Spike in Selling Climaxes Leads to S&P 500 Reversal Week

There were 105 S&P 500 selling climaxes last week. This means that 105 of the 500 S&P stocks (21%) dropped to new 52-week lows, but bounced back to end the week with a gain.

Selling climaxes are considered a sign of accumulation as ‘strong hands’ buy the stocks offered for sale by ‘weak hands.’

The S&P 500 Index itself also saw a selling climax. The chart below highlights all weekly reversals (not all of them led to 52-week lows) since mid-2013. All but one (August 24, 2015) were followed by at least another week of gains.

The weekly bar chart also shows that the S&P 500 reached (and exceeded) the minimum down side target at 1,848.77 and the October 2014 low at 1,820.66.

The January 18 Profit Radar Report proposed that a break below S&P 1,870 would lead to a swift drop to 1,820, but listed five reasons why stocks should bounce thereafter.

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With the minimum down side target(s) met, the odds of a bounce or more lasting low have increased.

It remains to be seen whether this bounce will stick or eventually (perhaps after weeks of chopping around) roll over.

A break below 1,812 would unlock the next down side targets. Such a break, if it does occur, would probably set up a better buying opportunity (assuming there will be a number of bullish divergences).

Continued updates and analysis are provided via the Profit Radar Report.

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/Bond Ratio Shows Stocks are Overvalued

Much has been written about the ‘great rotation’ from bonds into stocks. In reality, investors ask themselves every day if there’s more value in stocks or bonds. There’s one accurate measure to determine where’s more value.

Stocks or bonds? Essentially that’s a decision investors make every day.

As with pretty much every other purchase, investors want to get the biggest bang for their buck and avoid risk. In other words, risk/reward is key.

What’s the better risk/reward play right now? Stocks or bonds?

To find out we will take a look at the value of the S&P 500 Index relative to 10-year Treasury prices. The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) is used as proxy for 10-year Treasuries.

The chart below plots the S&P 500 Index against a ratio attained by dividing the S&P 500 against the price of IEF (S&P 500:IEF).

This is one of the easiest and most effective ways to determine the value of both asset classes relative to each other.

The chart shows that S&P 500:IEF ratio extremes put the kibosh on stocks every time. The degree of the correction varied, but the direction for the S&P 500 was the same every time – down.

There is one problem though.

It usually takes hindsight to determine what constitutes an S&P 500:IEF ratio extreme.

The ratio, although extreme right now, could become more stretched. Will it?

The dashed horizontal gray line shows today’s ratio in correlation to prior readings. In fact, the ratio is at a point where it turned down in early 2007 and early 2008. This appears as natural resistance for the ratio … and the S&P 500.

The S&P 500:IEF ratio suggests that risk is increasing for the S&P 500.

This harmonizes with the S&P 500 chart, which conveys the message that stocks are at a short-term inflection point. This article highlights some technical ‘speed bumps’ most investors aren’t aware of: What’s Next For the S&P 500?

 

Federal Reserve ‘Financed’ 17% of all U.S. Stock Purchases

At one point or another over the last few years we’ve all heard about the bursting Federal Reserve Balance sheet (it’s still growing by the way). However, how big is the Fed’s balance sheet in correlation to the total U.S. stock market? It’s big!

A billion used to be a big number, but ‘billions’ today are outdated like Myspace.

Today we (and with ‘we’ I mean the Federal Reserve) talk in trillions.

The Federal Reserve’s balance sheet is about $3.7 trillion. As recently as July 2008 the Fed’s balance sheet was below $900 billion.

Since then the Fed embarked on a little shopping spree (about $3 trillion worth). As it turns out, when the Fed goes shopping, Wall Street goes shopping.

According to the World Bank, the total market capitalization of the U.S. stock market in 2012 was $18.67 trillion (2013 estimate around $21.4 trillion).

Based on preliminary 2013 figures, the Federal Reserve’s balance sheet could have bought 17% of all U.S. traded stocks.

The chart below provides a visual as it plots the total annual U.S. stock market capitalization against the S&P 500. According to Standard & Poor’s, there is over $5.14 trillion benchmarked to the S&P 500 index (NYSEArca: SPY).

We know that the Federal Reserve doesn’t directly buy equities (other central banks do), but it may as well have.

The Federal Reserve is pumping about $85 billion of fresh money (about $110 billion total since maturing funds are reinvested) into the ‘economy.’

‘Economy’ sounds better than big banks and financial institutions (the Fed calls them primary dealers, there are 21 such primary dealers, most of them U.S.-based), but that’s where the money is going.

Big banks on the other hand turn around and buy stocks and ETFs – which may include Financial Select Sector SPDR (NYSEArca: XLF), or SPDR S&P Bank ETF (NYSEArca: KBE), and of course Twitter, LinkedIn and Facebook (not Myspace).

Aha Moment

We’ve all heard how big the Federal Reserve’s balance sheet is before and have gotten used to (and desensitized) to the number.

However, when viewed in comparison to the total market capitalization of all U.S. traded stocks, it becomes obvious just how big a player the Federal Reserve really is.

If you – like me – are fascinated with large numbers, you’ll like this little piece of trivia:

Is it possible to put a price tag on all the assets held in the entire United States of America? Yes it is. In fact, we’ve done this right here (based on Federal Reserve data): How Much is The Entire United States of America Worth?

Simon Maierhofer is the publisher of the Profit Radar Report.

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Weekly ETF SPY: SPY ETF vs S&P 500 – Technical Analysis Variations

The S&P 500 Index triggered a beautiful ‘kiss good bye’ signal on Tuesday, before Bernanke spoke and sunk stocks. Interestingly, the sell signal for the S&P 500 could not be seen in the chart of the SPDR S&P 500 ETF (SPY).

SPY S&P 500 ETF or S&P 500 Index. What’s the difference? It’s like tomato or tomato (imagine the second ‘tomato’ spoken with a British accent).

I always try to base my analysis on the purest representation of any given index or asset class. When it comes to the S&P 500, the purest representation is the actual S&P 500 Index you always see quoted.

The SPDR S&P 500 ETF (SPY) tracks the S&P 500 very closely, but even minor variations can make a major difference.

For example: The June 18 Profit Radar Report (released the night before Bernanke opened his mouth and buried the market) noted that the S&P 500 is at an important inflection point and warned:

There is a parallel channel going back to the October 2011 low. Indexes often touch a previously broken support (in this case the black October 2011 parallel channel at 1,655) before dropping to a new low. The S&P touched this channel today and failure to move above could spell trouble.

The first chart below shows the S&P 500 parallel channel referred to in the Profit Radar Report (if you aren’t a subscriber, I tweeted a close up picture of this channel on Tuesday).

I have often observed the S&P 500 (and other indexes) double back a broken support before letting go and peeling away for good. This upper line of the parallel channel was a key ingredient to the bearish forecast (the recommendation of the Profit Radar Report was to go short at S&P 1,635 and Nasdaq-100 2,970). I call it the ‘kiss good bye.’

Drawn in the second chart is the exact same parallel channel for the SPDR S&P 500 ETF (SPY). However, unlike the S&P 500 Index, SPY’s channel is placed differently. There was no kiss good bye for the SPY ETF.

Key support (red line) was broken for both, when prices dropped below the June 6 low (160.25 for SPY and 1,598.23 for the S&P 500).

The SPY chart allows us to draw a support trend line (green line) that’s unique to SPY. I wouldn’t say there is a clear winner in the SPY vs S&P 500 debate, but I prefer to base my S&P 500 technical analysis on the S&P 500 chart. It’s as pure as it gets.

Why further down side is still ahead, what the down side is, and why stocks will rally again when this is all over is discussed in Thursday’s special Profit Radar Report.

S&P 500 – Technical Analysis Shows the Trend

Markets are inherently unpredictable, but technical analysis is the most accurate forecasting tool available to investors. Since technical analysis is based on past price action, it is quite simple to confirm (or expose) when and where technical analysis has been right or wrong.

Some define technical analysis as mumbo jumbo, others (and that’s the official definition) see it as a method of forecasting prices based on past market activity.

Isn’t using past market activity (or prices) to forecast future prices like driving by looking in the rearview mirror? That’s a great question.

The Past Matters

Why does the past matter? Allow me to use a tennis analogy. Roger Federer (possibly the best ever all-around tennis player) has never won a clay court match against Rafael Nadal (possibly the best ever clay court tennis player) at the French Open Tournament (one of the big four Grand Slam tournaments).

Who do you think has a mental advantage the next time Federer and Nadal meet at the French Open? Federer knows he’s never beaten Nadal at the French Open, Nadal knows he’s never lost to Federer at the French Open.

Federer has to overcome a mental ‘resistance’ to beat Nadal at the French Open. I use the term mental ‘resistance’ because it relates to resistance (and/or support) seen in the securities market.

Charts of specific securities, such as the S&P 500, reflect the mental state of the composite of all investors. Charts reveal past price areas where either sellers or buyers prevailed, creating areas of support or resistance.

Being unaware of previously established support/resistance levels is like climbing a ladder without knowing which steps are broken.

Past Significance of Support/Resistance Levels

The proof is in the pudding, so let’s take a look at a 14-year chart of the S&P 500 Index (corresponding ETF: SPDR S&P 500 ETF – SPY).

The chart includes four long-term support/resistance levels made up of two trend lines (red lines) and two parallel channels (black and dashed lines).

The trend channels are created by connecting the 2002 and 2009 lows with the 2000 high (dashed black line) and 2007 high (solid black line). Since the last touch point of this channel is the 2009 low, it could be used as a guide only thereafter.

2000 High Parallel Channel

In May 2011, the S&P approached the upper dashed parallel channel resistance (gray circle). I remember that time vividly as my wife and I were vacationing on a little island in the Bahamas (for some reason the market usually sells off when I’m on vacation).

My May 1, 2011 update for subscribers featured the chart below and stated: “The chart below updates the S&P’s position relative to various resistance levels and the ideal target range for a potentially historic market top. The ideal target range is between 1,369 and 1,382.

The next day (May 2, 2011) the S&P briefly spiked as high as 1,370.58  (right into the 1,369 – 1,382 target range) on news that Osama Bin Laden had been killed. The stock market euphoria was short-lived, as the S&P sold off, fell below trend line support (pink line) and ultimately plunged as much as 20%.

The S&P 500 paid attention to this parallel channel once more in November 2011, when it was used as a springboard for the most powerful leg of the post-2009 QE bull market.

2007 High Parallel Channel

In January 2013 the S&P 500 approached the ‘big brother version’ of the same parallel channel (this time the upper line was created by the 2007 not the 2000 high – gray circle).

The parallel channel resistance coincided with trend line resistance (red line). This was powerful resistance and I thought stocks would pause and temporarily reverse there … but they didn’t.

With that resistance out of the way, it was clear that the S&P wanted to test its all-time high and the next trend line resistance (red line) around 1,593.

It barely shows on the weekly bar chart, but the S&P was actually repelled by trend line resistance at 1,593 in April (subscribers of the Profit Radar Report went short at 1,593 and closed out short positions at 1,540).

This (temporary) decline from 1,593 to 1,536 left several open chart gaps (one at 1,588), that’s why we expected a deep retracement. That deep retracement however, turned into a rally to even higher highs.

With the S&P above the last trend line resistance and with no other overhead resistance levels caused by prior support/resistance levels left (the S&P carries no more ‘inherited technical burdens’), there is nothing holding stocks back.

That doesn’t mean stocks can’t and won’t decline, but as long as prices remain above trend line support, the larger trend is simply up.

Unlike the S&P 500 and Dow Jones (which are trading at all-time highs), the Nasdaq-100 still trades well below its heyday highs of the year 2000. This means there are more well-defined support and resistance levels available.

Those support/resistance levels are powerful risk management tools and can be used to find low-risk entries and high probability trade set ups.

At the time of this article’s publication, the Profit Radar Report is long the Nasdaq-100 with a stop-loss just beneath an important long-term support.

The Profit Radar Report reveals key support/resistance levels along with low-risk and/or high probability trade set ups.

Weekly ETF SPY: XLF – Running Into Resistance

Financials are the second most important industry sector of the S&P 500 Index. Right now the Financial Select Sector SPDR ETF (XLF) sports a curious correlation to an economic indicator, along with some directional clues.

Since 2007, the financial sector has tracked consumer sentiment closer than any other sector. The chart below plots the Financial Select Sector SPDR ETF (XLF) against the Thomson/Reuters University of Michigan Consumer Sentiment Index.

Consumers aren’t nearly as confident now as they were in 2007 and the financial sector is far away from its 2007 high.

The comparison between consumer sentiment and XLF is more of anecdotal than predictive value, but the chart of XLF does provide some technical nuggets.

XLF is now trading above Fibonacci resistance at 18.21. This Fibonacci level corresponds to a 38.2% retracement of the points lost from 2007 – 2009.

The move above Fibonacci resistance is bullish and resistance now becomes support.

However, a resistance level made up of several lows reached in 2000, 2002, and 2003 is immediately ahead at 18.52 – 19.66.

Financials, as with the rest of the market, have enjoyed an incredible run, but investors have come to love financials a bit too much.

Current sentiment towards financials is almost the polar opposite to what the Profit Radar Report noted on August 5, 2012:

Financials are currently under loved (who can blame investors). Of the $900 million invested in Rydex sector funds, only $18 million (2%) are allocated to financials. With such negative sentiment a technical breakout (close above 14.90) could cause a quick spike in prices.”

The combination of sentiment extremes and upcoming resistance suggests that some type of correction is not far away. However, the correction may be more on the shallow side. Watch Fibonacci and trend line support for more clues.

Will Small Caps Lead the Market to All-time Highs?

Market timers often watch small caps for clues about possible trend reversals, but thus far the Russell 2000 Small Cap Index is going strong. Here’s a closer look at seasonality and support/resistance levels for the Russell 2000.

It’s said that major market tops are often preceded by weakness in small cap stocks. This premise makes sense, as small cap stocks are most sensitive to the ebb and flow of liquidity. As a liquidity gauge, small cap indexes like the Russell 2000 could be the canary in the mine.

The truth is in the pudding. Does this theory hold up against the facts? The chart below plots the S&P 500 Index against the Russell 2000. I guess the key point is how you define a “major” market top.

Small cap weakness foreshadowed the 2007 top, but wasn’t obvious at the 2010, 2011, and 2012 highs (at least not on the weekly chart).

What about today? Small caps are going strong and the canary is chirping and frolicking.

The second chart provides a closer look at the Russell 2000 (corresponding ETF: iShares Russell 2000 ETF – IWM).

The Russell 2000 climbed back above the green trend line originating at the October 2011 low.

Recent prior peaks supply various resistance levels (red lines) and today’s decline drove prices below the green November 15 support line (an early warning signal), but starting in mid-December small caps tend to outperform large caps. January is one of the strongest months for small cap stocks.

Historical seasonal patterns suggest that more strength lies ahead for small caps. Technicals support this view. This may drive small caps to new all-time highs (less than 4% away), but I doubt it will be enough to push the Dow and S&P to all-time highs. A break below technical support at 836 (green trend line support) would warn that this year is different.


Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.