Money is Rushing from Small Caps into Large Caps

Money is always rotating from one segment to another. Sometimes this rotation is bullish, other times it’s bearish. Right now money is flowing from small caps into large caps, a sign that investors are losing their appetite for risk.

Somebody flipped the switch from ‘risk on’ to ‘risk off.’

There are many measures of ‘risk on – risk off.’ Almost all of them are lagging.

I usually don’t care for lagging gauges, but this one has an interesting twist.

Illustrated in the chart below is the ratio between the iShares Russell 2000 ETF (NYSEArca: IWM) and iShares Russell 1000 ETF (NYSEArca: IWB).

A high ratio means that investors prefer small caps over large caps (risk on) and vice versa.

Although the ratio has been stuck in a range since August 2013, up until recently more money was flowing into the small cap Russell 2000 ETF than into the large cap Russell 1000 ETF.

This changed rather abruptly.

Here’s what makes this IWM:IWB ratio interesting:

The ratio has dropped to levels of prior support. As the dashed purple lines indicate, ratio lows generally occur fairly close to S&P 500 lows.

Obviously, the IWM:IWB is not at a new low, but the gray lines show that prior tests of this low caused temporary S&P 500 (NYSE: SPY) bounces.

This may be the case here too. A drop below the lower green support line, however, may indicate a change of investor behavior.

Less appetite for risk generally translates into lower prices.

While the IWM:IWB ratio has yet to drop below support, another indicator has already triggered a sell signal. More details here:’

MACD Triggers the Year’s Most Infamous Sell Signal

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.

Advertisements

How TLT ETF Unnecessarily Fooled S&P 500 Investors … and May Do So Again

Like detectives, investors are always searching for clues about the market’s next move. Unfortunately some clues turn out to be misleading. A false Treasury ETF (TLT) breakout just sent investors in the wrong direction … and may do so again.

I’m a big fan of ETFs, but when analyzing an asset class, the analysis should be based on the purest representation of that asset class.

A number of technical analysts spotted a bullish TLT breakout on March 27. TLT is the iShares 20+ Year Treasury ETF (NYSEArca: TLT).

On March 28 I published the article “Beware of False TLT Treasury ETF Breakout and S&P 500 Breakdown.”

TLT’s breakout appeared like a ‘fake out break out’ because the 30-year Treasury Futures (ZB), a purer representation of Treasuries, didn’t confirm the breakout.

The first two charts below (featured in the March 28 article) show the discrepancy between TLT and ZB.

In short, TLT is above resistance (green bubble), ZB is well below important double resistance.

The performance of 30-year Treasuries can be a powerful tell tale sign, as Treasuries often move in the opposite direction of the S&P 500.

A Treasury breakout would likely have coincided with an S&P 500 breakdown.

The third chart zooms in on 30-year Treasury futures (ZB) and highlights the performance since March 28 in blue.

We see that ZB was rejected by resistance, but more importantly, ZB is now trading right on top of short-term green trend line support (green arrow).

This means that it will probably takes a drop below support to unlock lower prices for ZB and higher prices for the S&P 500.

Just like 30-year Treasuries have found support, the S&P 500 is dealing with key resistance.

This S&P 500 resistance is revealed here and may well change the way you look at the S&P 500:

S&P 500 – Stuck Between Triple Top and Triple Bottom – What’s Next? (Article #4)

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.

Fed Needs Help of its Worst Enemy to Unload QE Assets

Talk about a classic catch 22. The Federal Reserve has been buying Treasuries to depress interest rates and spark the economy. With a bloated balance sheet, the Fed needs the help of its arch enemy to unload assets.

1,273%. That’s how much the Federal Reserve’s balance sheet has mushroomed since 1990.

As of January 22, the Federal Reserve owns $2.228 trillion worth of U.S. Treasuries and $1.532 trillion worth of mortgage-backed securities.

Various other holdings bring the Fed’s balance sheet to $3.815 trillion.

The chart below provides a visual of the sharp balance sheet increase since 2008.

Buying those assets is the easy part, but how will the Fed unload them?

The Fed’s Enemy – Who?

The Federal Reserve engaged in massive quantitative easing (QE) to depress interest rates. Low interest rates forced investors into stocks and defrosted the frozen credit markets.

By extension, QE drove up stock indexes like the S&P 500 and Dow Jones (NYSEArca: DIA). Bernanke termed this the ‘wealth effect,’ which the Fed hoped would spill over into the economy.

The Fed’s biggest enemy is interest rates, rising interest rates to be exact. Particularly important is the 10-year T-note yield.

Rising interest rates make Treasuries and Treasury Bond ETFs like the iShares 20+ Year Treasury ETF (NYSEArca: TLT) more attractive than stocks.

Rising interest rates also result in higher loan and mortgage rates, which are speed bumps for the economy and real estate.

The chart below, published on December 12, plots the S&P 500 against the Fed’s balance sheet and 10-year Treasury Yields. Yields are inverted and the chart shows that the Fed has lost control over yields.

How The Fed’s Arch Enemy Can Help

The Federal Reserve is the biggest buyer and owner of Treasuries. The Fed can print money and buy securities all day long.

But, who will end up buying all the Treasuries the Federal Reserve has amassed? What happens when the Fed becomes the seller? The Fed can’t print buyers. There has to be a demand or the Fed (if possible) has to create a demand.

Irony at its Best

What makes Treasuries attractive? High yields, which ironically is exactly what the Fed is trying to avoid. High yields are bad for stocks and bad for the economy, but may be the Fed’s only hope to eventually unload assets.

There’s another caveat. High yields translate into lower prices. As yields rise, the Fed’s Treasury holdings – and Treasury ETFs like the iShares 7-10 Year Treasury ETF (NYSEArca: IEF) – will shrink.

Are there other alternatives? How about doing nothing and let the free market do its thing. Perhaps that’s what Bernanke and his inkjets should have done all along.

There is another problem largely unrelated to QE and the Federal Reserve. It’s ownership of U.S. assets (not just Treasuries).

We know that the Federal Reserve owns much of the Treasury float, but more and more U.S. assets are falling into the hands of foreigners. More and more U.S. citizens have to ‘pay rent’ to overseas landlords.

Here’s a detailed look at this economically dangerous development:

US Assets are Falling into the Hands of Foreign Owners at a Record Pace

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.

Gold ETF Assets Tumble To 5-Year Low, but Lack Tell-Tale Sign of Major Low

Two gold sentiment gauges have plunged to 5-year lows as investors can’t get out of gold ETFs fast enough. Extreme sentiment often sends prices higher, but the big tell-tale sign of a major low is still missing.

Is gold sentiment bearish enough for a sustainable snap back rally?

There are dozens of sentiment indicators related to broad stock market indexes like the S&P 500 (NYSEArca: SPY), but there are few for precious metals.

We looked at one of them – the Commitment of Traders Report – on December 6. Large speculators had dialed down their long futures exposure to the lowest level in five years (see chart and article here: COT Report: Large Speculators are Giving up on Gold).

Large speculators (whether it’s S&P 500 or gold) generally find themselves on the wrong side of the trade, so today’s gold bounce makes sense. But is it just a relief rally or the beginning of something big?

Here’s another, in the past reliable, sentiment gauge: Investors commitment to own gold ETFs like the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU).

According to data from State Street (SPDRs) and BlackRock (iShares), GLD and IAU held over 1,550 tons of gold earlier this year, an all-time high.

Since then however, investors have been rushing out of GLD and IAU as the combined total of gold held dropped to 1,004 tons.

Is there a correlation between GLD and IAU’s combined assets and gold price lows?

The chart below plots the price of gold against the combined total tons of gold held by GLD and IAU.

In times past, there’s been a high correlation between gold assets and gold price lows.

However, since early this year gold ETF assets have been declining without letup.

Almost every week/month has seen a new low.

Sure, when viewed in hindsight the actual gold asset low may mark a gold bottom, but unfortunately hindsight isn’t an investment strategy.

There hasn’t been a gold bear market in well over a decade. We don’t have any bear market gold ETF data, so at this point guessing how much more money investors will yank out of gold ETFs is tougher than identifying solid support for gold.

Based on the COT report and gold asset data, sentiment is bearish enough for a bounce, but we are still lacking the tell-tale sign of a lasting bottom.

This tell-tale sign accompanied all gold market lows since 2005 (see chart).

An enlarged chart and full explanation of this tell-tale sign is available here:

The Missing Tell Tale Sign of a Lasting Gold Market Low

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

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

Wal-Mart of ETF Providers Offers Most Bang for The Buck

 

Wal-Mart is known for rigorous pricing, swallowing up market share and frustrating competition. The Wal-Mart of the ETF market place is going about business almost the same way, but this Wal-mart can’t offer everything.

The ETF market place offers many exotic choices, such as a Global Carbon ETF, Forensic Accounting ETF, and IPO ETF, but that’s not what makes ETFs attractive and efficient.

Yes, BMW may build an electric car, but their flagship product is the ultimate driving machine.

The flagship ETF product is a plain and simple index ETF. Who builds the best index ETF?

2013 Index ETF Inflows

Since 2010, Vanguards index ETF market share has grown from 15 to 20% while iShares (owned by BlackRock) and State Street bemoan small losses (datasource: Bloomberg).

In 2013 Vanguard ETFs grew by $51 billion, receiving 32 cents of every dollar invested.

Index ETF Fees

The average Vanguard ETF has an expense ratio of 0.14%, compared with 0.35% for State Street’s SPDRs and 0.39% for iShares’ ETFs.

This is not a true apples to apples fee comparison, as State Street and iShares offer some more specialized ETFs with higher fees.

What about the most popular S&P 500 ETF?

The bellwether SPDR S&P 500 ETF (NYSEArca: SPY) has an expense ratio of 0.11%. The iShares Core S&P 500 ETF (NYSEArca: IVV) comes in at 0.07%, while the Vanguard S&P 500 ETF (NYSEArca: VOO) has a price tag of 0.05%.

ETF Holdings

As per its patent, Vanguard is able to pool mutual fund and ETF assets and issue different shares (such as ETF).

As a result, Vanguard ETFs provide a more pure representation of the underlying index. On average, iShares ETF hold 312 securities, State Street ETFs 308, and Vanguard ETFs 1,171.

Unlike iShares and BlackRock, Vanguard is not a publicly traded company and doesn’t have to worry about pleasing Wall Street.

It All Doesn’t Matter, if …

… you buy at the wrong time.

Even if you have the best-in-class product, you will still lose money if you buy at the wrong time. Neither State Street, nor iShares or Vanguard will tell you when to buy (chances are any advisor will always tell you now is the best time to buy).

When is the right time to buy? Here are a few tips.

Buy Low, Sell High – How to Spot the Best S&P 500 Entry Points

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

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

 

Bond / S&P 500 Ratio Suggests Bonds Are Undervalued

Boring or exciting, tortoise or hare, bonds or stocks? There are different ways to figure out when to overweigh stocks over bonds or vice versa. This indicator shows the value of bonds relative to the S&P 500 Index.

Boring or exciting, tortoise or hare, bonds or stocks?

A low interest rate environment generally favors stocks as investors flee from fixed-income vehicles into higher-octane stocks.

This has been a winning strategy. The SPDR S&P 500 ETF (NYSEArca: SPY) is up 25%, compared to a 3% loss for the iShares Barclays 7 – 10 year Treasury Bond ETF (NYSEArca: IEF).

However, one indicator suggests that 10-year Treasury bonds are about to catch a bid.

The indicator is the ratio between the S&P 500 Index (SNP: ^GSPC) and the iShares Barclays 7 – 10 Year Treasury Bond ETF (IEF).

The chart below plots IEF against the S&P 500 : IEF ratio.

The red arrows highlight extremes in the S&P 500 : IEF ratio. More often than not an extreme in the ratio has coincided with lows for IEF and Treasury bonds in general, which includes the iShares Barclays 20+ Year Treasury ETF (NYSEArca: TLT).

The S&P 500 ETF : IEF ratio as a bullish indicator for Treasury Bonds however, is in conflict with our technical analysis for the 10-year Treasury Note yield.

The longer-term trajectory for the 10-year rate seems to be up.

The second chart of the 10-year Treasury Note yield (Chicago Options: ^TNX) shows that yields have broken above a short-term resistance trend line, which seems to put yields on track to surpass their September high (see chart annotations for previous Profit Radar Report analysis).

In an ideal world all indicators always point in the same direction, but when is market analysis ever ideal? It even takes some hindsight to pinpoint actual ratio extremes highlighted above.

The indicators may be telling us that there’s some short-term weakness for bond yields followed by a period of rising 10- year yields (with a target above 3%).

Does the S&P 500 : IEF ratio also apply to the S&P 500 Index?

A chart that plots the S&P 500 against the S&P 500 : IEF ratio can be found here. Although the chart isn’t failproof, it sends a message that shouldn’t be ignored. View S&P 500 vs S&P 500 : IEF ratio chart here.

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

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

 

S&P 500/Bond Ratio Shows Stocks are Overvalued

Much has been written about the ‘great rotation’ from bonds into stocks. In reality, investors ask themselves every day if there’s more value in stocks or bonds. There’s one accurate measure to determine where’s more value.

Stocks or bonds? Essentially that’s a decision investors make every day.

As with pretty much every other purchase, investors want to get the biggest bang for their buck and avoid risk. In other words, risk/reward is key.

What’s the better risk/reward play right now? Stocks or bonds?

To find out we will take a look at the value of the S&P 500 Index relative to 10-year Treasury prices. The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) is used as proxy for 10-year Treasuries.

The chart below plots the S&P 500 Index against a ratio attained by dividing the S&P 500 against the price of IEF (S&P 500:IEF).

This is one of the easiest and most effective ways to determine the value of both asset classes relative to each other.

The chart shows that S&P 500:IEF ratio extremes put the kibosh on stocks every time. The degree of the correction varied, but the direction for the S&P 500 was the same every time – down.

There is one problem though.

It usually takes hindsight to determine what constitutes an S&P 500:IEF ratio extreme.

The ratio, although extreme right now, could become more stretched. Will it?

The dashed horizontal gray line shows today’s ratio in correlation to prior readings. In fact, the ratio is at a point where it turned down in early 2007 and early 2008. This appears as natural resistance for the ratio … and the S&P 500.

The S&P 500:IEF ratio suggests that risk is increasing for the S&P 500.

This harmonizes with the S&P 500 chart, which conveys the message that stocks are at a short-term inflection point. This article highlights some technical ‘speed bumps’ most investors aren’t aware of: What’s Next For the S&P 500?