S&P 500: The Tug of War Between the Need of New Lows and ‘Magnet’ Highs

Stocks are caught between a rock and a hard place.

On one hand, there’s the ‘need’ for a new low (more about why this is a ‘need’ in a moment). On the other hand, there’s a bullish reversal (selling climax), a breadth thrust, and an open chart gap (about 7% higher) that needs to get filled.

Who will win this tug of war? Bulls or bears?

Bullish Factors

Reversal Week: The S&P 500 painted a weekly reversal candle on January 22. The January 24 Profit Radar Report pointed out that: “All but one weekly reversals since mid-2013 were followed by at least another week of gains.”

Last week’s strong performance locked in the second week of gains. More details about the significance of weekly reversals (especially after a 52-week low) is available here: Spike in Selling Climaxes Leads to S&P 500 Reversal Week

Chart Gap: There is an open chart gap at 2,043. Since 2009, all open chart gaps have been closed. This one is unlikely to be different. At some point in 2016, the S&P will take care of this unfinished business.

Breadth Thrust: Last Friday (January 29), the S&P 500 soared 2.42%. 92% of S&P 500 stocks ended that day with gains. This was the strongest up day since September 8, 2015.

In theory, 90% up days, are an indication that buyers are ready to step up and drive price higher. But theory is not always reality.

The chart below marks all recent 92% up days. The two 92% up days during the V-shaped recoveries of 2014 led to new all-time highs. The two 92% up days in August/September 2015 were followed by a retest of the prior low.

The January 24 Profit Radar Report outlined this path for the S&P 500 (solid yellow projection more likely, dashed yellow projection less likely).

Thus far, the S&P is following the projection quite closely.

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Does the January 29 breadth thrust conflict with the solid yellow projection? No.

Bearish Factors

As the chart below shows, there were numerous 92%+ breadth thrusts in August/September 2011, which closely resembles the yellow projected show above. The S&P eventual dipped below its initial panic low.

Why are we looking at the 2011 chart?

  1. This was the last 10%+ correction.
  2. It’s been more than three years since the S&P had a 2011-style correction (2012 was the last time), where the initial panic low is broken after weeks of sideways W action.

Throught 2013 and 2014 we’ve only seen V-shaped recoveries. The August/September 2015 correction was W-shaped without break of the initial panic low.

This doesn’t mean a 2011 correction (W-shaped with break of the initial panic low) has to happen now, but based on the principal of alternation (the stock market rarely delivers the same pattern over and over), the odds of a 2011-style correction are higher than before.

New lows against bullish divergences would likely be a good opportunity to buy. We are always looking for low-risk entry levels, thus the ‘need’ for new lows.

The 2016 S&P 500 Forecast has just been published. It includes a detailed analysis of supply & demand, technicals, investor sentiment, seasonality, cycles & patterns. The forecast answers whether a major top is in or not, and shows the maximum up-and down side for 2016. Numerous unique data points are combined to craft an actual 2016 S&P 500 performance projection chart. The 2016 S&P 500 Forecast is available to subscribers of the Profit Radar Report. Subscribe now and become the best-informed investor you know.

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.

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S&P 500 Forecast – Crash Wave Update

To put it mildly, U.S. stocks have been in a severe funk since December 29.

How low can stocks go?

We are dealing with a stock market rogue wave. By nature, rogue waves are unpredictable freak waves. Nevertheless, they occur often enough to discern certain rogue wave patterns.

The January 10 Profit Radar Report Pointed out that: “The S&P is nearing the next support zone and our down side target. The next support and inflection zone for a bounce is 1,895 – 1,870.”

The January 13 Profit Radar Report shared this chart and commentary, illustrating the most likely outcome:

The chart below plots the S&P 500 against the CBOE Equity Put/Call ratio (dark blue) and the VIX (light blue). We are not quite seeing the same panic readings as in August, but we’re reasonably close. It’s worth noting that there is a small bullish divergence (green circles) between the S&P 500 (which dropped to a new low) and the VIX and p/c ratio (which did not reach new extremes).

Upon completion, rogue waves tend to be followed by either 1) A snap back rally (dashed yellow projection) or 2) A choppy bounce, another low, and then a snap back rally (solid yellow projection).

The August meltdown (black circle) was followed by a hybrid of the above two scenarios. Rogue waves don’t follow rules and may extend further than anticipated, however, based on nearby support at 1,890 – 1,870, this decline could be near its termination point (or already over).”

At this point in time, the S&P is enjoying the biggest intraday gain of the year. Now we’ll have to see if it follows the dashed or solid yellow projection more closely.

For continuous updates and hand-crafted out-of-the-box research, test drive the Profit Radar Report and become the best-informed investor you know.

Simon Maierhofer is the publisher of the Profit Radar ReportThe 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.

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Stock Market Liquidity is Drying Up

Money makes the world go round and vice versa.

We’ve all had a front seat watching the Federal Reserve pump up stocks with QE cash.

Money is like a lubricant. Lack of money, is like ‘sand in the works.’

For the first time since 2007, we are actually seeing signs of liquidity shrinkage.

A while ago I was wondering if there is enough strength behind the latest rally leg to drive stocks to new all-time highs. And if so, could stocks sustain trade above all-time highs?

To get the answer, I turned to the same indicator that foreshadowed the 1987, 2000 and 2007 market tops, and virtually ‘guaranteed’ new bull market highs after the 2010, 2011, 2012 and 2014 correction. I call this powerful gauge ‘secret sauce’ (more later).

New All-time Highs?

Since the beginning of the 2009 bull market, the S&P 500 suffered five corrections of 9% or more (based on closing prices). The summer 2015 meltdown was the most recent one (-12.35% from high to low).

To gauge the longevity of the rally from the August 2015 panic low (S&P 1,867), we will be comparing the current rally with the rallies from the 2010, 2011, 2012 and 2014 bottoms.

With four weeks of gains in the rear-view mirror, we can do just that. As of Friday, October 23, 2015, the S&P 500 recovered slightly more than a Fibonacci 78.6% (78.85%) of the prior losses. This will be our benchmark.

To gauge the strength of the various rallies from their original low, we need more than just a price chart. We need a pulse on internal strength, buying power and liquidity.

Price and internal strength go together like horsepower (or kilowatts) and battery life. You can only judge an electric cars capability once you know horsepower and battery life. The same is true for stocks. To make a decent assessment we need to get a good feel for price and internal strength.

As mentioned earlier, my preferred strength and liquidity indicator is ‘secret sauce.’ Why ‘secret sauce’ is so potent, and why it’s called secret sauce is discussed here.

Again, we will use ‘secret sauce’ to measure and compare the strength of the S&P 500 after having retraced about 78.8% of the losses that led to major lows in 2010, 2011, 2012 and 2014.

The chart below plots the S&P 500 against ‘secret sauce.’ The blue boxes start at the pre-correction high, and end at the 78.8% S&P retracement level.

As the ascending green lines indicate, there was a ton of liquidity behind the 2010, 2011 and 2012 rallies. “Secret sauce’ retraced 119.75 – 193.47% by the time the S&P retraced 78.8% of its losses. Not surprisingly, the bull market continued plowing higher thereafter.

The rally from the 2014 low was not quite as dynamic. Although it led to new all-time highs, this particular rally turned very choppy and eventually gave back all gains.

The table lists the exact details of each rally.

In one way, the rally from the August 2015 panic low is similar to the 2014 rally (‘secret sauce’ retraced barely 70% in 2014 and 2015).

However, unlike in 2014, secret sauce is flashing the same signals now as it did before the 1987, 2000 and 2007 market tops. More details here. S&P 500 Threatening to Follow 2007 Topping Pattern

Simon Maierhofer is the publisher of the Profit Radar ReportThe 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.

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Has the Market Fooled Enough Bears to Tank?

By some measures, investor sentiment turned extremely bearish last week.

Only 20% of retail investors surveyed by the American Association for Individual Investors (AAII) were bullish on stocks, the lowest level since April 2013.

Headlines like the following dominated financial news sites:

  • “Wedbush: Stock market is at major top” – Yahoo!Finance
  • “Stockman: Stocks and bonds will crash soon” – Yahoo!Finance
  • “Low VIX points to tumble ahead for stocks: UBS” – Barron’s
  • “Irrational exuberance is dooming the stock market” – MarketWatch
  • “Beware: Bull market flashing warning signs” – CNBC
  • “S&P 500 rally thins and it’s worrying market analysts” – Bloomberg
  • “Why you should care that Robert Prechter is warning of a ‘sharp collapse’ in stocks” – MarketWatch

The June 10 Profit Radar Report commented regarding those developments (and especially the last two headlines):

Prechter has predicted a sharp collapse literally every single month since late 2009, and it’s unlikely to occur when you see it featured on the Yahoo!Finance homepage.

We’ve been watching the rally thin and become narrower since April, but when the media starts to pick up on such nuances, the information usually isn’t worth too much anymore (an interesting bullish twist of this thinning market was discussed in this June 9 article).

There appear to be too many bears out there right now to send stocks significantly lower. A push to 2,140+ may be needed to flush them out.”

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Perhaps somewhat anecdotally, but nevertheless telling, my article titled “Will the market rally to flush out a horde of premature bears?” (published on July 12 on MarketWatch) got very little attention. It just wasn’t bearish enough to attract attention.

Two of my other articles (with neutral or somewhat bullish titles) on the other hand quickly made it into the top 5 most popular article list at MarketWatch.

I’m no genius, but I’m learning that the market is highly unlikely to crash when everyone expects it. A watched pot doesn’t boil.

After all, this is not the first time we’ve been there. I.e. Sep 18, 2013: Who or what can kill this QE bull Market? or July 25, 2014: Bears cry wolf – Everyone wants to be the next Roubini.

The 4-day, 50-point S&P 500 rally has no doubt caused an uncomfortable squeeze for committed bears. I would like to see additional gains, which would likely set up a nice opportunity to short the S&P 500 into July/August.

This opportunity will likely come at a time when fewer people expect it.

A recent article highlighted the similarities between 2011 and 2015 (2011 saw a 20% summer meltdown). Sunday’s Profit Radar Report featured a revealing investor sentiment comparison between June 2011 and June 2015.

You may access this comparison instantly here. It may also be the topic of an article for next week.

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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Stock Market Money Flow Check

Every once and a while it’s a good idea to check equity money flows, kind of like a GPS for what the money is doing.

Here’s a series of three charts to help us do just that.

1) Asset Allocation

In March, exposure to stocks (according to the American Association for Individual Investors asset allocation survey) soared to the highest level since the 2007 financial crisis.

This sounds scary, but the long-term asset allocation chart helps put things into perspective. Leading up to the 2000 market top, investors had up to 77% of their portfolio in stocks, and up to 69% in 2007.

2) Commercial Traders

The chart below shows the net S&P 500 e-mini futures contracts held by commercial traders. On balance, commercial traders are more or less neutral.

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3) VIX, Put/Call Ratio, SKEW

Chart #3 plots the S&P 500 against three different sentiment indicators:

  • CBOE SKEW: The SKEW was designed to measure the risk of a ‘Black Swan’ event. Higher SKEW = higher risk.
  • CBOE Equity Put/Call Ratio: This ratio shows to what extent option traders favor call options over put option. Lower readings = more optimism = more risk.
  • CBOE Volatility Index (VIX): The mix shows the market’s expectation of 30-day volatility. Lower VIX = Elevated risk. The VIX has lost much of its contrarian indicator mojo starting in 2012.

The CBOE SKEW (5-day SMA to smooth out daily swings) is near the lower end of a two-year range.

The CBOE equity put/call ratio dropped to 0.46 yesterday, a 1-year low. The 5-day SMA is not as low, but still at the lower end of an eight-month range.

The VIX is back to what used to be considered the ‘danger zone.’

Summary:

Money is flowing into equities, but there are no screaming investor sentiment extremes. Anyone claiming that stocks will crash because any one single sentiment gauge is at financial crisis levels is taking things out of context.

Detailed investor sentiment analysis is available to Profit Radar Report subscribers.

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.

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Can We Still Trust the Investors Intelligence Sentiment Poll?

Doing the same thing over and over again, but expecting a different outcome is often considered insanity.

By that definition, some analysts are legitimately insane. Why?

Because they’ve doomed the stock market based on bullish investor sentiment, and have been doing so for many months, even years.

You will see what I mean upon further inspection of the chart below.

Since late 2013, the Investors Intelligence (II) survey of advisors and newsletter writers has shown (extreme) bullish sentiment.

Illustrated via the chart is the percentage of bearish advisors. This percentage has been around 14 since late 2013, which happens to be the lowest since 1987.

And since late 2013 (and way before that), Elliott Wave International (one of many market forecasting services that’s been spreading doom and gloom) has been warning that a 2008-like meltdown is directly ahead.

The cold fact is that the S&P 500 has tagged on another 20%+ since 2013.

This is not the data’s fault. It’s the interpreter’s fault … and an unfortunate symptom of tunnel vision. Perhaps the II poll has just become too popular to be effective as contrarian indicator, and lost its mojo.

II is not the only sentiment data available, and it’s the analyst’s responsibility to determine the validity of the II survey in context with other sentiment data. Now more than ever, it’s important to widen the horizon and look at other sentiment gauges.

The Profit Radar Report monitors dozens of sentiment indicators and consistently publishes at least six every month.

For example, the February 19 Profit Radar Report Sentiment Picture summed things up as follows: “In short, sentiment is elevated, and may be a short-term drag, but is not indicative of a major market top.”

Throughout 2013 and 2014, the Profit Radar Report pointed out the lack of excessive optimism and likelihood of higher stock price (click here for a more complete record or the 2014 sentiment analysis).

Here is a look at the latest Sentiment Picture, published on May 29.

The two charts categorize various sentiment gauges as either opinion poll (what investors say) or money flow (what investors do).

The American Association for Individual Investors (AAII) and National Association of Active Investment Managers (NAAIM) opinion surveys do not confirm the bullish (bearish for stocks) tone of the Investors Intelligence poll.

Three other sentiment gauges more closely related to actual money flow do not show any real extremes.

What’s the moral of the story?

Don’t trust fear mongers or ‘one trick pony’ predictions based on any single sentiment gauge.

We live in a complex world. We need complex analysis.

Oh, on by the way, purely based on sentiment, stocks could continue to grind higher.

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.

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Stock and Cash Allocation Reaches 2000 and 2007 Crisis Levels

Stock exposure just reached the highest level since 2007 and investors’ cash cushion has shriveled to the lowest level since 2000. Is this as scary as it sounds?

Data like this, especially when it stirs up financial crisis memories, should be viewed in context of the bigger picture.

Here’s what happened:

The latest American Association for Individual Investors (AAII) asset allocation poll showed that investors racked up their stock allocation to 68.6%, the highest level since June 2007.

At the same time, the cash cushion shrunk to 14.9%, the lowest since January 2000.

We all know what happened right after January 2000 and June 2007. But it takes a longer-term chart to tell the whole story truthfully.

 

The chart below plots the S&P 500 against investors’ allocation to stocks and cash going back to 1987.

Here’s what stands out regarding the 2000 market top:

The all-time cash % low (11%) occurred in March 1998, two years before the 2000 top.

A secondary cash % low happened in January 2000 (14%), very near the 2000 top.

The all-time stock % high (77%) occurred in January and March 2000, very near the 2000 top.

Here’s what stands out regarding the 2007 market top:

Stock allocation (70%) peaked 18-month before the 2007 S&P 500 high.

Cash allocation didn’t reach a significant low (16%) until November 2010.

There were no allocation extremes near the 2007 market top.

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Conclusion:

A monkey that sits on the ground cannot fall from the tree. The AAII data shows that, metaphorically speaking, most ‘investors are sitting high up the tree.’

If (or when) the stock market gets rattled, a ton of investors will be shaken out of the tree and fall hard.

The operative word is ‘if.’ Just because current cash and stock allocation matches the 2000 and 2007 levels, doesn’t mean a market crash is imminent.

There is a much more accurate major market top indicator than the AAII data. This indicator correctly foreshadowed the 1987, 2000 and 2007 top. You may read more about it here: Is the S&P 500 Carving Out a Major Market Top?

As the blue and green circles illustrate, the AAII poll data is more effective in predicting market bottoms than market tops.

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.

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This Eerily Accurate Indicator is the Best at Being the Worst

Two positives makes a negative and too much success is the worst thing that can happen to a contrarian indicator. This particular ‘indicator’ is so accurate, because the underlying opinions are ‘the best at being the worst.’

  • “This chart says we’re in for a 20% correction”
  • “An overdue stock market selloff is looming”
  • “Stocks are telling you a bear market is coming”
  • “This chart shows why the market is in trouble”

Before you call me a fear monger, allow me to clarify that those headlines are from May 2014.

As it turns out, whatever stocks or charts were ‘telling’ us, wasn’t the truth. It probably wasn’t as much of a stock market lie, than the media getting the signals wrong. There was no bear market, no 20% correction and no real ‘trouble.’

Here are more recent headlines:

  • “Buyer beware? Investor sentiment at highest level of 2014”
  • “Why the stock market is weaker than it looks”
  • “Are you prepared if the market tanks in Q4?”
  • “Don’t get suckered by stock market winning streak”

Purely based on the second set of headlines, I wrote in the November 5 Profit Radar Report:

Media attention on bullish sentiment could be a contrarian contrarian  (two negatives make a positive) indicator and actually be net positive. Investment advisors and newsletter-writing colleagues (polled by Investors Intelligence) are embracing this rally. The percentage of bulls has soared from 35.3% on October 21 to 54.60%. This is the largest jump in nearly 40 years. Perhaps surprisingly, this is not as contrarian a signal as it appears. Furthermore, advisor optimism is somewhat neutralized by media pessimism and headlines such as: “This stock market rally is for suckers” – MarketWatch and “Don’t buy into stock market craziness” – CNBC. Media bearishness is not as extreme as it was in May/June, but it may be significant enough to continue propelling stocks higher.”

Too much success is the worst thing that can happen to a contrarian indicator (such as investor sentiment).

A contrarian indicator with mainstream appeal loses its effectiveness, just like a rare commodity that’s suddenly available in abundance (imagine what would happen to gold prices if everyone suddenly found a couple pounds of the yellow metal in their backyard).

The Profit Radar Report not only monitors dozens of sentiment indicators, it also gauges media exposure of any specific indicator and media sentiment in general.

Fortunately, media sentiment has been one of the most accurate indicators of the year. This indicator remains so right, because cover stories tend to be so wrong.

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.

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The Missing Ingredient for A Major Bull Market Top

This article reveals the single most powerful stock market indicator in recent history. It not only protected investors from many past bear markets, it also predicted higher stock market prices throughout this bull market.

I am in a predicament. I want you to know about the one indicator that will be more useful in the year ahead than any other stock market related indicator (you’ll see why this indicator is essential for any investor in a moment).

But (and that’s a big but), I want to be fair to my subscribers. Since it wouldn’t be right to share research reserved for paying subscribers, I came up with this solution:

You will see the indicator in its full power and glory, but I won’t disclose the name of the indicator. It will simply be dubbed ‘secret sauce.’

I’ve been following secret sauce for many years. What makes this indicator unique is that it has protected those ‘listening’ from many bear markets, while keeping investors on the right side of the trade (long and strong) throughout this bull market.

Although I wasn’t aware of it when I first learned about secret sauce, my research shows that secret sauce correctly telegraphed the 1987, 2000 and 2007 market tops.

How it Works

Secret sauce reveals a terminal condition often hidden by price action: Internal stock market deterioration (for a detailed description go here).

The charts below show how the market lost steam internally (black line) even though the S&P 500 (blue line) continued higher … right until it hit the ceiling in 1987 and 2000.

The same thing happened prior to the 2007 top. Secret sauce stopped confirming the S&P 500 highs on June 4 (dashed red line). The market topped on October 11 and rolled over.

The dashed green lines in the above chart show that secret sauce confirmed every new S&P 500 high since the bull market took off in 2009, telegraphing that every correction was eventually to be succeeded by new highs.

Obviously, secret sauce isn’t necessarily a short-term indicator, but the advance notice of the market’s intention is invaluable to almost every type of investor.

Knowing whether short-term draw downs will eventually be recovered is incredible insight not offered by any other indicator.

Secret sauce is the main reason why the Profit Radar Report has continually looked for new highs, even in April/May 2014 when the media strongly advertised a market crash.

At some point secret sauce will not confirm new S&P 500 highs and send a warning signal. In fact, there is a fledgling bearish non-confirmation right now.

The Profit Radar Report continuously monitors and updates secret sauce. Sunday’s special Profit Radar Report includes a detailed analysis of this fledgling bearish divergence and how it should affect the S&P 500 for the remainder of 2014.

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.

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Two Inversely Correlated Asset Classes Provide Lifeline and Noose for S&P 500

U.S. equities are part of an intricate global financial ‘ecosystem.’ They do not trade in a vacuum. As part of something bigger, U.S. equities are subject to certain correlations, which provide clues about U.S. stocks’ next move.

U.S. stocks do not trade in a vacuum; they are part of an intricate ‘ecosystem’ of worldwide financial markets.

As with any ecosystem, financial markets adhere to the ‘cause and effect’ principle.

Just like there’s a correlation between birds of prey and the mice population or bees and pollination, there are correlations between specific financial markets (some are directly correlated, others are inversely correlated).

Understanding market correlations/connections can be helpful in forecasting stock market movements.

Some of those financial ecosystem correlations are:

  1. U.S. stocks (or S&P 500) and the Japanese yen
  2. U.S. stocks (or S&P 500) and U.S. Treasuries

S&P 500 vs Japanese Yen

Due to the carry trade, the yen has become an important force for the S&P 500.

As part of the yen carry trade, U.S. investors borrow yen to buy U.S. stocks. The yen can be borrowed cheaply and U.S. stocks have delivered juicy returns in recent years.

Courtesy of Japan’s Prime Minister Shinzo Abe, a falling yen makes paying back the yen even cheaper and has made the carry trade even more attractive.

A rising yen would have the opposite effect on U.S. stocks.

The Japanese Yen Futures chart below shows the yen butting against double trend line resistance and the 200-day SMA.

S&P 500 vs 30-Year Treasuries

Bond investors have a reputation to be smarter than stock investors. I like to monitor 30-year Treasury bond prices (corresponding Treasury ETF: TLT) as they tend to have an inverse correlation to the S&P 500.

On April 2, 30-year Treasury prices found support at the green trend line. The April 2 Profit Radar Report stated that: “30-year Treasuries have reached near-term support. Prices tend to respond to such trend lines, so a bounce is possible. A bounce for Treasuries would provide headwinds for higher stock prices.”

30-year Treasury Futures bounced from support and now trade above double trend line resistance. This bullish breakout (assuming it sticks), suggests lower prices for U.S. stocks.

Although those charts don’t tell us the up side potential for the yen and Treasuries (or down side risk for the S&P 500), they do tell us that we are at a pivotal point in time.

The S&P 500 (NYSEArca: SPY) chart confirms the message of yen and Treasuries and provides clear ‘points of ruin’ or must hold support levels.

Here is the most important near-term support level:

Don’t Get Fooled by This S&P 500 Bounce

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.