Should We be Worried about ‘Smart Money’ Leaving Stocks?

Uh-oh. The ‘smart money’ is selling stocks. It rarely pays to bet against the smart money, which includes insiders and hedgers with deep pockets and big research budgets. Should we be worried about their stock market exodus?

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.”

Charles Dickens classic novel “A Tale of Two Cities” describes London and Paris during the French Revolution, but it could also be applied to Wall Street post 2009.

It is the ‘best of times’ as the S&P 500 (NYSEArca: SPY), Dow Jones (NYSEArca: DIA) and Russell 2000 (NYSEArca: IWM) move from one all-time high to the next. Even the Nasdaaq (Nasdaq: QQQ) is within striking distance of its all-time high.

It is also the ‘worst of times’ for many permabears, who continue to trash talk every rally … and get crushed.

Some of you may remember my inflammatory message for stock market bears published in the July 13, 2014 Profit Radar Report:

Here’s a message for everyone vying to be the next Roubini: A watched pot doesn’t boil and a watched bubble doesn’t burst. The stock market is not yet displaying the classic warning signs of a major top. There will be a correction, but the bull market won’t be over until most bears turn into bulls or the media stops listening to crash prophets.”

My bullish conviction was rooted primarily in extreme investor pessimism (reflected by the following July 2013 headlines) and the absence of the one ingredient that foreshadowed the 1987, 2000 and 2007 crashes (more details here).

  • MarketWatch: “If ever there were a time for a stock sell signal, it’s now”
  • CNBC: “Market will crash, just don’t know catalyst: Faber”
  • Reuters: “Billionaire activist Carl Icahn says ‘time to be cautious’ on U.S. stocks?”
  • CNBC: “I’m selling 6 times more than buying: Wilbur Ross”

Today, we are back at (or near) all-time highs and read headlines such as: “Why the smart money is bailing out of the bull market.”

Indeed, the ‘smart money’ is selling stocks as the ‘dumb money’ is rushing in.

Is this bearish? If so, how bearish is it?

Here is a look at six different sentiment gauges consistently tracked by the Profit Radar Report.

Of the six Profit Radar Report staples only four show extreme optimism:

Newsletter writers polled by Investors Intelligence (II) are the most bullish since June 2014 and active investment managers (polled by NAAIM) haven’t been as bullish since November 2013.

The VIX is low, but needs to shed another 20% before reaching last year’s extreme.

The CBOE equity put/call ratio and CBOE SKEW are only in midly bearish territory.

The media seems somewhat suspicious of new highs, but not nearly as bearish as in June/July 2014.

To be fair, a number of ancillary sentiment gauges match the kind of sentiment extremes seen in December 2010 and 2013.

My interpretation is that current gains will soon be given back, but any correction now or in the near future is likely to be followed by new recovery highs later on.

What’s the benefit of following the above six sentiment gauges?

Here is a more detailed track record published in the the December 2014 Sentiment Picture (the biggest reason to worry about stocks right now is listed at the bottom of this article):

Throughout 2014 many analysts, market timers, the media and ‘experts’ opined that the bull market is on borrowed time, largely because investor sentiment has been extremely bullish. Here are two examples:

  • Title: The boys who cried wolf: Crash prophets on the rise – Yahoo on May 2:

    Article excerpt: “The Dow Jones closed at an all-time high, which doesn’t change the views of the collection of Cassandras calling for a stock market crash. This group, including esteemed figures like Jeremy Grantham and Marc Faber have been emerging from their bomb shelters with relative frequency over the last month to reiterate their bearish views and insist they weren’t wrong with earlier calls, just early.”

  • Title: If ever the stock market flashed a ‘sell’ signal, it’s now – MarketWatch on July 9

    Article excerpt: “Sentiment indicators such as Investors Intelligence are at historic highs (that is bearish), and the RSI Wilder indicator is telling us the market is seriously overbought. Yes, the market can still go higher, but it’s on borrowed time. Don’t believe me? When you are standing 17,000 points in the air at the top of Dow Mountain, and the market is priced for perfection, there is nowhere to go but down.”

This widespread display of pessimism has been baffling and unfounded based on our set of sentiment gauges. At no point in 2014 did optimism reach levels suggestive of a major top. As the small selection of recent Sentiment Picture observations shows, an objective and in depth analysis of investor sentiment has persistently pointed to higher prices.

November 30 Sentiment Picture: “Investor sentiment is not at the kind of extremes usually associated with major market tops. Seasonality may draw prices lower temporarily, but the majority of sentiment gauges point towards higher prices later this year and/or early next year.”

October 31 Sentiment Picture: “In short, investor sentiment allows for further up side.”

September 25 Sentiment Picture: “Few sentiment gauges were at extremes on September 19, when the Dow Jones, S&P 500 and Nasdaq reached their new highs. If this selloff is commensurate to the lack of sentiment extremes at the actual high, it should be on the shallow side.”

August 29 Sentiment Picture: “The overall sentiment picture is fractured, and void of the ‘all in’ mentality seen near major market tops. Isolated extremes cause only small pullbacks here or there.”

The December Sentiment Picture shows a small up tick in ‘dumb money confidence’ (AAII, NAAIM) and complacency by option traders (CBOE Equity Put/Call Ratio). The CBOE SKEW is elevated.

Those readings could contribute to a pullback, but optimism is not pronounced enough to be indicative of a major top.”

The Biggest Reason to Worry about Stocks Right Now

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.

Advertisements

What Triggered the Stock Market Rout? How Long Will it Last?

The S&P 500 has corrected more than 5% and the financial media is quick to pretend that it saw the lousy 2014 start coming. Here’s the media’s real time (embarrassing) assessment of the ‘expected’ rout along with what’s next.

Hindsight is 20/20 and the financial media is quick to point out that the ‘long awaited correction’ has finally arrived (financial tabloids morphed from stock market cheerleader to doomsday sayers in less then a week).

Here’s the media’s actual real time wisdom expressed in five headlines:

Reuters: “Big Year Ends with Wall Street Hopeful for 2014” – December 27, 2013
MarketWatch: “Wall Street Sees S&P 500 rising 10% next Year” – December 27, 2013
Barron’s: “Morgan Stanley’s Adam Parket: 2014 in 2014 for the S&P 500 – December 27, 2013
CNBC: “Jeremy Siegel: Dow Jones to 18,000 in 2014” – December 31, 2013
CNBC: “Dr. Doom Roubini Gets Bullish on Global Economy” – January 2, 2014

It is still possible that the S&P 500 will rise 10% this year. The S&P may even rally to 2,014 as the Dow Jones (DJI: ^DJI) climbs to 18,000.

But, nothing goes straight up. A German saying warns that: “Everything’s got an end, only sausages have two” (only Germans can wrap up wisdom and sausages in the same sentence).

Running Out of Fuel

Like a fire, a stock market rally needs fuel in the form of new buyers. Stocks can’t rally without buyers.

The December 20 Profit Radar Report featured the composite sentiment / S&P 500 chart shown below and warned:

The problem with excessive bullishness is that it causes investors to go all in. Based on the above polls, investors are fully invested, or nearly so. A fully invested person can only do one of two things: hold or sell. Neither action buoys prices. Based on current data, it looks like bullish sentiment will catch up with stocks in January. This should cause a deeper correction.”

The January 15 Profit Radar Report stated that: “The S&P 500 is closing in on technical resistance at 1,855 and we are alert for a reversal.

Will the Rout Last?

A number of early indicators suggest that 2014 will be a tough year.

The tough year is just beginning, but the Profit Radar Report’s 2014 Forecast stated that: “A Q1 correction may find support at 1,746 – 1,730,” which is where the S&P 500 (NYSEArca: SPY) closed on Monday.

This may spark a counter trend rally, but will likely lead to even lower levels.

From Rout to Bear Market?

Since the mid 1970s the S&P 500 and Dow Jones have precisely adhered to two very reliable long-term cycles. Every cycle has seen a major high or low. For the first time in 14 years, both cycles coincide and project a major high in 2014 (we all know what happened 14 years ago). Here’s a detailed look at the two cycles and their message:

7-and 14-year Cycle Project Major Market 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.

Are Gold and Silver Revving Up for Another Leg Down?

Believe it or not, gold is one of the best performing asset classes of 2014, but today’s drop is the biggest this year. Here’s the simplest explanation of today’s drop and why eventual new lows are likely.

Gold hasn’t gone anywhere fast in a few weeks, but is down 20 points today.

According to the financial media, there are various reasons why gold is down:

“Gold falls 2% as dollar climbs on Fed” – Reuters
“Gold lower on stronger U.S. dollar, rebound in stock market” – Forbes
“Gold edges lower as Chinese support fades ahead of holiday” – CNBC
“Gold prices fall on stimulus, demand outlook” Economic Times

Wow, there are many reasons, but no unanimous consent. According to Forbes, gold is down because the S&P 500 and dollar are up. CNBC blames ‘Chinese support,’ whatever that means.

Simple but Effective

The following piece of gold trivia shows that every investor could easily see why gold is down today.

All the information needed is contained in the gold chart below. Can you see why gold is down today?

If you can’t see it, look at the second chart. What a difference just one line makes.

The silver chart paints the same picture, even more compelling.

The Profit Radar Report has been watching the gold and silver trend line for weeks. Initially they acted as a magnet and drew prices higher. Lately, they have acted as resistance and rejected price.

Although I prefer to analyze the purest representation of an asset, it’s noteworthy that the chart for corresponding gold and silver ETFs, the SPDR Gold Shares (NYSEArca: GLD) and iShares Silver Trust (NYSEArca: SLV), look similar.

Long-Term Outlook

What about the longer-term outlook for gold and silver?

The December 29 Profit Radar Report featured this longer-term forecast:

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 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 near-term resistance is at 1,255 +/-. “

Any gold and silver rally prior to a new multi-year low seems doomed. Nevertheless, the string of higher highs and lower lows has yet to be broken and a close above the highlighted gold and silver trend lines would temporarily extend the current bounce and unlock higher targets.

How low will gold and silver have to go? There is a strong confluence of trend lines (similar to the ones highlighted above) that should act as a magnet for prices and serve as a foundation for a sizeable rally.

Detailed targets for a lasting low are outlined by the Profit Radar Report.

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. 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.

Trusted German Newspaper Asks: “Will the Financial System Collapse?”

A reputable German newspaper asks the question forgotten by many domestic media sources: With or without tapering, will the financial system collapse? The answer may be surprising to many.

Have you ever gotten tired of the same old financial news coverage dispensed by the likes of CNBC, Fox, Wall Street Journal, Reuters, and other US media outlets?

I’m not saying it’s bad information, but like eating the same meal over and over again, the same slant on financial developments could become a bit stale.

In my last trip to Germany I made a conscious effort to pick up and read a number of reputable German finance/economy magazines.

I’ll write more about interesting tidbits discussed in the German financial media in the coming days, but here’s more detail about a headline that caught my attention?

“Is A Financial Collapse Approaching?” 

This question was featured on the front page of the September 4 edition of the Focus Money magazine.

As a contrarian investor, my first thoughts were that prominently discussing the odds of a financial collapse minimizes the chances of just such an event. But this changed after I read the article.

Focus magazine asked legendary emerging markets investor Mark Mobius for his feedback on various investment themes. The MIT educated Mobius is 77 years old and heads the emerging markets team for Franklin Templeton.

Tapering Yes – Collapse No

Mobius expects Bernanke to start tapering, but says that this will have virtually no effect on stocks (NYSEArca: VTI) as liquidity remains in the system (although he admits QE’s role in driving up stock prices).

Mobius asserts that banks (NYSEArca: KBE) have cleaned up their balance sheets and will funnel more money in the real economy. “The fear of tapering is overdone – it will barely affect stocks,” he says.

Mobius believes that QE by the Bank of Japan will be successful and ultimately affect world markets (NYSEArca: EFA). In fact, liquidity provided by the BOJ will make up for the liquidity withdrawn by the Federal Reserve.

Time to Buy US Stocks?

Focus magazine: “As an emerging markets (NYSEArca: EEM) specialist, would you recommend buying US stocks?”

Mobius: “Diversification is important and investors shouldn’t put all their eggs in one basket, but it’s certainly a good idea to buy US stocks.”

A Bear in Bull’s Clothing

The financial collapse headline and Mobius’ views struck a cord with me as I see the odds of a major market top forming around current prices greater than 50%.

After reading the Focus Money article it became clear that – according to Mobius – there is no risk of a financial collapse. From a contrarian point of view that’s more bearish than bullish.

Mobius has strong opinions about other emerging markets issues, such as:

1) China’s government completely (as in 100%) controls its banks and has the ability to successfully implement any and all financial policies.

2) The most attractive place to invest is Africa, in particular Nigeria.

I don’t agree with Mr. Mobius’ outlook, but he does offer a perspective not available to many US investors.

Another somewhat shocking forecast is featured in Germany’s Handelsblatt, the German economy and finance newspaper.

The front page of an August edition touts another gold rush caused by China.

For more information read: According to Reputable German Newspaper, New Gold Rush Lies Ahead

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter

 

What’s Next? Bull or Bear Market? Try Gorilla Market

Right or wrong? The QE bull market will last as long as the Federal Reserve keeps QE going. A majority of investors say ‘Yes,’ but a curiously sophisticated experiment and powerful data suggest a surprise outcome.

In 2004 Daniel Simons of the University of Illinois and Christopher Chabris of Harvard University conducted a fascinating experiment.

If you want to be part of the experience take a minute (it literally only takes a minute) and watch this video before you continue reading.

To get the full effect, watch the video first and don’t read ahead.

If you don’t want to watch the video, here’s a quick summary:

Truth in Simplicity

The experiment is quite simple. There are two groups of three people each. One group is wearing black shirts, the other group white shirts.

The three people wearing black shirts are passing one ball to fellow black shirts; the ones wearing white shirts are doing the same. So there are six people, passing two balls.

The assignment is to watch how many times the players wearing white, pass the basketball.

It’s a simple assignment that requires some concentration and a clear mind.

The answer: The white shirts pass the ball 15 times.

But wait, there’s more. Many viewers get the number of passes right, but completely overlook a woman dressed in a gorilla suit. The gorilla walks slowly across the scene, stops to face the camera, and thumps her chest.

Half of the people watching the video did not see the gorilla. After watching the video for a second time, some of them refused to accept that they were looking at the same tape and thought it was a different version of the video.

“That’s nice, but what’s your point Simon?” Good question.

The Invisible 800-Pound Gorilla

The experiment was supposed to illustrate the phenomenon of unintentional blindness, also known as perceptual blindness. This condition prevents people from perceiving things that are in plain sight (such as the bear markets of 2000 and 2008).

Much of the media has zeroed in on one singular cause for higher or lower prices. Sample headlines below:

Reuters: Wall Street climbs as GDP data eases fear of Fed pullback
Reuters: Brightening jobs picture may draw Fed closer to tapering
Reuters: Wall Street slips amid Fed caution

The media is busy ‘counting passes,’ or watching Bernanke’s every word and interpret even the slightest variation of terminology.

The Fed’s action is the only thing that matters, but amidst ‘counting passes,’ many overlook the gorilla.

Gorilla Sightings

It’s believed that a rising QE liquidity tide lifts all boats. This was impressively demonstrated in 2010 and 2011 when various asset classes and commodities reached all-time highs. It only conditionally applies to 2012 and 2013 though.

In 2011 gold and silver rallied to nominal all-time highs. Why?

  1. The Fed pumped money into the system (aka banks) and all that excess liquidity had to be invested somewhere, anywhere, including precious metals.
  2. Fear of inflation. Gold is known is the only real currency and inflation hedge. Silver rode gold’s coattail and became known as the poor-man’s gold. From 2008 – 2011 gold prices nearly tripled and silver went from $8.50 to $50/ounce.

Since its 2011 high, the SPDR Gold Shares ETF (NYSEArca: GLD) has fallen as much as 38.29% and the iShares Silver Trust (NYSEArca: SLV) was down as much as 63.41%.

This doesn’t make (conventional) sense or does it. QE or the fear of inflation didn’t stop in 2011. In fact, QE (and the associated risk of inflation) is stronger than ever. Based on the above rationale, the gold and silvers meltdown is inconceivable and unexplainable.

The QE ‘Crown Jewel’

Initially QE was limited to government bonds or Treasury bonds. In other words, the Federal Reserve would buy Treasuries of various durations from banks and primary dealers with freshly printed money.

The effect was intentionally twofold:

  1. The Fed would pay top dollars to keep Treasury prices artificially inflated and interest rates low.
  2. The banks would have extra money to ‘play’ with and drive up asset prices, a process Mr. Bernanke dubbed the ‘wealth effect.’

With that thought in mind, take a look at the iShares 20+ year Treasury ETF (NYSEArca: TLT) chart above.

From the May peak to June trough TLT tumbled 14.56%, more than twice as much as the S&P 500 (7.52%).

Lessons

The lessons are simple:

  1. QE doesn’t always work and can misfire badly.
  2. We don’t see every gorilla (or looming bear).

All this doesn’t mean that the market will crash tomorrow. In fact, the stock market doesn’t exhibit the tell tale signs of a major top right now and higher highs seem likely.

Unintentional blindness is real and often magnified by the herding effect. The investing crowd (or herd) is convinced that stocks will go up as long as the Fed feeds Wall Street.

The above charts suggests that we shouldn’t follow this assumption blindly.

Is it Time to Bury Your Head in the Sand and Hope for the Worst?

Welcome to the new and not just imaginary QE world where weak GDP (only the most followed gauge of economic activity in the U.S.) numbers are applauded and received with cheer by Wall Street. Confused? Oh you shouldn’t be anymore.

Ignorance is bliss. We are all familiar with the bad news is good news phenomenon created by the Fed’s QE.

Bad news is good news because it means either more QE or the same QE over a longer period of time. Many commentaries have been written about today’s backwards state of affairs.

Below is one of the most blatant displays of the new up side down investment paradigm.

For your enjoyment, here is a section from a June 26, 2013 Reuters article under the headline: Wall Street Climbs as GDP Data Eases Fear of Fed Pullback.

“The broad-based advance lifted the S&P 500 above the 1,600 threshold for the first time since last Thursday. Stocks have recently sold off after the Fed said it is moving closer to reducing its monthly bond-buying efforts, but the last two days of buying show some believe the market has overreacted.

The rally followed data showing the U.S. economy grew at an annual rate of 1.8 percent in the first quarter, well below expectations for gross domestic product to grow at a 2.4 percent annual rate.

While the GDP data looks backward and includes the start of cutbacks in federal spending, analysts said it could influence the Fed’s considerations of whether the economy is strong enough for it to begin scaling back its $85 billion a month in bond purchases. Should this contribute to keeping the Fed from moving sooner, it would be seen as supportive for stocks.

Stocks have been closely tied to the central bank’s easy money policy, with the Dow and the S&P 500 hitting a series of record closing highs as investors bet that the bond buying would remain in place, and then dropping dramatically on hints that the stimulus could be reduced before the end of the year.

In a nutshell, GDP – the most watched gauge of the economy’s health – came in 25% lower than expected, but Wall Street applauded because this means more QE.

What about the second-most watched gauge of the economy’s health – unemployment figures?

As per last Friday’s BLS (Bureau of Labor Statistics) release, the U.S. economy added 195,000 jobs in June. The unemployment rate stayed at 7.6%.

Stocks rallied. Why?

Associated Press: Stronger Than Expected Job Growth Raises Hopes for Stronger Economy.

But shouldn’t that be bad news for the stock market?

Reuters: Brightening Jobs Picture May Draw Fed Closer to Tapering

Is anyone confused? If so, just hope for bad economic news to drive up stock prices. If that doesn’t work, keep in mind that good news is good news and bad news is good news (really, any news is good news).

I personally feel that economic news and the medias spin on the news deserves only a very limited portion of my attention span.

I rely on technical analysis. Technical analysis is not flawless, but it is consistent.

Technical indicators told us a week ago that the S&P 500 and Nasdaq-100 will come up and close open chart gaps at 1,629 and 2,960. The gaps have been closed and the market is at a key inflections point. How stocks react here should set the stages for the coming weeks.