message of One Oddball Indicator

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.

Investment Managers Slash Equity Exposure by 50%

The investment professionals are supposed to have it all figured out and be smarter than the average retail investor. Well, this article is not about smarts, but it shows that the pros don’t feel comfortable sticking to their ‘bullish guns.’

Professional money managers spend tons of time and money on investment research, so you’d expect them to stick to whatever decision they make.

But that’s not the case. Data from the National Association of Active Investment Managers (NAAIM) suggests that even the pros fold quickly.

The chart below plots the S&P 500 against the average stock exposure of investment managers polled by NAAIM.

With exposure of 101% the average manager was actually leveraged long in November and December and still 96% long in January.

Since November, managers have slashed their allocation to stocks by 49.75% to a current exposure of 50.97%.

Such quick reversals from similarly bullish readings don’t happen too often. The red lines in the chart above show some of them and how the S&P 500 performed thereafter.

The sample size is small, but three out of four times saw a short-term rebound, followed by more weakness and an eventual recovery for the S&P 500 (NYSEArca: SPY).

I find this mildly fascinating, because this harmonizes with the message produced by my composite of indicators.

Although, it appears like the eventual recovery could become the biggest sucker rally in a long time, at least that’s the message of two monster stock market cycles that converge for one massive sell signal in 2014.

More details can be found here:

2 Monster Stock Market Cycles Project Major S&P 500 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.

Most Important Number in Finance is Slipping Out of the Fed’s Control

The Federal Reserve is the most powerful financial institution in the world and yet it is like the emperor without clothes. Ironically, the very force the Federal Reserve is most afraid of may be the only thing to save the Treasury.

Mirror mirror on the wall, what is the most powerful financial institution of them all?

The S&P 500, Dow Jones and pretty much all other markets seem to dance to the tune of the QE rhythm … and yet the Federal Reserve resembles the vain king portrayed in Christian Andersen’s “The Emperor’s New Clothes.” How so?

Rogue Interest Rates

The chart below shows the Federal Reserve’s monetary base sandwiched by the S&P 500 (SNP: ^GSCP) and the inverted 10-year Treasury Yield (Chicago Options: ^TNX).

The purpose of the chart is to show QE’s effect (or lack thereof) on stocks (represented by the S&P 500) and bonds (represented by the 10-year Treasury yield).

The 10-year Treasury yield has been inverted to express the correlation better.

I’ll leave the big picture interpretation of the chart up to the reader, but I have to address the elephant in the room.

Since the Federal Reserve stepped up its bond buying in January, the 10-year yield hasn’t responded as it ‘should’ and that’s very odd (the chart below shows the actual 10-year yield performance along with forecasts provided by the Profit Radar Report).

As of December 5, 2013, the Federal Reserve literally owns 12% of all U.S. Treasury securities and by some estimates 30% of 10-year Treasuries.

Icahn More Powerful Than Fed?

The Federal Reserve basically keeps jumping into the Treasury liquidity pool without even making a splash. If Carl Icahn can allegedly drive up Apple shares (with a 0.5% stake), why can’t the Fed manipulate interest rates at will?  This is just one of the many phenomena that makes investing interesting and keeps the financial media in business.

Conclusion

We do know why the Fed wants low interest rates. Rising yields translate into higher mortgage rates, and a drag on real estate prices. Eventually higher yields make Treasury Bonds (NYSEArca: IEF) a more attractive investment compared to the S&P 500 (NYSEArca: SPY) and stocks in general.

Ironically, what the Fed is trying to avoid (higher yields) may be the only force to save the U.S. Treasury. How can the Federal Reserve ever unload its ginormous Treasury position without the help of rising interest rates?

The emperor without clothes maintained his dignity (at least in his mind) as long as everyone pretended to admire his imaginary outfit. Perhaps a market wide realization that the Federal Reserve isn’t as powerful as it seems may ‘undress the scam.’

Regardless, the Fed’s exit from bonds would likely be at the expense of stocks, a market the Federal Reserve has been able to manipulate more effectively than bonds.

The Federal Reserve owns 12 – 30% of the U.S. Treasury market, but how much of the U.S. stock market has the Federal Reserve financed?

This stunning thought is explored here: Federal Reserve ‘Financed’ XX% of all U.S. Stock Purchases

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.

Most Important Number in Finance is Slipping Out of the Fed’s Control

The Federal Reserve is the most powerful financial institution in the world and yet it is like the emperor without clothes. Ironically, the very force the Federal Reserve is most afraid of may be the only thing to save the Treasury.

Mirror mirror on the wall, what is the most powerful financial institution of them all?

The S&P 500, Dow Jones and pretty much all other markets seem to dance to the tune of the QE rhythm … and yet the Federal Reserve resembles the vain king portrayed in Christian Andersen’s “The Emperor’s New Clothes.” How so?

Rogue Interest Rates

The chart below shows the Federal Reserve’s monetary base sandwiched by the S&P 500 and the inverted 10-year Treasury Yield (Chicago Options: ^TNX).

The purpose of the chart is to show QE’s effect (or lack thereof) on stocks (represented by the S&P 500) and bonds (represented by the 10-year Treasury yield).

The 10-year Treasury yield has been inverted to express the correlation better.

I’ll leave the big picture interpretation of the chart up to the reader, but I have to address the elephant in the room.

Since the Federal Reserve stepped up its bond buying in January, the 10-year yield hasn’t responded as it ‘should’ and that’s very odd (the chart below shows the actual 10-year yield performance along with forecasts provided by the Profit Radar Report).

As of December 5, 2013, the Federal Reserve literally owns 12% of all U.S. Treasury securities and by some estimates 30% of 10-year Treasuries.

Icahn More Powerful Than Fed?

The Federal Reserve basically keeps jumping into the Treasury liquidity pool without even making a splash. If Carl Icahn can allegedly drive up Apple shares (with a 0.5% stake), why can’t the Fed manipulate interest rates at will?  This is just one of the many phenomena that makes investing interesting and keeps the financial media in business.

Conclusion

We do know why the Fed wants low interest rates. Rising yields translate into higher mortgage rates, and a drag on real estate prices. Eventually higher yields make Treasury Bonds (NYSEArca: IEF) a more attractive investment compared to the S&P 500 (NYSEArca: SPY) and stocks in general.

Ironically, what the Fed is trying to avoid (higher yields) may be the only force to save the U.S. Treasury. How can the Federal Reserve ever unload its ginormous Treasury position without the help of rising interest rates?

The emperor without clothes maintained his dignity (at least in his mind) as long as everyone pretended to admire his imaginary outfit. Perhaps a market wide realization that the Federal Reserve isn’t as powerful as it seems may ‘undress the scam.’

Regardless, the Fed’s exit from bonds would likely be at the expense of stocks, a market the Federal Reserve has been able to manipulate more effectively than bonds.

The Federal Reserve owns 12 – 30% of the U.S. Treasury market, but how much of the U.S. stock market has the Federal Reserve financed?

This stunning thought is explored here: Federal Reserve ‘Financed’ XX% of all U.S. Stock Purchases

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).

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

Wrong-footed? Active Investment Managers are Record Long

Thanks to QE, contrarian investors have become an endangered species. Going short prematurely has ‘killed’ many. The surviving contrarians suffer from PTPSD (post-traumatic premature short disorder). In times past, this extreme would get contrarians excited.

Active investment managers polled by the National Association for Active Investment Managers (NAAIM) were record long last week.

The significance of this indicator (or lack thereof) can easily be misconstrued and lead contrarian investors in the wrong direction.

This article will take a look at a couple of interesting twists revealed by deeper digging.

The chart below plots the S&P 500 against the average position of active investment managers polled by NAAIM.

As of November 27 (the most recent data available) the average investment manager is 101.45% long. It’s impossible to be more than 100% long without margin, so the average investment manager is leveraged long.

The First Twist

From a contrarian point of view this sounds bearish. However, the chart also shows the last time active investment managers were leveraged long: January 30, 2013 (104.25%).

Investment managers’ appetite for stocks had no ill effect on the S&P 500 then. Could the current extreme be just another false alarm?

The Second Twist

Not all NAAIM position extremes are created equal. NAAIM also provides data on investment managers’ confidence in their bets and standard deviation of their allocation.

The second chart also plots the S&P 500 (NYSEArca: SPY) against the NAAIM average position and provides two additional data points: Managers’ confidence in their bet and the deviation among managers’ positions.

The green line shows managers’ confidence. More than three quarters of active investment managers are at least 95% long stocks. That’s the highest reading in the survey’s history.

Furthermore, there is a high degree of group think as the deviation is only 26.85%.

At the January NAAIM position extreme, three quarters of active investment managers were ‘only 85.25% long stocks with a deviation of 32.24%.

Untwisting the Knot

Based on the confidence in their decision and the lack of deviation among active managers, last week’s poll results may cause more of a headwind for stocks than in January.

The NAAIM poll is just one piece of the puzzle. There is another far more important, although less obvious, cause for stocks to correct further.

You can learn more about this force and a key price ‘control level’ here:

The ‘Invisible’ But Powerful Bearish Force

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

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

 

Contrarian Investment Idea: China ETF Looks so Bad, is it a Buy?

Just a couple of years ago China was considered the world’s growth engine, but not anymore. Pretty much every piece of news related to China’s economy is negative and Chinese stocks are close to their 2008 low. Is this a contrarian investment opportunity?

A few days ago, a reporter from Investor’s Business Daily asked me to write about an international investment opportunity. I focused predominantly on the action of the S&P 500, Nasdaq-100, Dow Jones, gold, silver, euro, and 30-year Treasuries, so it took a bit of research to come up with an international trade set up.

The opportunity that stood out most is a highly contrarian one and won’t win you a popularity contest at your next cocktail party: China.

Barron’s July 2, front cover categorized the Chinese economy and stock market as a “falling star.”

Printed in bold black font on the same front cover is this warning: “The Chinese economy is slowing and is likely to slow a lot more. Get ready for a hard landing.”

The Contrarian Opportunity

Contrarian investors know that forecasts of “hard landings” often turn into some of the best buying opportunities (remember how everyone felt about U.S. stocks just a few months ago). Contrarian investing means going against the crowd and requires nerves of steel and often patience, but even technical indicators suggest that a buying opportunity in China is approaching.

The Shanghai Composite Index is only about 15% above its 2008 low (@ 1,679) and currently sits atop important support, right around 2000. Unfortunately, U.S. investors can’t invest directly in the Shanghai Composite Index, but don’t worry, there’s an ETF for that.

The iShares FTSE China 25 Index Fund ETF (FXI) provides exposure to the 25 largest and most liquid Chinese companies. FXI seems to be forming a giant 5-year triangle with well-defined support and resistance.

How to Trade FXI

A break out in Q4 2012 is quite possible. Key support is currently at 31.70 and rising. Key resistance is currently at 36.30 and falling. The key support level lets you know exactly if and when you’re wrong (a break below 31.70) and makes this trade attractive from a risk management perspective.

There are two ways to trade this constellation:

1) Buy on weakness and as close to 31.50 as possible with a stop-loss just below 31.50 (more aggressive option).

2) Buy once prices break above 36.50 with a stop-loss just below 36.50 (more conservative option).

Hopefully, by the time the next cocktail party rolls around it’ll be more fashionable to talk about Chinese investments and how you got in before anyone else did.
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.

Investors Now Embrace the Most Hated Stock Rally Ever – Is it Time to Bet on Short ETFs?

After a 12% rally investors are starting to buy into the S&P 500 and other indexes again. At the same time technical resistance is getting stiffer and seasonality is turning bearish. Is it time to buck the trend and start nibbling on short/inverse ETFs?

PIMCO’s king of bond funds, Bill Gross, joined the “stocks are dead’ club in late July and CNBC calls the latest rise in stocks the “most hated stock rally in history.”

At the June 4 low (1,267 for the S&P 500) investors and investment advisors hated stocks like fish hate hooks. Despite (actually because of) this negativity stocks keep on keeping on and June 4th turned out to be the second best buying opportunity of the year (see charts below).

But nothing is as persuasive as rising prices, and 12% into the rally investors are starting to embrace the idea of continually rising stocks. The crowd is generally late to the party (thus the term “dumb money”) and this time may be no different.

Investor sentiment is an incredibly potent contrarian indicator. Unfortunately, sentiment-based signals in recent months have been murky, but are starting to make sense again.

Murky Doesn’t Have to be Bad

Murky is not always bad though. The following is what I mean by murky during this summer and how the sentiment picture is starting to clear up.

The Profit Radar Report (PRR) continually monitors various investor sentiment measures, which includes the Investors Intelligence (II) and American Association for Individual Investors (AAII) polls as well as the Equity Put/Call Ratio and VIX.

The Sentiment Picture below was published by the PRR on July 20, 2012. Quite frankly it was one of the oddest sentiment constellations I’ve ever seen. The VIX was near a 60-month low parallel to a multi-month pessimistic reading of the AAII poll.

This just didn’t make sense and the simple conclusion was that there is no high probability trading opportunity.

Six weeks and several head fakes later the S&P 500 Index (SPY) is trading a measly 30 points higher than it did on July 20, and even in hindsight we know that there was no high probability trade.

Current Sentiment Picture

The second chart reflects the change of sentiment of investment advisors (II) and retail investors (AAII) since July 20. There’s no excessive bullishness, but rising prices are starting to resonate with investors.

Sentiment alone doesn’t tell us how high stocks may rally or if they are ready to crack right now. When we expand our horizon to include seasonality and technicals we see that September (especially starting after Labor Day) sports a bearish seasonal bias and that there’s strong resistance at S&P 1,425 – 1,440.

There is little reason for investors to own stocks right now. Aggressive investors may choose to pick up some short or even leveraged short ETFs at higher prices.

The Short S&P 500 ProShares (SH) and UltraShort S&P 500 ProShares (SDS) are two inverse ETF options that increase in value when the S&P slumps.

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