NYSE Composite Chart is Sending Strong Message

Although not nearly as popular as the S&P 500 or Dow Jones, the NYSE Composite sports one of the most transparent technical pictures we’ve seen in quite a while. Here’s a closer look at the strong message of the NYSE Composite.

The NYSE Composite Index is not often discussed, but as one of the broadest U.S. indexes (1,868 components) it offers a unique big picture perspective, especially right now.

First off is a weekly log scale bar chart of the NYSE Composite since its March 2009 low along with some basic support/resistance levels and trend lines.

The second chart zooms in on the more recent price action.

There are a number of noteworthy developments:

There is a possible head-and shoulders top. The red line is the neckline. The projected target is 10,655, which was already reached last week.

The measured HS target at 10,655 also coincides with green trend line support.

Despite the measured HS target having been fulfilled, the August 3 Profit Radar Report predicted another leg down.

The NYSE Composite (NYSEArca: NYC) already exceeded last weeks low and the measured HS down side target. Today it broke below last week’s low and first green trend line support.

What does this mean for the NYSE Composite?

It doesn’t take a ‘chart Sherlock’ to perceive that the next leg down is underway.

While the trend is still down, the outlook is not as bleak as many expect. There is support at 10, 447 (200-day SMA) and 10,250.

From this support I expect a reaction that will surprise Wall Street and investors alike.

More details along with an actual projection for the S&P 500 are available via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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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Federal Reserve Source: QE May Increase 26% in 2014

How much QE is enough? Based on the latest statement by a Federal Reserve president, the Fed may beef up QE by another 26% in 2014. However, there’s also another interpretation, which would nail the financial media for shoddy reporting.

Charles Evans is the ninth president and chief executive officer of the Federal Reserve Bank of Chicago.

He tweeted the following on Tuesday, November 19:

“Our purchases will continue to be open ended. We may need to purchase 1.5 trillion in assets until January 2015”

As a Federal Reserve president Mr. Evens is fluent in the art of sending cryptic messages. The above tweet is no different.

Deciphering the Modern Day Enigma

What could Mr. Evans have meant?

Currently the Federal Reserve is buying $85 billion worth of assets per month. That’s $1.02 trillion per year or $1.19 trillion until January 2015.

Going from the current pace of $1.19 trillion to $1.5 trillion in asset purchases is an increase of 26%.

Is Mr. Evans saying that the Fed may have to further beef up QE?

Enough to Buy 8% of ALL U.S. Stocks Every Year

$1.5 trillion is an incredible amount of money. How incredible?

According to the World Bank, the total market capitalization of the U.S. stock market was $18.67 trillion in 2012. Total market cap includes the S&P 500 (SNP: ^GSPC), Dow Jones (DJI: ^DJI), and every other U.S. index you can think of.

$1.5 trillion is enough to buy 8% of all U.S. traded stocks. No wonder the S&P 500 and Dow Jones have nowhere to go but up.

Comparing the Fed’s current $4 trillion balance sheet with the total U.S. market cap (projected to be $21.4 trillion in 2013) almost allows the conclusion that the Federal Reserve conceivably financed 17% of all U.S. stock purchases.

When considering the size of the Fed’s balance sheet and active purchases in correlation to the total U.S. stock market, it seems almost inconceivable for the S&P 500 ETF (NYSEArca: SPY), Dow Jones Diamonds ETF (NYSEArca: DIA) and any other broad market ETF or index to catch a sustainable down draft.

Media Omission May Solve The ‘Evans Enigma’

There is another explanation for the $1.5 trillion ‘Evans Enigma.’

The Federal Reserve is already buying more than $85 billion worth of assets every single month, but the financial media largely omits the real scope of all QE-like programs. How much is the Federal Reserve really spending every single month?

A detailed analysis along with a simple one-chart visual summary of all of the Federal Reserve’s QE-like programs can be found here:

Glaring but Misunderstood QE – How Much the Fed is Really Spending

Simon Maierhofer is the publisher of the Profit Radar Report. The 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.

 

Dow Jones and S&P 500 Skew Broad Markets Real Performance

Based on the Dow Jones and S&P 500 it looks like stocks still need to conquer their 2007 highs before being ‘resistance free,’ but that isn’t the case. The Dow and S&P paint a deceptive and less bullish picture than reality.

If you don’t open your eyes to the bigger picture, you open your portfolio to unnecessary losses.

CNBC’s countdown clock will tell you that the Dow is only X points away from its 2007 all-time high. That’s true, but it’s also deceptive.

The Dow Jones Industrial Average is a price-weighted average of only 30 large cap stocks. IBM alone accounts for over 11% of the Dow’s movements.

The S&P 500 is a market capitalization weighted index of 500 large cap stocks that emphasizes the performance of the largest of large caps.

Mega Cap, ‘Mini’ Performance

Fact is that the bluest of the large cap stocks are lagging compared to the rest of the market. IBM is 5% from its all-time high as is Exxon Mobil. Oh yes, there’s also Apple, key player of the S&P 500, trading 36% below its high watermark.

A simple chart illustrates the ‘weakness’ of mega cap stocks compared to their large cap cousins. Figure 1 provides a visual comparison of the S&P 500 SPDR (SPY) and an equal weight S&P 500 ETF (Guggenheim S&P 500 Equal Weight ETF – RSP).

SPY trades about 3% below its 2007 high, equal weighted RSP trades more than 7% above its 2007 high. Why?

The top five S&P 500 components (Apple, Exxon Mobil, GE, Chevron, IBM) account for 11% of the index. Four of the top five holdings are more than 5% from their all-time highs.

The top five equal weight S&P 500 components account for 1% of the equal weight index and allow ‘smaller larger’ caps to pick up the slack of mega caps.

‘Smaller is Bigger’

Smaller is better in this QE bull market (more below). Mega caps underperform large caps, and large caps under perform small and mid-cap stocks.

Figure 2 plots the S&P 500 SPDR (SPY) against the MidCap 400 SPDR ETF (MDY) and SmallCap 600 SPDR ETF (SLY). The message is the same. MDY and SLY are at new highs, SPY isn’t.

What’s the Big Deal?

Stocks are up, portfolios are up, Wall Street is happy and the media is ecstatic, so what difference does it make who or what performs best?

Market tops are liquidity events. When investors stop buying, stocks start falling. Small and mid-cap stocks dry up first as they are most sensitive to liquidity squeezes.

That’s why small and mid-cap stocks tend to underperform somewhat going into larger scale highs. Thanks to the Fed’s artificial liquidity environment that hasn’t been the case.

Based on the strong showing of small and mid cap stocks and the absence of bearish divergences, the Profit Radar Report was expecting new highs even when the S&P traded well below 1,400 in November of last year.

Historic money flow patterns suggests that the overall trend remains up as long as small and mid cap stocks keep up with large caps.

What’s Killing Stocks and What May Resurrect them?

It’s better to be out of stocks wishing you were in, than in wishing you were out. But it’s best to be short stocks when stocks are down. The short trade has worked well, but how much more down side is there?

Every kid knows you better eat your ice cream before it melts. Investors should know to lock in profits before they disappear.

The recent 8.6% drop in the S&P 500 and 12.6% fall in the Nasdaq-100 has certainly done some technical damage and erased a fair amount of profits.

What has caused the market’s sell off and how much worse can it get?

There’s never just one event that triggers a market sell off, but as far as the recent sell off is concerned there’s one reason that weighs heavier than any other: Apple.

Live by the Sword, Die by the Sword

Apple had an incredible run, soaring from $80 in 2009 to $705 in September 2012. Apple became the most valuable company in the world and in the process controlled 20% of the Nasdaq-100 and 5% of the S&P 500.

Apple was like a “dictator of the financial market.” As Apple goes, so goes the market. But that relationship is a two-edged sword, because when Apple sneezes the market will get a cold.

So how was Apple’s health?

According to the Wall Street Journal, “Wall Street analysts are increasingly bullish as Apple hits fresh highs” (August 27, 2012) and MarketWatch wrote “Apple seen as trillion dollar baby” (August 21, 2012).

In contrast, the August 22 Profit Radar Report warned: “The new iPhone will hit the stores soon, a mini iPad is in the pipeline, Apple TV will be in many living rooms near you soon and the holiday season is coming up. Based on fundamentals there’s no reason Apple stock shouldn’t rally, but technicals suggest that a top may be just around the corner.”

This warning was followed up by a specific trade recommendation via the September 12 Profit Radar Report: “Aggressive investors may short Apple (or buy puts or sell calls) above 700 or with a close below 660. Obviously, there is no short Apple ETF and if you don’t have a margin account set up, you may consider using the Short QQQ ProShares (PSQ), which aims to deliver the inverse performance of the Nasdaq-100 (Apple accounts for 20% of the Nasdaq-100).”

Apple has fallen over 25% from its September high and dragged every major U.S. index with it. If you’re looking for a scapegoat, look no further than Apple.

How Low Can Stocks Go?

The S&P started to tread on “thin ice” in late October. Why thin ice? Because it was trading perilously close to key support around 1,400 (see trend lines in the chart below). The thin ice finally broke when the S&P fell through key support at 1,396.

A break of key support is generally a precursor of lower prices, that’s why the November 7 Profit Radar Report stated that: “A move below 1,396 will be a signal to go short with a stop-loss around 1,405.”

The chart below was originally published in Sunday’s (Nov. 11) Profit Radar Report, which included the forecast for the week ahead. Below are a few excerpts from Sunday’s PRR.

“We are short with the S&P’s drop below 1,396. How low can stocks go?

The chart below shows two important levels: 1,371 and 1,346 (updated chart shown below).

Since there’s a good chance of an extended down move, I’m inclined to just let our short position run and see where it takes us. 1,371 is the first hurdle to be overcome to look lower.”

The S&P sliced through 1,371 on Wednesday, and Friday’s trade drew prices as low as 1,343. Since our weekly target has been met we’ve sold half of our short positions.

This doesn’t preclude lower prices, but a bounce is possible and it’s smart money management to eat your ice cream before it melts, or take some profits before they disappear. Continuous target prices and buy/sell levels will be provided by the Profit Radar Report.