Chart: 2014 Market Humiliates Money Managers

Have you ever bought or sold stocks at the worst possible time? If you have, you’ll really enjoy this chart, which exposes just how bad the recent timing of professional money managers has been.

Buy low, sell high. It’s easier said than done, but you’d at least expect the ‘pros’ to be reasonably good at this.

Wrong! Professional money managers already racked up an impressive lousy track record for 2014.

On February 7, I wrote an article titled: “Investment Managers Slash Equity Exposure by 50%,” and published the chart below.

The article commented that such an irrational move out of equities usually leads to a rebound of the S&P 500.

The chart data is based on the NAAIM (National Association of Active Investment Managers) survey, which is updated every Thursday.

Last week, the NAAIM survey was updated on February 6, which means that most of the data is received on February 4 and 5.

So in reality professional investment managers slashed their equity exposure by 50% right around February 4 and 5.

The S&P 500 (SNP: ^GSPC) tumbled to its 2014 low on … you guessed it … February 5 at 1,738.

That’s when active managers sold. The S&P 500 and S&P 500 ETF (NYSEArca: SPY) rallied over 5.2% since. The Nasdaq QQQ ETF (Nasdaq: QQQ) soared 7.11% since.

If the same thing happened to you (buy or sell at the worst of times), take heart, the pros didn’t do any better.

When harping on the skills (or lack thereof) of professional managers I’m often reminded of this saying: “Don’t throw stones if you’re sitting in a glass house.”

To be brutally honest, the 90 S&P point rally didn’t trip the buy trigger outlined in my Profit Radar Report, but at least we saw this rally coming.

The February 2 Profit Radar Report stated that: “Our preferred forecast calls for a brief dip towards 1,730 followed by an energetic rally towards 1,830 for the S&P 500,” and the February 12 Profit Radar Report mentioned 1,845 (open chart gap) as target.

The February 5 update featured this visual projection (yellow line) of the ‘energetic rally towards 1,830’ (as illustrated by the yellow line we expected the S&P 500 to close the open chart gap at 1,733.45 before rallying strongly).

The latest NAAIM data shows that the average investment manager increased equity exposure from 50.97% to 73.26%.

That’s interesting, but it’s impossible to draw any predictive conclusions from this one data point change.

However, the S&P 500 has surpassed our initial up side target ~1,830 and came within striking distance of closing the 1,845 gap, so risk is rising.

The Dow Jones (NYSEArca: DIA) is close to 14-year key resistance level, which delineates bearish risk from bullish potential.

In short, there’s no reason to be complacent around current levels and the pros may feel some redemption if trade revisits the previous low.

Of course, the ‘pros’ will look like complete fools if the big fat buy signal given by this indicator pans out.

New Spin on Old Indicator Gives Big Fat Buy 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.

Big Banks Pity Their Near-Record Profits – Is This Bullish for the Financial Sector?

It’s tough being a banker today. The Federal Reserve wants to buy their bonds for top dollars, profits are near all-time highs, and yet bankers just aren’t happy. Here’s a closer look at the numbers and technicals.

“Mirror, mirror on the wall, who is the richest of them all,” the six big banks ask. The mirror replies: “You are the richest of them all, almost as rich as you were in 2006.” Disappointed about not being the richest ever, the banks walk away to drown their sorrow in a pity party.

The six largest banks reported a combined annual (June 2011 – June 2012) profit of $63 billion. How does this compare to the banks’ all-time record earnings? In 2005 banks earned $68 billion, in 2006 they earned $83 billion.

Banks are depressed because the new regulatory regime crimps their style and proven methods to make money. It requires banks to maintain bigger capital cushions. This limits their appetite for insane leverage and makes it harder to earn an “adequate” return on equity.

Boy, and those low interest rates really make it hard to make money too, they say. Never mind that the Fed pushed down interest rates just to keep the banks alive.

Some of the $63 billion profits (exactly how much nobody knows) aren’t real profits. They are accounting gains, profits engineered by clever accountants. That would explain why the six largest banks announced at least 40,000 job cuts from June 2011 – June 2012.

Perhaps this will give the banks – which are JPMorgan Chase, Wells Fargo, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley – reason to cheer. According to Bloomberg estimates they are expected to earn in excess of $75 billion in 2013.

Will Financials Rally Further?

The August 5, Profit Radar Report took a closer look at financial sector – the Financial Select Sector SPDR ETF (XLF) in particular – and featured the following research:

“Financials are currently under loved (who can blame investors). Of the $900 million invested in Rydex sector funds, only $18 million (2%) are allocated to financials.

With such negative sentiment, a technical breakout (close above 14.90) could cause a quick spike in prices. Next trend line resistance, and possible target, if 14.90 is overcome, is 15.63.”

As the chart below shows, this technical break out above resistance (dotted red lines) occurred on August 6th. The initial target at 15.63 (outlined by the solid red line) was met and exceeded quickly.

This red line, previously resistance, has now become support. There was no price/RSI divergence at the September 14 high, which suggests at least another run to new highs … another reason to make the bankers happy.

The analysis for the SPDR S&P Bank ETF (KBE) looks nearly identical.

The only way investors can share in the bankers’ (undeserved) joy is to profit from opportunities like this. The mission of the Profit Radar Report is to identify high probability and low-risk buy/sell signals for the S&P 500 and many other asset classes.

S&P 500 vs. Investors – Are Retail Investors Really the “Dumb Money?”

Retail investors have many choices to buy and sell stocks: Mutual funds and ETFs are just two of them. Regardless of the options, investors are often considered the “dumb money.” Is the dumb money really dumb?

Wall Street geniuses and the financial media often consider retail investors the “dumb money.” That’s ironic, because Wall Street and the media are notorious for dishing out group think advice that’s getting many of the small guys burned.

There’s plenty of data that shows that a plain index investing or index ETF investing approach (the real “dumb” buy and hold a basket of stocks approach) handily beats the returns achieved by Ivy League educated mutual fund managers that engage in actively buying and selling.

If you’ve read my articles before you know that I like to pick on Wall Street and the financial media, but today we’ll talk about the investing prowess of retail investors – the “dumb money.” Is the dumb money really dumb?

Is the Dumb Money Really Dumb?

One of the best measures of retail investor’s appetite for stock is the asset allocation poll conducted by the American Association for Individual Investors (AAII).

The chart below plots the S&P 500 Index (SPY) against investors’ portfolio allocation to stocks. Investors’ stock allocation pretty much waxes and wanes with the performance of the S&P and almost plots a mirror image of the S&P.

Unfortunately, the cliché is true; retail investors buy when stocks are high and sell when stocks are low. I believe this is due to crowd behavior and the forces of investing peer pressure rather than stupidity, as the term dumb money implies.

What else can we learn from this chart aside from the fact that retail investors tend to buy high and sell low?

The average allocation to stocks since the inception of the survey in 1987 is 60.9% (dashed red line). The S&P currently trades near a 52-month high, yet investors’ allocation to stocks is below average (60.5% as of August). This is unusual.

In fact, in the 21st century there’ve only been a couple of instances where investors’ stock allocation was below average when the S&P was near a 3+ year high. Those instances are marked with a red arrow. In August 2006 stocks went on to rally. In March 2012 stocks declined first and rallied later.

Lessons Learned

The lesson for investors is A) not to follow the crowd and B) not to follow Wall Street or the financial media.

The mission of the Profit Radar Report is to keep investors on the right side of the trade. A composition of indicators used identified the March 2009 and October 2011 lows as investable lows and got investors out of stocks at the 2010, 2011, and 2012 highs.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.