What a 613-Indicator-Based Risk/Reward Tool Says About Stocks in May


The Risk/Reward Heat Map (RRHM) is a complex tool I created to identify whether risk or reward will dominate in any of the upcoming 12 months. I made the Risk/Reward Heat Map available to subscribers of the Profit Radar Report in December 2019. 

As of right now, the Risk/Reward Heat Map is the compound message of 613 individual studies, indicators and signals.

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

Turning individual studies into a forward-looking Risk/Reward Heat Map is a 2-step process:

1) Develop each individual study. Here is how it’s done:

– Identify a unique market development. Example: Last Friday, the S&P 500 and 32% of its component stocks closed at a 52-week (or all-time) high.

– Identify past precedents that meet the same (or similar) criteria. Example: Since 2000, the S&P 500 and >31% of its component stocks closed at 52-week high 7 other times (total of 8 signal dates). The orange line in the chart below highlight all the signal dates.

2) Turn individual study into a forward-looking component of the Risk/Reward Heat Map. Here is how it’s done:

– Calculate the S&P 500 returns and odds of positive returns for 1, 2, 3, 6, 9, 12 months after past precedents (signal dates). Example: After the above-mentioned signal dates, the S&P 500 was down 1 month later 6 times (86%) with an average loss of 2.2% (using only 1st signal in 30 days). 12 month later, the S&P 500 was up 5 times (71%) with an average gain of 10.5%.

– When the odds of positive returns are 80% or higher for a certain month, it is counted as bullish study for that month (+1 is added for that month).

– When the odds of positive returns are 50% or lower for a certain month, it is counted as bearish study for that month (-1 is added for that month). Example: The above study is bearish for June.

The proof is in the pudding

Shown below is one of many bullish studies published in April 2020 (others are available for review here). Explanatory annotations are made in yellow.

The unique development at the time was that the S&P 500 delivered two 90% up volume days (when 90% of volume flowing into advancing stocks) in a 3-day period. 

2 out of 3 90% up days happened 7 other times in the past. The colored graphs show returns after the 7 prior signal dates. 

The performance tracker (table at bottom of chart) shows that returns for the next 3, 6, 9, 12 month were wildly bullish with 83% – 100% odds of positive returns. +1 (bullish odds) were added for the months of July 2020, October 2020, January 2021, April 2021.

Repeating the above process of identifying a unique event and its precedents and then cataloguing forward returns 613 times results in the up-to-date Risk/Reward Heat Map. 

Does the Risk/Reward Heat Map work?

The chart below plots the S&P 500 against net signals (bullish – bearish) since inception, which allows us to visually assess if the Risk/Reward Heat Map works. 

The outright bearish implications for January/February/March 2020 (red columns) were echoed by the stock market during the February/March 2020 meltdown.

Starting in March 2020, the vast majority of studies implied significant future reward with little risk (green columns). 

Throughout 2020 and 2021 there were only a few periods of weakness, and all of them occurred when the number of bullish studies was less than 20 (orange bars). 

Sell in May and go away?

For May, the Risk/Reward Heat Map is in caution mode, and the May 3 Profit Radar Report warned that: “May continues to be a pressure point, resistance in terms of time.”

The Risk/Reward Heat Map is unique because it’s actually a predictive forward looking tool. To filter out false signal, I use real time data to validate the Heat Map’s message. Right now, it will take a good close below 4,090 to unlock a deeper pullback.

The Risk/Reward Heat Map is constantly updated and shows riks/reward for each of the next 12 months. The Risk/Reward Heat Map is available to subscribers of 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. 

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

Earnings, and one Famous Wall Street Adage to Ignore

Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. This market outlook below was sent out on April 29. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

There’s a Wall Street adage that says: “Never short a dull market.”

Boy, has it been a dull market. One way to spot a dull market is when you don’t receive a Thursday e-mail from me (like last Thursday). This may be silly, but I respect people’s inboxes and only send out updates when I feel like there’s something worth writing (or when I didn’t send one out last week).

Anyway, is the adage never to short a dull market true?

First, let’s define dull. From Monday – Wednesday the S&P 500 average maximum daily percentage change (based on closing prices) was 0.09%. Yeah, let’s call that dull.

The yellow lines in the chart below mark every time (since 2014) when the maximum daily % change (3-day SMA) was 0.10% or less (we’ll call this the signal).

Although this week was the first signal since 9/19/2019, it happened many time before. Throughout 2017, it was a good idea not to short a dull market, but shorting a dull market 2014 – 2016 would have yielded positive short-term returns most of the time.

In short, it’s better to know the facts than trust an adage. That’s, by the way, what the Profit Radar Report is all about, getting the facts of what’s really going on.

Talking about facts, the stock market has delivered some rare phenomena recently, like:

– Very bullish breadth readings and all-time highs

– Incredibly low volume

I wanted to find out:

  1. If breadth has gotten so good (too good to be true) that it’s actually a negative
  2. If new all-time highs on record low volume are bearish for stocks.

My findings along with S&P 500 forward returns after similar setups in the past are available here: What are the Implications of Rare Stock Market Phenomena?

The April 15 Free Market Outlook highlighted shorting TSLA as the new FOMO trade. The entire April 15 Market Outlook along with the rationale to short TSLA was posted here.

The chart below shows how TSLA has done since I recommended shorting it on April 14. What’s real ‘curious’ is that TSLA’s decline accelerated after it delivered a solid earnings beat.

This is one reason why I tend to ignore earnings. Two, even better reasons, (one of them being the Buffett Indicator) for ignoring earnings – and perhaps more importantly sky high valuations – are discussed here: 3 Reasons for Ignoring Earnings and Valuations

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Profit Radar Report.

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.” 

What Are the Implications of Rare Stock Market Phenomena?


‘Knowledge is power’ is one of my favorite truisms, and I want to empower my subscribers. To do that, I’ve beefed up the research presented via the Profit Radar Report.

‘Beefing up,’ to me, means extracting and presenting facts few investors are aware of.

Here are a couple examples of what I mean:

On April 8, the stock market delivered the following trifecta:

 – >90% of S&P 500 stocks closed above their 50-day SMA

 – >90% of S&P 500 stocks closed above their 200-day SMA 

 – >7% of NYSE stocks set new 52-week high

This is an amazing feat of strength. The question is: How amazing? And is that good for stocks … or too good to be true?

The chart below, published in the April 12 Profit Radar Report, identifies when and how often the above conditions existed before.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

The chart outlines how rare this trifecta is, but it’s hard to discern detailed forward performance on a 20-year chart.

The performance tracker, included in the same update and shown below, graphs S&P 500 forward returns for 1 year after the first signal of each cluster (called the signal date).

The table at the bottom of the chart shows average returns and the percentage of positive returns after 1, 2, 3, 6, 9, 12 months.

A sample size of 4 is not huge, but there are a couple of common themes:

1) Returns for the first few months were rocky

2) Any gains were given back about 5 months later (dashed red line)

But, there is another interesting wrinkle to the ‘trifecta feat of strength.’ April trading volume has fallen off a cliff.

Are new all-time highs on low volume bearish?

To find out what history says, the April 18 Profit Radar Report identified current markers and searched for historic parallels. Here are last week’s markers:

  1. S&P 500 at all-time high
  2. NY Composite a/d line (cumulative) at all-time high
  3. NY Composite OCO a/d line (cumulative) at all-time high

But:

 – NYC trading volume more than 20% below its 200-day SMA

 – Volume of advancing stocks less than 56%

The orange lines in the chart below highlight when the above conditions existed. Again, we are looking at a rare constellation with one common eventuality: Further gains were possible, but given back at some point over the next few months.

Shown above are only two of dozens of studies conducted every month.

My first step is always to find the common theme conveyed by each individual study. The next step is to find the common theme conveyed by all conducted studies.

The Risk/Reward Heat Map (RRHM) is a simple visual aid that identifies future periods of risk or reward conveyed by hundreds of individual studies.

The RRHM is available for free to subscribers of the Profit Radar Report (you can read more about it here).

No amount of knowledge can consistently predict stock market movements, but a fact-based approach assures that every decision is an educated decision, a decision that tilts the odds in your favor.

The world has never been more uncertain. Get the facts you need to make decisions you can feel good about. Get 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. 

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

Is Boring Grind Higher the Calm Before Storm?


S&P 500 and Dow Jones price action has been remarkable in many ways. I wanted to find out just how remarkable when viewed in the context of history. Here is how the recent price action stacks up (information below was published in Tuesday’s 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

Last Friday, the S&P 500: closed at an all-time high, which was 13.4% above its 200-day SMA, which was confirmed by the cumulative NY Composite advance/decline lines (a measure of liquidity). The same may happen again today. The yellow lines in the first chart below show other times that’s happened. Never (aside from the most recent cluster).

We can’t learn much from a sample size of 1, so let’s loosen our filter to see how big of a sample size we get. 

The next chart highlights periods when the S&P 500 closed more than 13% above its 200-day SMA.

Now we have too big of a sample size. If we restrict the criteria to catch only those times when the S&P 500 traded >10% above its 200-day SMA while at an all-time high (confirmed by the cum NYC a/d) we get the following hits.

In an attempt to identify breadth readings and price action comparable to current, we’ll now adjust the parameters to show times when the S&P 500 traded >13% above its 200-day SMA while the cum NYC a/d line was at an all-time high. There are only 3 other clusters in the past half century. The first of the most recent signal cluster triggered on 11/16/20.

Tuesday’s Profit Radar Report shows exactly how the S&P 500 did after the first signal date of each cluster (see above chart). This performance tracker details the S&P 500 forward performance after the signal date via graphs and tables (detailed returns for the next 1, 2, 3, 6, 9, 12 months along with odds of positive returns).

Of course there are other parameters that could be used to assess and compare the current market. Monday’s Profit Radar Report, for example, identified other times when more than 90% of stocks trade above both their 50-and 200-day SMA while more than 7% of stocks trade at a 52-week high.

Obviously history does not repeat itself, but it provides insight on how price (which is a reflection of investors, which is based on crowd behavior) reacts in certain situations. Examining historic precedents often reveals recurring patterns useful in assessing what’s next.

Continuous updates along with the performance tracker of similar precedents 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. 

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

S&P 500 Update: Will Excess Hopium Spark 2020 Replay?


Different year, same path. Below is a S&P 500 comparison between the first 18 trading days of 2020 and 2021.

It’s probably no coincidence that both years started with an epic tug-of-war. The tug-of-war leading into January 2020 was described here and the tug-of-war leading into 2021 was described here.

This seems like a crazy question, but based on the eery January similarity, one worth asking:

What are the odds of 2021 being a 2020 replay?

There are different ways of looking at this. 1) Based on historical precedents and 2) Based on the most recent developments.

Historical Precedents

Shown below is the S&P 500 performance of the years that most closely resemble the path of 2020. No doubt 2020 was more extreme than any other year, but the general trajectory of 1980, 1997, 2003, 2009 was pretty darn close that that of 2020.

Here is where it gets interesting: The next chart shows the performance of the years that followed: 1981, 1998, 2004, 2010. Here are two key takeaways:

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  • There was no repeat of the prior year’s path
  • Any gains were given up by August

Most Recent Developments

Sunday’s (January 24) Profit Radar Report featured the chart below and warned that: “The S&P 500 is at double trend channel resistance and the 138.2% projection level mentioned in the 2021 S&P 500 Forecast. There are RSI-35 divergences at multiple degrees and the cumulative NY Composite a/d line did not confirm Thursday’s all-time high. Stocks are near an inflection zone that could spark a pullback. For the S&P 500, that inflection/resistance zone is 3,850 – 3,880.”

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

One swallow doesn’t make a summer, and one down day doesn’t make a bear market. Tuesday was a big down down day, one that ‘came just in time’ and erased 3 weeks of gains for the S&P 500, but it wasn’t more then that. Not yet.

Based on the sentiment extremes seen in December and January, the down side potential is much greater, but it will take a break below the two purple wedge lines to do some actual chart damage. 

Yesterday’s Profit Radar Report stated that: “Today’s drop pulled the S&P 500 into a key support zone. RSI-2 is almost over-sold, so a bounce is possible. The weight of evidence, however, suggests more risk ahead, with or without bounce. A break below 3,725 – 3,650 is needed for bears to gain the upper hand.

Summary

Historically, a replay of the 2020 path in 2021 is very unlikely. But the extreme hopium building up in recent weeks makes a bigger correction likely, and the positive breadth readings throughout 2020 suggest a cameback after a correction.

In short, a full 2020 replay is unlikely, but a drop below purple wedge support could spark a nasty drop and subsequent snap back rally, which is the ‘mini-me’ version of what happened in 2020.

Continuous updates 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. 

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

If you enjoy quality, hand-crafted research, sign up for the FREE iSPYETF e-newsletter & market outlook

S&P 500 Update


Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on January 7. If you’d like to sign up for the free e-newsletter, you may do so here (we will never share your e-mail with anyone, just as we don’t accept advertising).

I enjoy helping people make educated investment decisions. To be educated one needs to have data (=knowledge) and interpret that data without being clouded by emotions or biases.

The Profit Radar Report filters a ton of data in an effort to discern the stock market’s next move. As this newsletter mentioned, there are times when future implications of the examined data are pointing in different directions.

This just happened in December. Almost every study based on stock market breadth projected rising prices and almost every study based on red-hot sentiment projected lower prices (I called this an epic tug-of-war).

Many of those studies were published in this December 1 article: Stock Market Risk is Clashing against Historical Strong Reward Potential.

My data-based conclusion at the time was as follows: “Normally the combination of historic investor optimism while stocks are pressing against long-term resistance is a recipe for disaster. But, as the above studies show, strong stock market internals are likely to over-power other risk factors.”

Since December 1, 2020, the S&P 500 has slowly risen from 3,660 to 3,800 … but internal breadth actually deteriorated.

The chart below (published in the December 30 Profit Radar Report) plots the S&P 500 against the NYSE up volume ratio (5-day SMA, which shows how much volume goes into advancing vs declining stocks).

Throughout December, the S&P moved higher while the up volume ratio declined. About 50% of the time that led to an immediate nasty pullback (red bars) but other times price continued higher (green boxes).

Interestingly, investors lost some of their bullishness the last 2 weeks of December (see gray graph, which is a composite of sentiment gauges). In other words, the tug-of-war tension eased a bit and allowed for further gains.

Even though overall bullish, the Risk/Reward Heat Map just saw an up tick in risk for January and February.

For this risk potential to turn into reality, however, the S&P 500 needs to drop below the green trend line. Price can continue to grind higher as long as it stays above.

Even though 2020 has brought unprecedented stock market action, there are actually a number of years that have shown a very similar general trajectory (see chart below).

The soon to be published 2021 S&P 500 Forecast will show how the S&P performed after years with a similar trajectory.

Continued updates and the new 2021 S&P 500 Forecast are available via the Profit Radar Report

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

Stock Market Signals Are Piling Up

Subscribers to iSPYETF’s free e-mail newsletter receive a market outlook, usually once a week. The market outlook below was sent out on November 19. If you’d like to sign up for the free e-newsletter, you may do so here.

A ton has happened the last two weeks, but you wouldn’t know it by looking at the S&P 500 chart. The post-election/vaccine news pop (Nov 9) pushed price above the red resistance line for a couple hours, but that’s it.

Despite the continued S&P 500 (and Nasdaq) trading range, there’ve actually been a number of historically rare signals … elsewhere or under the hood. 

Signal 1: The percentage of S&P 500 stocks above their 200-day SMA has cycled from below 10% to above 80% (currently 88%, the highest reading since January 2020). Over the past 20 years, this has happened only 4 other times.

The chart below plots the S&P 500 against the percentage of S&P 500 stocks above their 200-day SMA. The 10% and 80% level are marked in red and green. The exact forward performance (graph and table) after the signal triggered was published in the November 15 Profit Radar Report. 

Signal 2: It took over 26 months, but the Russell 2000 finally exceeded its 2018 high. Over the past 35 years, the Russell 2000 set a new all-time high after a correction that lasted at least a year seven other times. 

The green boxes highlight similar recoveries. The November 18 Profit Radar Report published the exact forward performance (graph and table) when the Russell 2000 did the same thing in the past. 

Signal 3: On November 2, 3, 5, 9, 80% or more of NYSE volume went into advancing stocks. Over the past 50 years, up volume exceeded 80% on 4 of 6 trading days only 7 other times.

How did the S&P 500 do after similar ‘volume thrusts’? The November 15 Profit Radar Report showed the exact forward performance (graph and table) after the last 7 times this happened.

What’s the benefit of knowing the forward performance of past signals?

The Profit Radar Report shows the performance for the next 1, 2, 3, 6, 9 and 12 month along with odds of positive returns for each time frame. This allows investors to gage future risk and reward based on similar setups.

There is much noise, but when the market delivers 3 historically rare signals in a short period of time, it’s usually worth listening.

Continued updates along with the most likely long-term forward path for the S&P 500 (this was just published) are available via the Profit Radar Report

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

S&P 500 Update – The Sports Illustrated Jinx and Mean Reversion

The September 21 Profit Radar Report and September 24 Free Market Outlook (sign up here for free weekly Free Market Outlook e-mail) highlighted the the green S&P 500 support trend line as is was likely to spark a bounce. As the chart below shows, the line is derived by connecting the 2007 and 2018 highs.

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

The bounce from trend line support happened, now we get to assess whether stocks will continue higher or relapse yet again.

Mean Reversion & the Sports Illustrated Jinx

The concept of mean reversion wasn’t discovered until the late 1800s (some 200 years after Newton was credited with discovering gravity) and is still misunderstood. 

There is a fascinating correlation between mean reversion and the Sports Illustrated (SI) jinx. According to the ‘jinx,’ athletes  are jinxed to perform poorly after appearing on the magazine’s cover. There’s a simple explanation for the so called jinx:

To make it on the SI cover, an athlete (or team of athletes) must have performed exceptionally well for a period of time. Appearing on the cover usually means that the athlete has performed above his average skill level (aided by a measure of luck and ‘being in the zone’) for too long and is bound to revert to the mean.

What does the SI jinx have to do with stocks?

The above-mentioned trend line has been acting as a mean reversion average of sort. When price rallied above the trend line for the first time (November 2019 – February 2020) it reversed lower, so much lower that price snapped back and once again exceeded it (July 2020 – September 2020). Last week, price once again came back to the trend line. 

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The chart below includes two more mean reversion gauges. The Bollinger Bands and RegressionDivergence. The center Bollinger Band converged with the support trend line at the time of the low (Sep 24) and the RegressionDivergence was smack dab neutral.

Based on the concept of mean reversion, the S&P 500 corrected enough to allow for the next rally.

Two Options

This is consistent with the S&P 500 projection and commentary published in the September 27 Profit Radar Report:

Since price broke above purple diagonal/wedge resistance, we assume wave B is now underway. Waves B are the most difficult waves to predict, with no real price targets and patterns ranging from very choppy to grinding and relentless.  Please note that the projections are not in scale in terms of time.

The alternative interpretation is that last week’s low was more important and will lead to new all-time highs (dashed green arrow). For the initial portion of this rally (or perhaps much of the rally, if it extends) it will be difficult to distinguish which option is playing out.”

Due to seasonality and pre-election uncertainty, stocks may still turn lower over the next 3 weeks, but more and more indicators are re-affirming a bullish fourth quarter tilt.

Continued updates 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.

Confession: I didn’t See this Coming. Why?

From the March 2020 low, the S&P 500 rallied 63.70% in less than 6 months. This rally dwarfed my already bullish chart projection and outlook shared in the March 26 Profit Radar Report: “We anticipate a recovery towards 3,000 (for the S&P 500) over the next couple months and quite possibly new all-time highs in 2020.

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

Although the March 26 Profit Radar Report outlined that new all-time highs were quite possible even in 2020, I expected a deeper pullback before actually reaching those all-time highs. Aside from a hitting a small speed bump in June, stocks never delivered such a pullback.

Throughout this rally, the S&P never dropped below key support, so reluctantly I had to allow for momentum to drive stocks higher even though stocks were over-bought and over-loved.

Fold or Stick to Your Guns?

Quite frankly, it was painful watching the market grind higher throughout August, and as an analyst I had to make a choice between:

  1. Throwing all caution to the wind and buy (because it’s been working) or
  2. Remaining true to historical facts and patterns.

What were the facts?

In early August, the S&P 500 came within striking distance of its February 2020 all-time high. The August 8 Profit Radar Report analyzed how the S&P 500 performed after it dropped 30% or more and subsequently rallied within 2% of an all-time high.

That forward performance was illustrated via the chart below. Forward performance was decent, but almost every time, the S&P 500 gave back all gains accrued.

This was not the only study suggesting that any accrued gains will eventually be erased. The chart below, which plots the Nasdaq-100 against its distance from the 200-day SMA (also published in the August 9 Profit Radar Report) projected one of two possible outcomes:

  1. The Nasdaq-100 will either correct fairly quickly or
  2. The Nasdaq-100 will continue grinding higher but eventually give back accrued gains (horizontal red lines)

Throughout August, stocks continued higher and risk of a pullback increased. The August 23 Profit Radar Report showed that there were 6 days where the S&P closed higher, but more stocks declined than advanced. The dashed purple arrow showed the most likely price trajectory. 

The August 30 Profit Radar Report showed that the Nadsaq-100 almost tagged long-term trend channel resistance and warned that: “S&P 500 Futures are in nosebleed territory.” For the first time since the start of this rally I actually suggested shorting stocks as a speculative trade for aggressive investors.

The September decline has erased all the August gains, which was the minimum expected down side. As the weekly S&P 500 chart shows, price is below double resistance, but above support. While below resistance, we need to allow for further down side, but a break below support is needed to get lower targets.

The question I keep asking myself is: How can I avoid underestimating a stock market move?

Lessons Learned

I will let you know when I’ve found a solution. For now, here are two lessons I’ve learned:

We are living in an age of extremes, and sometimes stocks just defy the odds

  1. Don’t become emotional with everyone else.
  2. One of my fellow market analyst wrote on September 2 that there is no sign of a top. Over the next 3 days the Nasdaq-100 lost some 10%. Investing peer pressure is powerful and as it becomes more intense it becomes more dangerous.

Continued updates 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.

What Do Those Rare Stock Market Anomalies Mean?

Relentless is one way to describe the stock market rally from the March low. Unusual is another, and recently it’s gotten plain odd.

Relentless & Unusual

The chart below shows the relentless and unusual nature. I first published the chart on April 7, when it became clear that this rally was going to be strong. The various graphs below show the trajectory of the fastest rallies from a 52-week low.

As the performance tracker shows (based on forward performance as of April 7), initial strength always continued, but this rally has broken all record.

Odd – Exhibit #1

Here is where things get odd. On July 20, the S&P 500 closed 0.84% higher, but 57% of all NYSE-traded stocks ended lower. This anomaly occurred 7 more times since.

The chart below plots the S&P 500 against the daily percentage change and percentage of declining stocks. The red arrows highlight days when the S&P closed higher despite a majority of stocks closing lower.

S&P 500 rallies despite more declining than advancing stocks have only occurred in two other distinct periods over the past 50 years.

Odd – Exhibit #2

Yesterday (August 26), the S&P 500 ended the day with a 1.02% gain, but the VIX rose 5.63%. Since there is an inverse relationship between the S&P 500 and the VIX, this is a very unusual reading.

In fact, since 1997, there’s been only one other time when the S&P 500 gained more than 1% and the VIX gained more than 5%. It was on June 8, 2020 (see chart below).

If we relax the parameters to include every instance where the S&P gained more than 1% and the VIX more than 3%, we get 10 other instances over the past 20 years.

Do Oddities Matter

The March 26 Profit Radar Report looked at a number of indicators (including liquidity) and concluded that: “We anticipate a recovery towards 3,000 (for the S&P 500) over the next couple months and quite possibly new all-time highs in 2020.”

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

New all-time highs are no surprise to subscribers of the Profit Radar Report, but that stocks got there without any significant pullback is unusual, even unprecedented.

But we are here now, and I’ve found that most investors approach the market in one of three ways:

  1. Get out of the market because it doesn’t make sense anymore
  2. Buy because the Federal Reserve will keep stocks afloat
  3. Stay informed and look at indicators that work most of the time (the kind of indicators that sniffed out the March low and projected a powerful rally) and put the odds in your favor.

If option #3 sounds most appealing to you, and if you would like to find out the other rare and unique times in history when 1) S&P 500 and VIX went up at the same time and 2) S&P 500 rallied with more declining than advancing stocks, you will find the Profit Radar Report of interest.

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.