Contrarian Take: Did Doomsday Prophets Scare the Bear?

Bears are powerful creatures, but they can get scared easily and may suffer from a fear similar to stage fright. Many media outlets have reported sightings of bears, but when everyone expects its appearance, it fails to show.

Baron Rothschild’s famous adage, that the time to buy is ‘when there’s blood in the streets’, is timeless.

History has also shown that the old adage is reversible, meaning that the time to sell is when there’s no sight of ‘blood in the streets’ or extreme optimism.

Is there extreme optimism right now?

Allow me to introduce my very own, non-scientific media sentiment indicator.

A couple of weeks ago value investing icon Jeremy Grantham published his first quarter 2014 newsletter. The topic was a statistical approach to market bubbles.

The Glass Half Empty Interpretation

According to the letter, Grantham believes that the S&P 500 will form a bubble that will eventually burst. The conclusion in his words is as follows:

“But I believe it [the bubble] will not end for at least a year or two and probably not before it reaches a level in excess of 2,250 on the S&P 500 (SNP: ^GSPC). I am not saying that this time is different. I am sure it will end badly.”

The financial media (not sure if they read the entire report or not) spun the following headlines out of Mr. Grantham’s analysis:

“Jeremy Grantham on Bubbles: ‘I am sure it will end badly’” – Wall Street Journal
“Jeremy Grantham: Stocks set to crash around November 2016” – Moneynews
“When Jeremy Grantham sees bubbles, it’s worth paying attention” – The Globe and Mail
“Jeremy Grantham makes a very specific call about when the bubble will burst” – Business Insider

This may have gotten lost in translation, but Grantham ‘predicted’ two developments:

  1. The S&P 500 will rally to 2,250
  2. It will end badly

Yet, I could not find a single article that even mentioned, let alone highlighted, S&P 2,250, which is a pretty bold call.

In fact, bearish financial headlines were so pervasive in early May that Yahoo Breakout ran a segment called: “The boys who cried wolf: Crash prophets on the rise.”

Is someone (hint: media) trying to spill blood on the street?

It Happened Before

This environment reminds me of what we saw about a year ago, when I wrote in the March 10 Profit Radar Report that:

The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point that stocks are only up because of the Fed. We know this is a phony rally, but so does everyone else. We know this will probably end badly eventually, but so does everyone else. The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number.”

My research (S&P 500 2014 Forecast, published on January 15, 2014, available to subscribers of the Profit Radar Report) proposed a rally towards S&P 1,950 followed by a 10%+ correction back in January.

However, the recent spell of bearish headlines (caused by sideways trading not a correction) made me suspicious. It was time for the market to fool the crowded trade again. I proposed this head fake scenario in the May 7 Profit Radar Report (S&P was as low as 1,860 that day):

“The weight of evidence suggests the onset of a larger correction in May, but we are not the only ones expecting a correction. A false pop to 1,900 – 1,915 would shake out the weak bears and set up a better opportunity to go short.”

We got an S&P 500 (NYSEArca: SPY) pop to 1,902.17 on May 13, but the headlines continue to be bearish. We’ll have to see if the pop was enough to fool the bears and set the stage for a deeper correction.

I will be looking at key support and resistance levels for valuable directional clues.

The most important near-term support/resistance levels are disclosed here for free:

S&P 500 Analysis: The ‘Chopping Zone’ Explained

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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Murky Message: Insiders Dump Stocks at Record Pace

Insiders, like corporate officers and directors, are the smartest indicator of a company’s (and by extension the stock market’s) health. Unfortunately, getting access to good insider sales data is tough. Here’s one promising set of data though.

Nobody knows more about a company than its corporate officers and directors.

By extension, nobody knows more about the U.S. stock market than the sum of U.S. corporate officers and directors (also called insiders).

Up until 2013, Investors Intelligence used to publish helpful data on insider selling, but ever since it’s become difficult to get good insider sales data.

On Friday the Wall Street Journal published an interesting article on insider selling.

It refers to the research of Nejat Seyhun, a finance professor at the University of Michigan.

Mr. Seyhun puts an intriguing twist on insider sales as he strips transactions from ‘insiders’ who own more than 5% of a company’s shares.

Although the government considers 5%+ owners insiders, Mr. Seyhun has found that it is usually mutual or hedge funds that own 5% or more of a company’s shares.

This adjusted figure shows that insiders are currently selling six shares for every one that they bought, which is the worst Mr. Seyhun has ever seen.

Insider Panic – Immediately Bearish?

Is this an immediately bearish sign? Not necessarily. There have been two prior occasions when the adjusted insider ratio got almost as bearish as it is today – early 2007 and early 2011.

Those time periods are marked on the S&P 500 chart below.

How did the S&P 500 perform going forward?

It struggled higher before eventually succumbing to increasing selling pressure.

By nature, this indicator is not immediately bearish. To circumvent the appearance of selling before bad news hits the fan, insiders often sell well in advance of perceived (or expected) trouble.

In summary, based on insider selling we should stay tuned for a potentially nasty wave of selling.

Last week’s high volume sell off suggests that trouble may be closer than expected, but there’s a different way of looking at this classically bearish signal: Short-Term SPDR S&P 500 ETF Analysis

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.

Trusted German Newspaper Asks: “Will the Financial System Collapse?”

A reputable German newspaper asks the question forgotten by many domestic media sources: With or without tapering, will the financial system collapse? The answer may be surprising to many.

Have you ever gotten tired of the same old financial news coverage dispensed by the likes of CNBC, Fox, Wall Street Journal, Reuters, and other US media outlets?

I’m not saying it’s bad information, but like eating the same meal over and over again, the same slant on financial developments could become a bit stale.

In my last trip to Germany I made a conscious effort to pick up and read a number of reputable German finance/economy magazines.

I’ll write more about interesting tidbits discussed in the German financial media in the coming days, but here’s more detail about a headline that caught my attention?

“Is A Financial Collapse Approaching?” 

This question was featured on the front page of the September 4 edition of the Focus Money magazine.

As a contrarian investor, my first thoughts were that prominently discussing the odds of a financial collapse minimizes the chances of just such an event. But this changed after I read the article.

Focus magazine asked legendary emerging markets investor Mark Mobius for his feedback on various investment themes. The MIT educated Mobius is 77 years old and heads the emerging markets team for Franklin Templeton.

Tapering Yes – Collapse No

Mobius expects Bernanke to start tapering, but says that this will have virtually no effect on stocks (NYSEArca: VTI) as liquidity remains in the system (although he admits QE’s role in driving up stock prices).

Mobius asserts that banks (NYSEArca: KBE) have cleaned up their balance sheets and will funnel more money in the real economy. “The fear of tapering is overdone – it will barely affect stocks,” he says.

Mobius believes that QE by the Bank of Japan will be successful and ultimately affect world markets (NYSEArca: EFA). In fact, liquidity provided by the BOJ will make up for the liquidity withdrawn by the Federal Reserve.

Time to Buy US Stocks?

Focus magazine: “As an emerging markets (NYSEArca: EEM) specialist, would you recommend buying US stocks?”

Mobius: “Diversification is important and investors shouldn’t put all their eggs in one basket, but it’s certainly a good idea to buy US stocks.”

A Bear in Bull’s Clothing

The financial collapse headline and Mobius’ views struck a cord with me as I see the odds of a major market top forming around current prices greater than 50%.

After reading the Focus Money article it became clear that – according to Mobius – there is no risk of a financial collapse. From a contrarian point of view that’s more bearish than bullish.

Mobius has strong opinions about other emerging markets issues, such as:

1) China’s government completely (as in 100%) controls its banks and has the ability to successfully implement any and all financial policies.

2) The most attractive place to invest is Africa, in particular Nigeria.

I don’t agree with Mr. Mobius’ outlook, but he does offer a perspective not available to many US investors.

Another somewhat shocking forecast is featured in Germany’s Handelsblatt, the German economy and finance newspaper.

The front page of an August edition touts another gold rush caused by China.

For more information read: According to Reputable German Newspaper, New Gold Rush Lies Ahead

Simon Maierhofer is the publisher of the Profit Radar Report.

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Will the Persistently Wrong Dow Theory Sell Signal Finally Come True?

No other technical indicator has been around as long as the Dow Theory. Dow Theory started out more as an economic theory, which Charles Dow published in the Wall Street Journal around the turn of the 20th century.

Dow’s theory focused on two key economic sectors: manufacturing (industrials) and transportation. If goods were being produced and moving through the economy, it should show up in the price action of the Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJT). A strong economy would buoy both averages.

The corresponding ETFs for the DJIA and DJT are the SPDR Dow Jones Diamonds (DIA) and SPDR Dow Jones Transportation Average (IYT).

Despite a rather decent century long track record, the Dow Theory sell signal has been dead wrong for well over a year. Why is that, and will the sell signal finally kick in late September/October?

The chart below plots the Dow Jones Industrial Average (DJIA) against the Dow Jones Transportation Average (DJT). There are a number of bearish divergences, but none of them have hindered the DJIA from breaking to new recovery highs.

The Dow’s trend is clearly up while the Transport’s trend is clearly down. The Dow is above resistance while the Transport is below support. Something’s gotta give, will the Dow break down or the DJT catch up?

Historical Performance & Seasonality

An examination of the historical significance of the current divergences doesn’t reveal a bearish bias. In fact, the performance of the Dow has been positive after instances where the Dow traded close to a 52-week high, while the DJT was nearly 10% below its 52-week high.

October is also the beginning of a historically favorable season for the Transports (perhaps due to the upcoming holidays). However, the week after September triple witching and October in general, has a bearish bias for the Dow Industrials.

Technicals

As if the bearish divergence wasn’t enough, the DJIA is now above resistance. The DJT is below support. Technically it will take a move above what’s now resistance to unlock more bullish potential for the Transports, but historical performance and seasonality suggest the risk for Transports is limited. Exactly the opposite is true for the Dow Industrials.

Intangibles

QE3 is here and the massive inflow of liquidity tends to buoy all asset classes including oil. High oil prices in turn cut into the profit margin of transportation companies like FedEx, UPS, Union Pacific, etc.

FedEx has already cut its fiscal 2013 forecast. Chief Financial Officer Alan Graf blamed weak global economic conditions. But that’s old news and already priced into the Transports recent slide.

It is obvious that the Transports refuse to confirm the Dow’s rosy picture, but the bearish omen hasn’t hurt the Dow’s performance either.

I follow and respect Dow Theory, but have learned not to be dogmatic about any one single indicator. The Dow Theory sell signal will be right eventually, but the weight of evidence of technicals, seasonality, and sentiment suggests some weakness for stocks over the near-term followed by year-end strength.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.