Detailed Investor Sentiment Comparison Between 2007 and 2015

Once a month, the Profit Radar Report publishes a detailed analysis of investor sentiment (called Sentiment Picture).

The October 2015 Sentiment Picture tackled the question whether current investor sentiment is indicative of a major market top.

To find out, the Sentiment Picture provided a side-by-side comparison of investor sentiment at and leading up to the 2007 top with current sentiment.

Before we get to the 2007/2015 comparison, allow me to fine tune expectations. There are things sentiment analysis can and cannot do.

Sentiment analysis (like any single indicator) is not infallible and shouldn’t be used as stand alone indicator. The Profit Radar Report always looks at the combined message of supply/demand, technical analysis, seasonality and sentiment.

Sentiment, however can help gauge the probability of a major top or bottom. To illustrate, the July 24 Sentiment Picture attempted to answer the same question: Are there enough bulls to form a major market top?

It stated that: “Considering that stocks just were near all-time highs, sentiment is quite subdued. The lack of real investor enthusiasm, has continually pointed to new highs, and does so again this month. The question is when a bigger correction will occur.”

The ‘bigger correction’ started shortly thereafter, but stocks are trading near their 2015 highs once again.

The September 24 Sentiment Picture noted extreme bearishness and proposed that: “Sentiment is pointing towards a buying opportunity. In fact, purely based on overall sentiment, stocks should be closing in on a tradable low.”

That tradable low occurred three days later at S&P 1,871.

Are There Enough Bulls for a Major Market Top?

Below is the sentiment chart featured in the October 29, 2015 Sentiment Picture. This chart plots the S&P 500 against six different sentiment gauges (the actual sentiment analysis includes dozens more indicators):

  • CBOE SKEW Index
  • CBOE Equity Put/Call Ratio
  • CBOE VIX
  • National Association of Active Money Managers (NAAIM) equity exposure
  • Percentage of bullish advisors polled by Investors Intelligence (II)
  • Percentage of bullish retail investors polled by the American Association for Individual Investors (AAII)

The second chart highlights investor sentiment surrounding the 2007 high.

  • In 2007, the VIX was trading near 16. This was 50% lower than the August high (near 30), but 60% above the 2007 low (near 10).
  • The CBOE Equity Put/Call Ratio (5-day SMA) was towards the lower end of its range.
  • The SKEW wasn’t extremely high, but towards the upper end of its range.
  • Investment advisors and newsletter writers (polled by Investors Intelligence – II) were extremely bullish.
  • Retail investors (polled by the American Association for Individual Investors – AAII) were extremely bullish.
  • Active investment managers (polled by the National Association of Active Investment Managers – NAAIM) were bullish.

In October 2015, investors are not as bullish as they were in 2007. This becomes particularly obvious when looking at the AAII, II and NAAIM crowd.

Since the October sentiment picture was published, investors have become a bit more bullish. Perhaps even bullish enough for another pullback (there was also some significant internal weakness last week), but investor enthusiasm as not as pronounced as it was in 2007 or other historic market tops.

Investor sentiment is just one of the four powerful price movers monitored by the Profit Radar Report. Here is a (free) detailed look at supply and demand (or liquidity): Is the Stock Market Running out of Willing Buyers?

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 Analysis: The ‘Chopping Zone’ Explained

S&P 500 analysis: Since late 2013, the S&P 500 has been ‘boxed in’ by well-defined support/resistance levels. This explains 4-months of range bound trading activity. Here is the S&P 500 ‘chopping box zone’ along with key near-term support and resistance.

Buy-and hold investors know that the S&P 500 (SNP: ^GSPC) hasn’t gone anywhere since the beginning of 2014. Why and when will this aimless back and forth stop?

Here are four charts that will progressively shed some light on the issue:

The first chart is a plain weekly S&P 500 bar chart. At the top we see an index that has stalled.

The second chart is the same S&P 500 chart with some simple annotations.

  1. Solid black trend channel going back to March 2009
  2. Dashed black trend channel going back to October 2011
  3. Green support/resistance line going back to April 2010
  4. Green support line going back to November 2012
  5. Fibonacci projection level going back to 2002

The third chart is a daily bar chart going back to October 2011.

The fourth chart zooms in on the most recent market action in correlation to the various support/resistance (S/R) levels mentioned above.

The blue lines show an S&P 500 that has been boxed in by its own S/R levels.

Each blue circle represents a tidbit of ‘insider information’ available to investors familiar with such levels.

S/R conscious investors didn’t chase the S&P 500 when it touched the upper resistance rim and didn’t sell when it touched the lower boundary.

The Profit Radar Report combines those simple S/R levels with technical analysis, seasonality patterns and sentiment analysis.

Here’s an actual recent example of sentiment analysis combined with S/R levels and seasonality:

In the beginning of May, the financial media delivered a wave of bearish headlines, such as:

“Why investors expect to sell in May and go away” – Investors Business Daily
“This Chart Says we’re in for a 20% correction” – CNBC
“I’m worried about a crisis bigger than 2008: Dr Doom” – CNBC
“Risk of 20% correction highest until October” – MarketWatch

Merely based on those headlines, it became clear that the market will shake out premature bears with a drop and pop punch. Via the May 4 Profit Radar Report, I shared this outlook:

“The ‘chart detective’ inside of me favors a shallow dip (1,874 – 1,850) followed by a pop to 1,900 or 1,915 before we see a 10%+ correction. This bold prediction is mainly based on what the ‘chart detective’ thinks will fool the maximum number of investors.”

Resistance at 1,900 was composed of short-term pivots and a long-term Fibonacci projection level. The brief pop above 1,900 no doubt stopped out all the weak bears that followed the media’s doom-and gloom talk. Was it enough of a pop?

Thus far the S&P 500 has followed our script, however it continues to trade within the ‘blue box chopping zone’ and above double trend line support.

This week’s high and today’s low are now the new short-term support/resistance box for the S&P 500.

I often get asked: “But what about valuations?”

Do valuations matter? Quite possibly. But how do you determine whether stocks are cheap or expensive? Not even the so-called pros can agree on valuations. Here’s an objective look at three objective valuation metrics and why the pros passionately disagree about valuations.

Are Stocks Cheap or Overpriced? Here’s why Analysts Passionately Disagree

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.

Historic S&P 500 Seasonality is About to Turn Ugly

The old adage ‘Those who don’t learn from history are doomed to repeat it’ tends to come true twice a year. In September/October and April/May. It is quite possible that the pivotal April turning point will arrive earlier this year.

As many of you already know, my “3 Pillars of Market Forecasting” are:

In terms of S&P 500 seasonality, there are basically two times of the year that tend to be pivotal for the S&P 500: April/May and September/October.

September/October often sees market lows, and/or the beginning of bullish seasonality (such as 2011, 2012, 2013).

April/May often sees market tops, and/or the beginning of corrections (such as 2011, 2012, 2013).

Midterm presidential election year Aprils tend to be even more potent.

The chart below plots the S&P 500 YTD against S&P 500 midterm seasonality (based on every midterm year since 1950).

On average, the S&P 500 (NYSEArca: SPY) starts getting into trouble around mid-April (full seasonality charts, including overall seasonality and midterm seasonality with democratic president is available to subscribers of the Profit Radar Report).

What makes April 2014 even more precarious is that MACD just triggered a sell signal (signals are stronger when technical analysis confirms seasonal patterns).

This sell signal is loaded with tell tale signs. More details are available here:

MACD Triggers the Year’s Most Infamous Sell Signal

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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

Is Investor Sentiment Bullish Enough for a Major Market Top?

The QE bull market is now over five years old. According to some, its recent structure also resembles the 1928 ‘last gasp’ before the Great Depression hit. There’s reason to look for a correction, but is sentiment bullish enough for a major top.

Excessive optimism is generally bad news for stocks. That’s why sentiment analysis can be a helpful tool in spotting (major) market tops.

There’ve been a number of commentaries suggesting an impending bear market (either because today’s market allegedly mimics the 1928 market or simply because this QE bull is getting old).

Does investor sentiment point towards a major top?

The Profit Radar Report always looks at the ‘3 pillars of market forecasting.’ 1) Technical analysis 2) Sentiment analysis 3) Seasonality & cycles.

The below chart was featured in the March 20 Profit Radar Report and plots the S&P 500 against five measures of sentiment:

Sentiment Picture March 14

 

 

VIX
CBOE Equity Put/Call Ratio
CBOE SKEW
% of Bullish Advisors (II)
% of Bullish Investors (AAII)

 

We saw a number of sentiment extremes in December and January.

 

In fact, the December 20, 2013 Profit Radar Report looked at the same gauges and suspected that: “Bullish sentiment will catch up with stocks in January. This should cause a deeper, but also temporary correction.”

 

That correction came and left. It also reset sentiment. There are no extremes, at least not the kind that point towards a major S&P 500 top.

 

Seemingly Minor, But Intriguing

 

However, the green lines highlight an intriguing divergence between the S&P 500 (NYSEArca: SPY) and VIX.

 

Normally the S&P and VIX move in opposite directions. But since mid-February they’ve moved in the same direction. This is unusual and unsustainable. Either the VIX or S&P 500 has to break down to restore the historic correlation.

 

There’ve been two recent cases where the S&P and VIX moved in the same direction. Both had the same outcome.

 

More details here (this is a free excerpt of the Profit Radar Report):

 

VIX and S&P 500 Sport Bearish (for S&P) Divergence

 

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.

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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.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

 

Assessing QE Bull Market Longevity Based on Investor Sentiment

The Federal Reserve’s liquidity policy has changed the game. Those who don’t adjust to the new rules will become dinosaurs. The interpretation of sentiment indicators is one of the things that changed. Changed yes, but obsolete no.

Is investor sentiment still a valid contrarian indicator in the Fed-manufactured liquidity rally?

The short answer is yes, but …

But what?

I believe that investor sentiment (as contrarian indicator) is an important piece of the puzzle of the market-forecasting picture, but it needs to be recognized that QE has altered money flow and how investors feel about stocks (NYSEArca: VTI).

The QE domino effect changes how sentiment should be used and interpreted.

Here’s the value sentiment indicators bring to the table in a QE market. See if you can find a pattern.

Excerpts are taken from the monthly Sentiment Picture, published by the Profit Radar Report:

The beginning of 2013 saw some slight sentiment poll extremes, but actual money flow indicators reflected indifference. In other words, investors didn’t ‘put their money where their mouth’ was.

This changed in May. The May 19 Sentiment Picture noted growing optimism, particularly among money flow indicators, and warned that: “Risk is rising and the tipping point where the market is running out of buyers is nearing.”

For easy comparison, the S&P 500 (SNP: GSPC) below shows S&P 500 daily bars along with Sentiment Picture forecasts.

The S&P 500 corrected after the May Sentiment Picture and came back to new highs on August 2.

The August 18 Sentiment Picture focused on whether the August 2 high marked a major market top and concluded that: “A major August top is possible, but not probable.”

The S&P 500 (NYSEArca: SPY) rallied to a new high in September, and the September 27 Sentiment Picture asked if the September high marked a major top?

September 27 Sentiment Picture conclusion: “Although current sentiment doesn’t preclude lower prices, the lack of bullishness at the September highs suggests higher prices ahead eventually.

The chart below shows the actual September 27 Sentiment Picture (without the commentary). The S&P 500 is plotted against five different sentiment gauges to provide a comprehensive sentiment analysis.

It shows the VIX (Chicago Options: ^VIX) near the lower end of the range. But that’s meaningless. Various 2012 Sentiment Pictures put the VIX (NYSEArca: VXX) on probation since it has lost its contrarian indicator mojo.

The other four gauges (CBOE Equity Put/Call Ratio, SKEW Index, % of bullish advisors and % of bullish investors) showed no notable extremes.

The October Sentiment Pictures (forgive me for keeping this chart exclusive for Profit Radar Report subscribers) shows an obvious up tick in bullishness, especially for the SKEW Index and the percentage of bullish investors.

Previous bullish extremes weren’t enough to trigger a market top call. Is last week’s significant up tick enough?

The companion article to the subject matter of sentiment addresses this question:

Do Current Sentiment Extremes Allow for Another 20% Rally?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

 

QE Haters are Driving Stocks Higher

Stubborn bearish sentiment is one of the key reasons why stocks continue to rally, essentially giving bears the finger. Bears can’t stop the QE liquidity waves. Perhaps it’s time to stop fighting them and learn how to surf them. It would be the best for bears … in two ways.

Bears, if you are looking for someone to blame for having been on the wrong side of the trade – look in the mirror.

Yes, the Federal Reserve’s financial alchemists have artificially engineered this QE bull market and yes, the economy is still lagging.

But that’s not the only reason. The stock market is actually using the bears as a springboard for higher prices.

Stock markets don’t roll over until most of the bears throw in the towel, but bears maintain a tight grip on their bearishness even at their own detriment.

This front-page article featured in the May 5, 2012 edition of USA Today sums the situation up nicely:

“Wall Street’s long-running story about how stocks are the best way to build wealth seems tired, dated and less believable to many individual investors. Playing the market isn’t as sexy as it used to be. Stocks remain out of fashion.”

I remember this time well, because my three key indicators (I call them the three pillars of market forecasting: technical analysis, seasonality and sentiment) were about to line up for a major buy signal.

In a June 3, 2012 update to subscribers I wrote that: “The S&P 500 is within our 1,248 – 1,284 target range for a bottom. Most of my studies suggest higher prices over the coming weeks and a tradable bottom due soon. While June generally falls in the seasonally weak summer period, we find that election year Junes generally sport a strong performance”

The S&P 500 bottomed at 1,266 on June 4, 2012.

Sentiment Sours as Stocks Rally

Since then stocks have rallied and sentiment has soured.

The chart below shows just how stubborn bears are. The S&P 500 ETF (NYSEArca: SPY) soared as much as 36% since its 2012 low, yet the 6-week SMA of bullish investment advisors and newsletter-writing colleagues (polled by Investors Intelligence) is closer to readings seen near bottoms than tops (red circles).

This trend was obvious in early 2013 when the financial media was outright bearish even though the Dow Jones  just pushed to new all-time highs and the VIX (Chicago Options: ^VIX) was lingering near multi-year lows.

Via the March 10, 2013 Profit Radar Report I shared this observation with my subscribers:

“The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point out the ‘elephant in the room’ – stocks are only up because of the Fed. Below are a few of last week’s headlines:

CNBC: Dow Breaks Record, But Party Unlikely To Last
Washington Post: Dow Hits Record High As Markets Are Undaunted By Tepid Economic Growth, Political Gridlock
The Atlantic: This Is America, Now: The Dow Hits A Record High With Household Income At A Decade Low
CNNMoney: Dow Record? Who Cares? Economy Still Stinks
Reuters: Dow Surges To New Closing High On Economy, Fed’s Help

The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number. Sentiment allows for further gains.”

Small Correction, Big Effect

The minor summer correction (big black arrow) has suffocated rising optimism before it had a chance to flourish into extremes.

Now, nearly all major US indexes are near all-time highs – the Nasdaq (Nasdaq: QQQ) is outperforming every other broad market index – but sentiment is at best neutral.

From a sentiment analysis point of view, this suggests yet higher stock prices eventually (this doesn’t preclude a deeper correction).

Aside from sentiment, there is an unnoticed but very effective technical pattern that telegraphed the onset of almost every market rally since the 2009 low.

More details about this pattern can be found here:

The Secret QE Bull Market Trade Pattern that Almost Never Fails

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.