S&P 500 Update – Big Fake or Little Fake?

As mentioned in the last S&P 500 update we were looking for stocks to continue lower into the next target/inflection zone, which was around 2,740 (May 29 Profit Radar Report: “We expect 2,740 – 2,720 to be reached. From there, a larger bounce may develop.”).

Sunday’s (June 2) Profit Radar Report featured the chart below and stated that: “S&P 500 Futures are down some 15 points in Sunday night’s session and already reached their first target. Aggressive investors afraid of missing out on a bounce (which could turn into something more) may put some money to work.”

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This bounce happened, and it happened quickly and honestly stronger than I expected.

Big Fake or Little Fake?

Now the question is: Will stocks relapse or continue to new all-time highs?

The chart below shows that the S&P 500 fell as low as 2,728.81 on Monday. This drop closed the open chart gap at 2,744.13 and tagged Fibonacci target at 2,739.45, where wave c = wave a (a common target for waves c). The open chart gap at 2,851.11 is the next up side target (I wrote about the power of chart gaps here last week).

In terms of breadth, this week’s market action was bullish. Despite Monday’s 6-point drop, 65.03% of NYSE stocks advanced (strength ‘under the hood’), and on Tuesday, 81.48% of NYSE stocks advanced.

The horizontal blue line helps us determine other times when more than 80% of stocks advanced. In general it’s been a positive (green lines), but there’ve been false signals as well (May 16, red line and October 16, 2018, not shown).

So Tuesday’s strong up day is positive, but not an infallible buy signal.

I still prefer for this rally to relapse. The question is how high it will rally and relapse (big fake, or little fake). The June 2 Profit Radar Report outlined the 4 most likely paths going forward. One was already eliminated by this week’s action. That leaves three. Continued updates, projections, and buy/sell recommendations are available via the Profit Radar Report.

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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S&P 500: Year-end Rally or Breakdown?

2015 has been the year of trading ranges. The S&P 500 was stuck in a 100-point range from February to August and again from October until now.

Prolonged periods of zig-zagging tend to wear down support/resistance levels and dilute the effectiveness of technical analysis.

At times like this, it makes sense to overweigh other indicators to get a better read on the market. Here are a few of them:

Seasonality:

As of December 11, the S&P 500 was down 3.27%. Such poor performance is unusual for December. In fact, since 1970, the S&P 500 lost more than 3% after the first nine December trading days only four prior times (1975, 1980, 1996, 2002).

The graphs below (originally published in the December 13 Profit Radar Report) represent all years with 3%+ losses after the first nine December trading days (dashed black line) along with the performance over the next 30 trading days. December seasonality (green graph) typically turns notably bullish in mid-December.

Here’s another December anomaly:

Last week (Thursday/Friday), the S&P had two 1.5% back-to-back losses in the second half of December. According to SentimenTrader, this hasn’t happened since 1937.

Since 1928, there’ve only been eight back-to-back losses of more than 1% during the second half of December. All of those were during bear markets, but the S&P ended the year above the second down day level every single time.

Market Breadth

The December 6 Profit Radar Report pointed out extremely weak market breadth (more details here: Why are Stocks Down Despite Bullish Seasonality?).

Buyers fatigue is not always a short-term timing toll, but it’s been like a dark cloud over Wall Street, and certainly contributed to the lousy December performance.

There’s a small tell tale sign that buyers may be awakening (perhaps only for a little while). How so?

As the chart below shows, on Friday, the S&P closed at the lowest level since October 13. Some market technicians may consider this a technical breakdown, however, there was a bullish divergence between the S&P 500 and the percentage of NYSE stocks above their 50-day SMAs.

At least by one measure, selling was not as strong as price suggests. More often than not that’s a good sign.

Based on technicals, last week’s low at 1,993 seems important for the S&P 500.

Summary

As long as the bullish divergence and support at 1,993 hold, positive December seasonality deserves the benefit of the doubt.

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 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.

Deep Tissue S&P 500 Analysis

A rip current is a powerful, fast-moving flow of water running from the beach back to the open ocean. About 80% of lifeguard rescues are related to rip currents, and about 150 people are killed by rip currents every year (just in the US).

Lifeguards and experienced swimmers/surfers can detect rip currents, and know what to do, but they are invisible to novice swimmers.

The stock market is full of rip currents, that’s why some investors sink (often because they don’t think) and others swim.

Here are some of the cross currents lurking beneath the surface.

The chart below plots the S&P 500 against the percentage of NYSE and S&P 500 stocks below their 50-day SMA, and my favorite indicator (I call it ‘secret sauce’).

Secret Sauce Warning Signal

Secret sauce is an incredibly potent indicator, and is the most important ‘bull market health meter’ I’ve found.

Up until April 2015, secret sauce has been giving the ‘all clear’ signal, meaning that higher highs were still to come (it never triggered a ‘danger’ signal from 2009 – 2015). That’s not the case anymore.

In fact, currently secret sauce is showing the same warning signals it flashed before the 1987, 2000 and 2007 bear markets.

A detailed description of secret sauce and how it works is available here: The Missing Ingredient for a Major Bull Market Top

Rip Current Warning

The percentage of stocks above their 50-day SMA has been declining since 2012/2013, but the lag accelerated in April.

Large cap stocks are holding up much better than the rest of the market. How so?

48.8% of S&P 500 stocks are above their 50-day SMA, but only 33.5% of NYSE stocks. The NYSE Composite is comprised of some 3,500 issues, including (and predominantly) small and mid cap stocks. The S&P 500 consists of the 500 largest U.S. corporations.

A quick glance at the Russell 2000 chart, which just dropped to new lows, confirms the lagging performance of small caps.

Small cap underperformance is one of the 3 stages of a dying bull market (click here for the anatomy (3 stages) of a dying bull market).

Market breadth is warning that the stock market is trying to drag investors into open waters.

The percentage of stocks above their 50-day SMA is not yet at rock bottom levels, so there is more down side risk.

However, some investor sentiment measures are showing a high degree of pessimisms (which tends to be positive for stocks).

Bottom line, there is risk, but it seems to be somewhat limited, and will only be triggered by a drop below support (click here for key S&P 500 support).

I would love to see a correction. The deeper the correction, the better the buy signal for a final hurray rally.

If the S&P 500 doesn’t bounce soon, despite some excessively bearish sentiment readings, it could be a warning sign that a short-term break down is near.

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.

 

Is this Bull Market Circling the Drain?

Bill Gross just wrote that the bull market supercycle for stocks and bonds is approaching an end. Gross has made similar warnings before and acknowledges they were premature.

Eventually Mr. Gross will be right, but when?

Here are two indicators that have kept us on the right side of the trade for years.

The chart below plots the S&P 500 against the percentage of NYSE stocks above their 50-day SMA, and a liquidity gauge I call ‘secret sauce’ (actual name available to subscribers of the Profit Radar Report).

‘Secret sauce’ is an incredibly reliable long-term major market top indicator. It essentially measures liquidity and demand. All recent major market tops (1987, 2000, 2007) were foreshadowed by a down turn in the ‘secret sauce’ indicator. Throughout 2010, 2011, 2012, 2013, 2014 and 2015, ‘secret sauce’ has been pointing higher.

On average, ‘secret sauce’ starts turning south about six months before the final S&P 500 high. The recent S&P 500 (NYSEArca: SPY) high was confirmed by ‘secret sauce,’ so the final top still seems months away (more details about ‘secret sauce’ is available here: Is the S&P 500 Carving Out a Major Market Top?).

The percentage of NYSE stocks above their 50-day SMA is a shorter-term measure of market breadth.

Although the S&P 500 is settled withing 0.2% of its all-time closing high yesterday, there were only 59.8% of NYSE stocks above their 50-day SMA, compared to 71.7% on April 15.

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This condition of internal weakness doesn’t prevent further gains – in fact I’d love to see another flameout spike – it suggests that this rally is not sustainable.

Based on this set of indicators – which I consider quite reliable – there should be a correction followed by another rally to new highs.

Continuous updates will be 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.

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Under the Hood is more Strength than the S&P 500 Chart Shows

If you own stocks, this is a good new / bad news scenario.

On one hand, U.S. stocks are stronger than the S&P 500 (NYSEArca: SPY) chart suggests. On the other hand, stocks are (or were) overbought, at least based on this indicator.

Here are the details:

The percentage of NYSE stocks above their 50-day SMA nearly matched their previous highs last week, while the S&P 500 stayed below its prior highs.

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The potential implications are two-fold:

  1. The buying pressure behind the latest rally leg is actually stronger than the S&P 500 chart suggests.
  2. The % of NYSE stocks above their 50-day SMA reached an overbought reading. Prior such instances either saw stocks struggle to move higher or correct.

Based on technical analysis, investors should watch last weeks high – 2,111.91 for the S&P 500. Trade below allows for further weakness, trade above would translate into further up side (at least temporarily).

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.

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S&P 500 Suffers from Lack of Participation

Friday was the first time since October 15 that the S&P 500 displayed a blatant lack of internal deterioration. The ensuing Friday/Monday slump quickly erased three weeks of up side progress.

Sunday’s Profit Radar Report featured the chart below along with the following warning:

On Friday the S&P 500 reached a new intraday and closing all-time high. The percentage of NYSE stocks above the 50-day SMA did not confirm Friday’s price high. That’s the biggest divergence between price and % of stocks > 50-day SMA since this rally started.

The success of this rally now rests on the shoulders of fewer companies. This doesn’t mean it has to end, but distributing weight on fewer shoulders generally accelerates the process of tiring.

Near-term support is around 2,040 – 2,030. I’m not yet sure if and how much lower the S&P 500 will drop, but the deeper the correction, the better the next buying opportunity.

It’s worth noting that the % of stocks above their 50-day SMA was the only indicator I follow that actually showed a small bullish divergence at the October 15 low. I’m not sure if this correction will be long enough to create a bullish divergence, but if it does, it shouldn’t be ignored.

For the first time this year, small cap stocks look actually more attractive than large cap stocks. The iShares Russell 2000 ETF (NYSEArca: IWM) has the potential for a bigger year-end pop compared to the SPDR S&P 500 ETF (NYSEArca: SPY).

Continued analysis and buy/sell signals for SPY and IWM will be available to subscribers of the Profit Radar Report.

Recent Profit Radar Report analysis for the Dow Jones is available here: Dow Jones Repelled by 12-year ‘Insider’ Resistance

Recent Profit Radar Report analysis for the Nasdaq-100 is available here: Nasdaq-100 ‘Stuck on an Island’

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 to get actionable ETF trade ideas delivered for free.