Will The S&P 500 Reward Politicians Shenanigans With New Recovery Highs?

It seems like the stock market is rewarding short-sighted politics and alibi deficit deals, but that’s not the case. The stock market seems to have a specific agenda revealed by a little-known but effective indicator.

I don’t like to dignify bad behavior. That’s probably why I’ve only written about the fiscal spectacle once before (December 7: Will the Fiscal Cliff Really Send Stocks Spiraling?).

Stocks rallied strongly on news that Congress approved a quick fix that buys a little more time. Will the S&P 500 and SPY ETF even go as far as reward politicians’ shenanigans with new recovery highs?

Confession Time

I have to admit that we didn’t get to profit (at least not much) from this week’s explosion to the up side. That’s not because it wasn’t expected.

The December 23 Profit Radar Report wrote that: “The decline from September 14 – November 16 was a correction on the S&P’s journey to new recovery highs. This scenario is supported by the lack of bearish price/RSI divergences at the September 14 high, continuous QE liquidity and bullish seasonality.”

The same update also warned that: “the S&P is littered with resistance levels from 1,417 – 1,440. This suggests that any immediate up side may be choppy.”

In fact, the up side was so choppy that it diluted many support/resistance levels and made it tricky to find a low-risk buying level. The chart below (it looks busy, that’s why there was no low-risk entry) highlights the support/resistance levels rendered nearly useless by 5 weeks of zig zagging back and forth.

This is frustrating, but crying over spilled milk is of no benefit. There will always be another trade set up, in fact a huge setup is in the making right now.

Wednesday’s move above 1,448 unlocked a number of temporarily bullish options. The up side from here is probably going to be choppy and limited, but should lead to the best low-risk sell signal in well over a year.

I am using a little-known but effective strategy to project the target (and reversal zone) for the current rally. Effective because the strategy is a mirror image of the strategy I used to pinpoint the April 2011 high (at S&P 1,365), which led to a 300-point free fall.

This strategy suggests a new recovery high followed by a major top. I don’t know if the reversal will be as significant or more significant than the one in April 2011, but investing is a game of probabilities. The odds for a low-risk entry just don’t get much better than this.

The latest Profit Radar Report reveals the little known strategy used to project the target for this rally along with the actual target level for a potentially epic reversal.

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P/E Ratio Based Valuations are Beyond Deceptive

P/E ratio analysis used to be a time-tested, go to valuation parameter. Recent changes however, have turned the P/E ratio into the most deceptive value barometer around. Here’s why.

The P/E ratio is based on profits and only reliable as long as the “P” in P/E are actual profits. In a world where Wall Street thrives on manipulation, do P/E ratios still apply?

To illustrate: Wells Fargo is trading around $33 a share with earnings per share of $3.18 and a P/E ratio of 10.40. This is cheap, isn’t it?

But how do we know that Wells Fargo’s profit is really $3.18 a share?

As of December 30, 2011, Wells Fargo had total assets of $1.313 trillion and total liabilities of $1.173 trillion. You and I don’t know what the assets and liabilities are, and I venture to say that Wells Fargo doesn’t even know.

How much are the millions of homes Wells Fargo financed before the housing bust really worth? Again, we don’t know, but we know that due to an FASB (Financial Accounting Standard Board) rule change, Wells Fargo and every other corporation in the U.S. can now overstate the value of their under water assets.

FASB Rule 157

FASB rule 157 applies to fair value (or mark-to-market) accounting. Fair value is (or used to be) defined as “the price that would be received to sell an asset or paid to transfer liability in an orderly transaction between market participants.”

In 2008 the market turned disorderly and on April 9, 2009, the FASB (strong armed by Congress) changed rule 157 to suspend the fair value rules when the market is unsteady.

Instead of reporting the current value of an asset (market-to-market), corporations are now allowed to pick a price they believe the asset will be worth in the future (mark-to-make-believe).

Cause and Effect

What effect would this have? A March 2009 Bloomberg published this assessment:

“By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASB’s change could boost bank industry earnings by 20 percent. Companies weighed down by mortgage-backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University in Columbus. ‘This could turn net losses into significant net gains,” Dietrich said.’”

Is that really what happened? Let’s see which companies drove earnings growth for the S&P 500 in 2012.

The chart and data below was compiled by Morgan Stanley’s Adam Parker. According to his research, ten stocks are driving about 88% of the entire S&P 500 earnings growth.

Six (seven if you consider GE a financial stock) of the ten companies belong to the financial sector (Bank of America, AIG, Goldman Sachs, Wells Fargo, JPMorgan Chase, Citigroup).

Without Apple and the financial sector, earnings growth for the S&P 500 would be next to zero. A bad year for Apple and a return to fair value accounting could easily double the P/E ratio.

Based on P/E ratios, does the S&P 500 still look cheap?

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.

How to Spot Low-Risk, High Profit Trades

It’s easy to pick out bygone trading opportunities after the fact – hindsight is 20/20. But this article looks at live low-risk trades and provides a tutorial on how to identify low-risk trades and when to lock in profits.

“Buy the best and forget the rest.” This is the mission statement of the Profit Radar Report. “Buying the best” doesn’t refer to the best stocks but to the best profit opportunities.

The quality of trade setups is more important than the quantity, but how do you spot a quality setup? The next few paragraphs highlight three actual quality opportunities for gold, silver and the S&P 500,

Before we delve into the actual charts, I’d like to define what makes a quality setup.

1) High probability trade: I follow three key market forecasting elements (continuous coverage provided via the Profit Radar Report):

I) Technicals
II) sentiment
III) seasonality.

A high probability (usually equal to a high profit trade) setup only happens when all three indicators point in the same direction. Using this technique I identified the following high probability trades:

Sell: April 2010, May 2011 – Buy: March 2009, October 2011, June 2012.

It’s comparatively rare for my three key indicators to align. But that doesn’t mean there aren’t any quality setups.

2) Low-risk trade: A low-risk setup is a trade with significantly higher profit potential than risk of losses. That’s because the entry point is very close to key support or resistance, which provides a powerful and well-defined stop-loss level.

We haven’t had a high probability set up in nearly half a year, so the quality setups highlighted below are all classified as low-risk trades.

S&P 500

The S&P 500 reached our revised up side target of 1,475 on September 14, the day after the Fed announced QE3. We didn’t go short at 1,475 because the new recovery came come absent of a bearish RSI divergence (the April 2010, May 2011 and May 2012 highs were all market by bearish RSI divergences).

The initial phase of the decline was very choppy and difficult to trade. Key support was at 1,396. The November 7 Profit Radar Report warned that: “A move below 1,394 will be a signal to go short with a stop-loss around 1,405.”

The November 14 Profit Radar Report recommended to: “Place a stop order to close half of our short position at 1,348 to take profits.” The second half was closed out at 1,371.

We closed our positions for a 46 and 27 S&P point profit. At no time was the risk greater than 10 points. The 27 – 46 point gain wasn’t as great as if we entered earlier, but we had a favorable risk/reward ratio and most importantly low-risk profits.

Corresponding ETFs are the Short S&P 500 ProShares (SH), UltraShort S&P 500 ProShares (SDS) or the S&P 500 SPDR (SPY).

Gold

In early October gold was sitting atop quadruple support but sentiment had become frothy. The October 7 Profit Radar Report stated:

“According to the latest Commitments of Traders (COT) report, small speculators are now holding the most net long gold positions in a quarter century. Friday’s action also produced a red candle high. Both developments are generally bearish. However, as mentioned in Wednesday’s PRR, gold prices remain above quadruple support (2 trend lines, 20-day SMA, and 61.8% Fibonacci). As long as prices remain above support we’ll give this rally the benefit of the doubt. A move/close below 1,765 will be a signal to go short for aggressive investors with a stop-loss at 1,775” (later raised to 1,777).

When should we take profits? The October 25 Profit Radar Report said this: “Gold dropped to support at 1,700 today. We are getting to a point where it becomes tempting to lock in a 65-point gain. Since gold hasn’t seen a daily bullish RSI divergence yet either, we’ll hold our short position. We’ll sell half of our holdings at 1,680.

We sold half of the gold position at 1,675 in early November and the second half at 1,725 a few days later and captured a 5% and 2.5% profit. Corresponding ETF trades were a) short the SPDR Gold Shares (GLD) or b) buy the UltraShort Gold ProShares ETF (GLL).

Silver

Silver broke above trend line support on July 25 at 27.30. This was a buy signal. Our stop-loss was at no time more than 2% below the entry price (initially red, than green trend line).

In hindsight we could have held on to the position as long as the sharply ascending green trend line remained in tact, but hindsight is 20/20.

We closed the position around 30 and 32 for a 10% and 16% gain in the iShares Silver Trust (SLV).

Future low-risk and high probability trade signals are available via the Profit Radar Report. 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.

What’s Killing Stocks and What May Resurrect them?

It’s better to be out of stocks wishing you were in, than in wishing you were out. But it’s best to be short stocks when stocks are down. The short trade has worked well, but how much more down side is there?

Every kid knows you better eat your ice cream before it melts. Investors should know to lock in profits before they disappear.

The recent 8.6% drop in the S&P 500 and 12.6% fall in the Nasdaq-100 has certainly done some technical damage and erased a fair amount of profits.

What has caused the market’s sell off and how much worse can it get?

There’s never just one event that triggers a market sell off, but as far as the recent sell off is concerned there’s one reason that weighs heavier than any other: Apple.

Live by the Sword, Die by the Sword

Apple had an incredible run, soaring from $80 in 2009 to $705 in September 2012. Apple became the most valuable company in the world and in the process controlled 20% of the Nasdaq-100 and 5% of the S&P 500.

Apple was like a “dictator of the financial market.” As Apple goes, so goes the market. But that relationship is a two-edged sword, because when Apple sneezes the market will get a cold.

So how was Apple’s health?

According to the Wall Street Journal, “Wall Street analysts are increasingly bullish as Apple hits fresh highs” (August 27, 2012) and MarketWatch wrote “Apple seen as trillion dollar baby” (August 21, 2012).

In contrast, the August 22 Profit Radar Report warned: “The new iPhone will hit the stores soon, a mini iPad is in the pipeline, Apple TV will be in many living rooms near you soon and the holiday season is coming up. Based on fundamentals there’s no reason Apple stock shouldn’t rally, but technicals suggest that a top may be just around the corner.”

This warning was followed up by a specific trade recommendation via the September 12 Profit Radar Report: “Aggressive investors may short Apple (or buy puts or sell calls) above 700 or with a close below 660. Obviously, there is no short Apple ETF and if you don’t have a margin account set up, you may consider using the Short QQQ ProShares (PSQ), which aims to deliver the inverse performance of the Nasdaq-100 (Apple accounts for 20% of the Nasdaq-100).”

Apple has fallen over 25% from its September high and dragged every major U.S. index with it. If you’re looking for a scapegoat, look no further than Apple.

How Low Can Stocks Go?

The S&P started to tread on “thin ice” in late October. Why thin ice? Because it was trading perilously close to key support around 1,400 (see trend lines in the chart below). The thin ice finally broke when the S&P fell through key support at 1,396.

A break of key support is generally a precursor of lower prices, that’s why the November 7 Profit Radar Report stated that: “A move below 1,396 will be a signal to go short with a stop-loss around 1,405.”

The chart below was originally published in Sunday’s (Nov. 11) Profit Radar Report, which included the forecast for the week ahead. Below are a few excerpts from Sunday’s PRR.

“We are short with the S&P’s drop below 1,396. How low can stocks go?

The chart below shows two important levels: 1,371 and 1,346 (updated chart shown below).

Since there’s a good chance of an extended down move, I’m inclined to just let our short position run and see where it takes us. 1,371 is the first hurdle to be overcome to look lower.”

The S&P sliced through 1,371 on Wednesday, and Friday’s trade drew prices as low as 1,343. Since our weekly target has been met we’ve sold half of our short positions.

This doesn’t preclude lower prices, but a bounce is possible and it’s smart money management to eat your ice cream before it melts, or take some profits before they disappear. Continuous target prices and buy/sell levels will be provided by the Profit Radar Report.

Will Google’s Fumble Take Down the Entire Technology Sector?

Due to a combination of facts, Google shares dropped as much as 11% on Thursday before trading in GOOG was halted by the Nasdaq. What caused this meltdown and will it carry over and drag down the Nasdaq and technology sector?

Google couldn’t wait to share its disappointing Q3 earnings with Wall Street. Although slated for an after-hours earnings report, Google accidentally spilled the beans around 12:30 EST.

At first it looked like a refreshing change to Washington’s modus operandi of extend and pretend or snore and ignore. But as it turns out, R.R. Donnelley (the company that does Google’s financial filings) accidentally filed Google’s 8-K form too early.

Heading for the Exits

Surprise turned into disappointment and distain as investors dumped GOOG as fast as they could. At one point GOOG was down $83.43 or 11%. Nasdaq even suspended trading in GOOG. Why the rush for the exits?

Analysts surveyed by Thomson Reuters expected earnings of $10.65 a share and net revenue of $11.86 billion.

The actual profit was only $9.03 a share on revenue of $11.33 billion. Another  major concern was that the average price that advertisers paid Google per click fell 15% from a year earlier. If Google, the king of monetizing advertising dollars, can’t charge top dollars anymore, how will Facebook and others?

What’s Next for Google?

Google is the third largest component of the Nasdaq-100 Index (corresponding ETF: PowerShares QQQ) after Apple and Microsoft. What does Google’s sell off mean for the Nasdaq QQQ and the technology sector (corresponding ETF: Technology Select Sector SPDRXLK)?

GOOG trading volume was through the roof as prices tumbled below the 20 and 50-day SMA and a couple of trend lines. Prices generally stabilize somewhat after large sell offs like this before falling a bit further. A new low parallel to a bullish price/RSI divergence would be a near-term positive for Google. Next support for GOOG is around 660 and 630.

Will Google Drag Down the Technology Sector?

The Nasdaq Indexes and the Technology Select Sector SPDR (XLK) has been much weaker than the Dow Jones and S&P 500 as of late. There were no bearish divergences at the recent S&P and Dow highs. This lack of indicators pinpointing a major top limits the down side of the tech sector.

Key support for the Technology Select Sector SPDR (XLK) is at 29.50. A move below 29.50 would be technically bearish although there may not be much more down side. Traders may use 20.50 as trigger point for bullish and bearish trades.

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.

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.

Technology Investing for Beginners – You can’t Lose Money with Apple Math

I got this piece of “Apple Hot News” in my inbox yesterday: “Apple today announced that pre-orders of its iPhone 5 topped two million in just 24 hours, more than double the previous record of one million held by iPhone 4S. Demand for iPhone 5 exceeds the initial supply, and while the majority of pre-orders will be delivered to customers on September 21, many are scheduled to be delivered in October.”

What’s the profit margin on 2 million iPhones? Apple doesn’t reveal profit margins, but Reuters got hold of a document filed in Apple’s patent battle against Samsung.

According to this document, Apple’s gross margin for U.S. iPhone sales between April 2010 and March 2012 ranged from 49 – 58%. The iPhone 5 sells for $199 – $399 (depending on built in storage).

Let’s calculate a 58% profit margin on 2 million iPhones sold for $299. The result is $347 million. Since last Thursday’s unveiling of the new iPhone 5, Apple (AAPL) shares have risen 3.5%. This means that Apple’s market cap increased by some $24 billion.

A $24 billion increase based on the news of 2 million pre-orders worth about $347 in gross profit doesn’t make sense.

In fact, common sense and seasonality suggests that Apple is soon due for a reality check (a. k. a. lower prices). Since Apple is the MVP of the technology sector, it’s likely that the Nasdaq QQQ ETF (QQQ) and SPDR Technology ETF (XLK) will follow Apple’s direction.

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.