The Little Bullish Indicator Nobody is Reporting On

Tunnel vision is a luxury investors can’t afford. Yet, bullish signals from a well-known investor survey have been ignored for too long. Angry messages on comment boards also confirm a bullish message that shouldn’t be ignored.

Allow me to point out a bullish indicator that’s being flat out ignored by the media and investors: Investor sentiment.

Civil Surveys

The chart below plots the percentage of bullish investors surveyed by the American Association for Individual Investors (AAII) against the S&P 500.

The percentage of bullish investors dropped to 29.60, one of the lowest readings of the year.

This isn’t a historical extreme, but it’s noteworthy considering that the S&P 500 is yet at another all-time high.

The dashed lines show what happened the last several times investors felt as gloomy as this week. Eight out of nine times the S&P 500 rallied.

The Profit Radar Report has been monitoring the AAII poll and observed back on May 14 that: “The percentage of AAII bears is down to 28.34% and various media outlets have boldly gone on record predicting a crash or severe correction. Today the put/call ratio is at 0.72, a level that’s indicative of a low more than a top.”

What makes the AAII crowd pessimism unique is how it contradicts other, more bullish sentiment polls.

The bottom graph on the chart shows the difference between AAII bulls and bullish advisors surveyed by Investors Intelligence (II). 56.5% of advisors are currently bullish.

The spread between AAII and II bulls is one of the largest and most persistent in the history of the two surveys.

Angry Response

In yesterday’s article “The Long-Awaited S&P 500 Correction Already Happened” I dared to suggest that the expected S&P 500 correction already happened.

The passionate responses on Yahoo’s comment board confirmed the AAII poll. Here are a few:

“The big one hasn’t hit yet”

“Wow they baked a correction hidden in an up turn and we are suppose to buy it. Soon you will see what the real thing is and then look at this article.”

“What a load of nonsense”

Conclusion

Every investor should always look at all the facts. Fact is, bearish sentiment is too pronounced to ignore.

A correction, which is overdue and would be healthy, may come any day, but data points like this caution that it may not happen yet.

Bottom line, as long as support holds, the trend is up. The July 8 Profit Radar Report identified key support, which has been tested five times since (and held everytime).

This key support, and why it is important, is revealed here:

S&P 500 Forecast: Key Support

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.

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Major Investor Sentiment Divergence Confuses S&P 500

More than ever before, investors are looking at various sentiment gauges to get a pulse on the market. After all, excessive optimism correctly foreshadowed every recent crash or correction. But, there’s a big sentiment divergence right now.

The 2000 and 2007 market crashes, and even the 2010 and 2011 corrections were preceded by excessive investor optimism.

Well, once bitten, twice shy. Investors are trying their darndest not to make the same mistake again. Nobody wants to get left holding the bag … again.

That’s why investor sentiment indicators are more closely monitored and written up today than at any other time (at least it feels that way).

How optimistic or pessimistic are investors right now?

Frankly, it depends on who you ask.

If you ask investment advisors and newsletter writers (as Investors Intelligence – II – does every week), you’ll get bullish forecasts from 60.2%.

If you ask retail investors (as the American Association for Individual Investors – AAII – does every week), you find that only 37.20% of ‘average Joe’ investors are bullish.

This is unusual. How unusual?

The chart below plots the S&P 500 against the percentage of bullish advisors (II), the percentage of bullish investors (AAII) and the difference between the two (II – AAII).

We saw a similar discrepancy between retail investors and advisors in April 2014, but the current spell of differing opinions is the longest stretch since at least the 2007 market top.

Prior instances since 2012 led to smaller pullbacks followed by continued gains.

However, the sample size is too small to draw any high probability conclusions.

Here are two additional factors worth considering:

  1. Overall investor sentiment (a composite of six different sentiment indicators) is at or near a bullish extreme (today’s Sentiment Picture – published by the Profit Radar Report – contains a detailed look at six different sentiment gauges).
  2. The S&P 500 is struggling to move above major resistance around 1,955. In fact, this resistance is so significant that the 2014 S&P 500 Forecast (published by the Profit Radar Report) projected a May/June high at 1,955 on January 15, 2014.

We have yet to see sustained trade above 1,955. Obviously, the market considers this resistance cluster important.

What are the odds of the S&P 500 reversing here? Could this be a major market top?

More details are available here: Updated 2014 S&P 500 Forecast

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.

Two Sentiment Gauges Reach Multi-Year Bullish Extremes

It’s been a while since we’ve seen bullish sentiment conditions, but this week’s rally pushed two sentiment gauges to multi-year extremes. But, there is reason to view the two extremes in context with the larger sentiment picture.

We looked at various sentiment measures in April and May, and the common denominator was that investors were unusually bearish.

As happens so often, bearish sentiment turned into bullish price action (for an insightful read on foolishly bearish forecasts click here: Hey Bears! Where is the Promised Crash or Correction?).

Thanks to the cycle of sentiment mean reversion, rising prices (since late May) lifted bullish sentiment. In fact, two sentiment measures reached multi-year extremes this week.

One particular gauge that foreshadowed a stock market rally back in May was the CBOE Equity Put/Call Ratio.

The May 14 and 18 Profit Radar Report featured this chart of the equity put/call ratio and stated: “Prior corrections were preceded by a put/call ratio around 0.5 or below. Today the put/call ratio is at 0.72, a level that’s indicative of a low more than a top. The equity put/call ratio cautions of further up side.”

The second chart updates the equity put/call ratio and plots it against the S&P 500. On Wednesday the equity put/call ratio dropped to 0.43, the lowest reading sine January 2011.

In addition, the percentage of bullish investment advisors polled by Investors Intelligence rose to 62.2%, the second highest level in the survey’s history.

Readings above 60% generally result in a rally pause or correction. However, the survey’s all-time high water mark (62.9%) occurred in December 2004 and didn’t cause too much trouble.

The equity put/call ratio is more worrisome as it indicates very limited hedging activity. This means many investors are long and naked (long without put protection). If the S&P 500 starts falling, they have to sell their core holding.

I always look at more than just two sentiment gauges. A broadening of the sentiment scope reveals that other gauges are still in neutral territory (retail sentiment, CBOE SKEW Index, etc.).

Once a month, the Profit Radar Report publishes a comprehensive sentiment picture that plots six sentiment gauges against the S&P 500. The May 23 Sentiment Picture proposed that: “The market will grind or spike higher (whichever is necessary to turn more investors into bulls) before delivering a noteworthy correction.”

Clearly the S&P 500 (NYSEArca: SPY) has succeeded in turning many more investors into bulls. Whether it’s been enough to cause a correction remains to be seen, but risk is rising.

What about stock market valuation? Are stocks too expensive and ready for a mean reversion?

Here is an objective look at four different valuation metrics and what they mean for the stock market.

Is the S&P 500 Overvalued?

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.

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.

Murky Message: Insiders Dump Stocks at Record Pace

Insiders, like corporate officers and directors, are the smartest indicator of a company’s (and by extension the stock market’s) health. Unfortunately, getting access to good insider sales data is tough. Here’s one promising set of data though.

Nobody knows more about a company than its corporate officers and directors.

By extension, nobody knows more about the U.S. stock market than the sum of U.S. corporate officers and directors (also called insiders).

Up until 2013, Investors Intelligence used to publish helpful data on insider selling, but ever since it’s become difficult to get good insider sales data.

On Friday the Wall Street Journal published an interesting article on insider selling.

It refers to the research of Nejat Seyhun, a finance professor at the University of Michigan.

Mr. Seyhun puts an intriguing twist on insider sales as he strips transactions from ‘insiders’ who own more than 5% of a company’s shares.

Although the government considers 5%+ owners insiders, Mr. Seyhun has found that it is usually mutual or hedge funds that own 5% or more of a company’s shares.

This adjusted figure shows that insiders are currently selling six shares for every one that they bought, which is the worst Mr. Seyhun has ever seen.

Insider Panic – Immediately Bearish?

Is this an immediately bearish sign? Not necessarily. There have been two prior occasions when the adjusted insider ratio got almost as bearish as it is today – early 2007 and early 2011.

Those time periods are marked on the S&P 500 chart below.

How did the S&P 500 perform going forward?

It struggled higher before eventually succumbing to increasing selling pressure.

By nature, this indicator is not immediately bearish. To circumvent the appearance of selling before bad news hits the fan, insiders often sell well in advance of perceived (or expected) trouble.

In summary, based on insider selling we should stay tuned for a potentially nasty wave of selling.

Last week’s high volume sell off suggests that trouble may be closer than expected, but there’s a different way of looking at this classically bearish signal: Short-Term SPDR S&P 500 ETF Analysis

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.

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.