By Simon Maierhofer
It's been a weird year for investors. Stocks seem to churn, coil or trade aimlessly for weeks and then explode (or implode) for a few days. Then the cycle starts all over again. All this is overshadowed by the omnipresent fear of a major market crash. Thanks to a reliable set of indicators, I haven't suffered from that fear in years, but I appear to be an exception.
According to Goldman Sachs, investors have already withdrawn $156 billion from mutual funds in 2016. This is more than double the amount in 2015 and the most since 2008. Based on the latest AAII poll of individual investors, less than one out of four investors expect stocks will be higher in six months.
Other investor sentiment indicators aren't quite as bearish, nevertheless, investor sentiment — and the wink-of-the-eye contrarian notion that the market tends to punish the “crowded trade” — suggests that the next 'fat pitch' trade may be to buy stocks.
Do other indicators agree?
October is the most bipolar month of the year, launching bull and bear markets alike. In recent years, October more often than not rejuvenated the bull market (blue bars highlight month of October).
The Profit Radar Report was very bullish in October 2011 (a buy signal at S&P 1,120), October 2013 and October 2014. Although we anticipated the September/October 2015 rally, our money-flow indicator said stocks will relapse (which they did dramatically at the beginning of 2016).
In general, the fourth quarter enjoys the tailwind of bullish seasonality.
The VIX and S&P 500 typically trade in the opposite direction, that's why VIX analysis can at times be helpful for stock investors. Few investors know that VIX seasonality hits a major peak in October (click here for VIX seasonality chart ). This is generally bullish for stocks.
In February, the S&P 500 produced a rare breadth thrust. This kind of thrust happened only eight times in the past 35 years. Every single time the S&P 500 traded higher a year later, with an average gain of 19.16%.
A detailed analysis of this breadth thrust is available here: 2016 Bear Market Risk is Zero Based on this Rare but Consistent Pattern
‘Fat pitch’ swing
Odds favor a fourth-quarter-2016 rally, but a trade without a defined trigger isn't a “fat pitch” trade.
Here's the setup needed for a “fat pitch” buy signal:
A drop below the September low (S&P 2,119) against a bullish divergence. We'll be looking at relative strength (RSI), the VIX and the percentage of stocks above their 50-day simple moving average (SMA) for bullish divergences.
This is exactly what happened when the Profit Radar Report recommended buying the S&P 500 at 1,828 on Feb. 11 (chart above illustrates the RSI divergence against support on Feb. 11).
Such fat-pitch setups can't be forces, but we can identify them in advance and be ready to strike if/when they happen. Right now, there is about a 50% chance we'll get this setup. This S&P 500 update highlights the key S&P 500 levels to watch for early signals.