US Treasury bonds and notes have been range bound for over six months.

There is reason to believe that Treasuries, especially 30-year Treasuries bonds, will soon break higher. Why?

Smart Money

Commercial hedgers – a group of traders considered the ‘smart money’ – are buying Treasuries across the bond curve in anticipation of higher prices.

The chart below shows commercial hedgers’ aggregate net exposure to 5, 10, 30-year Treasuries (blue graph).

As the green arrows show, hedgers’ bullish bets are generally vindicated by a period of rising prices.

Below is a list of ETFs likely to benefit from the bullish developments seen by commercial hedgers. Long-term maturities are more dynamic and subject to bigger price moves.

  • iShares Short Treasury Bond ETF (NYSEArca: SHV)
  • iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY)
  • iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI)
  • iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF)
  • iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT)

Seasonality

The green chart insert shows that seasonality is generally bullish for the remainder of the year.

A move above the red resistance lines is necessary to unlock an up side target of 129 – 133. This up side target is based on Fibonacci retracement levels (50% and 61.8%) and an open chart gap.

Sustained trade below 120 would put any rally on hold.

Above analysis was initially published in the August 26 Profit Radar Report. Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s 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 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, 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 Newsletter to get actionable ETF trade ideas delivered for free.

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Contrarian Indicator? Longer-term VIX Fears Far Outweigh Short-term Concerns

Investors are more concerned about implied 3-month S&P 500 volatility than 1-month volatility. How do we know that?

The ratio between the CBOE Volatility Index (VIX) and CBOE S&P 500 3-month Volatility Index (VXV) was just at 0.79, the lowest reading in 2015.

It is a sign of complacency when investors are more concerned about 3-month than 1-month volatility. Is it also a contrarian indicator?

The chart below plots the VIX:VXV ratio against the S&P 500 (NYSEArca: SPY). The dashed red lines mark all sub 0.80 readings since 2010. There were only four similar signals since the beginning of 2013. While not flat out wrong, the signals came either a bit too late or didn’t result in noteworthy weakness.

The VIX:VXV ratio is more valuable for bottom fishers than top pickers. Spikes above 1.1 have been more predictive of tradable lows than sub 0.8 readings of tradable tops.

What about overall investor sentiment? Is overall investor sentiment worrisome? Here is a detailed look at six different investor sentiment gauges:

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

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.

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.

Smart Money is Leaving Gold Just as the ‘Herd’ is Jumping in

From June 2 to July 10 gold prices surged 8.7%. Commercial traders were the first to get in on this rally and the first to get out. While commercials pulled out, the ‘herd’ (or dumb money) piled in. Could this be a significant gold high?

The greater fool theory may just be playing out in the gold market.

Commercial traders (often considered the ‘smart money’) have been pulling money out of gold while investors and speculators (often considered the ‘dumb money) are piling into gold and gold ETFs.

The most popular gold ETFs are the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU).

The chart below plots the SPDR Gold Shares against the futures positions of commercial traders (Commitment of Traders report).

Commercials’ exposure to gold futures just dropped to the lower level since October 2012. This marked the onset of a nasty decline that accelerated in March 2013, the only other time commercials really scaled down their exposure (red lines).

Partially based on investor sentiment, the June 13 Profit Radar Report recommended to short gold (unfortunately, our sell stop was not quite triggered).

Various media outlets linked this week’s gold (and GLD, IAU) selloff with Yellen’s comments about inflation.

Those comments may have contributed to gold’s $50 drop, but it can’t be the only reason. If it were, it would imply that commercial gold traders (which started selling gold weeks ago) could actually read Yellen’s mind.

Is there another reason why gold prices sold off? Yes there is.

In fact, based on a combination of factors, the June 1 Profit Radar Report projected a gold rally to around 1,350 followed by a steep reversal.

The actual price projections, the reasons for the projection, and what’s next is discussed here:

Gold Chart at the Cusp of Breaking Down

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.

Fed Fund Rate Suggests S&P 500 Rally

Here’s yet another indicator that the Federal Reserve legally ‘manipulates’ the stock market. This chart shows the correlation between the S&P 500 and the 30-day Fed Fund Rate. Based on this unique correlation, stocks should rally (at least temporarily).

Market correlations are never married for better or for worse or until death do they part, but they are valuable tools for market forecasters.

There are dozens of correlations. Some are logical and make sense, others are exotic and off the wall.

This piece is about the correlation between the S&P 500 (SNP: ^GSPC) and the 30-day Federal Funds Rate (30 FFR).

The Federal Funds Rate (FFR) is the interest for which a depository institution lends funds maintained at the Federal Reserve to other depository institutions.

The 30 FFR reflects the average daily FFR in a particular month and is investable via the 30-day Federal Funds Futures.

The Commitment of Traders Report (COT) provides a glimpse of how traders feel about the 30 FFR, and that’s where it gets interesting.

The COT tracks positions of commercial, non-commercial and non-reportable traders. Commercial traders are considered the ‘smart money.’

Commercial traders have been piling into the 30-day Federal Funds Futures, basically betting on a higher FFR.

The FFR essentially acts as the base rate that determines all other interest rates in the US.

There generally is a direct correlation between Treasury rates and stock prices. That’s what makes the 30 FFR an interesting forward-looking indicator.

How is it forward looking?

The chart below plots the S&P 500 against the 30 FFR shifted forward approximately 30 days or four weeks (the COT reports weekly).

The green portion of the 30 FFR chart reflects the outlook for the next four weeks.

The second chart shows the long-term correlation between the S&P 500 and 30 FFR.

It’s worth noting that commercial traders’ 30 FFR long positions are near an all-time high. Therefore, up side could be limited.

For now, the Fed Funds Rate confirms what we foresaw already last week: Higher prices.

My thoughts, shared via the May 4 Profit Radar Report, were as follows: “The chart detective inside of me favors a shallow dip to 1,874 – 1,850 followed by a pop to 1,9xx (exact level reserved for subscribers) before we see a 10%+ correction.

I expected higher prices not because the charts telegraphed it, but because of a non-scientific yet incredibly effective indicator. More details can be found here:

Too Many Bears Spoil the Crash (or Correction)

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.