How Stocks Escaped from 3 ‘Unavoidable’ Bear Markets

This bull market has been counted out many times. Just over the past few years, stocks faced three – allegedly – unavoidable bear markets … and escaped all of them.

Here are the three ‘unavoidable’ bear markets, and why stocks escaped:

Unavoidable Rate Hike Bear Market

Starting in 2015, the Federal Reserve let it be known that interest rates will be rising.

According to the pros, rising rates would sink stocks. After all, that’s why the Fed kept them near zero for so long.

However, history simply doesn’t agree with this conclusion. The April 26, 2015 Profit Radar Report used the chart below to illustrated that rising rates are not bearish.

In fact, 9 of the 13 periods of falling rates (since 1954) saw stocks rally. That’s why the Profit Radar Report concluded that: “A rate hike disclosed at the April, June, July or even September or October FOMC meetings is unlikely to coincide with a major S&P 500 top.”

Barron’s rates iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

Unavoidable Oil Slump Bear Market

Falling oil prices were the hot topic as prices dropped 50% from June – December 2014.

The general opinion was that falling oil prices would send stocks lower, like in 2008.

The December 14, 2014 Profit Radar Report ousted this bogus reasoning with the chart and commentary below:

“This year’s oil price collapse differs from the 2008 collapse relative to the S&P 500. In 2008, the S&P 500 topped before oil did. In fact, the S&P 500 recorded its all-time high in October 2007 and was already down 21% by the time oil topped on July 11, 2008. In 2014, the S&P 500 recorded new all-time highs five months after oil started to decline.

The chart below plots oil against the S&P 500 and shows that falling oil prices are not consistently bearish for stocks. If history can be used as a guide, stocks are likely to hold up despite the oil meltdown.”

Unavoidable QE Bear Market

In 2008, the Federal Reserve unleashed it’s first round of Quantitative Easing (QE). A couple trillion dollars later, QE came to an end in October 2014.

Investors feared the withdrawal of QE would sink stocks (just like a junkie will crash without new fix).

The simplified logic (QE started this bull market, the end of QE will finish the bull market) seemed logical, but it wasn’t factual.

The October 5, 2015 Profit Radar Report plotted the QE money flow against the S&P 500 and concluded that: “We expect new bull market highs in 2015.”

Why?

The correlation between QE and stocks (at least in 2013/2014) did not support the notion of a bull market end. More importantly, our major market top indicator said the bull market is not over.

2016 Bear Market?

At the beginning of the year, when the S&P traded near 1,900, the media found countless of reasons why the bear market is finally here (many of them are listed here).

About six months and a 15% rally later, it’s obvious that the bull market is alive and well.

Short-term, the S&P has reached the lower end of our up side target range, so a pullback becomes more likely (more details here). However, any pullback should serve as a buying opportunity.

If you are looking for common sense, out-of-the-box analysis, check out the Profit Radar Report. It may just make you the best-informed investor you know.

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.

Stock Market Money Flow Check

Every once and a while it’s a good idea to check equity money flows, kind of like a GPS for what the money is doing.

Here’s a series of three charts to help us do just that.

1) Asset Allocation

In March, exposure to stocks (according to the American Association for Individual Investors asset allocation survey) soared to the highest level since the 2007 financial crisis.

This sounds scary, but the long-term asset allocation chart helps put things into perspective. Leading up to the 2000 market top, investors had up to 77% of their portfolio in stocks, and up to 69% in 2007.

2) Commercial Traders

The chart below shows the net S&P 500 e-mini futures contracts held by commercial traders. On balance, commercial traders are more or less neutral.

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3) VIX, Put/Call Ratio, SKEW

Chart #3 plots the S&P 500 against three different sentiment indicators:

• CBOE SKEW: The SKEW was designed to measure the risk of a ‘Black Swan’ event. Higher SKEW = higher risk.
• CBOE Equity Put/Call Ratio: This ratio shows to what extent option traders favor call options over put option. Lower readings = more optimism = more risk.
• CBOE Volatility Index (VIX): The mix shows the market’s expectation of 30-day volatility. Lower VIX = Elevated risk. The VIX has lost much of its contrarian indicator mojo starting in 2012.

The CBOE SKEW (5-day SMA to smooth out daily swings) is near the lower end of a two-year range.

The CBOE equity put/call ratio dropped to 0.46 yesterday, a 1-year low. The 5-day SMA is not as low, but still at the lower end of an eight-month range.

The VIX is back to what used to be considered the ‘danger zone.’

Summary:

Money is flowing into equities, but there are no screaming investor sentiment extremes. Anyone claiming that stocks will crash because any one single sentiment gauge is at financial crisis levels is taking things out of context.

Detailed investor sentiment analysis is available to Profit Radar Report subscribers.

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 and 17.59% in 2014.

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

 

Stock and Cash Allocation Reaches 2000 and 2007 Crisis Levels

Stock exposure just reached the highest level since 2007 and investors’ cash cushion has shriveled to the lowest level since 2000. Is this as scary as it sounds?

Data like this, especially when it stirs up financial crisis memories, should be viewed in context of the bigger picture.

Here’s what happened:

The latest American Association for Individual Investors (AAII) asset allocation poll showed that investors racked up their stock allocation to 68.6%, the highest level since June 2007.

At the same time, the cash cushion shrunk to 14.9%, the lowest since January 2000.

We all know what happened right after January 2000 and June 2007. But it takes a longer-term chart to tell the whole story truthfully.

 

The chart below plots the S&P 500 against investors’ allocation to stocks and cash going back to 1987.

Here’s what stands out regarding the 2000 market top:

The all-time cash % low (11%) occurred in March 1998, two years before the 2000 top.

A secondary cash % low happened in January 2000 (14%), very near the 2000 top.

The all-time stock % high (77%) occurred in January and March 2000, very near the 2000 top.

Here’s what stands out regarding the 2007 market top:

Stock allocation (70%) peaked 18-month before the 2007 S&P 500 high.

Cash allocation didn’t reach a significant low (16%) until November 2010.

There were no allocation extremes near the 2007 market top.

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Conclusion:

A monkey that sits on the ground cannot fall from the tree. The AAII data shows that, metaphorically speaking, most ‘investors are sitting high up the tree.’

If (or when) the stock market gets rattled, a ton of investors will be shaken out of the tree and fall hard.

The operative word is ‘if.’ Just because current cash and stock allocation matches the 2000 and 2007 levels, doesn’t mean a market crash is imminent.

There is a much more accurate major market top indicator than the AAII data. This indicator correctly foreshadowed the 1987, 2000 and 2007 top. You may read more about it here: Is the S&P 500 Carving Out a Major Market Top?

As the blue and green circles illustrate, the AAII poll data is more effective in predicting market bottoms than market tops.

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 and 17.59% in 2014.

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

Update: Will the S&P 500 Roll Over Again?

I was wrong! I expected the S&P 500 to rally from 1,990 to 2,080 and roll over to new lows. The rally happened, the subsequent reversal did not (at least not yet). Will the S&P 500 roll over later? Here’s an updated S&P 500 forecast.

How quickly things change. Here’s the chart and forecast that now requires a full reevaluation:

February 1 Profit Radar Report: “Near-term support around 1,990 is becoming quite obvious. When support is too obvious, the market may want to fool investors with a seesaw. A drop below 1,990 followed by a reversal and rally towards 2,080 (green projection in chart below) is most likely” (the alternate red projection would only have come into play with sustained trade below 1,990).

The S&P briefly dropped below 1,990 and rallied to 2,080 … and beyond. In fact, there was a new all-time S&P 500 (NYSEArca: SPY) high today.

The new all-time high is in harmony with the longer-term forecast of the January 4 Profit Radar Report: “Based on the ‘secret sauce indicator’, we expect new all-time highs following correction lows” (for the benefit of paying subscribers, I replaced the name of the actual indicator with ‘secret sauce.’ More details about the reliable ‘secret sauce indicator’ is available here).

However, as implied by the original green projection, I expected the S&P 500 to roll over around 2,080 and drop below 1,980.9 (February 2 low) at the minimum. In fact, I would have preferred to see 1,900 for a great buying opportunity.

Obviously the S&P 500 did not roll over around 2,080, but do I still expect new lows?

New Lows?

Below is an updated version of the February 1 chart. The green circles mark bullish touch points. There were other telltale signs along the way hinting at more immediate bullish potential.

The February 6 article – Will New MidCap Highs Propel All Stocks Higher? – noted the new SPDR MidCap ETF (NYSEArca: MDY) all-time highs, the S&P 500 trend line breakout and solid internal market breadth.

The warning given was that: “There’s no room for tunnel vision. Dale Carnegie beautifully illustrated the cost of tunnel vision: ‘Here lies the body of William J., who died maintaining his right away. He was right, dead right as he sped along, but he’s just as dead as if he were wrong. Nobody wants to be William J.”

There was also the Nasdaq QQQ ETF (Nasdaq: QQQ) breakout (February 10: Can the Nasdaq QQQ ETF Break out of a Bull Flag Pattern and Rally 10%?).

Will this be Another Extended Rally?

Some short-term indicators are overbought, but RSI confirmed the recent high and the new S&P all-time high is greeted with headlines such as:

• Robert Shiller’s (depressing) advice for investors – CNBC
• 7 danger signs of stocks’ coming bear market – MarketWatch

That’s not the kind of optimism indicative of a major top.

The new ATH essentially eliminates the immediate risk of new lows (below 1,980.9). A smaller correction is still possible, but the overall environment is changing towards ‘buy the dip’ … for now.

Continued updates are available via the Profit Radar Report.

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 and 17.59% in 2014.

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

Simon Says: Here is Big Support for Small Cap Stocks

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

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

That’s why we read headlines like this:

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

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

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

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

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

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

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

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

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

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

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

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

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

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

The Only Indicator That Foresaw a Persistent S&P 500 Rally with No Correction

MarketWatch reports that most people missed the recent rally? Why? Obviously because nobody saw it coming. Here is one indicator that persistently suggested further gains (this indicator also explains why so many missed the rally).

I spend a lot of time plotting intricate charts illustrating technical patterns and developments, sentiment extremes and seasonal biases.

Perhaps my most impactful chart this year was featured in the 2014 S&P 500 Forecast (published by the Profit Radar Report on January 15).

This chart combined all my analysis into one simple S&P 500 projection for 2014 (view S&P 500 projection chart here).

If you click on the link above you’ll notice that the projection was about as accurate as anything in the financial world can be.

I’d like to think that charts have value, but the effectiveness of any chart crafted since early May pales in comparison to this rudimentary and unscientific, but uncannily accurate indicator.

Headline Indicator or ‘Blind Guides’

The headline indicator is simply an assessment of media sentiment. Unfortunately, many retail investors listen to the media, making this a helpful contrarian indicator.

Below is a brief chronicle of the media’s uncanny prowess to support the wrong side of the trade along with commentary by the Profit Radar Report.

You’ll be surprised to read just how wrong the financial press has been (the S&P 500 chart below includes even more media headlines).

April 30, 2014 – S&P 500 at 1,884

April 30, Profit Radar Report: “The old and chewed-out ‘sell in May and go away’ adage is getting a lot of play these days. I get suspicious when our carefully crafted outlook becomes the trade of the crowd and a crowded trade. How will the market fool the crowded trade?”

The media’s take:

• CNBC: “Why sell in May adage makes sense this year: Strategist”
• IBD: “Why investors expect to sell in May and go away”
• MarketWatch: Risk of 20% correction highest until October

May 11, 2014 – S&P 500 at 1,878.48

May 11, Profit Radar Report: “How will the market fool the crowded trade? A breakout to the up side with the possibility of an extended move higher.”

The media’s take:

• Bloomberg: “The next liquidation crisis: What are the signals?”
• CNBC: “I’m worried about a crisis bigger than 2008: Dr Doom”
• Bloomberg: “U.S. markets on brink of 11% correction”

June 11, 2014 – S&P 500 at 1,944

June 11, Profit Radar Report: “Different day, same story: Stocks are near their all-time highs, but the media treats this advance with outright contempt. Below is a small selection of today’s headlines. We can’t dismiss media sentiment as retail investors (unfortunately) listen to the media.”

The media’s take:

• CNBC: “Cramer: Prepare for stock decline”
• WSJ: “How long can stocks maintain all-time highs?”
• MarketWatch: “3 reasons why the Dow shouldn’t be at 17,000”

June 25, 2014 – S&P 500 at 1,959

June 25, Profit Radar Report: “It only took one small down day (Tuesday) to reinvigorate media fear mongers.”

The media’s take:

• Yahoo: “S&P’s Stovall says be careful before jumping into stagnant market”
• Yahoo: “’It looks like a peak:’ Robert Shiller’s CAPE is waving the caution flag”
• CNBC: “Wall Street’s biggest bull calls for a correction.”

Irony at its Worst

A correction would actually be healthy, but a watched pot doesn’t boil.

The June 25 Profit Radar Report explains: “The media’s continuous market top calling, artificially extends every rally. We saw this in April/May. Although media pessimism isn’t as pronounced today as it was in April/May, it’s enough to be considered a bullish wild card.

Bull markets die or correct because of ‘starvation.’ The market needs potential buyers to fuel rallies. That’s why good news tops are dangerous, because they suck in so many buyers and leave few sellers. Where there’s no buyer, there’s no price increase. ‘Scary’ media headlines disturb this cycle and provide continuous ‘ammunition’ for the bull.”

Today – S&P 500 at 1,973

On Monday the S&P 500 closed at 1,973. What does the media say?

• CNBC: “Why this could be as good as it gets for stocks”
• Yahoo: “Common sense says look out for a market top”
• USA Today: “History says July is cool time to own stocks”
• WSJ: “Dow nears 17,000 as rally gains steam”

Yes, you saw correctly, there are actually two headlines with a bullish connotation, but the most fitting headline comes from MarketWatch.

“Dow flirts with 17,000, but most people missed the ride”

Hmmm, let’s see if the media can crack the mystery behind the missed rally.

It is obviously premature to order a coffin for this rally (or the entire bull market), but several indicators – one of them is the ‘sudden drop’ indicator – suggest caution.

This ‘sudden drop’ indicator has a flawless record since the beginning of the QE bull market in 2009. Is it reason to worry.

Here is a detailed look at the ‘sudden drop’ index: S&P 500 ‘Sudden Drop’ Index at Historic Extreme

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.

The Secret Dow Jones Barrier Every Investor Should Know

Stocks haven’t gone anywhere in 2014. There are a number of reasons for this, one is a insurmountable technical barrier created by the Dow Jones over the past 15 years. Every investor should know about this barrier.

Almost haft of all airplane accidents occur during takeoff or landing?

That’s when the speed is slower, more airplanes are in the immediate airspace, and most importantly, that’s when the plane is in close proximity to the ground.

Similarly, most stock reversals occur at support/resistance levels.

Why? There’s more action, or friction at support/resistance levels.

A little while ago we asked “Is it Too Late to Jump into Stocks? Watch S&P Reaction to This Inflection Point.” Key resistance for the S&P 500 at the time was just below 1,900.

The S&P has been stuck in a rut, because it wasn’t able to overcome this hurdle, in fact, it was rebuffed by this inflection point several times (click above link to view S&P 500 resistance, still valid today).

Here’s a clear resistance level for the Dow Jones (DJI: ^DJI).

Shown is a log scale of the Dow Jones (NYSEArca: DIA) going back to 1999. The resistance level is constructed by connecting the 2000 and 2007 highs.

We don’t create those ‘lines in the sand,’ the market does. We just connect the dots.

The Dow seems to think this line is important, so should we.

The simple conclusion is that trade below the trend line limits up side potential, while trade above the trend line would unlock higher targets.

There’s only one reason to expect a false trend line throw-over top. More details here:

Expecting ‘Sell in May and Go Away’ Pattern? – Prepare for Surprise

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.

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

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

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

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

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

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

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

3 Most Predictable Patterns of 2013

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

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

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

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

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

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

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

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

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

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

When Are the Bulls Wrong?

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

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

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

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

Unique Sentiment Reading Reveals Surprising Buy Signal

The chart discussed in this article shows why it is important to approach market analysis with an objective mind. A bearish analyst will see an undisputable sell signal, while an objective analyst (and a tweak of how the data is presented) shows a buy signal.

By now even the Geico cavemen should know that investors are overwhelmingly bullish, which is bearish for stocks.

However, the latest sentiment data, as you will see below, reveals the skittish nature of investors and a potential buy signal.

On Wednesday Investors Intelligence (II) reported that the percentage of bullish advisors and newsletter-writing colleagues has slipped from 60.6% to 56.1%.

I’ve seen and created many sentiment charts before. Below is one of them.

It plots the S&P 500 against the percentage of bullish advisors polled by II.

The chart shows exactly what it’s supposed to, a somewhat lower degree of bullishness.

However, what the chart doesn’t show is the near-extreme level of skittishness.

The second chart plots the S&P 500 against the rate of change of bullish sentiment.

Advisors this week are 7.43% less bullish than last week. In the last couple of months the rate of change has dropped from +17.02% to –7.43%.

As the dashed red lines illustrate, in times past rates of change at 7% or below have generally been bullish for the S&P 500 (NYSEArca: SPY) and Dow Jones.

I would not view this unique rate of change indicator as a buy signal, but it does show that data often can be interpreted multiple ways.

It is important to analyze data without bias (some analysts massage data to fit their bias) and most importantly recognize the danger of a possible surprise move to the up side.

Having said that, the weight of evidence does suggest that a correction is near.

Here are 3 reasons why: The 3 Worst Pieces of News so Far in 2014

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

Investors Stuck Between ‘Ignorance is Bliss’ and ‘You Snooze you Lose’

Shuffle your money in the market and forget about it has been the best any investor could do since the Federal Reserve started Quantitative Easing. The ‘ignorance is bliss’ strategy has worked well, too well. Will ‘you snooze you lose’ take over soon?

Sometimes not doing anything is the best thing you can do.

Investors who’ve been sitting on their hands (and portfolio) since 2009 must be quite happy. Ignorance has been bliss.

In 2007 however, there was no bliss in ignorance. Those who got caught up in the general spirit of complacency got a rude wake up call. You snooze you lose (literally).

By some measures, investor sentiment has reached a level similar to 2007.

Is now the time to stop snoozing or continue to be ignorant?

The Case for ‘Stop Snoozing’

Aside from a few minor glitches, the S&P 500 (SNP: ^GSPC) has been on a tear for much of 2013.

The S&P 500 is now trading 12% above its prior 2007 high. Until a few weeks ago investors felt largely indifferent about the continual streak of new all-time highs.

But now optimistic sentiment extremes are popping up all over the place.

We don’t have enough space to discuss all of them here, but the S&P 500 / investment advisor sentiment chart below is a nice proxy of investor enthusiasm.

The chart simply plots the S&P 500 against the percentage of bullish investment advisors and newsletter-writing colleagues.

Another largely unpublicized, but extremely accurate contrarian sentiment gauge is discussed here: Largely Unknown but Accurate Gauge Shows Stocks are Overvalued

The Case for ‘Stay Ignorant’

Let’s be clear about this: Sentiment is at an optimistic extreme and under normal condition I would not go long.

However, I’ve observed another curious albeit non-scientific sentiment development: The response of readers to financial commentary.

When I publish bullish articles, they are met by crickets, while bearish articles receive much more praise. Once again, this isn’t measurably scientific, but shows that sentiment may not be as stretched as various indicators suggests.

Since reaching my long-term up side target (published in various issues of the Profit Radar Report) of 1,760, the S&P 500 hasn’t gone anywhere.

Perhaps the ‘gone nowhere’ action is enough to work off an overbought condition and launch another rally leg (an overbought condition can be relieved by price or time). However, I trust the up side as little as I fear the down side.

Here’s how I intend to navigate the coming days (weeks?): If the S&P 500 moves above my up side trigger level (And only then. Trigger level is discussed in the Profit Radar Report) we will go long with a relatively small position – the easiest way to do this is via the SPDR S&P 500 ETF (NYSEArca: SPY). Those wanting more bang for their buck may use the ProShares Ultra S&P 500 ETF (NYSEArca: SSO).

Due to sentiment the up side is tricky, so tight stop-loss protection will be recommended.

Only a drop below support (or a move to my next target level) will have us considering going short.

My most recent free S&P 500 analysis includes more of my thoughts on the S&P 500 (from a technical point of view).