S&P 500 Update – Was Risk Flushed Out?

The last S&P 500 update introduced the risk/reward heat map (RRHM), which projected increased risk in January/February (see image below). How exactly the RRHM is produced is discussed here: Risk Reward Heat Map Methodology

The January 15 Profit Radar Report warned that: “Based on our risk/reward heat map, we are approaching a period of increased risk with an initial emphasis on late January.”

Just 4 days later, stocks suffered the biggest pullback since October 2019.

The pullback stopped on February 3, which makes the analysis from the February 2 Profit Radar Report (republished below) all the more interesting:

                                        * * * * *  February 3, Profit Radar Report * * * * *

“Based on preliminary data, 82.85% of NYSE-traded stocks ended Friday lower, the biggest down day since August 8, 2019. The chart below shows various breadth gauges. The bottom graph reflects down days. A cluster of down days (80% or 90%) tends to reflect selling exhaustion and is usually seen near bottoms, so we’ll be keeping an eye on that.

We’ve seen two 80%+/- down days already, so one could argue there’s already a measure of exhaustion.

Almost all of our short-term sentiment gauges perked up nicely and are already showing minor extremes. In times past, readings of similar degree have been enough to mark a bottom. Since we’ve seen some significant optimism extremes at the top, it is quite possible we need some more significant pessimism extremes. This, however, is not required.

The S&P 500 closed right on the green support trend line, which could be considered the minimum down side target for this pullback. Due to the sentiment extremes at the top and our RRHM, we would like to see lower prices, with 3,190 being the next and 3,130 +/- a more ideal down side target.”

                                      * * * * *  End February 3, Profit Radar Report * * * * *

The S&P 500 spiked 110 point this week. The chart below shows the resistance (red) and support (green) levels mentioned in the February 3 Profit Radar Report.

The S&P tagged the minimum down side target, which was based on a trend line going back to 2016. The S&P failed to reach the ideal target, which was based on a trend line going back to 2007, and would have reflected a more proportional correction.

Resistance is still at 3,336. A break above 3,336 would allow for a move to next resistance, but the CBOE equity put/call ratio is getting dangerously low once again, and the RRHM suggests we may not be out of the woods yet.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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

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.

Market Pulse: Is Investor Sentiment Really ‘Dangerously Bullish’?

How bullish are investors really? There are different types of investors, individual investors, institutional investors, traders, smart money, dumb money … and there’s a gauge for each group. Here’s a look at six different investor sentiment indicators.

The market has been stuck in yet another waiting pattern, so we might as well use the time to look at the forces that may (or may not) jolt stocks out of their waiting loop.

According to many, overheated investor sentiment will break the stale mate and send stocks spiraling lower.

There’s just one flaw with this line of reasoning. Sentiment is not overheated.

The Profit Radar Report continuously analyzes how investors feel about stocks and publishes a comprehensive sentiment picture once a month.

The chart below, which plots the following six sentiment gauges against the S&P 500 (NYSEArca: SPY), was published in the August Sentiment Picture on August 29:

  • Equity put/call ratio
  • CBOE Volatility Index (VIX)
  • NAAIM survey of active money managers
  • II survey of investment advisors
  • AAII survey of individual investors

Where are the sentiment extremes?

There’s only one: Last week 51.92% of individual investors were bullish. That’s the highest reading since December 24, 2013. The red lines highlight other 50%+ spikes and how the S&P 500 reacted.

Yes, the bullish December AAII reading was followed by a January pullback, but there’s a big difference between today and December: No other indicator is confirming August’s AAII spout of enthusiasm, and AAII bulls are back down to 44.70%.

There was one more extreme not illustrated by the chart: The percentage of bearish investment advisors polled by II dropped to 13.3%, the lowest reading since 1987. This is a legitimate extreme.

The August 29 Sentiment Picture summed up the big picture sentiment situation as follows:

Perhaps most noteworthy is that we continue to see isolated sentiment extremes, but the source of such extremes only rotates (the SKEW and put/call ratio in July, the AAII poll in August), it doesn’t compound. We see different gauges hit overheated levels at different times, but never all at the same time.

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.

Based on sentiment, we could see 1) a continued grind higher interrupted by the occasional 3-10% correction or 2) a prolonged period of choppy sideways trading.”

Bottom line, sentiment is not extreme enough for a big scale market top.

The most important market breadth indicator, which correctly foreshadowed the 1987, 2000 and 2007 crashes, also doesn’t show the deterioration needed for another crash.

More details about this must-know indicator can be found here: How to Discern a Major Market Top

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.

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.


A Detailed Look at 5 Different Sentiment Gauges

If you want to know how much money is waiting on the sidelines to drive stocks higher, take a look at various sentiment measures. Combine those sentiment measures with actual money flow gauges and you’ll get a good idea of how much cash is left (or not) waiting to buoy the stock market.

Seasoned investors look at many indicators before making buy/sell decisions. One of them should be sentiment.

My personal ‘three pillars of market forecasting’ are technical analysis, seasonality, and sentiment.

Technical analysis includes trend lines, patterns (like triangle, head-and shoulders, etc.), Fibonacci levels, divergences and so on.

Seasonality includes seasonal patterns and cycles for broad indexes and sometimes individual stocks and sectors.

Sentiment can be subdivided into many segments. I consistently follow more than a dozen sentiment and money flow gauges and regularly chart the following five for Profit Radar Report subscribers:

CBOE Volatility Index (VIX)
CBOE Skew Index
CBOE Equity Put/Call Ratio
% of bullish advisors polled by Investors Intelligence (II)
% of bullish investors polled by the American Association for Individual Investors (AAII)

The chart below is a reprint of the July 25 Sentiment Picture (available to subscribers of the Profit Radar Report).

It plots the S&P 500  against the above-mentioned sentiment gauges.

The VIX (NYSEArca: VXX) continues to linger near a multi-year low. This has been the case for almost a year. Using the VIX to time market highs has been a fool’s errand. We realized that back in November 2012 when the Sentiment Picture ‘quarantined’ the VIX:

“When an indicator doesn’t work, we’ll put it on ‘probation’ until it proves its worth again.” Let’s just say the VIX has continued to be on probabation.

The put/call ratio is a valuable member of the sentiment family. The May 19 Sentiment Picture noted that option traders were finally jumping on the rally bandwagon and warned that: “Risk is rising. A fair portion of current gains should be quickly retraced.” The S&P 500 (NYSEArca: SPY) quickly lost 7% thereafter before rebounding.

Sentiment polls by Investors Intelligence (II) and the American Association of Individual Investors (AAII) are a ‘casualty’ of the QE liquidity market and need to be taken with a grain of salt.

Extreme bullishness reflected in the polls hasn’t had much of an impact on stocks, but bearish extremes have coincided with rallies.

The April 26 Sentiment Picture for example picked up on the extremely bearish AAII poll numbers and the large number of II folks looking for a correction and wrote:

“36% of advisors and newsletter writers polled by Investor’s Intelligence (II) are looking for a correction. Incidentally, that’s exactly what we are expecting. However, the market rarely fulfills the expectation of the masses.” In other words: expect higher prices.

It took years of trial and error to become familiar with the various sentiment gauges and learn how to interpret the different readings. I have found that there’s a difference between sentiment polls and money flow indicators. The equity put/call ratio, for example, is an indicator that shows if investers are really ‘putting their money where their mouth (sentiment polls) is.’

When the put/call ratio finally reached extreme territory in May (and investors started to put their money where their mouth is), the stock market turned sour, at least temporarily. A updated chart and analysis of the equity put/call ratio is available here: “Is a Market Top Near? ‘Smart’ Option Traders Send a Curious Message.

Continuous sentiment analysis is available via the Profit Radar Report.

Will ‘Sell in May and Go Away’ Come Late?

About a month ago we asked if sell in May and go away came early? At the time it appeared like it did … but ultimately ‘buy in May like there’s no tomorrow’ is what happened. Does that mean that all risk has vanished or will June be the month of heavy blows?

In mid-April I re-printed a long section of the Profit Radar Report and asked if ‘sell in May and go away arrived early.’

How has the pattern and connected trade played out?

Is the 2013 edition of ‘Sell in May’ a no show or is it just delayed?

Below is an updated version of the chart featured in the April 17, “Did ‘Sell in May and Go Away’ Arrive Early” article.

Two things stand out:

·      The sell in May pattern is obvious.

·      The sell in May pattern is perhaps too obvious to come true.

Because the pattern was so obvious, the Profit Radar Report imposed certain conditions to authenticate the pattern:

·      The S&P 500 has to move above und subsequently below 1,593 to trigger a sell signal (sell signal triggered on April 11 – see red circle of chart insert).

·      The sell in May high tends to appear as a double top. Therefore short positions were closed at 1,540 and 1,560.

·      The move above 1,597 voided the sell in May pattern.

Overall seasonality (seasonality based on each year since 1950) shows weakness right around May 1. Post election year seasonality (seasonality based on each post election year since 1950) points to weakness at the end of May.

The last post election year – 2009 – saw a high in early June followed by a brief correction and continuation of the rally.

2013 may also see a high according to the post election year seasonality cycle.

Wednesday’s across the board reversal and the associated reversal candles for all major indexes suggest that the top tick has already been seen.

Overheated sentiment gauges point to a correction that will be deeper than the 2009 hiccup.

To summarize, based on sentiment and seasonality the conditions are ripe for a correction. However, we need to see a technical breakdown below support or a move to re-test resistance before getting a low-risk entry to go short. According to technicals, the odds for any top to be a major market top are low.

Yesterday’s Weekly ETF SPY highlights the precise support/resistance levels used to identify low-risk entries for the Nasdaq-100.