Two Diametrically Opposed Sector Opportunities

The S&P 500 is trading at the same level where it was on July 8. Such a 15-week chop zone is pretty boring, but it doesn’t stop there. The S&P hasn’t made any net progress since May 2015.

When the broad market is stale, it makes sense to look at other opportunities.

The Profit Radar Report always scans various markets and sectors for sentiment extremes or seasonal trades with the potential to provide returns independent of the broad market.

Thus far this year, we’ve found such returns in gold, silver, natural gas, small caps, VIX and the utility sector.

Utilities ETF

The October 12 Profit Radar Report pointed out that every single utility sector stock has been below its 50-day SMA for more than five days. An extremely rare oversold condition.

The October 13 Profit Radar Report observed that: “XLU (Utilities Select Sector SPDR ETF) jumped above trend line resistance on strong volume. This increases the odds that some sort of a low is in place. We are buying XLU at 47.80.”

We didn’t want to chase the S&P 500 when it bounced from its 2,120 support level on October 13, but wanted some low-risk exposure to equities.

Being oversold and overhated, XLU fit the bill.

Sometimes there is no particular up side target (as is the case with XLU), but identifying low-risk buying opportunities allows investors to either grab quick gains or hold on and ‘play with house money.’

Bank ETF

The banking sector is approaching a very strong resistance cluster.

The chart of the SPDR S&P Bank ETF (KBE) shows price near trend line resistance, 78.6% Fibonacci retracement, and where wave A equals wave C.

Additionally, there was a bearish RSI divergence at the October 27 high.

Seasonality is bearish for the first three weeks of November.

This doesn’t mean that bank stocks will crash, but it certainly indicates that buying KBE right around 35 is a bad idea.

There is no short bank ETF, but traders may consider shorting KBE or buying inverse ETFs like SEF or SKF. This setup may only lead to a short-term correction.

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, and 24.52% in 2015.

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

S&P Bank ETF Just Erased 18 Months of Gains

Wall Street’s most notorious financial engineers aren’t getting any love from investors lately.

The SPDR S&P Bank ETF (NYSEArca: KBE) just slipped to the lower end of an 18-month trading range, again.

My December 29 article pointed out that KBE is traded at key resistance around 34 and warned that: “KBE is at an inflection point. Could KBE become the (sector) tail that wags the (broad market) dog?”

KBE is close to support around 31, but a break to at least 29.5 becomes likely if that fails.

Perhaps more intriguing is the long-term correlation between KBE and its cousin the Financial Select Sector SPDR (NYSEArca: XLF).

KBE’s recent reversal below its high kept a divergence alive that proved bearish in 2007. More details here: Bearish Financial Sector Divergence Stokes 2007 Crash Memory (don’t allow the bearish title to scare you … at least not yet).

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.

Simon Says: SPDR S&P Bank ETF (KBE) Gnawing on Key Resistance

The Financial Select Sector SPDR ETF (NYSEArca: XLF) has been leaping from one new recovery high to the next.

But its Wall Street cousin, the SPDR S&P Bank ETF (NYSEArca: KBE), has been stuck in a 12-month trading range.

The chart below plots KBE against XLF. KBE is back at key resistance around 34.

KBE is at an inflection point. Could KBE become the (sector) tail that wags the (broad market) dog?

The December 21 Profit Radar Report showed two S&P 500 projections (one long-term bullish, one short-term bearish) and stated:

Stocks may hit an inflection point once the S&P 500 and Russell 2000 record new all-time highs. Depending on measures of market breadth at the time, we will either scale down (or protect) our long exposure or add to it.”

The S&P and R2K did hit new all-time highs and are close to their inflection point.

I’m not sure if KBE will be the tail that wags the dog, but KBE confirms that the market should be watched carefully for either acceleration or temporary breakdown.

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.

Most Despised Sector is Leading Charge into Correction Zone

posted on iSPYETF on 11-23-2013

The Financial Select Sector SPDR ETF (XLF) is leading the charge to new (recovery) highs. Unlike the major market indexes, XLF is still having to deal with overhead resistance, such as this solid Fibonacci level.

People dislike injustice and QE is a blatant display of injustice. The Federal Reserve is helping out big banks while the little guy is left holding the bag.

Whether we like it or not, the financial sector is leading the latest charge to new all-time highs for the Dow Jones and S&P 500.

The Financial Select Sector SPDR ETF (NYSEArca: XLF) has broken above resistance provided by the September 2001 low and is heading for the next technical milestone – the 50% Fibonacci retracement (see XLF chart below).

The 50% Fibonacci retracement at 22.01 was isolated as target for this rally in my July 12 analysis of the XLF ETF.

Despite recent strength, the Financial Select Sector SPDR ETF still hasn’t even recovered 50% of the points lost from 2007 – 2009.

As of today, the Financial Select Sector SPDR ETF is about 2% away from the 50% Fibonacci retracement.

The SPDR S&P Bank ETF (NYSEArca: KBE) is about 5% away from its 50% Fibonacci retracement.

Does this Fibonacci level matter? The XLF chart chronicles how the financial ETF responded to the 23.6% and 38.2% Fibonacci levels.

The interaction with the 23.6% level was intense and saw a number of tests. The 38.2% level halted XLF’s advance just briefly.

It would be reasonable to expect some sort of reaction to the 50% Fibonacci level.

It’s a good idea to keep an eye on XLF (and KBE) here as the financial sector accounts for 16.19% of the S&P 500 (NYSEArca: SPY). This doesn’t mean that the tail wags the dog, but the performance of XLF and KBE may provide a sneak peek for what’s next for the S&P 500.

At the same time, the Dow Jones is reaching the long-term target we called for many months ago … and it’s not Dow 16,000.

Reaching this Dow target has been more than a decade in the making: Forget Dow 16,000 – Here’s the Real ‘Bubble Popper’

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

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


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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Dow Jones Component Reshuffle is Bearish for Stocks

The Dow Jones Industrial Average is about to undergo the most significant changes in a decade. The featured chart shows that S&P Dow Jones Indexes usually gets the timing of its changes wrong. Furthermore, the ‘New Dow’ will be subject to the whims of the most vulnerable sector of the US economy.

Good-bye Hewlett-Packard, Bank of America, and Alcoa. Hello Nike, Goldman Sachs, and Visa.

The Dow Jones Industrial Average is undergoing its most dramatic facelift in a decade and will morph into a much more financial sector focused average. The changes will go into effect September 20, 2013.

I see the following risks short and long-term:

Short-term Reshuffling Risks

In recent years reshuffling components was followed by temporary corrections. The weekly DJIA chart below chronicles changes and the effect on the Dow since February 2008 (there was no change from November 2005 – February 2008).

The short-term performance immediately following the shuffle was generally negative, although the losses were limited. Long-term was in line with random.

Long-term Reshuffling Risks

S&P Dow Jones Indexes, a subsidy of McGraw-Hill (which is also the parent company of Standard & Poor’s and J.D. Power and Associates), dropped one financial name (BofA) from the mighty Dow and added two (Goldman Sachs and Visa).

But the exposure to financials is more significant than even the two for one swith suggests. Why?

The Dow Jones (NYSEArca: DIA) is a price-weighted gauge, that’s why it’s called an average not an index. Price-weighted simply means that the stock with the biggest price tag carries the most weight. Currently that’s IBM. At $190 a share IBM accounts for 9.43% of the DJIA and is the unquestioned VIP (Chevron, the ‘runner up,’ trades at $123).

Soon to be deleted Bank of America trades at $14.50 and accounts for 0.74% of the index (keep in mind that the index has only 30 components). That means that BAC would have to move 13 times as much as IBM to match IBM’s effect on the average.

Currently financials are the fifth biggest sector of the DJIA and account for only 11.39%. Here’s where it gets interesting:

Visa trades at $186 and Goldman Sachs at $165. The top three holdings of the Dow Jones will be IBM, Visa and Goldman Sachs. Based on a quick thumbnail assessment, financials will soon be the biggest sub-sector of the Dow with an allocation around 25%.

We shouldn’t forget that the Financial Select Sector SPDR ETF (NYSEArca: XLF) and SPDR S&P Bank ETF (NYSEArca: KBE) lost 85% from 2007 to 2009, significantly underperforming the S&P 500 (NYSEArca: SPY), which was down ‘only’ 57%.

So the heavy financial weighting of the Dow can be a negative.

In fact, former Treasury Secretary Hank Paulson mentioned in a guest contribution for a German finance and economy newspaper that he fears yet another financial ‘firestorm’ (firestorm is the term he used).

According to Paulson the financial sector is quite vulnerable. This article explains in detail the problem Paulson warns of: Hank Paulson Warns of Another Financial Crisis.

Simon Maierhofer is the publisher of the Profit Radar Report.

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How The Federal Reserve Gives Insider Trading Tips to Big Banks

Investors have no clue what goes on behind closed doors at Wall Street banks and the Federal Reserve. But once and a while a juicy piece of information (probably overlooked by censors) provides a glimpse of Wall Street’s carefully guarded secrets.

The New York/Washington Banksters do a good job of keeping internals hidden, but once in a while a juicy nugget escapes. Those kinds of nuggets make investors lose faith in everything Wall Street, that’s why Banksters like to keep them secret to begin with.

Insider Tips from the Federal Reserve?

On August 17, 2007, the Federal Reserve cut the discount rate from 6.25% to 5.75%. The Fed is quite careful about changing the discount rate, and when it does it’s usually only tweaked by 0.25%. The 0.5% cut on August 17 was ‘unexpectedly’ drastic.

The Fed regularly releases transcripts of its policy meetings with a 5-year lag. Courtesy of such a release we are now getting a glimpse of what happened leading up to the August 17, 2007 meeting.

In an August 16 video conference call, Timothy Geithner (back then president of the New York Fed) said banks “obviously don’t have any idea that we’re contemplating a change in policy.”

Jeffrey Lacker, head of the Richmond Fed, questioned Geithner’s statement and asked: “Did you say that they are unaware of what we’re considering or what we might be doing with the discount rate?”

What reason did Lacker have to question Geithner? The transcript continues: “I (Lacker) spoke with Ken Lewis, president and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility.”

In a statement provided to Reuters last Friday, Lacker reiterates: “From conversations I had prior to the video conference call on August 16, 2007, I was aware of discussions among a few large banks about borrowing from their discount windows to support the asset backed commercial paper market.  My understanding was that (New York Fed) President Geithner had discussed a reduction in the discount rate with these banks in connection with these initiatives.”

What’s the Difference?

What difference does this make you may wonder. The chart below provides a nice visual. The Fed hasn’t had a chance to lower rates in years, but right before the financial crisis interest rate announcements sparked anticipation like nothing else.

At 2pm on August 16 (a day before the official announcement), stocks started to soar for no apparent reason. The S&P 500 jumped 45 points within a matter of hours and recorded its best gain in 4 ½ years.

Financial ETFs like the Financial Select Sector SPDR ETF (XLF) soared as much as 16.95% that day.

The SPDR S&P Bank ETF (KBE) gained as much as 7.26% that day.

Over the next few weeks, the S&P 500 continued to rally more than 200-points. It went as high as 1,576.09. The rest is history with still much mystery.

Although with a more than 5-year time-lag, we now find out that the Federal Reserve kindly gave the big banks a friendly heads up.

The Treasury declined to make Geithner available to comment. Spokesmen for the Federal Reserve Board in Washington, the New York Fed, Bank of America, and Ken Lewis all declined to comment.

Why Financial Sector Earnings Are a Deceptive Farce

Because of a slew of earnings reports, this has been called “the week of truth” for the financial sector. However, a deeper look at the sector shows that big bank earnings reports are at best symbolic. One could even say that the whole ritual is utterly deceptive.

Earnings season is in full swing and most financial heavy weights are due to report this week.

Yahoo!Finance writes that: “It’s a make or break week for the financial sector with five of six of the nation’s largest banks (JPMorgan, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley) scheduled to report fourth-quarter earnings results” this week.

Earnings are directly related to stock market valuations, but big bank earnings releases are nothing more than a ritualistic farce. Why?

There’s no simple answer, but the next few minutes will be well worth your time. Warning! Knowledge about banks’ (corresponding ETF: SPDR S&P Bank ETF – KBE) accounting standards will result in loss of faith in the financial sector’s worth.

From Mark-to-Market to Mark-to-Make-Believe

There was a time when banks loved the Mark-to-Market accounting model, because it allowed them to showcase truly miraculous real time profits. By 2006/07 the financial sector accounted for over 40% of S&P 500 earnings.

Things changed in 2007/08. Mark-to market was unpopular with banks because it would have shown enormous real time losses. Bankers preferred to hide their balance sheets, along with the Federal Reserve and Congress too.

Bankers lobbied the Financial Accounting Standards Board (FASB) to change the fair market accounting rule – rule 157 – but the FASB resisted. Changing fair market or Mark-to-Market was a free pass that practically required no write-downs ever.

However, via the Emergency Economy Stabilization Act of 2008, Congress gave the SEC the authority to suspend Mark-to Market accounting. FASB rule 157 was suspended on April 2, 2009.

FASB 157 – What Does it Mean?

Since April 2, 2009, banks are basically free to value their toxic assets as they please. This example illustrates how the financial engineering formula works in real life.

Bank ABC holds mortgage-backed assets originally valued at $1,000. After running some proprietary and non-verifiable models the bank determines it will eventually sell the asset for $950. The loss, termed credit loss, is only $50.

However, because of MBS bad rep, the banks portfolio is currently worth only $500. The actual current value ($500) minus the credit loss ($50) is called noncredit loss ($450).

The $450 noncredit loss is recorded on the balance sheet under “comprehensive income,” but is not run through the income statement. Those losses don’t affect earnings, and are excluded from banks’ regulatory capital calculation.

Extreme Financials

The chart below (courtesy of Yardeni Research) illustrates the effect of financials. The worst recession since the Great Depression caused five quarters of extreme earnings contraction followed by eight quarters of extreme earnings growth (yearly growth rates were capped at +100% and -100% due to extreme values).

Was the miraculous earnings recovery due to a fundamentally strengthening financial sector (corresponding ETF: Select Sector Financial SPDR – XLF) or accounting tricks?

Big Banks Pity Their Near-Record Profits – Is This Bullish for the Financial Sector?

It’s tough being a banker today. The Federal Reserve wants to buy their bonds for top dollars, profits are near all-time highs, and yet bankers just aren’t happy. Here’s a closer look at the numbers and technicals.

“Mirror, mirror on the wall, who is the richest of them all,” the six big banks ask. The mirror replies: “You are the richest of them all, almost as rich as you were in 2006.” Disappointed about not being the richest ever, the banks walk away to drown their sorrow in a pity party.

The six largest banks reported a combined annual (June 2011 – June 2012) profit of $63 billion. How does this compare to the banks’ all-time record earnings? In 2005 banks earned $68 billion, in 2006 they earned $83 billion.

Banks are depressed because the new regulatory regime crimps their style and proven methods to make money. It requires banks to maintain bigger capital cushions. This limits their appetite for insane leverage and makes it harder to earn an “adequate” return on equity.

Boy, and those low interest rates really make it hard to make money too, they say. Never mind that the Fed pushed down interest rates just to keep the banks alive.

Some of the $63 billion profits (exactly how much nobody knows) aren’t real profits. They are accounting gains, profits engineered by clever accountants. That would explain why the six largest banks announced at least 40,000 job cuts from June 2011 – June 2012.

Perhaps this will give the banks – which are JPMorgan Chase, Wells Fargo, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley – reason to cheer. According to Bloomberg estimates they are expected to earn in excess of $75 billion in 2013.

Will Financials Rally Further?

The August 5, Profit Radar Report took a closer look at financial sector – the Financial Select Sector SPDR ETF (XLF) in particular – and featured the following research:

“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. Next trend line resistance, and possible target, if 14.90 is overcome, is 15.63.”

As the chart below shows, this technical break out above resistance (dotted red lines) occurred on August 6th. The initial target at 15.63 (outlined by the solid red line) was met and exceeded quickly.

This red line, previously resistance, has now become support. There was no price/RSI divergence at the September 14 high, which suggests at least another run to new highs … another reason to make the bankers happy.

The analysis for the SPDR S&P Bank ETF (KBE) looks nearly identical.

The only way investors can share in the bankers’ (undeserved) joy is to profit from opportunities like this. The mission of the Profit Radar Report is to identify high probability and low-risk buy/sell signals for the S&P 500 and many other asset classes.