How Stocks Escaped from 3 ‘Unavoidable’ Bear Markets

This bull market has been counted out many times. Just over the past few years, stocks faced three – allegedly – unavoidable bear markets … and escaped all of them.

Here are the three ‘unavoidable’ bear markets, and why stocks escaped:

Unavoidable Rate Hike Bear Market

Starting in 2015, the Federal Reserve let it be known that interest rates will be rising.

According to the pros, rising rates would sink stocks. After all, that’s why the Fed kept them near zero for so long.

However, history simply doesn’t agree with this conclusion. The April 26, 2015 Profit Radar Report used the chart below to illustrated that rising rates are not bearish.

In fact, 9 of the 13 periods of falling rates (since 1954) saw stocks rally. That’s why the Profit Radar Report concluded that: “A rate hike disclosed at the April, June, July or even September or October FOMC meetings is unlikely to coincide with a major S&P 500 top.”

Barron’s rates iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

Unavoidable Oil Slump Bear Market

Falling oil prices were the hot topic as prices dropped 50% from June – December 2014.

The general opinion was that falling oil prices would send stocks lower, like in 2008.

The December 14, 2014 Profit Radar Report ousted this bogus reasoning with the chart and commentary below:

This year’s oil price collapse differs from the 2008 collapse relative to the S&P 500. In 2008, the S&P 500 topped before oil did. In fact, the S&P 500 recorded its all-time high in October 2007 and was already down 21% by the time oil topped on July 11, 2008. In 2014, the S&P 500 recorded new all-time highs five months after oil started to decline.

The chart below plots oil against the S&P 500 and shows that falling oil prices are not consistently bearish for stocks. If history can be used as a guide, stocks are likely to hold up despite the oil meltdown.”

Unavoidable QE Bear Market

In 2008, the Federal Reserve unleashed it’s first round of Quantitative Easing (QE). A couple trillion dollars later, QE came to an end in October 2014.

Investors feared the withdrawal of QE would sink stocks (just like a junkie will crash without new fix).

The simplified logic (QE started this bull market, the end of QE will finish the bull market) seemed logical, but it wasn’t factual.

The October 5, 2015 Profit Radar Report plotted the QE money flow against the S&P 500 and concluded that: “We expect new bull market highs in 2015.”

Why?

The correlation between QE and stocks (at least in 2013/2014) did not support the notion of a bull market end. More importantly, our major market top indicator said the bull market is not over.

2016 Bear Market?

At the beginning of the year, when the S&P traded near 1,900, the media found countless of reasons why the bear market is finally here (many of them are listed here).

About six months and a 15% rally later, it’s obvious that the bull market is alive and well.

Short-term, the S&P has reached the lower end of our up side target range, so a pullback becomes more likely (more details here). However, any pullback should serve as a buying opportunity.

If you are looking for common sense, out-of-the-box analysis, check out the Profit Radar Report. It may just make you the best-informed investor you know.

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 profile 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, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Is the Stock Market Rigged? … and a More Important Question

Is the stock market rigged? Many believe it is … and rightfully so.

However, there are more interesting and pertinent questions, such as:

  • To what extent is the market rigged, and how does it affect me?
  • Why do allegations of a rigged market sprout up right now?

Different Ways to Rig the Market

There are different ways to ‘rig’ the market, and there are different entities to do so.

  • High frequency traders attempt to gain a time advantage.
  • Inside traders try to get information ahead of the crowd.
  • The Federal Reserve and central banks around the globe aim to prop up equity markets via various types of quantitative easing or low interest rates. The chart below plots the S&P 500 against the actual QE liquidity flow to illustrate the correlation (or lack thereof, may the reader judge) between stocks and QE.

Regardless of the exact correlation between QE and stocks, even the Federal Reserve’s own research admitted that FOMC meetings drove the S&P 55% above fair value (more details here).

But none of the above is new or shocking.

Why Now?

Perhaps more interesting than who and how is why now?

Isn’t it curious that articles and charts (like below) about central bank liquidity driving up stocks are popping up just as the S&P 500 is breaking to new all-time highs?

There were no such claims last August or early this year when the S&P traded below 1,900. Seems like investors (and fund mangers) are fishing for excuses.

As the chart below shows, investors and fund managers were clearly under-invested at the recent lows. 3 out of 4 large cap fund managers got beaten by the S&P 500 in 2015. How to explain such dismal performance?

Central bank liquidity is a welcome scapegoat. Fund managers could (and do) essential argue: “Our research suggested lower prices, but central banks stepped in and unexpectedly buoyed stocks.”

Boycotting Yourself Out of Profits

This is the most hated stock market rally ever, that’s why it’s gone on for so long.

Today’s market hater is tomorrow’s buyer (disgruntled, but ‘better late than never’). As long as this cycle perpetuates, there’s more up side. We observed this back in 2013: QE Haters are Driving Stocks Higher

Boycotting the market by avoiding stocks may feel like the ethical thing to do, but it hurts the portfolio.

There is no question the market is rigged to some degree, but that’s not necessarily a disadvantage for open-minded investors.

Rigged or not, the stock market has responded reasonably well to time-tested indicators. A number of them pointed to a strong stock market rally.

The key question is not whether the market is rigged, it’s how do you handle a rigged market? Now is the time to be the best informed investor you know.

The latest indicator-based S&P 500 forecast is available here: Stock Market Melt-Up Alert?

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 profile 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, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Will the Absence of QE Continue to Melt Gold?

The Fed just announced that sterilized QE is over, done, toast. Gold prices have crashed, slicing through a 15-month support shelf like a knife through butter. But, are QE and gold really connected? This chart shows the surprising truth.

Here are two facts (most investors will say they are not random):

  1. QE is over.
  2. Gold is crashing.

Here is a key question:

Is gold crashing because QE is over?

To get the answer, we’ll do two things: 1) Rewind and 2) Reason.

Rewind Time to 2008

Gold’s last big bull market leg started in October 2008, right after the Federal Reserve unleashed QE1.

Investors feared inflation due to the massive liquidity influx. Gold was considered as the default inflation hedge and prices soared from $680/oz to $1,900/oz.

At first glance it seems like QE1 buoyed gold. The inverse conclusion is that the end of QE may well sink gold.

Reason & Facts

During QE1, gold prices, and gold ETFs like the SPDR Gold Shares (NYSEArca: GLD), gained 34%.

QE2 lifted GLD by 10%.

But, and that’s a big but, throughout QE3/QE4 GLD lost 32%.

The chart below plots GLD against a visual description of QE1 – QE4. QE3 and QE4 are lumped into one graph (light green) to illustrate the combined effect of both programs.

QE3 started when gold was still trading near $1,800/oz ($175 for GLD). It’s been down hill ever since.

Gold rallied during QE1 and QE2 and declined during QE3 and QE4. Statistically, the evidence shows a 50% chance that QE may or may not have affected gold prices.

I realize that there are other factors in play, but one takeaway from this chart is that the absence of QE in itself is not necessarily terrible for gold and GLD.

More Facts

The December 29, 2013 Profit Radar Report featured the following gold forecast for the year ahead:

Gold prices have steadily declined since November, but we haven’t seen a capitulation sell off yet. Capitulation is generally the last phase of a bear market. It flushes out weak hands. Prices can’t stage a lasting rally as long as weak hands continue to sell every bounce.

Gold sentiment is very bearish (bullish for gold) and prices may bounce from here. However, without prior capitulation, any rally is built on a shaky foundation and unlikely to spark a new bull market.

We would like to see a new low (below the June low at 1,178). There’s support at 1,162 – 1,155 and 1,028 – 992. Depending on the structure of any decline, we would evaluate if it makes sense to buy around 1,160 or if a drop to 1,000 +/- is more likely.”

Obviously much has happened since December 29, and the levels mentioned back then may need some tweaking. Nevertheless, gold has fallen below 1,178 and is trading near the 1,155 support level.

In addition, gold sentiment has soured quite a bit. Two recent CNBC articles expected gold prices to drop below $1,000 and trade at $800 next year.

The Commitment of Traders report shows increased pessimism, but not historically extreme pessimism.

The chewed out adage that fishing for a bottom is like catching a falling knife obviously applies to anyone looking to buy gold.

But based on a composite analysis of fundamentals, sentiment and price action, the falling golden knife is closer to the kitchen floor than the hand that dropped it.

The latest Profit Radar Report includes a detailed strategy on how to buy gold with minimum risk and maximum rewards.

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.

Dare to Compare – Could the End of QE Crash Stocks Like in 2010 and 2011?

The S&P 500 dropped 17% right after QE1 ended and 20% right after QE2 ran out? Will stocks crash again now that QE3 and QE4 have been completed? Here is the only visual QE history chart along with an unexpected conclusion.

QE1 ended on March 31, 2010. Shortly thereafter the S&P 500 dropped as much as 17.12%.

QE2 ended on June 20, 2011. Shortly thereafter the S&P 500 dropped as much as 20.76%.

Fed officials are expected to end asset purchases (QE3 and QE4) at the next FOMC meeting on October 28-29. Will stocks crater like they did in 2010 and 2011?

QE History & Comparison

QE1 started in December 2008 with $660 billion, was expanded by $1,050 billion in March 2009, and ended in March 2010.

QE2’s $600 billion asset purchase injection started in November 2010 and lasted until June 2011.

QE3 started in September 2012 at a rate of $40 billion per month.

QE4 started in December 2012 at a rate of $45 billion per month.

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Starting in January 2014, QE3 and QE4 have been reduced gradually by $5 billion per month.

QE3 and QE4 have already been wound down to combined monthly purchases of $15 billion, and Fed officials said they expect to end asset purchases after the October 28-29 meeting.

Will the QE3 and QE4 withdrawal shock the system (aka stock market) as QE1 and QE2 did?

QE After Shock?

I’m a visual person and find that a picture (or chart) really says more than a thousand words.

Here is a simple, visual explanation of the various QE programs. This is the only QE history chart on the web, and was originally published in the October 5 Profit Radar Report. QE1, QE2, QE3 and QE4 are illustrated by various shades of green, because green is the color of money (chart courtesy of the Profit Radar Report).

Illustrated are the monthly dollar purchases. Exact monthly asset purchase data for QE1 and QE2 is not readily available, so the amounts shown are based on total committed funds divided by the number of months the program was in effect.

QE3 and QE4 differ from QE1 and QE2 and two important ways:

1) The asset purchases under QE1 and QE2 were more significant than the asset purchases under QE3 and QE4.

2) QE1 and QE2 stopped cold turkey. The Federal Reserve obviously learned from the almost instant S&P 500 (NYSEArca: SPY) selloffs and equipped QE3 and QE4 with the ‘taper’.

Purely theoretical, the actual end of QE3 and QE4 could be a non-event, and should be much less noticeable than the end of QE1 and QE2.

Why Did the S&P 500 Just Lose 200 Points?

But, if that’s the case, why did the S&P 500 just lose as much as 200 points?

Investors may have simply sold stocks in anticipation of QE ending. Sometimes it’s all about mind of matter. If investors mind (that QE is ending) it matters, at least temporarily. In addition, the Dow Jones reached an important technical resistance level on September 17. The Profit Radar Report predicted that this resistance level would increase the risk of a correction.

It is undeniable that the various QE programs have driven asset prices higher. It would be intuitive to conclude that the absence of QE (at least sterilized QE) will send stocks lower.

But the stock market is not always intuitive and doesn’t conform to investors’ expectations.

Furthermore, despite the end of QE, the stock market has not yet displayed the classic pattern of a major market top, the kind of pattern that foreshadowed the 1987, 2000 and 2007 highs. Here’s what I mean: The Missing Ingredient for a Major Bull Market Top

In summary, I wouldn’t sell stocks just because QE is ending.

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.

Most Important Number in Finance is Slipping Out of the Fed’s Control

The Federal Reserve is the most powerful financial institution in the world and yet it is like the emperor without clothes. Ironically, the very force the Federal Reserve is most afraid of may be the only thing to save the Treasury.

Mirror mirror on the wall, what is the most powerful financial institution of them all?

The S&P 500, Dow Jones and pretty much all other markets seem to dance to the tune of the QE rhythm … and yet the Federal Reserve resembles the vain king portrayed in Christian Andersen’s “The Emperor’s New Clothes.” How so?

Rogue Interest Rates

The chart below shows the Federal Reserve’s monetary base sandwiched by the S&P 500 (SNP: ^GSCP) and the inverted 10-year Treasury Yield (Chicago Options: ^TNX).

The purpose of the chart is to show QE’s effect (or lack thereof) on stocks (represented by the S&P 500) and bonds (represented by the 10-year Treasury yield).

The 10-year Treasury yield has been inverted to express the correlation better.

I’ll leave the big picture interpretation of the chart up to the reader, but I have to address the elephant in the room.

Since the Federal Reserve stepped up its bond buying in January, the 10-year yield hasn’t responded as it ‘should’ and that’s very odd (the chart below shows the actual 10-year yield performance along with forecasts provided by the Profit Radar Report).

As of December 5, 2013, the Federal Reserve literally owns 12% of all U.S. Treasury securities and by some estimates 30% of 10-year Treasuries.

Icahn More Powerful Than Fed?

The Federal Reserve basically keeps jumping into the Treasury liquidity pool without even making a splash. If Carl Icahn can allegedly drive up Apple shares (with a 0.5% stake), why can’t the Fed manipulate interest rates at will?  This is just one of the many phenomena that makes investing interesting and keeps the financial media in business.

Conclusion

We do know why the Fed wants low interest rates. Rising yields translate into higher mortgage rates, and a drag on real estate prices. Eventually higher yields make Treasury Bonds (NYSEArca: IEF) a more attractive investment compared to the S&P 500 (NYSEArca: SPY) and stocks in general.

Ironically, what the Fed is trying to avoid (higher yields) may be the only force to save the U.S. Treasury. How can the Federal Reserve ever unload its ginormous Treasury position without the help of rising interest rates?

The emperor without clothes maintained his dignity (at least in his mind) as long as everyone pretended to admire his imaginary outfit. Perhaps a market wide realization that the Federal Reserve isn’t as powerful as it seems may ‘undress the scam.’

Regardless, the Fed’s exit from bonds would likely be at the expense of stocks, a market the Federal Reserve has been able to manipulate more effectively than bonds.

The Federal Reserve owns 12 – 30% of the U.S. Treasury market, but how much of the U.S. stock market has the Federal Reserve financed?

This stunning thought is explored here: Federal Reserve ‘Financed’ XX% of all U.S. Stock Purchases

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, 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. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Most Important Number in Finance is Slipping Out of the Fed’s Control

The Federal Reserve is the most powerful financial institution in the world and yet it is like the emperor without clothes. Ironically, the very force the Federal Reserve is most afraid of may be the only thing to save the Treasury.

Mirror mirror on the wall, what is the most powerful financial institution of them all?

The S&P 500, Dow Jones and pretty much all other markets seem to dance to the tune of the QE rhythm … and yet the Federal Reserve resembles the vain king portrayed in Christian Andersen’s “The Emperor’s New Clothes.” How so?

Rogue Interest Rates

The chart below shows the Federal Reserve’s monetary base sandwiched by the S&P 500 and the inverted 10-year Treasury Yield (Chicago Options: ^TNX).

The purpose of the chart is to show QE’s effect (or lack thereof) on stocks (represented by the S&P 500) and bonds (represented by the 10-year Treasury yield).

The 10-year Treasury yield has been inverted to express the correlation better.

I’ll leave the big picture interpretation of the chart up to the reader, but I have to address the elephant in the room.

Since the Federal Reserve stepped up its bond buying in January, the 10-year yield hasn’t responded as it ‘should’ and that’s very odd (the chart below shows the actual 10-year yield performance along with forecasts provided by the Profit Radar Report).

As of December 5, 2013, the Federal Reserve literally owns 12% of all U.S. Treasury securities and by some estimates 30% of 10-year Treasuries.

Icahn More Powerful Than Fed?

The Federal Reserve basically keeps jumping into the Treasury liquidity pool without even making a splash. If Carl Icahn can allegedly drive up Apple shares (with a 0.5% stake), why can’t the Fed manipulate interest rates at will?  This is just one of the many phenomena that makes investing interesting and keeps the financial media in business.

Conclusion

We do know why the Fed wants low interest rates. Rising yields translate into higher mortgage rates, and a drag on real estate prices. Eventually higher yields make Treasury Bonds (NYSEArca: IEF) a more attractive investment compared to the S&P 500 (NYSEArca: SPY) and stocks in general.

Ironically, what the Fed is trying to avoid (higher yields) may be the only force to save the U.S. Treasury. How can the Federal Reserve ever unload its ginormous Treasury position without the help of rising interest rates?

The emperor without clothes maintained his dignity (at least in his mind) as long as everyone pretended to admire his imaginary outfit. Perhaps a market wide realization that the Federal Reserve isn’t as powerful as it seems may ‘undress the scam.’

Regardless, the Fed’s exit from bonds would likely be at the expense of stocks, a market the Federal Reserve has been able to manipulate more effectively than bonds.

The Federal Reserve owns 12 – 30% of the U.S. Treasury market, but how much of the U.S. stock market has the Federal Reserve financed?

This stunning thought is explored here: Federal Reserve ‘Financed’ XX% of all U.S. Stock Purchases

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, 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. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Federal Reserve Source: QE May Increase 26% in 2014

How much QE is enough? Based on the latest statement by a Federal Reserve president, the Fed may beef up QE by another 26% in 2014. However, there’s also another interpretation, which would nail the financial media for shoddy reporting.

Charles Evans is the ninth president and chief executive officer of the Federal Reserve Bank of Chicago.

He tweeted the following on Tuesday, November 19:

“Our purchases will continue to be open ended. We may need to purchase 1.5 trillion in assets until January 2015”

As a Federal Reserve president Mr. Evens is fluent in the art of sending cryptic messages. The above tweet is no different.

Deciphering the Modern Day Enigma

What could Mr. Evans have meant?

Currently the Federal Reserve is buying $85 billion worth of assets per month. That’s $1.02 trillion per year or $1.19 trillion until January 2015.

Going from the current pace of $1.19 trillion to $1.5 trillion in asset purchases is an increase of 26%.

Is Mr. Evans saying that the Fed may have to further beef up QE?

Enough to Buy 8% of ALL U.S. Stocks Every Year

$1.5 trillion is an incredible amount of money. How incredible?

According to the World Bank, the total market capitalization of the U.S. stock market was $18.67 trillion in 2012. Total market cap includes the S&P 500 (SNP: ^GSPC), Dow Jones (DJI: ^DJI), and every other U.S. index you can think of.

$1.5 trillion is enough to buy 8% of all U.S. traded stocks. No wonder the S&P 500 and Dow Jones have nowhere to go but up.

Comparing the Fed’s current $4 trillion balance sheet with the total U.S. market cap (projected to be $21.4 trillion in 2013) almost allows the conclusion that the Federal Reserve conceivably financed 17% of all U.S. stock purchases.

When considering the size of the Fed’s balance sheet and active purchases in correlation to the total U.S. stock market, it seems almost inconceivable for the S&P 500 ETF (NYSEArca: SPY), Dow Jones Diamonds ETF (NYSEArca: DIA) and any other broad market ETF or index to catch a sustainable down draft.

Media Omission May Solve The ‘Evans Enigma’

There is another explanation for the $1.5 trillion ‘Evans Enigma.’

The Federal Reserve is already buying more than $85 billion worth of assets every single month, but the financial media largely omits the real scope of all QE-like programs. How much is the Federal Reserve really spending every single month?

A detailed analysis along with a simple one-chart visual summary of all of the Federal Reserve’s QE-like programs can be found here:

Glaring but Misunderstood QE – How Much the Fed is Really Spending

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Do Sentiment Extremes Still Matter in a Fed-Manipulated Stock Market?

Investor sentiment used to be one of the most effective contrarian indicators known to man. Then the Federal Reserve came and change the rules. Do sentiment extremes still work as a contrarian indicator in the fake QE bull market?

Famous investor John Templeton said that: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

This used to be the most important rule of thumb in investing – give investors what they want. When everyone wants to own stocks, sell them yours. When everyone wants to dump stocks, buy theirs.

This rule of thumb used to work pretty reliably until an unrelenting and indiscriminate buyer entered the market place – the Federal Reserve. No matter the price, the Federal Reserve will buy it.

Templeton’s observation was based on the assumption of finite demand. The Federal Reserve has created infinite demand.

Templeton’s rule of thumb has since been replaced by John Maynard Keynes’ euphemism: “The market can stay irrational longer than you can stay solvent.”

Does that mean that investor sentiment has become obsolete as a contrarian indicator?

Has Sentiment Become Obsolete as Contrarian Indicator?

I always like to look at hard data, but truth be told there is not much hard data about sentiment extremes.

The chart below plots the S&P 500 (SNP: ^GSPC) against the percentage of bullish advisors polled by Investors Intelligence (II).

We see a nearly unprecedented wave of euphoria in late 2010. At that time many different sentiment and actual money flow gauges were literally off the charts.

Those extremes, however, had no immediate impact on stocks. In fact, the S&P 500 (NYSEArca: SPY) kept rallying for another couple months (gray boxes). Eventually the S&P 500 lost 20%.

In October 2011 investor sentiment had soured (bullish for stocks) and the S&P 500 was near important support at 1,088. In my October 4 update to subscribers (now known as the Profit Radar Report), I recommended to buy at S&P 1,088.

Since the October 2011 low the S&P 500 has rallied over 65%, but investor sentiment has never eclipsed the 2010 euphoria … until now (more below).

This rally has truly been the most hated rally in history and not a day goes by without commentary shooting against the Federal Reserve’s QE.

The worry that QE will end badly (along with political uncertainty) has provided the ‘wall of worry’ needed to propel stocks higher.

Euphoria is Back

Although we’ve seen blips of optimism, euphoria didn’t re-enter the picture until this week.

I follow literally dozens of sentiment and actual money flow indicators. Most of them show the biggest wave of optimism since the 2010 ‘sentiment peak.’

The Most Effective Use of Sentiment Extremes

The above chart shows that excessive pessimism is a better contrarian indicator than excessive optimism.

Optimistic sentiment extremes generally translate into rising risk, but not necessarily immediate pullbacks.

That doesn’t mean we should ignore current extremes. The S&P 500 (NYSEArca: IVV) and Nasdaq Composite are butting up against serious multi-year resistance right now, and disappointment over failed attempts to overcome such resistance could easily send stocks lower.

Where is this resistance and how serious is it? The two charts featured in the article “Nasdaq and S&P 500 Held Back by ‘Magic’ Resistance” pinpoint this ‘magic’ resistance level.

Simon Maierhofer is the publisher of the Profit Radar Report.

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Post FOMC Meeting Effect Tends to Kill S&P 500 Mojo

The Federal Reserve announced that the ‘big bad taper’ will stay in the closet. That’s good news. The Fed announced the same thing on September 18, which led to a three-week correction. The same thing happened in late July.

You know the spiel. When there’s a Federal Reserve meeting on Wednesday, the stock market (NYSEArca: VTI) takes a hiatus until Mr. Bernanke makes his announcement.

There’s a Federal Open Market Committee (FOMC) meeting about every 45 days or eight times a year.

More often than not the S&P 500 has a positive bias going into the FOMC meeting, but the S&P 500 ETF has lost its mojo after each of the last three FOMC meetings.

The S&P 500 chart below illustrates the S&P’s performance after the last 10 FOMC meetings.

This chart covers an incredibly bullish time period, but it’s interesting to note that – since September 2012 – the S&P 500 dropped below the FOMC meeting high every single time within the next few weeks.

More remarkable than the S&P’s post FOMC performance history is the S&P’s pre FOMC performance history.

An official Federal Reserve study shows that the ‘pre FOMC drift’ (optimism leading up to the FOMC announcement) accounts for all S&P 500 gains over the last two decades.

In other words, pre FOMC gains inflated the S&P 500 to an unbelievable degree. A full analysis (with shocking charts) of the Federal Reserve study is available here:

New York Fed Research Reveals That FOMC Drove S&P XX% Above Fair Value

Can the S&P 500 Rally another 20%?

The S&P 500 just gained 100 points in 10 days. Some suggest that further gains from an overbought condition are unlikely. This may well be correct, but with or without correction, can the S&P 500 rally another 20% from here?

The S&P 500 is trading at all-time highs and just even entertaining the idea of another rally leg makes me think of this quote:

“Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.”

I’m not an economist and I’d like to think that I’m no madman, but I’m starting to warm up to the idea of another sizeable rally leg.

This is partially because QE wasn’t around when Kenneth Boulding, an economist born in 1910, uttered the above words.

Although absurd when considering the economic backdrop, based on a factual and objective examination of the S&P 500 (NYSEArca: IVV) chart and investor sentiment, considerably higher stock prices are possible, even likely.

Why Now?

Stocks are nearing an overbought condition, isn’t now the wrong time to talk about another 20% rally?

The timing of this discussion is based solely on the fact that the S&P 500 (NYSEArca: SPY) has reached my long-term target around 1,750.

Technical Target Price Captured

The target was based on a 55-month long trend channel (shown in chart below) and first mentioned in the July 14 Profit Radar Report, which stated the following:

“The May 22 high did not look like a major top and the current rally doesn’t have the attributes of a major high yet either. It would be reasonable to expect some weakness with support at 1,635 followed by the next rally leg to 1,700 – 1,750.”

The October 7 Profit Radar Report confirmed the prior forecast like this: “The scenario that appears to make most sense is a quick trip into the 1,660s or 1,650s followed by another rally to new all-time highs.”

The S&P 500 chart below shows the S&P trading as high as 1,765 and Monday, tapping the upper trend channel line and capturing my long-standing target for this rally.

 

If this trend channel is going to repel the S&P 500, it needs to do so soon. Otherwise ‘persistence wears down resistance.’ Persistent trade around current levels increases the odds of higher prices.

Sentiment Analysis

Famous investor John Templeton said that: “Bull markets are born in pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

Based on Templeton’s rhetoric, bull markets have four stages: Pessimism, skepticism, optimism, and euphoria.

For good reason the artificial QE bull market has been called the ‘most hated rally ever.’ Not a day goes by without banter against the Federal Reserve or Ben Bernanke.

Everyone and their grandmother knows that the Fed can’t print an economy out of trouble and that this experiment will end badly.

There’s no scientific way to prove this, but skepticism seems to be the predominant emotion of the market’s current stage.

However, to keep this analysis objective, we need to mention some rather bullish sentiment readings that popped up lately.

Bullish sentiment readings (bearish for stocks) include the equity put/call ratio, bullish asset allocation of Rydex traders, near record-high margin debt and perhaps, most importantly, a very elevated SKEW Index reading.

The SKEW Index was created by the makers of the VIX and – unlike the VIX (NYSEArca: VXX) – has been a trusted indicator this year.

To read about the implications of the current SKEW extreme go here: Watch Out! The S&P 500 Just got ‘SKEWed’

I personally believe that QE has changed the dynamic and the meaning of pretty much all sentiment gauges, but I also believe that understanding the composite sentiment picture holds the key to identifying the next investable low and the major top so many investors are waiting for.

Profit Radar Report subscribers know that I’ve been chronicling various sentiment indicators and actual money flow gauges for a long time. The correct interpretation of investor sentiment has kept us on the right side of the trade since the beginning of the year.

For a quick summary of how sentiment has affected trading thus far this year and an updated look at various current sentiment gauges and indicators click here: Assessing QE Bull Market Longevity Based on Current Investor Sentiment

Simon Maierhofer is the publisher of the Profit Radar Report.

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