This Chart Should SCARE Every BEAR

Bears finally got 18 days of hope as the S&P 500 lost as much as 9.8% and expectations of the long-awaited market crash seemed to finally pan out. However, this may be just a cruel déjà vu. Here’s a chart that should scare every bear.

People often look for strength in numbers, but on Wall Street, ‘strength in numbers’ – also known as crowd behavior – tends to backfire.

Here is a look at one interesting chart. The chart plots the S&P 500 against the average exposure to US equity markets reported by members of the National Association of Active Investment Managers (NAAIM).

I’m a chart and numbers guy, but the message of this chart is probably more powerful if we emphasize the emotions behind the numbers, rather than just the numbers.

Last week, active money managers slashed their US equity exposure to 9.97%, the lowest reading since September 28, 2011.

In 2011, the S&P 500 fell as much as 21%. Last week money managers bailed before the S&P even lost 10%. They flat out panicked.

Why did money managers panic?

Were they right to panic?

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There may be a myriad of reasons why money managers decided to heavy-handedly hit the sell button, … but here is my interpretation (valued at 2 cents or more):

Obviously money managers were scared. Scared of what? The ‘big one!’

Tucked away in their memory banks were sell in May headlines such as:

  • CNBC: “This chart shows the market is a ticking time bomb” – June 11
  • Yahoo Finance: “Beware: 2014 is looking a lot like 2007” – May 22
  • CNBC: “I’m worried about a crisis bigger than 2008: Dr Doom” – May 8

The S&P 500 rallied as much as 200 points following those doom and gloom headlines. The normal reaction would be to dismiss crash calls as wrong, but money managers simply must have labeled them as ‘premature.’

The level of panic seen at the October 15 low was enough to propel the S&P as much as 140 points.

Was their panic justified? In other words, despite this bounce, did the ‘big bad bear market’ start at the September highs?

Has the “Big Bad Bear Market’ Started?

The easy and straight-forward conclusion based on the fact that money managers appear to have expected this ‘bear market’ is this:

Sure, there are plenty of reasons why stocks should roll over, but a watched pot doesn’t boil. Bear markets are rarely anticipated by the masses.

There are also persuasive reasons why this bull market has more time left. We just discussed one. Another is bullish seasonality and the absence of the most reliable bear market trigger I’m aware of.

After extensive research, I found an indicator that correctly warned of the 1987, 2000 and 2007 tops, and at the same time projected new highs in 2010, 2011, 2012 and 2013. More details here.

It is possible that the October panic lows will be tested once more, but the weight of evidence suggests that the bull market is not yet over. Short-term, the S&P 500 and Dow Jones are bumping against important resistance levels. A move above those levels is needed to unlock higher targets.

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 Three Biggest Bull Market Mistakes of Market Pros (Including Myself)

Have you ever felt like a fool for selling at the worst of times? This article won’t get your money back, but it’ll put a smile on your face and show that the financial pros’ timing may be even worse than the average Joe’s.

It’s said that everybody is a genius in a bull market. If that’s still true, we must not be in a bull market (the geniuses are dwindling).

A few days ago, the bull market genius gene by-passed me and put me on a waiting list, but it’s more fun to write about the blunders of others, so we’ll start there (more about my search for the genius gene later).

If you don’t feel like an investing genius all the time, you’ll enjoy these three tales of bad timing (one of them on my expense).

Airlines on Fire

Airline stocks have been on fire. Below is a chart of Delta Air Lines. We have to show an individual airline stock chart, because there are barely any airline mutual funds and no airline ETFs.

In fact, the last airline ETF (Guggenheim Airline ETF – FAA) was closed not too long ago. Since we are talking about timing, bad timing in particular, if you had to point out what month the Guggenheim’s airline ETF got canned, which would it be?

The announcement to close the airline ETF went out on February 19, 2013 (see arrow on chart), just before Delta and other airlines stocks started to soar.

The Pros Get it Wrong

The week of February 5, which is when the S&P 500 bottomed at 1,737, professional investment managers slashed their equity exposure a whopping 50%.

The chart below plots the S&P 500 against the long exposure of money managers polled by NAAIM (National Association of Active Investment Managers).

Their decision to dump stocks around February 5 was the worst timing ever, and it’s not the first time that’s happened. Now it kind of makes sense why some 80% of actively managed mutual funds underperform broad index ETFs like the SPDR S&P 500 ETF (NYSEArca: SPY).

My Worst Trade in Years

I’m a terrible liar, so I’m just going to come out and say it: “I did not expect this week’s rally after seeing Monday’s sell off.”

Unlike the NAAIM Pros, who sold around S&P 1,740, I (as expressed in the Profit Radar Report) expected a strong rally from 1,732, with an initial target at 1,830.

The February 19 Profit Radar Report upgraded the target to 1,870 +/-.

Up until Monday, the forecast played out beautifully, as the S&P 500 topped at 1,868 and dropped 40+ points on Monday.

To make matters worse, I recommended a tiny short position at 1,840 with a stop-loss at 1,851. To add more insult to injury, the S&P 500 gapped past our stop-loss at 1,851 on Tuesday right after the bell.

We already got rid of half this short position at a better price, but are still stuck with the second half and, at this point, the largest paper loss in years.

Our worst loss of all trades in 2013 was 1.01% (compared to an annualized gain of 59%). If it wasn’t for the gap up open, the position would have been closed out for a small 0.5% loss.

What’s the lesson? No matter your track record, the stock market can turn you into a fool (or genius) within a matter of hours.

Why are we still holding on to the second portion of this terrible short trade? Because the S&P 500 is at an inflection point that may bring our short position back into the green.

What and where is the inflection point? Here’s my take:

Is it Too Late to Jump into Stocks? Watch S&P 500 Reaction to This Inflection Point

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.

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.

Investment Managers Slash Equity Exposure by 50%

The investment professionals are supposed to have it all figured out and be smarter than the average retail investor. Well, this article is not about smarts, but it shows that the pros don’t feel comfortable sticking to their ‘bullish guns.’

Professional money managers spend tons of time and money on investment research, so you’d expect them to stick to whatever decision they make.

But that’s not the case. Data from the National Association of Active Investment Managers (NAAIM) suggests that even the pros fold quickly.

The chart below plots the S&P 500 against the average stock exposure of investment managers polled by NAAIM.

With exposure of 101% the average manager was actually leveraged long in November and December and still 96% long in January.

Since November, managers have slashed their allocation to stocks by 49.75% to a current exposure of 50.97%.

Such quick reversals from similarly bullish readings don’t happen too often. The red lines in the chart above show some of them and how the S&P 500 performed thereafter.

The sample size is small, but three out of four times saw a short-term rebound, followed by more weakness and an eventual recovery for the S&P 500 (NYSEArca: SPY).

I find this mildly fascinating, because this harmonizes with the message produced by my composite of indicators.

Although, it appears like the eventual recovery could become the biggest sucker rally in a long time, at least that’s the message of two monster stock market cycles that converge for one massive sell signal in 2014.

More details can be found here:

2 Monster Stock Market Cycles Project Major S&P 500 Top in 2014

Simon Maierhofer is the publisher of the Profit Radar ReportThe 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.

Mutual Fund Managers are Fully Embracing this Rally

Investors find mental safety in group behavior or group think. It’s always easier to buy when everyone else is buying. If everyone’s doing it, it must be right. More often than not, group think is the biggest investment trap. Professional managers as a group now are fully embracing this rally. Good news?

Financial pros tend to have a bad rep. Often for good reason. When financial advisors or money managers as a group start endorsing a stock market rally, it’s often time to bail.

How are the pros – professional investment managers – feeling now? In two words: long and confident.

According to the National Association of Active Investment Managers (NAAIM), the average manager is currently (as of last Thursday) 94.6% invested in stocks.

Contrarians will view this as bearish.

However, the actual data puts the current sentiment extreme into perspective.

The chart below plots the S&P 500 against the stock exposure of professional investment managers polled by NAAIM.

The current stock exposure is the second highest in the survey’s seven-year history.

Somewhat surprising though, previous extremes (dashed red lines) did not lead to immediate declines. In fact, the S&P 500 (NYSEArca: SPY) continued rallying for weeks in 2007 and 2013.

As a standalone contrarian indicator, the NAAIM survey is about as helpful as the VIX has been in 2013.

That doesn’t mean the survey is worthless, because lesser extremes (gray dashed lines) preceded (and correctly foreshadowed) the 2010, 2011, and 2012 corrections.

Based on the history of the survey, it appears that absolute extreme NAAIM readings (horizontal red line) could be a reflection of strong momentum (and continued gains), while lesser extremes (horizontal gray line) have a better track record as a contrarian indicator.

The NAAIM survey is only one of dozens of investor sentiment indicators I follow.

I don’t ever base my recommendations on any single indicator. However, the general message of increasing enthusiasm is confirmed by a number of other sentiment polls.

Composite sentiment cautions that the up side may be limited, but a few other indicators suggest an impending correction.

The question is how much further the S&P 500 and Nasdaq (Nasdaq: QQQ) can rally from their overbought condition. The following article takes a closer look at the up side potential:

Can the S&P 500 Rally another 20%?

Simon Maierhofer is the publisher of the Profit Radar Report.

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Contrarian Alert: Mutual Funds Are Buying This Rally – Should You Sell?

Most licensed and bonded professionals are considered authorities in their field. Usually you do as they say. Almost the opposite is true for financial pros, mutual fund managers. It often pays to do the opposite of mutual fund managers.

I’m not a craftsman, so if a pipe springs a leak I call a plumber. To get the job done right you call a pro. Unfortunately, the same principle doesn’t always apply to investing.

Often the opinions of the investment pros – mutual fund managers – work better as a contrarian indicator than an actual authority. That’s what makes the recent mutual fund manager survey interesting.
Each week the National Association of Active Investment Managers (NAAIM) surveys money managers to see how aggressively they are positioned, long or short.
The positions can range from leveraged bullish (200% net long) to leveraged bearish (200% net short).
The average mutual fund manager is currently 87.5% net long, that means that for every $100 under management, $87.5 are invested in stocks.
That’s not an all-time high, but as the middle portion of the chart below shows, fund managers are not often that bullish.
The chart plots the S&P 500 (SNP: ^GSPC) against two facets of the NAAIM survey. The vertical red lines highlight the correlation between extreme readings and the S&P 500 (NYSEArca: IVV).
Another interesting data point is the ‘last bear standing’ portion of the NAAIM survey. The most bearish manager polled, on average, is leveraged short (negative 110%). The most bearish manager right now is 15% long.
Rare as those bullish readings are, they are not as bearish for the S&P 500 (NYSEArca: SPY) as we’d expect from a contrarian sentiment indicator.
Some extremes led to corrections (October 2007, April 2010, February 2011), but in other instances (January 2007, September 2009, December 2010, January 2013) stocks just kept on trucking. Although on most occasions eventual corrections erased all or most of the gains accrued since the extremes were registered.
Another indicator that provides a sneak peek at what mutual fund managers are thinking are mutual fund cash levels. Just like a fire needs wood to burn, stocks need cash to rally.
How much cash is left to drive stock prices up further?
The detailed mutual fund cash level analysis featured here provides interesting inside with a twist.