Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on December 1, 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).
It’s been a while since the last Free Market update, but no updates were required as the market continues to follow my ‘keep it simple’ blueprint (almost like painting by numbers).
The complexity of current world events confuses many analysts and investors. I try to ‘de-confuse’ and simplify this incredibly complex environment … and the market is allowing me to do this (it’s not always this way).
The November 13, Profit Radar Report outlined our most recent ‘keep it simple’ blueprint:
“Chart gaps at 4,083.67 and 4,218.70 remain open. The next serious resistance zone is around 4,100. Short-term support is around 3,900. A pullback can happen any moment and price action may well be choppy in coming days/weeks, but odds of further gains following pullbacks are good.”
The blue box pinpoints the price action since November 13. Within a choppy environment, the S&P 500 first tested support around 3,900 and today closed the open chart gap (dashed purple line) at 4,083.67. Resistance around 4,100 is just ahead.
What caused this rally to 4,100? “Seasonality and the weight of evidence favor higher prices, which is our base assumption,” is what I told subscribers weeks ago.
There was also an absolute investor sentiment oddity, which I first pointed out in the November 9, Profit Radar Report: “According to the CBOE, the equity put/call ratio soared to 1.30 yesterday, which is an absolute panic reading that even exceeds the COVID extreme. If this data is correct, it should be a positive for price.”
The fifth graph in the chart below shows the bullish (for stocks) put/call ratio extreme, which means that option traders panicked more in the second half of November than at the 2020 meltdown low. Hard to believe, but that’s the CBOE data. The spike in the CBOE SKEW (blue graph) sent a similar message.
What’s next though?
The weight of evidence and seasonality are still supportive of higher prices, but something changed: The S&P 500 has now reached an important resistance and inflection zone.
This is a price zone where risk management takes on a more important role and prudent investors should consider reducing exposure or setting stop-losses below support.
Inflection zones are like traffic lights, they don’t have to be red, but if a car is going to have to stop, it’s likely at a traffic light.
King dollar … de-crowned?
Since September 28, when the US Dollar Index hit a 20+ year high, the USD dropped from 114.7 to 105. On that day, September 28, I happened to share the following chart and warning via the Profit Radar Report:
“The US Dollar Index has been on a tear, rising almost vertically. Normally I would draw ‘bowl’ support (previously used to predict major drops for TSLA and Bitcoin, see January 10, 2021 PRR), but currencies are prone to trend longer than equities. For this reason, the USD should be given a longer leash, but the parabolic rise combined with trend channel resistance suggests that at minimum a temporary pause and/or pullback is getting close and chasing the USD carries a fair amount of risk.”
Price got repelled by one trend channel and is now also trading below the other trend channel (currently at 107.5). This is now resistance and as long as price stays below resistance it can continue to work lower.
We live in uncertain, complex and confusing times. Get access to straight-forward, purely fact based research, and become the best-informed investor you know! Sign up for the Profit Radar Report.
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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.”
Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on September 29, 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 expanding diagonal pattern, first identified in the July 31 Profit Radar Report, continues to play out. The pattern is outlined via the purple lines below.
This pattern has been a surprisingly simple way to navigate an incredibly complex investing environment (I wrote about this here).
To continuously validate the pattern, I’ve also provided ‘the trend is down as long as’ resistance levels, such as the following:
September 18, Profit Radar Report: “Bears have the upper hand as long as the S&P 500 does not sustain trade above 3,920.”
September 21, Profit Radar Report: “Trade below 3,790 is another simple ‘line in the sand for short-term bearish risk.”
The ‘the trend is down as long as’ resistance levels are shown in red below. Neither of those level has been broken to the up side, so the trend continues down towards an eventual wave 5 low.
It’s beautiful when a pattern works out like ‘painting by numbers,’ but the market never consistently rewards one trick pony analysts.
Just last Sunday, I did a deep dive analysis of market breadth and investor sentiment to see if the weight of evidence supports or contradicts the expanding diagonal pattern.
Being aware of a wide spectrum of indicators prevents tunnel vision and getting blind sighted.
Market breadth
Shown below are 6 different breadth measures. Some of them are near their June lows (like the S&P 500) and others are reaching levels where a reversal to the mean becomes more likely.
Investor Sentiment
Only one out of the six short-term sentiment gauges plotted below is at a real extreme, the others still have room to grow.
In addition to just looking at the data, I also identify other times that most closely replicate today’s readings.
For example, there were 3 other signal dates that closely correlate to the market breadth data shown above and 9 signal dates that are closely correlated to current sentiment readings.
Would you like to know how the market reacted to similar conditions in the past?
Those findings, along with purely fact-based analysis is 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.”
Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on March 3, 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).
Last week we looked at the S&P 500 diagonal. This diagonal pattern has kept us on the right path for several weeks and has provided a down side target which has not yet been reached.
This week we’ll look at more traditional technical analysis.
1) The S&P 500 tagged support around 4,1130 and closed the open chart gap at 4,116.93
2) There was a bullish RSI-35 divergence at the February 23 closing low
3) The S&P 500 is now back a black trend channel resistance
4) The S&P 500 is above the first diagonal resistance line
5) The S&P 500 is about in the middle of the recent trading range
6) There is another open chart gap (and support) at 4,020.63
… And there is war in the Ukraine, inflation, and a pandemic
What does all this mean?
Thus far the S&P bounced from support and is now butting up against initial resistance, nothing unusual. However, price is getting close to invalidating the diagonal (I drew two potential diagonal resistance line, one solid and one dashed, both in purple and descending). The RSI divergence could mean a low (of some sort) is already in.
In other words, all the technical analysis in the world does not provide a big edge at this time. This is not unexpected. I warned in the Profit Radar Report that we are about to enter such a time:
“Last week’s (S&P 500) price overlap eliminated one clear Elliott Wave Theory pattern. We are left with either:
– A messy pattern
– A mid-term bullish pattern which would soon project another pullback
– A bearish pattern which would project a sizable bounce
Regardless of which path the market chooses, choppiness appears to be ahead. A decline should be followed by a bounce and a rally would likely to be followed by a pullback.”
I don’t pretend to know when I don’t, but knowing when to expect an untradeable environment is also helpful (unless you enjoy getting whip-sawed).
Based on the diagonal pattern, I’ve been looking for overall lower prices for about the past month. This pattern is not yet dead, but it’s getting stretched.
Although it’s difficult to find a low-risk entry at this time, the most promising approach looks to buy if and once we see new lows.
Whether the ensuing bounce will challenge or surpass the prior all-time highs is not clear, but it should be tradeable.
On that note, crowd psychology is providing very interesting feedback.
At least once a month, the Profit Radar Report provides an in depth look at investor sentiment. Here is what was published on February 27:
The first chart plots the S&P 500 against 9 different sentiment gauges. At first glance this chart probably doesn’t tell you much.
That’s why I take it a step further. That step is to identify other times with the most similar sentiment readings.
How do I quantify ‘most similar’?
Most similar means when at least 6 (of the 9) sentiment gauges fall within a 10% range of current readings. And that’s where it gets interesting.
The next chart shows that there were 7 signal dates where at least 6 of 9 indicators are within a 10% range. All of them occurred near significant lows (2015, 2016) or after a low was carved out (2020).
The sample size is small, but its curiously unanimous.
Regular readers of the Profit Radar Report know that I apply the same approach to identifying precedents to market breadth, volatility, most closely correlated price patterns, etc.
The result is not always as clear (or small), but it gives us an idea of how markets have reacted in the past under similar circumstances (which obviously don’t include Russia, inflation or a pandemic), but it’s still the best we can do.
Continuous updates and factual out-of-the-box analysis is 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.”
Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on March 3, 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).
Last week we looked at the S&P 500 diagonal. This diagonal pattern has kept us on the right path for several weeks and has provided a down side target which has not yet been reached.
This week we’ll look at more traditional technical analysis.
1) The S&P 500 tagged support around 4,1130 and closed the open chart gap at 4,116.93
2) There was a bullish RSI-35 divergence at the February 23 closing low
3) The S&P 500 is now back a black trend channel resistance
4) The S&P 500 is above the first diagonal resistance line
5) The S&P 500 is about in the middle of the recent trading range
6) There is another open chart gap (and support) at 4,020.63
… And there is war in the Ukraine, inflation, and a pandemic
What does all this mean?
Thus far the S&P bounced from support and is now butting up against initial resistance, nothing unusual. However, price is getting close to invalidating the diagonal (I drew two potential diagonal resistance line, one solid and one dashed, both in purple and descending). The RSI divergence could mean a low (of some sort) is already in.
In other words, all the technical analysis in the world does not provide a big edge at this time. This is not unexpected. I warned in the Profit Radar Report that we are about to enter such a time:
“Last week’s (S&P 500) price overlap eliminated one clear Elliott Wave Theory pattern. We are left with either:
– A messy pattern
– A mid-term bullish pattern which would soon project another pullback
– A bearish pattern which would project a sizable bounce
Regardless of which path the market chooses, choppiness appears to be ahead. A decline should be followed by a bounce and a rally would likely to be followed by a pullback.”
I don’t pretend to know when I don’t, but knowing when to expect an untradeable environment is also helpful (unless you enjoy getting whip-sawed).
Based on the diagonal pattern, I’ve been looking for overall lower prices for about the past month. This pattern is not yet dead, but it’s getting stretched.
Although it’s difficult to find a low-risk entry at this time, the most promising approach looks to buy if and once we see new lows.
Whether the ensuing bounce will challenge or surpass the prior all-time highs is not clear, but it should be tradeable.
On that note, crowd psychology is providing very interesting feedback.
At least once a month, the Profit Radar Report provides an in depth look at investor sentiment. Here is what was published on February 27:
The first chart plots the S&P 500 against 9 different sentiment gauges. At first glance this chart probably doesn’t tell you much.
That’s why I take it a step further. That step is to identify other times with the most similar sentiment readings.
How do I quantify ‘most similar’?
Most similar means when at least 6 (of the 9) sentiment gauges fall within a 10% range of current readings. And that’s where it gets interesting.
The next chart shows that there were 7 signal dates where at least 6 of 9 indicators are within a 10% range. All of them occurred near significant lows (2015, 2016) or after a low was carved out (2020).
The sample size is small, but its curiously unanimous.
Regular readers of the Profit Radar Report know that I apply the same approach to identifying precedents to market breadth, volatility, most closely correlated price patterns, etc.
The result is not always as clear (or small), but it gives us an idea of how markets have reacted in the past under similar circumstances (which obviously don’t include Russia, inflation or a pandemic), but it’s still the best we can do.
Continuous updates and factual out-of-the-box analysis is 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.”
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 5. 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).
Please accept my apologies for the lengthy newsletter pause. My brother and I had to go to Germany to take care of some property-related issues.
Thank you for the concern many have shown about the devastating floods. Fortunately those occurred north of where we were, but we feel for many who have lost their homes and lives. This is the view from our balcony after it stopped raining.
I always work remotely and have never skipped a scheduled Profit Radar Report update, but since I didn’t expect any big moves (and nothing changed) there was no absolute need for Market Outlook updates. I hope you are enjoying a good summer (up until today uninterrupted by my e-mails :).
From a timing perspective, the S&P 500 encountered an interesting 114-day turning cycle that’s been working since 4/26/2019. Thus far, the cycles has not been validated nor has it been invalidated, but if the cycle is going to show its teeth it should do so soon.
Two developments I always monitor, especially with the S&P 500 at or near all-time highs, are breadth and sentiment.
The chart below plots the S&P 500 against a variety of breadth gauges, all of which have failed to confirm the latest S&P highs. The bearish divergence between the S&P and the cumulative NY Composite advance/decline lines are considered highly bearish by many analysts.
While the 1987, 2000 and 2007 market tops were preceded by S&P 500 / NYC a/d line divergences, not every divergence causes a major top.
The Profit Radar Report looks at the big picture and now consistently identifies how the market reacted in the past to conditions we see today.
For example, in addition to the bearish divergence, at the July 26 all-time high:
– only 43.62% of volume flowed into advancing stocks
– only 45.75% of NYSE stocks advanced
– NYSE highs outpaced lows by only 1.85%
– 56.31% of stocks traded above their 50-day SMA
– 87.98% of stocks traded above their 200-day SMA
The first 3 data points are based on 10-day SMAs to smooth out outliers. Aside from the 200-day SMA figure, that’s some seriously ‘bad breadth.’
One could (and many do it every day) cherry pick one of the above indicators, look at past precedents, and paint a bearish picture (the percentage of stocks above their 50-day SMA is particularly ominous). But, and that’s a big but, if you you look at all of the above indicators, you get the signal dates below.
Unfortunately those signals dates are neither bullish nor bearish and are not very actionable, so what’s the point?
This knowledge protects us against falling prey to biased, ignorant or fear-mongering analysis.
The latest Sentiment Picture features the same kind of analysis for investor sentiment and shows at what other times the 9 sentiment gauges we monitor stood at levels most similar to today.
In short, based on cycles we are watching if there’s enough weakness to draw the S&P 500 below important support. As long as there isn’t, stocks can continue to grind higher.
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.”
Back in January 2020, I noticed a tug-of-war between extreme optimism (bearish for stocks) and bullish market momentum. As so often, euphoria was followed by dispair.
The pandemic has not left, but stock market euphoria is back, and this time optimism it’s clashing against internal stock market strength. Welcome to tug-of-war 2.0. Will sentiment cause the stock market to spiral down again?
Extreme Investor Optimism
The chart below shows just a few of the dozens of investor sentiment gauges I follow regularly. Aside from the VIX, all of them are in the extreme optimism danger zone.
130-year Trend Line Resistance
In addition to sentiment extremes, the Dow Jones Industrial Average (DJIA) is once again bumping against a 130-year old trend line, like it did in February 2020.
Based on those two factors, risk is very high. But, there are more than just 2 factors to consider.
Internal Strength
Various Profit Radar Report noticed historically extreme bouts of buying pressure after the March 2020 low. The forward performance trackers at the bottom of the studies highlight why studies from earlier this year are still applicableL
June 10, 2020 Profit Radar Report:
“Bullish study: On June 5 and 8, 90% of NYSE trading volume went into advancing stocks. Since 1970, there were only 4 other times that saw 2 consecutive 90% up days. The chart below plots the forward performance of those instances (forward returns and odds of positive returns are shown via the bottom panel).“
“Below is a look at the fastest S&P 500 rallies (1970 – today). To qualify for inclusion, price had to rise at least 20% in less than 3 months. This happened 12 other times (twice in 1982 and 2009, but only the first instances of those years are shown via chart below).
The 2020 rally (red graph) has been by far the quickest and strongest. The dashed blue line marks ‘today’ (78 days into the rally). Here are some key takeaways:
– The S&P is currently up 42.35%, which is already above the 40.43% average 12-month return. – The strong rallies of 1982 and 2009 took a breather during the summer. – With the exception of 1986, the S&P 500’s 12 month return was higher than the day 78 return every time.”
August 9, 2020 Profit Radar Report:
“Since 1970, the S&P 500 dropped more than 30% and thereafter rallied within 2% of its all-time high 5 other times. On average, the roundtrip from ATH to within 2% of ATH after a 30% decline took 60 months. This time it took only 6 months.
The chart below shows the forward performance of the S&P 500 after it first came within 2% of its prior ATH (after a >30% decline). Aside from the 1980 rally, future returns were generally positive, but every time, any gains were either erased or as good as erased about 4 months later (dashed red line).“
November 15, 2020 Profit Radar Report:
“Various recent PRRs noted a resurgence of buying pressure (i.e. October 11 PRR. Not to beat a dead horse, but here is one more: On November 2, 3, 5, 9, 80% or more of NYSE volume went into rising stocks. This was the 10th time since 1970 that 4 of 6 days saw >80% up volume (11/13/20 was another >80% up volume day).
The forward performance after the prior instances is plotted out below (2010 and 2011 actually hosted 2 of 4 of 6 80% up days events, but only the forward performance for the respective second event is shown). Over the next 4 months, 4 of 10 instances showed losses of 7-11%, but 6, 9 and 12 months later the S&P 500 was up every time.”
The performance tracker at the bottom of each study provides forward returns for the next 1, 2, 3, 6, 9, 12 months. The Risk/Reward Heat Map captures the data and provides a visual heat map of month by month risk vs reward for the next year.
Conclusion
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 if the main indexes break and stay above resistance.
Become the best informed investor you know by reading the Profit Radar Report.
The S&P 500 has arrived at major trend line resistance (see chart). Will it relapse lower or climb above?
To answer this question, we’ll look at various indicators:
Investor sentiment
Market breadth & liquidity
Seasonality & cycles
Technical analysis
Investor sentiment – Obsession with Recession
The August 25 Profit Radar Report pointed out various bearish sentiment extremes – including that google searches for ‘recession’ spiked to the highest level since 2008 – and warned that stocks are likely to rally to flush out investors’ obsession with recession (for more details and chart go here: “Today’s stock market pessimism is a reliable sign of a stock market rebound“).
The >150-point rally since certainly alleviated recession fears and turned investors more bullish.
The chart below plots the S&P 500 against 6 longer-term sentiment gauges.
The second chart plots the S&P 500 against 4 shorter-term sentiment gauges.
Sentiment summary: Sentiment is not frothy enough where it eliminates the possibility of further gains, but it now is more of a headwind than tailwind and more likely to curb gains and cause a pullback.
Market Breadth & Liquidity
The S&P 500 reached new all-time highs on four of the last eight trading days (November 5 – 14). But, on six of the eight days, more stocks declined then advanced.
There’s weakness ’under the hood,’ and it caused a number of bearish divergences shown on the chart below.
Bearish divergences can be erased quickly, but while they exist, they reveal a measure of weakness often seen prior to pullbacks.
Seasonality & Cycles
In terms of seasonality, the S&P 500 has passed the riskiest period of the year. However, cycles do not agree with the bullish year-end seasonality.
Technical analysis
The chart below highlights all the levels highlighted by the recent Profit Radar Reports:
Blue trend line: Potential resistance, but move above will lead to test of purple trend line
Purple trend line: Potential resistance, but move above will unlock higher targets
Red trend line: Potential resistance, but move above allows for further gains.
Although the yellow triangle formation cautions that a move above red trend line resistance will not last.
Initial target for any pullback will be the purple trend line. A break below the purple trend line is needed to get lower targets.
Summary
The S&P 500 is at red trend line resistance. A temporary move above (post triangle spike) seems likely, but the risk of a relapse and test of purple trend line support (at minimum) is high. A break back below red trend line resistance (assuming there will be a spike above it) is needed to signal a reversal.
Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.
Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.
Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.
The Profit Radar Report monitors dozens of indicators to compile a broad-based and educated forecast. All those indicators fall into one of the following four categories:
The September 2 Profit Radar Report included a detailed analysis of investor sentiment (called the Sentiment Picture). Based on sentiment, the September 4 Profit Radar Report stated that: “A fakeout breakout would burn a lot of premature bears, and may be just what is needed to clear the air for another leg lower.”
Below is a reprint of the entire Sentiment Picture:
August Sentiment Picture (Published September 2, 2019)
The July Sentiment Picture (published August 3) concluded that: “Short-term sentiment gauges are nearing a point where a bounce becomes likely. We’ve seen many bounces turn into spirited rallies (and this may happen again), but longer-term bullishness allows for additional losses after any bounce.”
The S&P 500 found a low the next day, but bounces (thus far) lacked escape velocity and remained within a trading range.
The following longer-term sentiment polls went from bullish to bearish (bearish considering how close the S&P 500 is to its recent all-time high):
National Association of Active Investment Managers (NAAIM)
Investors Intelligence (II)
American Association for Individual Investors (AAII)
The dash green arrows highlight when any of the above-mentioned polls showed similar readings over the past 56 months. Most of them occurred near a significant low.
Since inception of the AAII poll, sentiment (as measured by the AAII bull/bear ratio) was as bearish when the S&P 500 was within 5% of a 52-week high 9 other time (the only such instance in the 21st century was in April 2005). The worst return was 1 month later (S&P 500 down 44% of the time), the best return was 3, 6, and 12 month later (S&P 500 up every time).
According to Lipper, investors yanked more than $40 billion from equity funds over the past weeks (that’s 0.3% of total equity assets) and 2% over the past year. This is the biggest exodus out of stocks since 2016 and nearly as pronounced as in 2002. This is not a short-term timing tool, but strongly suggest that a deeper correction would be a buying opportunity.
The sentiment-based conclusion made last month (“longer-term bullishness allows for additional losses after any bounce”) has become less likely.
A change of character would have to occur for stocks to fall further despite a number of bearish (bearish relative to how close the S&P 500 is to its all-time high) sentiment gauges.
Short-term sentiment indicators are neutral.
Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.
Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.
Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.
A bear jumps out of a bush and starts chasing two hikers. They both start running for their lives, but then one of them stops to put on his running shoes. “What are you doing? You can’t outrun a bear!” says one hiker, the other one replies: “True, but I don’t have to outrun the bear; I only have to outrun you!”
What’s the point? The market is the composite opinion of all other investors. In essence, you beat ‘the market’ (aka the ‘bear’) by knowing more than your fellow investors (aka the other ‘hiker’). Knowledge is the edge.
I consistently follow dozes of different indicators, which fall into one of these four categories:
Supply & demand (liquidity)
Technical analysis
Investor sentiment
Seasonalities & cycles
When all or most indicators point in the same direction, there’s a good chance stocks will move in that very direction. I call this a high probability trade.
The last such signal occurred in December, when liquidity, sentiment, technicals and seasonality pointed higher. The bullish weight of evidence, at that time, was discussed in this article: Is the Bear Market Over?
Since then, the S&P 500 has gained more than 20%. How much further can stocks rally?
Investor Sentiment
Some sentiment gauges show elevated optimism, but considering the strong Q1 2019 performance, overall sentiment is surprisingly subdued. Shown below is a selection of six different sentiment indicators. None of them shows an extreme reading. Without extremes, sentiment doesn’t provide an edge. It is possible for stocks to move higher.
Technical analysis
Short-term: The S&P 500 is nearing over-bought and is facing mild resistance. The chart below highlights trend line resistance and horizontal volume resitance (volume by price not date) for the S&P 500 futures. Now doesn’t appear to be the time to chase price.
Longer-term: The trend is your friend, but the risk of being ‘un-friended’ exists, and it’s difficult to find low-risk entries in an market that’s driven by momentum, but on the edge of being over-extended.
Elliott Wave Theory, the most exotic tool in the technical analysis tool box, is up to interpretation and of little help (more details here).
Supply & demand
Liquidity continues to flow into US stocks. Uncertainty in the European Union and money on the sidelines in the US are a likely cause for the continued inflows. My favorite liquidity indicator suggested throughout 2016, 2017, and 2018 that new all-time highs will be reached, and that message continues to be the same.
Seasonality & cycles
Bullish mid-term election year seasonal forces, discussed here, appeared late, but they did show up.
Based on mid-term seasonality, more gains are likely, but general S&P 500 seasonality is entering a higher risk window.
Cycles are conflicting.
Summary
There are times when most indicators point in the same direction (as in December), making a directional forecast easy.
And there are also times when indicators are in conflict, such as now.
That doesn’t mean we are left entirely clueless. Based on the market’s pattern in early March, we expected the S&P 500 to see-saw across obvious resistance at 2,815 and secondary resistance at 2,830. The S&P spent two weeks doing just that. But in order to unlock lower targets, it would have had to break below 2,785, which it didn’t.
Periods of relative uncertainty are always frustrating, but two things should be kept in mind:
It’s good to know when visibility is limited and act accordingly. Would you trust on Uber driver who’s speeding in the fog? Can you trust an analysts who’s ignorant of ,or over confident in periods of uncertainty? Knowing there is no edge, is an edge in itself.
Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.
Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.
Although I warned of an environment where the risk of a meltdown is high (wave 3 down, based on Elliott Wave Theory), I can’t claim credit for predicting the December crash.
Because of my multi-indicator approach to market forecasting, and profound concern for my subscriber’s portfolio’s, I rarely ever make absolute one-directional predictions based on only one indicator.
Absolute Predictions
There are plenty of absolute and unequivocal predictions out there. Such ‘hit or miss’ or ‘all or nothing’ bets are great when they work out (and like gambling, sometimes they do), but cause excruciating pain when they don’t.
Below are a few examples of recent all or nothing predictions:
December 6: “The last great buying opportunity of the decade is here!”
December 10: “Keep cool! S&P 500 & Nasdaq holding above lows. Signal is bullish!”
December 19: “ All structural criteria is in place to create a POWERFUL 1-2 week rally”
My favorite: May 14, 2018 (and virtually every day since 2011): “I think it likely that the rally is ending today” (red arrows added to show implications of wave 2 top, and subsequent wave 3 decline)
I found in my research that the only folks who ‘predicted’ the December meltdown, are those we’ve been spewing doom and gloom for years (even a broken clock is right twice a day).
My Promise
My intent is not to discredit the above services, but to highlight the flaws of tunnel vision research. That is, research based on only one indicator or one methodology.
Before publishing the Profit Radar Report (many, many years ago), I lost a lot of money by trusting one single indicator (which at the time had a good track record). Back then, I took off my ‘research blinders,’ and vowed to expand my research horizon.
Better Diversification
Diversification is a popular term in the investment world, and it’s almost exclusively linked to asset allocation. But what about research diversification?
Just as a diversified portfolio smoothes out individual boom and bust cycles, research diversifcation eliminates the ‘hit or miss’ performance tied to any one single indicator.
Multi-indicator Approach
My goal is to distill and compress the message of various indicators (such as: investor sentiment, money flow, breadth, technical analysis, price patterns, seasonality, etc.) into the most likely path going forward, the direction suggested by the weight of evidence.
For example, on October 28, when the S&P 500 first fell into the 2,600s, I published the weight-of-evidence-based projection (yellow lines) along with the below commentary via the Profit Radar Report:
“The biggest potential ‘fat pitch’ trades are to go short above 2,830 (red box) or buy at the second low (green box).”
The yellow lines projected a move from 2,600 to ~2,850, followed by a drop to ~2,400.
Starting on December 9, I warned subscribers that a wave 3 crash is a possibility. For example, the December 9 Profit Radar Report stated that:
“Based on Elliott Wave Theory, the S&P 500 could be 1) nearing the exhaustion point of this down leg, or 2) be in a strong and sustained wave 3 lower. Scenario #2 seems more likely.”
The December 17 Profit Radar Report reiterated the following:
“Based on Elliott Wave Theory, both options discussed on December 9:
1) Washout decline with target of 2,550 – 2,500 (or 2,478 as per Sunday’s PRR)
2) Accelerating wave 3 lower (which could erase another 10% fairly quickly)
are still alive.”
In case you are new to Ellliott Wave Theory (one of the many indicators of the multi-indicator approach), here is a description of a wave 3:
Wave 3 is the longest and most powerful of all Elliott Waves. Wave 3 continues to move higher (or lower) despite overbought (or oversold) momentum and sentiment readings. A common target for wave 3 is a Fibonacci 1.618 of wave 1 (which currently is 2,269 for the S&P 500).
Pros and Cons
One ‘drawback’ of the multi-indicator approach is that you will rarely hear a flashy ‘all or nothing’ call.
The benefit is that you will rarely be on the losing end of such a call. The multi-indicator approach does however, outline when the risk of a crash or the potential of a spike is elevated.
And perhaps most importantly, there are times when nearly all indicators point in the same direction to form a potent and very reliable buy/sell signal (such as in March 2009, October 2011, February 2016).
Based on what I’m seeing right now, it seems like we are nearing such a signal.
Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.
Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.
Seasonality is one of 4 key indicators we analyze (the other 3 are: Money flow, technicals, and investor sentiment). Out of many seasonal patterns, this is probably the most important one for all of 2018.
The 2018 S&P 500 Forecast (part of the Profit Radar Report) highlighted this seasonal pattern (and chart):
“2018 is a mid-term year (based on the 4-year presidential election year cycle. Historically, stocks rally from the mid-year (2018) low to the pre-election year (2019) high (on average 50%). The average S&P 500 gain over the last 5 cycles was 36.8% (see chart for individual cycle gains).
Historically (going back to 1950), stocks fall about 20% into the mid-term (2018) low. The average S&P 500 loss from the preceding high to the mid-term low over the last 5 cycles was 18.41%. However, the 2002 loss was unusually large (34.54%). Excluding 2002, the average loss over the last 4 cycles was 14.38%.”
Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.
Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.
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