THE Hugely Important Unnoticed Development

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It’s been a quiet week, but prior to that the S&P 500 soared 300 points … despite last month’s bank crisis. As Reuters put it, that “bank crisis raises specter of 2008” and crash warnings were everywhere.

However, credit spreads said that things were not nearly as bad as they appeared. Credit spreads are one of the best ways to gauge the actual industry stress level. Why?

Credit spreads measure the relationship between two interest rates. This is money talking, not just the media or surveys.

The chart below plots the S&P 500 against the ICE BofA US High Yield Option-Adjust Spread, which calculates the difference between a spot Treasury curve (very safe investment) and BB rated bonds (junk bonds).

During real stress money moves away from junk bonds into safe bonds and the spread soars. As the chart shows, aside from a minor spike, the spread barely moved and is way below prior peaks.

I published the chart above along with a more detailed analysis of banking stress in the March 19 Profit Radar Report and concluded that: “The facts still favors stocks holding up, rallying or coming back once this correction is over. There is a window for XLF and KBE to bounce.“

The huge unnoticed development

While the above was a hugely unnoticed development (headline), it’s not THE hugely unnoticed development. What is it?

In terms of market breadth, the 10-day SMA of advancing NYSE stocks soared from 35.25% on March 17 to 65.75% on March 31.

The chart below plots the S&P 500 against the 10-day SMA of NYC advancers. The insert shows the daily percentage of advancing stocks from March 17 – April 4 (shaded in blue is the March 17 – 31 period).

Based on the data I purchase, the 10-day SMA of NYC advancers went from <40% to >61.5% within 11 days (based on other data this was achieved in just 10-days), which is the definition of a Zweig Breadth Thrust (kind of like the gold standard of breadth thrusts).

This particular breath trust triggered only 9 other times (since 1970).

I love sample sizes of around 10. Not too few, not too many, it’s a signal that means something and still has history.

The S&P 500 forward performance after the prior 9 signal was incredibly consistent and carries a lot of weight.

I shared the complete forward performance data with subscribers on Sunday. I won’t share it here, but I will say that this study is in direct conflict with an incredibly narrow-minded statement made by the biggest Elliott Wave forecasting service:

“We continue to think it’s a developing bear market, and that’s that. If we turn out wrong, we will have to eat crow. Discussing alternative possibilities would be a distraction.”

This service is expecting a nasty wave 3 crash. While I can’t dismiss this as a possibility (it’s one of many wave developments I track), I feel sorry for their subscribers who may have to eat crow because their analysts refuse to consider very compelling evidence just because it doesn’t fit into their bearish narrative.

I can’t promise to be right, but I promise to always look at the body of evidence to come up with an educated conclusion. Looking at ‘alternative possibilities’ (or the weight of evidence) is never a distraction, it’s an absolute necessity.

Above is a quick look at the S&P 500. It seems like my inclination shared in the April 2 Profit Radar Report is coming to fruition: “It is possibly that stocks will suffer a smaller pullback starting next week, recover and grind towards 4,200 – 4,300.”

Once we get there, it’s probably time to be more cautious as this is an inflection zone.

For continued updates, purely fact based research, and objective analysis, sign up for the Profit Radar Report. 

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

S&P Bank ETF Just Erased 18 Months of Gains

Wall Street’s most notorious financial engineers aren’t getting any love from investors lately.

The SPDR S&P Bank ETF (NYSEArca: KBE) just slipped to the lower end of an 18-month trading range, again.

My December 29 article pointed out that KBE is traded at key resistance around 34 and warned that: “KBE is at an inflection point. Could KBE become the (sector) tail that wags the (broad market) dog?”

KBE is close to support around 31, but a break to at least 29.5 becomes likely if that fails.

Perhaps more intriguing is the long-term correlation between KBE and its cousin the Financial Select Sector SPDR (NYSEArca: XLF).

KBE’s recent reversal below its high kept a divergence alive that proved bearish in 2007. More details here: Bearish Financial Sector Divergence Stokes 2007 Crash Memory (don’t allow the bearish title to scare you … at least not yet).

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.

Buying Climaxes Soar to 1-Year High

Wall Street concluded 2014 with double-digit gains, the S&P 500 was up 11.34%, but stocks didn’t end on a high note.

The last week saw 393 buying climaxes, the highest amount since January 2014.

According to Investors Intelligence, buying climaxes take place when a stock makes a 12-month high, but closes the week with a loss. They are a sign of distribution and indicate that stocks are moving from strong hands to weak ones.

Hardest hit were utility, bank and insurance stocks along with the corresponding ETFs.

The Utility Select Sector SPDR ETF (NYSEArca: XLU), Financial Select Sector SPDR ETF (NYSEArca: XLF) and iShares Russell 2000 ETF (NYSEArca: IWM) were some of the prominent ETFs with weekly red candle highs.

The Profit Radar Report closed all equity positions on December 30, largely because the Russell 2000 (one of the leading indexes at the time) displayed sluggish internals.

The chart below plots the S&P 500 against buying climaxes. When looking at the chart it’s important to keep in mind that buying climaxes are reported on Monday of the following week.

Since most of the 2014 corrections were brief and followed by a V-shaped recovery, it appears as if buying climaxes marked lows instead of highs.

The second chart shows selling climaxes, which soared in early December.

The recent spike of buying and selling climaxes suggests that investors are torn and the period of calm may have come to an end.

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.

Simon Says: SPDR S&P Bank ETF (KBE) Gnawing on Key Resistance

The Financial Select Sector SPDR ETF (NYSEArca: XLF) has been leaping from one new recovery high to the next.

But its Wall Street cousin, the SPDR S&P Bank ETF (NYSEArca: KBE), has been stuck in a 12-month trading range.

The chart below plots KBE against XLF. KBE is back at key resistance around 34.

KBE is at an inflection point. Could KBE become the (sector) tail that wags the (broad market) dog?

The December 21 Profit Radar Report showed two S&P 500 projections (one long-term bullish, one short-term bearish) and stated:

“Stocks may hit an inflection point once the S&P 500 and Russell 2000 record new all-time highs. Depending on measures of market breadth at the time, we will either scale down (or protect) our long exposure or add to it.”

The S&P and R2K did hit new all-time highs and are close to their inflection point.

I’m not sure if KBE will be the tail that wags the dog, but KBE confirms that the market should be watched carefully for either acceleration or temporary breakdown.

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.

Bearish Financial Sector Divergence Stokes 2007 Crash Memory

Since their inception, the SPDR S&P 500 ETF has almost always confirmed new highs of its cousin, the Select Sector Financial ETF. The only time it didn’t was in 2007 … and today. Here’s what makes this potential repeat intriguing.

For all the Whac-a-Mole bears who’ve been getting clobbered by the omnipresent bull market mallet, there’s finally a faint ray of hope flickering out of the same black hole that caused the last financial meltdown – the financial sector.

True, the Financial Select Sector SPDR ETF (NYSEArca: XLF) is humming higher, but the SPDR S&P 500 Bank ETF (NYSEArca: KBE) is not.

To be exact, the KBE bank ETF is trading 6.5% below its March high while the XLF financial ETF has already edged out new recovery highs. That’s unusual.

The chart below shows that since its inception, KBE has confirmed every significant new XLF high (dashed gray lines). Only two exceptions (dashed red lines) created a bearish divergence:

• May 2007
• August 2014

Although we don’t need the aid of a chart to remind us of what happened post May 2007, the chart tells us anyway.

Obviously, it would be premature to bunker up and batten down the hatches based on a sample size of one.

Even if the 2007 scenario is playing out again, it’s too early to pencil in a market crash in your 2014 trading calendar. Why?

1. There’s a grace period between the XLF high and the final S&P 500 (NYSEArca: SPY) high. In 2007, the S&P 500 rally continued five months after XLF topped and the market didn’t enter free fall territory until a year after XLFs all-time high.
2. XLF just saw a technical breakout. This looks bullish on the chart until proven otherwise. However, the breakout mimics a prior pattern that failed (see “XLF Breaks above Resistance to New 6-year High” for more details).

A small detail many have already forgotten is that the S&P 500 dropped nearly 12% in July/August 2007 just before shooting to its final October hurray.

A similar pullback now would certainly make this financial sector divergence even more intriguing.

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.

XLF Financial ETF Breaks above Resistance to New 6-year High

The XLF financial ETF just soared to new highs not seen since September 2008. Perhaps more interesting than this new high is the pattern of this breakout. Interestingly, this week’s XLF push mimics the June breakout almost tit for tat.

The Financial Select Sector SPDR ETF (NYSEArca: XLF) has been on fire and just busted through resistance that kept a lid on prices throughout July.

The XLF chart below shows Thursday’s breakout along with various other support/resistance levels highlighted in the past.

The blue boxes highlight the similarities between two recent patterns:

• Triple top (red dots)
• Selloff (red arrows)
• Eventual break to new highs (green arrows) on elevated volume (green boxes)

The question on most investors’ minds is whether this breakout will stick.

If the pattern repeats itself, XLF would enjoy limited upside, a consolidation period and another pullback.

I am not sure if the pattern will repeat, however the prior resistance right around 23.05 is likely to act as support in the days/weeks to come. A drop back below 23 would caution that the bullish breakout is due for a pause.

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.

Sector ‘Heat Map’ Shows Cooling Appetite for Risk

Every bull market has a certain life expectancy. Nobody knows how long this bull will live, but a look at the S&P 500 industry sector ‘heat map’ shows ‘graying around the temples’ as investors rotate out of higher risk industries.

A rising tide lifts all boats. This sounds cliché, but was certainly true in 2013.

The first chart below shows the Q4 2013 performance of the nine S&P 500 sector ETFs. Those nine ETFs are:

• Industrial Select Sector SPDR ETF (NYSEArca: XLI)
• Technology Select Sector SPDR ETF (NYSEArca: XLK)
• Consumer Discretionary Select Sector SPDR ETF (NYSEArca: XLY)
• Materials Select Sector SPDR ETF (NYSEArca: XLB)
• Financial Select Sector SPDR ETF (NYSEArca: XLF)
• Health Care Select Sector SPDR ETF (NYSEArca: XLV)
• Consumer Staples Select Sector SPDR ETF (NYSEArca: XLP)
• Energy Select Sector SPDR ETF (NYSEArca: XLE)
• Utilities Select Sector SPDR ETF (NYSEArca: XLU)
  The ETFs are sorted based on Q4 2013 performance.

More risky, high beta sectors (red colors) like technology and consumer discretionary were red hot in the last quarter of 2013.

‘Orphan & widow’ sectors (green colors) like utilities and consumer staples lagged behind higher risk sectors.

The first chart is a snapshot of a healthy overall market. No wonder the S&P 500 ended 2013 on a high note.

The second chart shows that the tide turned in 2014. Conservative sectors are now swimming on top, while high octane sectors have sunk to the bottom of the performance chart.

This doesn’t mean the bull market is over, but the distribution of colors illustrates that investors have lost their appetite for risk (for now).

Like graying around the temples, this rotation out of risk reminds us of an aging bull market.

It’s not yet time to order the coffin, but indicators like this do warn of the potential for a deeper correction.

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.

The Simple Trick That Skewed the S&Ps P/E Ratio For Everyone

Investing is about value, buying low and selling high. But how do you determine value if the most popular value gauge has been compromised. Yes, via a 2008 economic stabilization act, Congress changed the ‘E’ of P/E.

In 2008 everyone (aside from short-sellers) were in crisis mode. Banks, Federal Reserve, Treasury Secretary and the President were ready to do whatever it takes to get the job done.

The job? Bail out banks and push the S&P 500 higher (SNP: ^GSPC). How? Didn’t matter.

The job got done, and with stocks as with sausages, if the end result tastes good you don’t ask how they’re made.

Not a day goes by where we don’t read about bank profits, bank bonuses, and bank shenanigans to make more profit. So let’s talk about bank profits for a moment.

Not everything that shines is gold and not everything that’s black on the income statement is profit.

From Mark-to-Market to Mark-to-Make-Believe

There was a time when banks loved the Mark-to-Market accounting model, because it allowed them to showcase truly miraculous real time profits. By 2006/07 the financial sector accounted for over 40% of S&P 500 earnings.

Things changed in 2007/08. Mark-to market wasn’t so popular with banks because it revealed enormous real time losses. Bankers don’t like to see red. Bankers prefer to hide their losses.

The Federal Reserve and Congress decided that’s a good idea since losses erode confidence.

Bankers lobbied the Financial Accounting Standards Board (FASB) to change the fair market accounting rule – rule 157 – but the FASB resisted. The FASB knew that changing fair market or Mark-to-Market was a free pass that practically required no write-downs ever.

However, via the Emergency Economy Stabilization Act of 2008, Congress gave the SEC the authority to suspend Mark-to Market accounting. FASB was strong-armed and FASB rule 157 was suspended on April 2, 2009.

FASB 157 – What Does it Mean?

Since April 2, 2009, banks are basically free to value their toxic assets as they please. This example illustrates how the financial engineering formula works in real life.

The two charts below show 1) S&P 500 P/E ratio and EPS (based on as reported data) 2) S&P 500 financial sector EPS (datasource: Standard & Poor’s).

Bank ABC holds mortgage-backed assets originally valued at $1,000. After running some proprietary and non-verifiable models the bank determines it will eventually sell the asset for $950. The loss, termed credit loss, is only $50.

However, because of MBS bad rep, the banks portfolio is currently worth only $500. The actual current value ($500) minus the credit loss ($50) is called noncredit loss ($450).

The $450 noncredit loss is recorded on the balance sheet under “comprehensive income,” but is not run through the income statement. Those losses don’t affect earnings, and are excluded from banks’ regulatory capital calculation.

That’s right, every single bank earnings report since April 2, 2009 did not account for losses from toxic assets.

This means that the P/E ratio for ETFs like the Financial Select Sector SPDR (NYSEArca: XLF) and by extension the SPDR S&P 500 ETF (NYSEArca: SPY) is skewed.

It’s been nearly four years since the FASB rule 157 change, so why write about it now?

Because the European Commission is proposing a similar accounting change, and (this is a real shocker) confiscation of private assets to help banks. More details here: Europe Proposes Mass Confiscation of Private Assets

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.

$7 Trillion Corporate Cash Pile – Can it Set Stock Market on Fire?

Based on recent Thomson Reuters data, corporations around the globe hold a record $7 trillion worth of cash on their balance sheets. This has to be bullish for stocks, right? Not necessarily. Here’s everything you’ll ever need to know about the effect of corporate cash piles on stocks.

Reuters just reported that companies around the world hold almost $7 trillion of cash and cash equivalents on their balance sheets.

The Federal Reserve pumped about $3 trillion into the U.S. economy. This has propelled the S&P 500 ETF (NYSEArca: SPY) by over 175%. Should we imagine what $7 trillion could do?

Let’s take a look at some basic numbers and concepts before we start drooling over the potential stock market profits.

Corporate Cash 101

It is somewhat difficult to find coherent corporate cash figures that allow consistent charting and tracking. Most estimates exclude financial corporations (NYSEArca: XLF), other don’t. Some estimates are limited to domestic cash piles, other are global.

The analysis provided here is based on data from the Federal Reserve for non-farm and non-financial companies.

Based on the latest available data, non-financial U.S. corporations had caches worth $1.76 trillion. As figure 1 illustrates, this is the highest corporate cash pile in history.

Two Sides of the Balance Sheet

However, there are two sides to the balance sheet: Assets and liabilities. Wherever there are assets, there are also liabilities.

Figure 2 shows that corporate liabilities have grown along with the assets. The data suggests that a fair portion of the corporate cash pile is mortgages by liabilities.

Figure 3 pegs the difference between U.S. non-financial corporate assets and liabilities – U.S. corporate net worth – at $1.1 trillion.

The ‘Corporate 1%’

According to the Financial Times (which analyzed the S&P Global 1200 Index), 32% of corporations hold 82% of the aggregate global cash hoard.

Figure 4 shows the top 5 cash richest corporations of 2013. Apple, Microsoft, Google, Verizon, Samsung.

Effect of Corporate Cash on Stocks

Basic logic suggests that corporate cash – if invested – is bullish for the economy and, by extension, major stock indexes like the S&P 500 and Dow Jones (NYSEArca: DIA).

Figure 5 plots the S&P 500 (SNP: ^GSPC) against U.S. corporate ‘net worth.’

The correlation between corporate ‘net worth’ and S&P 500 peaks contradict the assumption that corporate wealth is good for stocks.

The red lines show that major S&P 500 peaks coincided with prior, albeit smaller, corporate cash stockpiles.

Corporations have more money because they are paying less taxes despite record profits.

‘Legal’ tax evasion has become one of the biggest contributors to the growing cash pile.

Here’s how companies do it and how many billions they save (or cost Uncle Sam):

Corporate Profits – Born in the US, Taxed Elsewhere or Nowhere

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, 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.

One Indicator Pegs U.S. Economy at Worst Level since 1959

Many economies predict 2014 to be the year of the economic recovery. Some economic indicators and surveys support this view, but this powerful common sense indicator shows the economy at its worst state since 1959.

Money velocity is the frequency at which one dollar changes hands and is used to buy goods and services within a given period of time.

To illustrate we’ll look at two simplified mock economies:

The Federal Reserve prints $100 to buy Treasuries from banks (NYSEArca: XLF). The bank invests the $100 in stocks.

A consumer withdraws $100 from his bank account to pay his mechanic. The mechanic takes his wife out for a nice dinner and the restaurant uses the money to pay its staff and buy new equipment. After receiving her pay check the waitress goes out and buys a new watch.

The original $100 in the second mock economy changed hands four times (high velocity) and helped support three additional individuals/businesses once  in circulation.

The conclusion is obvious: The higher the velocity, the healthier the economy.

Below is a chart of the U.S. money velocity. The St. Louis Fed money velocity data goes back as far as 1959. Current money velocity is at an all-time low.

This can’t be good for the economy and one would think that low money velocity couldn’t be good for the stock market either. Is that so?

Rather than assume, here are the facts.

The second chart plots the S&P 500 (SNP: ^GSPC) against the money velocity of M2 money stock.

The S&P 500 is charted on a log scale to enhance the major up and downs of the past 55 years.

Low money velocity preceded a bear market in 1973 and lower prices in 1977. Low money velocity was also seen about a year before the 1987 crash, which sent the S&P 500 and Dow Jones spiraling.

But there were other instances that had no effect, or no immediate effect, on the S&P 500 (NYSEArca: SPY) and Dow Jones (NYSEArca: DIA).

The current wave of velocity anemia is as unprecedented as the Fed’s liquidity machinations. Both events are likely connected (for every action there’s a reaction).

At very best, money velocity (and lack thereof) may serve as a very blunt warning signal.

Fortunately, there are better warning signals. One of them is discussed here. In fact, it is so effective, I call it insider trading. How Insider Trading Just Became Legal

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, 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.