S&P 500 Update: Is This Rally Leg Over?

The September 5, 2016 Profit Radar Report published the chart below along with the following commentary:

The chart below shows the long-term up side target purely based on projected symmetry. Based on the 1997 – 2013 trading range, the measured up side target is S&P 2,330 – 2,485, which is in the general vicinity of the 2,290 – 2,342 Fibonacci levels mentioned in the 2016 S&P 500 Forecast. Higher targets are possible, but we’ll reassess once we get there.”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Bussines Daily says “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

The second chart shows the trading activity over the past year along with short-term bars and trend lines we used to narrow down the up side target (the latest up side target was 2,494).

Short-term X-Ray

A special August 7 Profit Radar Report update featured this potent warning:

The S&P 500 ETF (SPY) closed at a new all-time high at the lowest volume of the year. For the first time in a while, there is a bearish divergence between the S&P 500 and the NY Composite a/d lines. The ideal scenario (and tempting setup to go short) would be a spike to 2,495+ followed by an intraday reversal.”

This is almost exactly what happened. The S&P 500 spiked as high as 2,490.87 before falling 52 points.

However, this drop quickly caused an oversold condition.

A special August 10 Profit Radar Report update featured this chart and stated that:

The CBOE equity putt call ratio (last chart) spiked to the highest reading (0.88) since April. The VIX is overbought. The VIX/VXV ratio jumped and contango fell. Both are near levels that have been seen at VIX highs. Stocks are oversold and ready to bounce. Based on the wave structure, we anticipate this bounce to be brief (2-6 days) and stay below the prior all-time highs (although the extent of the oversold condition would allow for a stronger bounce).”

Conclusion

The August 28, 2016 Profit Radar Report featured a bullish Elliott Wave Theory count with a projected up side target around S&P 2,500 (more details here: S&P 500 Update – Expect the Abnormal).

One of the images featured was a conceptual “We are here” chart (shown below). The green dots mark where we were in August 2016 (along with probability scores).

The red circles highlight where we are at today. The upcoming correction should be a choppy and frustrating wave 4 decline to be followed by another rally to new all-time highs. It then remains to be seen whether that high will be a major top or not.

Since the S&P did not quite reach our up side target, there is an alternate interpretation, which allows for continued gains almost immediately. However, that remains only an alternate unless the market tells us otherwise.

Continued analysis, with down side targets and buy/sell signals are provided 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 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.

 

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This ETF Flaw Caused Subscribers a 30% Loss, But we Fought Back

I am about to share the worst trade of my carrier with you. It cost me a fair amount of sleep (and probably cost me a number of subscribers, who must have thought Simon is quite the moron).

Here is the sad tale of a good trade hijacked by an ETF flaw (fortunately there’s a happy ending).

The Setup

Earlier this year, in mid-January, we saw a number of VIX extremes, such as highly elevated SKEW readings (SKEW measures ‘black swan’ risk), near-record SKEW/VIX ratio readings and the highest ever long exposure of commercial VIX traders (smart money). The charts below, published by the Proift Radar Report in January, illustrate the extremes.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Bussines Daily says “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Statistically, those conditions led to an average VIX spike of 22% over the next month every time (even a week later the VIX was higher 85% of the time).

The biggest problem (which we were well aware of) was the lack of a suitable trading vehicle for long VIX exposure. Yes, there is VXX, but it suffers from contango (we have often successfully shorted the VIX via XIV, which puts contango in our favor, more about XIV below).

What is Contango?

Below is a brief explanation of contango (taken from an August 2014 report):

The VIX quoted in-day-to-day life is the CBOE Volatility Index (VIX) spot price (today’s VIX price). However, the futures used to create ETPs like the iPath S&P 500 Short-Term VIX Futures ETN (VXX) are based on the future VIX price, which is almost always more expensive than the spot price. Over time the more expensive VIX futures decline in value, eventually converging with the spot price at expiration.

The chart below compares the current spot price with various futures prices. The difference between the spot price (12.20) and the September futures (13.45) is 9.84%. In other words, it will take a 9.84% move in the VIX to neutralize the time decay between the spot and September futures price.

As time goes by, ETF providers are forced to continuously replace expiring futures with new (more expensive) futures (this process is called ‘rolling over’). The further away the futures expiration date, the bigger the time premium. This time premium and resulting value decay is called contango.

Contango vs the Setup

Despite contango, the VIX buy signal seemed strong enough to deliver a net gain (a 20% short-term VIX spike tends to translate into a 5-7% VXX gain). We were looking for a short-term VIX spike, before a multi-week S&P 500 rally.

On January 23, we pulled the trigger and bought a very small amount of VXX at 20.60. A week later, the VIX traded higher, and a month later, the VIX traded higher. The VIX even spiked 22% (as expected) a number of times, but VXX contango persistently eroded VXX.

VXX by-passed the short-term VIX spike, and then, as anticipated, the stock market continued higher (which kept the VIX depressed). Nevertheless, we expected a period of choppy trading (volatility) to start in February/March.

On March 1, the S&P 500 topped, and has basically been range bound since.

On March 23, it was obvious that the VIX would fall again before the next window for a S&P 500 correction arrived. We bought XIV to hedge VXX, which turned out to be a great move.

The Next Window

The window to unwind this unfortunate VIX trade finally arrived this week. The May 14 Profit Radar Report stated that: “We are still looking to sell XIV and double up on VXX at S&P 2,407. Aggressive traders may elect to short the S&P around 2,410.”

Unfortunately there was another blow. The S&P 500 missed our trigger level for XIV and VXX (2,407) by one point (on Tuesday, March 16). The S&P gapped lower the next morning (by 17 points), robbing us of the best opportunity to unwind this trade.

We took the second-best opportunity. The March 17 intraday Profit Radar Report recommended to sell XIV at 77.40, and double up on VXX at 14.45. We closed XIV for a profit of 12.17% and bought VXX at 14.45.

The next morning (Thursday, March 18) we closed our entire VXX trade at 15.97. The VXX portion bought on January 23 accrued a 22.47% loss, the VXX portion bought on May 17 ended with a 10.51% gain. The 11.96% loss was offset by the 12.17% XIV gain.

At the end, we closed this unfortunate trade combo with a tiny 0.21% gain.

Lessons Learned

Patience and impeccable timing (at the end) rescued this trade, but in hindsight, the best worst trade is one not taken.

Contango needs to be respected. In the past, we traded XIV six times (XIV benefits from contango). All six XIV trades were profitable (12.17%, 14.46%, 13.33%, 7.57%, 15.70%, 4.49%). It’s better to focus on XIV (falling VIX) than VXX (rising VIX), especially in a bull market.

Although we knew that the VIX would fall mid-term, we bet on a short-term rise. It’s not smart to bet against the larger trend.

With the VXX trade closed at a miniscule profit, we keep our streak of no losing trade (since June 2015) alive.

The Profit Radar Report provides about 20 specific trade setups per year.

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.

 

How Alarming is the 23-year VIX Low?

According to Barron’s, the VIX is flashing a stock market warning. Barron’s is not alone. If you threw a water balloon in a room filled with analysts, odds are you’ll hit someone who’s bearish stocks because of the VIX.

Facts Trump Opinions

VIX readings below 10 are rare. There’ve only been 9 other ones since the VIX’s inception in 1993. None of them led to stock market crashes (click here for detailed analysis).

Some claim that the 2000 and 2007 market tops were preceded by a low VIX, but that’s one of the biggest misconceptions on Wall Street.

This special report, published by the Profit Radar Report on June 16, 2014, showed why the VIX was TOO LOW for a major market top back then (and still is today).

VIX Seasonality

VIX seasonality supports overall lower readings until the major seasonal low in early July.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Bussines Daily says “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

VIX-based Indicators

The chart below plots the S&P 500 against the VIX, VIX/VXV ratio, CBOE equity put/call ratio, and contango.

The VIX/VXV ratio gauges fear of short-term volatility (30-day, VIX) compared to longer-term volatility (90-days, VXV). Readings above 1 happen when investors are more concerned about the short-term than longer-term.

This occurs near stock market lows and has been a very reliable buy signal. The April 16 Profit Radar Report noted the VIX-sell signal highlighted in green (VIX is down 39% since).

On Monday, the VIX/VXV ratio was 0.776. Readings below 0.76 happen when investors are more concerned about the longer-term than the short-term.

Although a potential warning sign, the VIX buy signal (<0.77) has not been as accurate as the VIX sell signal (>1.0).

The CBOE equity put/call ratio and contango are showing a measure of bearish (for stocks) potential, but have plenty room to become more extreme.

S&P 500 Outlook

The April 11 Profit Radar Report published the chart below along with the following forecast: “As long as trade remains above 2,330, we are still looking for higher prices. The chart below outlines two potential up side targets (2,365 – 2,375 and 2,380 – 2,410).” The upside target was revised to 2,405 – 2,410 on April 26 (more detailed outlook available here).

The S&P is now just below 2,410. It remains to be seen whether bears will take a stand, but if they do, it should be around 2,410 (which would result in a VIX spike).

Continued analysis for the S&P 500, VIX and other asset classes is 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 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 500 Update – Churning for a Burning?

The S&P 500 reached our minimum down side target and rallied strongly. Is this rally for real or are stocks just ‘churning for another burning’?

Bullish Signals

This week’s rally is credited to the French election, but a series of solid buy signals triggered days before the news from France.

The CBOE equity put/call ratio signaled a S&P 500 rally.

Contango and the VIX/VXV ratio signal a VIX decline.

The chart below – which plots the S&P 500 against the VIX, VIX/VXV ratio, CBOE equity put/call ratio, and contango – was published in the April 16 PRR along with the following commentary:

The VIX/VXV ratio, equity put/call ratio and contango are at multi-month extremes.It appears like the amount of sellers left (needed to drive prices lower) is rather limited. The weight of evidence strongly suggests that we should focus on the upcoming buying opportunity, not on how much more down side may or may not be left.”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Bussines Daily says “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

The same Profit Radar Report also highlighted positive seasonality (see below).

Bearish Caveat

This bounce is in sync with seasonality and various buy signals, but will it last?

The April 9 PRR featured the yellow projection shown below. According to this scenario (based on Elliott Wave Theory), the S&P would reverse above 2,390 and fall to new lows (2,320 or below).

The S&P 500 is above 2,390 and has entered a price zone where a relapse becomes possible.

We will be watching various breadth, money flow, sentiment and technical indicators to determine whether this rally will stop here or not.

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 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.

 

The Biggest VIX Anomaly of the Year is Here

Since 1970, the S&P 500 has seen a ‘Santa Claus Rally’ (SCR) 73.9% of the time (SCR equals last five days of old year and first 2 days of new year).

Purely based on seasonality, there’s a good chance the S&P 500 will move higher in the coming days.

Due to the fairly predictable inverse correlation between the S&P 500 and the VIX, one would expect the VIX to move lower during the SCR period of the year.

However, that’s not the case. In fact, this is the biggest VIX anomaly of the year and is relected in VIX seasonality.

The December 27, 2015 Profit Radar Report observed this anomaly and stated:

On Thursday the VIX painted a potential reversal candle, which – combined with seasonality – will probably make it harder for the VIX to move much lower. Usually the mix moves in the opposite direction of stocks, however this inverse relationship tends to take a break from Christmas to New Years.”

During the 2015/16 SCR period, the VIX lost 24.21%.

We love shorting the VIX via the VelocityShares Inverse VIX ETN (XIV – here is why: The Spectacular VIX Tailwind Trade), that’s why this anomaly is so interesting.

In 2016, the Profit Radar Report recommended shorting the VIX (= buying XIV) twice for gains of 14.46% and 13.33%.

Various indicators go into a XIV buy signal, seasonality is one of them. Right now, seasonality is not in favor of buying XIV (even if the S&P 500 moves higher).

Continuous S&P 500/VIX updates with actual buy/sell recommendation 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 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.

 

What to Expect from the Post Election Stock Market

Were you able to get one of the special edition “Madam President” Newsweek issues?

That’s right, Newsweek printed and delivered newspapers featuring Hillary Clinton as president elect.

News-based Approach

“Like everybody else, we got it wrong,” said the CEO in charge of this mishap.

Indeed, the media did get it wrong. According to the media:

1) Donald Trump was ‘supposed to’ be only second best

2) The stock market ‘was supposed’ to sell off if Trump wins

This is the second time in 2016 that media and market pundits got blind sighted and fooled by a big event.

In June it was the Brexit vote, which 1) went different than expected 2) the stock market rallied instead of crashing like it was ‘supposed to.’

The news-based approach requires two accurate guesses:

1) How the vote (or any event) will go

2) How the market will react to a certain outcome

As the above two examples show, the market rarely follows the expected path.

Indicator-based Approach

The indicator-based approach has proven to be much more accurate than relying on news. The last free S&P 500 Forecast pointed out a number of sentiment extremes and stated that:

The best opportunities are born in times of panic. The more panic, the better the opportunity. It’s risky to short such a market, and much more promising to look for a low-risk buying opportunity.”

Stock futures suffered a brief panic selloff on Tuesday night (S&P 500 futures were down as much as 120 points), but quickly recovered.

This was in line with this observation shared in the November 6 Profit Radar Report:

The VIX is stretched to the up side, with various bullish sentiment extremes and bearish seasonality. Excessive fear shown going into an event causing uncertainty (election) usually results in a quick retreat of fear once results are in and digested.”

The VIX has lost over 50% in the past few days.

It’s hard to believe that the S&P 500 cash index (unlike the S&P 500 futures) remainded above support identified last week and reacted immediately to the oversold condition and bullish divergences.

Back to Basics

With election uncertainty out of the way, we can refocus on the basics:

Short-term, the S&P 500 is butting against triple resistance while overbought. In addition, the days following the election tend to show some weakness.

Longer-term, there are a number of bullish forces which should push stocks through resistance.

  1. The correction we expected last month reached our down side target (reason for correction and down side targets are shown here).
  2. The tailwind of two breadth thrust in 2016 bodes well for stocks (detailed breadth thrust analysis with implications is available here).
  3. S&P 500 seasonality is bullish for the remainder of 2016
  4. VIX seasonality is bearish for the coming weeks. XIV is up 8% since we last recommended it (after closing a 14% XIV gain in September). Here is why we like the XIV trade.

The Profit Radar Reports up side target may be surprising to many, but it is strictly indicator based. At this point, only one ingredient is missing to unlock higher price targets.

Up side targets, the missing ingredient, and continuous indicator-based S&P 500 analysis 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 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 500 Update

Although we are longer-term bullish, we expected lower prices prior to a buying opportunity. The last S&P 500 update highlighted lacking up side momentum and bearish divergences … which caught up with stocks this week.

The Profit Radar Report has been anticipating a ‘flush out’ move below obvious support at 2,120 and stated on October 30 that: “The next possible target for a low is 2,100.”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Bussines Daily says “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Why 2,100? An open chart gap at 2,098.70 has been waiting to get filled (dashed purple line).

The October 30 Profit Radar Report stated that: “The preferred scenario would be a quick (perhaps even intraday) washout (to 2,100) that flushes out weak hands and clears the air for a more sustainable rally.”

The emphasis is on quick. On Wednesday the S&P failed to build on the initial recovery from Monday’s lows (right after the open chart gap was closed). While the S&P maintains below resistance (prior support), it’s at risk to fall further.

As green lines in the first chart show, the S&P 500 is oversold (based on RSI-2). Oversold conditions have led to bounces 3 out of 4 times in 2016 (the one failure is highlighted in blue).

Oversold and Overhated

The market is not only oversold, it is also overhated.

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The second chart shows that various sentiment metrics are nearing noteable extremes.

VIX traders believe that longer-term volatility (90 days, VXV) will be higher than shorter-term volatility (30 days, VIX). The VIX/VXV ratio is above 1 for the first time since the Brexit vote.

Also for the first time since the Brexit vote, option traders are nearly buying as many puts as calls The CBOE put/call ratio is one of the highest we’ve seen in the past few years.

Opportunities are Born in Panic

History says that the best opportunities are born in times of panic. Where is maximum panic?

In January the S&P continued temporarily lower despite being oversold and overhated, but eventually rebounded strongly. The more panic, the better the opportunity.

It’s risky to short such a market, and much more promising to look for a low-risk buying opportunity.

The Profit Radar Report nailed the February low (buy recommendation at S&P 1,828 on February 11) and we will try to do the same for the up coming low.

Our focus in the coming days/weeks will be to minimize short-term down side risk without missing the lowest possible entry point to buy.

Continued S&P 500 updates and buy/sell recommendations 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 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.