How to Predict a Market Crash

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.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Crash Environment Alert

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.

The latest S&P 500 forecast is available here: Short-term S&P 500 Update

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.

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Is the S&P 500 Carving Out a Major Market Top?

This indicator is so valuable, I don’t want to keep it to myself. Unfortunately, I’m a bit in a pickle though.

I want to be fair to my subscribers. It just wouldn’t be right to share research reserved for paying subscribers for free, so I came up with this compromise:

You will see the indicator in its full power and glory, but I won’t disclose its name. It will simply be dubbed ‘secret sauce.’

As the charts below will show, ‘secret sauce’ correctly telegraphed the 1987, 2000 and 2007 market crashes.

Perhaps even more importantly, ‘secret sauce’ told investors to stay invested throughout this 6-year old bull market. Although there’ve been corrections along the way, ‘secret sauce’ has consistently pointed to new (all-time) highs.

What is Secret Sauce?

‘Secret sauce’ is basically a market breadth and liquidity indicator. Here’s how it works:

You know something’s wrong if the S&P 500 is at new highs, but ‘secret sauce’ isn’t.

Looking for more stock market analysis? >> Sign up for the FREE iSPYETF e-Newsletter

That’s what happened prior to the 1987, 2000 and 2007 crashes. ‘Secret sauce’ failed to confirm the new S&P 500 highs, which was an early indication of internal deterioration.

Like a ceiling fan that keeps going after it’s switched off, the market tends to keep going for a little while after liquidity and breadth peaks. ‘Secret sauce’ is a good reflection of when liquidity peaks and momentum slows before stocks roll over.

The first chart plots the 1987 and 2000 top against the S&P 500 (NYSEArca: SPY). The vertical red lines show the ‘incubation period’ between peak liquidity/breadth and peak price.

The second chart highlights the 2007 bearish divergence, which essentially marked the beginning of the end for stocks. It also captures the bullish green confirmations that kept pointing to continual new highs following the 2009 low.

I stumbled upon ‘secret sauce’ in 2013, and first introduced it to subscribers in the December 1, 2013 Profit Radar Report. Ever since then we’ve known to expect higher prices.

Obviously ‘secret sauce’ isn’t a short-term timing tool, but knowing whether a correction will morph into a full-fledged bear market or not has been incredibly helpful.

Especially since the media and self-proclaimed market pros have been calling for a market crash for years.

  • December 30, 2013: Why the market could see a 17% drop in 2014 – CNBC
  • May 15, 2014: Stocks are telling you a bear market is coming – MarketWatch

Imagine knowing when to simply ignore headlines as baseless fear-mongering. Is the recent pullback the beginning of the end?

All the details about ‘secret sauce’ 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.

S&P 500 Selloff Ironically Reduced Risk of Market Crash

This is a truly counter intuitive development: The recent sell-off, which knocked the S&P 500 from 1,991 to 1,911, actually decreased the risk of a market crash a la 2000 or 2007. Here’s why:

On May 20, we looked at an indicator that has the distinct reputation of signaling the 2000 and 2007 meltdowns (“A Look at the Risk Off Gauge That Correctly Signaled the 2000 and 2007 Tops“) .

Since then, this indicator has delivered a surprising twist.

We are talking about the XLY:XLP ratio.

XLY represents the Consumer Discretionary Select Sector SPDR ETF. XLP represent the Consumer Staples Select Sector SPDR ETF.

Consumer discretionary is an economically sensitive, high-octane sector. Consumer staples is an economically defensive sector.

The XLY:XLP ratio reflects how much risk investors are willing to take.

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

In late February, XLP started to outperform XLY (‘risk off’ mentality’). This led to a falling ratio. By May, the XLY:XLP ratio was on the verge of breaking below the trend line support.

Such a breach of trend line support foreshadowed the 2000 and 2007 rallies.

But then something curious happened. XLY recovered and so did the ratio.

Defensive sectors tend to fair better during poor markets, but despite the most recent selloff, which knocked the S&P 500 (NYSEArca: SPY) from 1,990 to 1,910, investors actually preferred XLY over XLP.

Why? I don’t know.

At the end of the day, a ‘market crash’ signal (like in 2000 and 2007) was averted.

The XLY:XLP ratio is just one of many indicators used to analyze the market and assess the (much talked about) risk of a market crash.

The Profit Radar Report just published an article on the most accurate ‘market crash vs correction’ indicator. This indicator correctly anticipated the 1987, 2000 and 2007 crash. At the same time, it exposed the 2010, 2011 and 2012 corrections as temporary blips.

More information is available here: How to Discern a Major Market Top

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.

S&P 500 Suffers First 1%+ Drop Since April 10 – Is this Bad News?

Today the S&P 500 lost more than 1% for the first time since April 10, 2014. This sell off comes amidst many predictions for a bull market end or market crash. In reality, how significant is today’s loss?

Streaks exist to be broken. The S&P 500 just broke a 66-day streak of not losing more than 1%. April 10 (blue box) was the last time the S&P 500 lost more than 1%.

Is today’s loss a bad omen?

Nowadays everything seems to be a bad omen, otherwise we wouldn’t read headlines such as:

  • “Two signs a market crash is coming”
  • “Bubble paranoia setting in as S&P 500 surge stirs angst”
  • “The indicator that proves the bull market is ending”

The S&P 500 is still within 1.5% of its all-time highs, so calls for a bull market end or crash are no doubt premature (we all know the odds of catching a falling knife).

Could today’s sell off lead to a deeper correction?

Here are a few facts to consider:

  • Today’s loss happened on elevated trading volume. The S&P 500 ETF (NYSEArca: SPY) chart shows other recent high volume declines (dashed red lines). Some of them were followed by additional selling, but most of them were not.
  • The July 8 Profit Radar Report pointed out that 1,955 is important short-term support (on a closing basis) for the S&P 500. This support has yet to be broken.
  • The July 13 Profit Radar Report highlighted key resistance at 1,980 – 1,985. So far the S&P wasn’t able to break above resistance.

In other words, despite today’s sell off, the S&P 500 remains range bound between support and resistance.

So could today’s decline be the beginning of a larger correction? Yes, but it could just as well be a minor buying opportunity.

Trusted indicators certainly have a better track record distinguishing one from another than attention-grabbing headlines.

In fact, one of those trusted indicators has predicted 6 of the last 8 buying opportunities correctly. If this indicator fails (and it’s at a ‘do or die’ point right now), it will foreshadow lower prices.

Here’s a look at this underrated and underappreciated, but accurate indicator:

S&P 500 Short-Term 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.

S&P 500 up, but Russell 2000 up More – Is this Role Reversal Significant?

Here’s the definition of a bandwagon: “A particular activity or cause that has suddenly become fashionable or popular.” Here’s the latest bandwagon idea: Short the Russell and S&P 500, because the market is going to crash.

Here’s the broken record story from last week: Small cap stocks are down hard, which allegedly means a market crash is straight ahead.

This story infected the financial media like a contagious virus. To wit:

“Small caps’ slide reflects a market in trouble” – MarketWatch
“More pain ahead for small caps” – Barron’s
“Small caps flash warning” – Wall Street Journal
“Hedge funds short small caps most since ‘04” – Bloomberg
“Small cap stocks send bear-market signal” – MarketWatch

Fact vs. Myth

True Fact: The Russell 2000 lost as much as 10% while the S&P 500 traded within striking distance of its all-time high.

True Fact: The Russell 2000 closed below its 200-day SMA for the first time in 17 months.

Myth: This foreshadows a market crash. A look at similar historical patterns, where the S&P 500 (NYSEArca: SPY) trades well below the Russell 2000, shows only a mild bearish bias.

The May 7 Profit Radar Report featured the above chart along with the following commentary:

Today, for the first time since November 21, 2012, the Russell 2000 closed below the 200-day SMA.

Many investors follow the 200-day SMA. A close below it is generally considered a sell signal and/or bear market. The path of least resistance would be to jump on the sell signal bandwagon, but that’s premature in my humble opinion.

The Russell support cluster at 1,100 – 1,080 seems more important than the 200-day SMA at 1,115.

The R2K recovered most of its intraday losses today, which created a hammer candle As the chart insert shows, a similar hammer candle preceded the prior two bounces.

The odds for a bounce – at least enough of a bounce to fool premature bears – are decent.”

It wouldn’t be prudent to chase the bounce. Why?

– This bounce only needs to be enough to fool shorts.

– Once the weak shorts are flushed out, the financial media may actually be right about a bigger correction (but by the time the shorts are flushed out, the media will probably have turned bullish).

– There are 3 strong reasons  to expect the ‘May blues’ or ‘summer doldrums,’ just not quite yet. More details here:

S&P 500: 3 Reasons 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.

If You Think the Market is About to Crash, Buy Stocks

What? Something’s wrong with this headline! Why would you buy if the market is about to crash? Look again. When investors think the market is about to crash, may actually be a good time to buy, if …

A watched pot doesn’t boil and a ‘watched’ market doesn’t crash.

Are investors watching signs for an impending market crash? It seems like they are.

Today and 1929

In February, charts like this one published by The Atlantic under the headline “That Viral Chart Predicting Another 1929 Stock-Market Crash?” made their rounds.

The chart compares the Dow Jones Industrial of the late 1920s with the Dow Jones of the early 2010s.

Today and 1987

Today, the S&P 500 chart shown below is stoking people’s imagination. It was published by USA Today under the headline “Is a 1987-type Market Crash 37 Days Away?”

Admittedly, articles like the ones mentioned above are anecdotal in nature, but they are published because that’s what people want to read right now (Barron’s just asked again: “Bubble or No Bubble”).

Just because it’s anecdotal doesn’t mean it’s garbage. Back in 2013, the March 10 Profit Radar Report looked at the Dow’s new all-time high and observed the following:

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 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.”

Once every month the Profit Radar Report takes a detailed look at investor sentiment (this report is called the ‘Sentiment Picture’). The Sentiment Picture plots various sentiment gauges against the S&P 500 (SNP: ^GSPC)  to illustrate how current extremes (if there are any) affected the S&P 500 in the past.

This comprehensive look at sentiment raised two red flags in 2013. One in May and one in December, when the Sentiment Picture warned that: “Bullish sentiment will catch up with stocks in January. This should cause a deeper, but also temporary correction.”

The correction came in January/February and basically reset investor sentiment.

Current Sentiment Reading

Although the S&P 500 (NYSEArca: SPY) is back near all-time highs, investor sentiment isn’t. The chart below, courtesy of the March 20, 2014 Sentiment Picture, illustrates sentiment.

There are no real extremes, which means there are enough potential buyers out there that could drive prices higher.

The lack of sentiment extremes doesn’t mean stocks must move higher. In fact, seasonality is soon turning bearish and the S&P 500 is butting against key long-term resistance.

The S&P 500 has peeled away from this resistance several times. Obviously if the S&P thinks this resistance important, so should we.

Here are two charts that illustrates the S&P’s most respected resistance (warning: the charts will probably change the way you look at the S&P 500):

S&P 500 – Stuck Between Triple Top and Triple Bottom – What’s Next?

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.