S&P 500: When Will the Trading Range Break?

There’s a time to buy, a time to sell and a time to be patient. Most of 2014 falls into the ‘be patient’ category. What’s causing this extended trading range and how much longer can it go on?

Since the beginning of the year, the S&P 500 hasn’t gone anywhere. Here’s why:

Limited Up Side

The S&P 500 has been struggling to break through technical resistance. The dashed red trend channel and solid red Fibonacci resistance have clipped the wings of the S&P 500 every time it staged an attempt to fly above resistance.

The first chart shows that aside from the January/February dip, the S&P 500 has been restricted to a range defined by predetermined support/resistance levels.

The second chart provides the long-term context needed to make sense of the highlighted support/resistance levels.

Limited Down Side

Obviously, the S&P 500 (NYSEArca: SPY) has bounced from technical support several times, but there’s been another reason why the S&P 500 hasn’t broken down.

It’s the ‘media put.’ Unlike the ‘Bernanke put’ (now Yellen put), which is cash driven, the ‘media put’ is information driven.

The media is the last entity qualified to dispense financial advice, but that’s exactly what they do. Unfortunately, enough investors are listening making the media a contrarian indicator.

Here’s some of the ‘advice’ (headlines) the media has been giving:

Yahoo Talking Numbers: “Why sell in May adage makes sense this year” – April 28
CNBC: “This chart says we’re in for a 20% correction” – May 1
CNBC: “Bubble talk catches fire among big-money pros” – May 5

The S&P 500 rarely dances to the tune of the media’s whistle, that’s why the Profit Radar Report expected a pop and drop combo to fool the ‘here comes the crash’ crowd.

The May 7 Profit Radar Report stated that: “A false pop to 1,900 – 1,915 would shake out the weak bears and set up a better opportunity to go short.”

When Will the Range Break?

The pop to S&P 1,902 on May 13 certainly rattled the cage of premature bears. A break below key support (key levels outlined in the most recent Profit Radar Report) may usher in the long-awaited 10%+ correction.

Could the correction morph into something bigger?

One indicator with the distinct reputation of signaling the 2000 and 2007 meltdowns is at the verge of triggering another ‘crash signal.’ But there’s one caveat.

Here’s the full intriguing story:

A Look at the Risk Gauge that Correctly Signaled the 2000 and 2007 Tops

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.

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

Will 2014 Be a Lost Year?

The major U.S. indexes have made no net progress since the beginning of the year. A lot of energy has been wasted on aimless up and down and sideways trading. Will 2014 be a lost year?

“Never give someone the opportunity to waste your time twice”

Most people don’t like wasting energy on stuff without getting results.

So far, 2014 has been a lost year for most investors.

The chart below shows the year-to-date performance of the S&P 500, Dow Jones, Nasdaq Composite, and Russell 2000 (blue line = 2013 close).

There’s been a lot of up and down and a lot of sideways trading, but at the end of April the indexes are basically stuck in stalemate.

Will the entire year be like the first four months?

Quite possibly. The Profit Radar Report’s 2014 Forecast (published January 15, 2014) featured a full-year S&P 500 projection, which pegged the S&P 500 in April at the same level as its 2013 close.

Despite an exciting summer (more details below), the Profit Radar Report’s 2014 projection also puts the S&P 500 at year-end close to where it started the year.

Bulls Can’t Break Out, Because …

Right now the S&P 500 and Dow Jones are held back by strong technical resistance.

The Dow Jones chart below shows some of the long-term resistance levels (made up of trend lines and Fibonacci projections).

Bears Can’t Peel Away, Because …

Too many cooks spoil the broth … and too many bears spoil a potential crash.

CNBC reported this morning that: “Bubble talk catches fire among big-money pros.”

It’s this kind of ‘preemptive bearishness’ that’s kept stocks buoyant for well over a year.

This combination of overhead resistance and the ‘bear put’ is likely to keep stocks in a trading range.

However, I expect this trading range to expand soon.

Bearish S&P 500 seasonality should soon drag stocks lower. The old ‘Sell in May and go away’ adage has received a lot of play this year, so the stock market is likely to ‘flush out’ the now crowded trade with another head fake.

More details here: Expecting ‘Sell in May and Go Away’ Pattern? – Prepare for Surprise

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.

Disappointing Earnings May Be An Opportunity for ETF Investors, But …

The earnings season is in full swing. Most heavy hitters are slated to report earnings this week or next. Rather than overanalyzing the effect of one or two companies, this article looks at the opportunity and risk presented by the long-term earnings picture.

Even before this year’s earnings ritual started, a number of companies spoiled the third quarter earnings season. Intel, Caterpillar, FedEx and many others warned that estimates were too high.

Bloomberg reported that earnings pessimism among U.S. chief execs is the highest since the 2008 meltdown and the Wall Street Journal warns of an “earnings pothole.”

The S&P 500 has rallied as much as 37% since the October 2011 low and the stock rally has become extended. Could a bad earnings season push stocks off the edge?

De-focus On Earnings

Earnings are just one of many forces that drive stocks, in fact I consider them secondary and to some extent a contrarian indicator. Record high Q1 2010, Q1 2011, and Q1 2012 earnings were followed by dismal short-term stock performance so disappointing Q3 2012 earnings don’t automatically translate into falling stock prices.

Seasonality is favorable for most of the remaining year and key technical support for the S&P 500, Dow Jones and even the Nasdaq-100 is holding up. Let’s take a closer look at the S&P 500’s technical picture.

Since June the S&P has been climbing higher within the black parallel trend channel. The S&P’s rally stopped at 1,474.51 on September 14, which was exactly when the upper parallel channel line converged with a decade old resistance line.

Ironically that was just one day after Bernanke promised unlimited QE3. They say don’t fight the Fed, but in this instance the Fed lost to technical resistance. The decline from the September 14 high helped digest overly optimistic sentiment and put the trading odds in favor of going long.

The October 7, Profit Radar Report cautioned of lower prices, but viewed any decline as an opportunity to go long: “A digestive period that draws the S&P to 1,450 and perhaps towards 1,420 seems likely. The highest probability trade is a buy signal triggered by a move below the lower black channel line (around 1,420), followed by a move back above.”

Using trend lines to identify buying or selling opportunities worked like a charm in 2010 and 2011 (trend line breaks were a major contributor to short recommendations in April 2010 and May 2011), but starting in 2012 the S&P delivered a number a fake trend line breaks.

That’s why the above recommendation was to wait for a break below trend line support followed by a move back above before buying. The strategy worked. From here we simply elevate the stop-loss to guarantee a winning trade. We will go short only if the next important support is broken.

Long-term Earnings Message

Even as the economy continues to deteriorate, corporate earnings have slowly crept to new all-time highs. That’s right, all-time record highs.

The chart below plots operating earnings for S&P 500 companies (as reported by Standard & Poor’s) against the S&P 500 Index. Corporate earnings are the epitome of a mean reverting indicator and as predictable as a boomerang.

Every time corporate earnings get too high they reverse and the boomerang hits stocks. Nobody knows how high is too high. Right now, too many are expecting the boomerang to hit so it may take a bit longer, but we’re getting there.

Summary

Over the short-term (possibly into Q1 or Q2 2013) stocks may continue to rally (despite disappointing Q3 2012 earnings), but the long-term implications of record high earnings are deeply bearish for stocks.

The short-term opportunity for investors is to buy the SPDR S&P 500 ETF (SPY) on pullbacks (as long as they remain above key support). I don’t have a specific up side price target, but we’ll take profits when we see bearish technical divergences.

Concurrently we’ll be watching for a market top. Unfortunately, market tops aren’t a one-time event, it’s a process. Like knocking over a Coke machine, you have to rock it back and forth a few times before it falls over.

We’ll be looking at ETFs like the Short S&P 500 ProShares (SH) and UltraShort S&P 500 ProShares (SDS) once we see bearish divergences confirmed by sentiment and seasonality.

The Profit Radar Report will identify low-risk and high probability buying opportunities when they present themselves.

Investors Now Embrace the Most Hated Stock Rally Ever – Is it Time to Bet on Short ETFs?

After a 12% rally investors are starting to buy into the S&P 500 and other indexes again. At the same time technical resistance is getting stiffer and seasonality is turning bearish. Is it time to buck the trend and start nibbling on short/inverse ETFs?

PIMCO’s king of bond funds, Bill Gross, joined the “stocks are dead’ club in late July and CNBC calls the latest rise in stocks the “most hated stock rally in history.”

At the June 4 low (1,267 for the S&P 500) investors and investment advisors hated stocks like fish hate hooks. Despite (actually because of) this negativity stocks keep on keeping on and June 4th turned out to be the second best buying opportunity of the year (see charts below).

But nothing is as persuasive as rising prices, and 12% into the rally investors are starting to embrace the idea of continually rising stocks. The crowd is generally late to the party (thus the term “dumb money”) and this time may be no different.

Investor sentiment is an incredibly potent contrarian indicator. Unfortunately, sentiment-based signals in recent months have been murky, but are starting to make sense again.

Murky Doesn’t Have to be Bad

Murky is not always bad though. The following is what I mean by murky during this summer and how the sentiment picture is starting to clear up.

The Profit Radar Report (PRR) continually monitors various investor sentiment measures, which includes the Investors Intelligence (II) and American Association for Individual Investors (AAII) polls as well as the Equity Put/Call Ratio and VIX.

The Sentiment Picture below was published by the PRR on July 20, 2012. Quite frankly it was one of the oddest sentiment constellations I’ve ever seen. The VIX was near a 60-month low parallel to a multi-month pessimistic reading of the AAII poll.

This just didn’t make sense and the simple conclusion was that there is no high probability trading opportunity.

Six weeks and several head fakes later the S&P 500 Index (SPY) is trading a measly 30 points higher than it did on July 20, and even in hindsight we know that there was no high probability trade.

Current Sentiment Picture

The second chart reflects the change of sentiment of investment advisors (II) and retail investors (AAII) since July 20. There’s no excessive bullishness, but rising prices are starting to resonate with investors.

Sentiment alone doesn’t tell us how high stocks may rally or if they are ready to crack right now. When we expand our horizon to include seasonality and technicals we see that September (especially starting after Labor Day) sports a bearish seasonal bias and that there’s strong resistance at S&P 1,425 – 1,440.

There is little reason for investors to own stocks right now. Aggressive investors may choose to pick up some short or even leveraged short ETFs at higher prices.

The Short S&P 500 ProShares (SH) and UltraShort S&P 500 ProShares (SDS) are two inverse ETF options that increase in value when the S&P slumps.

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