U.S. Stock Market: Are Individual Investors Now Fully Invested?

While generally not a big fan of weekly sentiment polls, the latest weekly survey results from the American Association of Individual Investors caught my eye. After missing most of the bull market in U.S. stocks that began in March 2009, individual investors now appear to be fully invested and fully committed to the long side (at the top, perhaps?). The latest AAII poll shows the bullish percentage is now at 51.9%, while bears among individual investors have dropped to only 19.2%. Even though these numbers are not at ultra extreme levels, they are certainly noteworthy outliers when compared to weekly AAII results over the last five years.

And here is one of the greatest charts I have ever seen as it relates to potential investor reserves or potential "firepower" for additional gains in the U.S. stock market. The author of this analysis is Lance Roberts of STA Wealth Management (www.stawealth.com). I found this chart after a simple Google search on NYSE Margin Debt. Doug Short at www.dshort.com highlighted this chart on one of his many well researched articles. In the chart below, Lance Roberts calculates Investor Credit as the sum of Free Credit Cash Accounts plus Credit Balances in Margin Accounts minus Margin Debt. The research is brilliant and clearly demonstrates (to me) that Individuals are leveraged to the hilt with U.S. stocks right now, and I think it is safe to assume that there is NO ADDITIONAL FIREPOWER from this source of potential buying to support any significant further gains in the U.S. stock market!

On the international front, saber rattling between Russian President Putin and most Western governments is escalating on a daily basis. While I can't vouch for the exact translation, according to a Reuters report, here is part of a pretty scary speech Putin made in Moscow yesterday (Friday 8/29):

"Russia is far from being involved in any large-scale conflicts. We don't want that and don't plan on it. But naturally, we should always be ready to repel any aggression towards Russia." Putin then goes on to say "Russia's partners should understand it's best not to mess with us. Thank God, I think no one is thinking of unleashing a large-scale conflict with Russia. I want to remind you that Russia is one of the leading nuclear powers." 

Ouch! Is there anyone who really thinks Putin is scared of a few sanctions from the West? The Russian-backed separatists in Eastern Ukraine have clearly won against the Pro-Western Kiev central government, and you can bet the ranch that hard fought territorial gains for separatist forces will continue to expand in the days and weeks ahead. Increased Western sanctions will do nothing to change this outcome, but additional sanctions will almost certainly guarantee a steep recession in Europe over the next several quarters at least! (Postscript to this paragraph added Sunday, August 31: Russian President Putin on Sunday raised his rhetoric over the situation in eastern Ukraine, saying for the first time that the region should perhaps become an independent nation. "We need to immediately begin substantive talks," he said in an interview with Russian state television, "on questions of the political organization of society and statehood for southeastern Ukraine with the goal of protecting the lawful interests of the people who live there.")

Lest we forget that there are a few things happening elsewhere in the world, in the Mideast today (8/30), King Abdullah of Saudi Arabia was in the news this morning suggesting that the next potential target for jihadists (now sweeping through Syria and Iraq) will be Western nations (presumably he means the U.S. and Western Europe) unless there is rapid and immediate action to thwart this extraordinary threat. 

To say this is an interesting landscape to be an investor right now is the ultimate understatement! The black swan population is no longer an endangered species, in my view!

I think it may be noteworthy that the only major U.S. stock index that was down last week was the Dow Jones Transportation Average (-0.26% on the week). While most other major indexes were up between 0.50% and 1.5%, Biotech stocks surged more than 6%, on average last week. The action in Biotech issues could be considered "frothy" !

And I think I have saved the best for last in this column today. The CBOE VIX Index was actually UP 4.45% last week. How is this possible given the steady and modest across-the-board daily gains last week. According to my formula, the actual volatility of the S&P 500 Index last week was just 3.23 for the 5-day period Monday through Friday. Yet the VIX Index strangely jumped 4.45% on the week to end at 11.98. 

What could be happening here? Is a big move about to unfold? The answer is a resounding YES!

In the interest of full disclosure, I have a significant short position in the S&P 500 Index in my managed accounts. Here are two key monthly charts with all signals reflected from my computer trading system:

(Second Postscript Sunday night, August 31, 4:20 PM Central Time: Chinese e-commerce company Alibaba plans to launch its U.S. initial public offering, which could raise more than $20 billion, early in the week of September 8th. Base upon this information, the initial valuation of this company is therefore estimated near $130 billion. With corporate stock buybacks now in decline, and corporate profit margins narrowing, and the Federal Reserve in a "stealth tightening" period, the Alibaba IPO will be looked upon as the ultimate "straw" that broke the back of the 66-month old bull market in U.S. stock prices when we are sharply lower in a full-fledged bear market three months from now.

Dow Jones Transportation Average Monthly Chart with Computer-generated Buy & Sell Signals

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

S&P 500 Index Closes Above 2,000 ... What's Next?

Despite some late day profit-taking, the S&P 500 Index managed to close above 2,000 today for the first time ever. The final tick was 2,000.02 as compared to an intra-day high posted late morning today at 2005.05. If an investor could have bought the exact intra-day low at 666.80 in early March 2009 and then held his position until today, he would now have a 200% gain, almost exactly.

Just a couple of quick notes this evening:

1. I think it's noteworthy that the Dow Jones Transportation Average AND the Dow Jones Utility Average both closed lower today (-0.39% and -1.00%, respectively).

2. A daily chart sell signal was triggered today by my computer system in the SPDRs Select Sector Utilities ETF (XLU).

3. A daily chart buy signal was triggered by my computer system today in the TYX 30-year Treasury Bond Yield Index. This is equivalent to a sell signal in the actual 30-year T-bond price.

4. A buy signal was triggered by my computer system yesterday in the VIX (CBOE Volatility Index). This was unusual because yesterday was another low volume UP day in the market.

5. Daily chart sell signals were triggered by my computer system yesterday in the Philadelphia Semiconductor Index (SOX) and the Semiconductor Holders ETF (SMH).

6. Does anyone really think that Russia will let the separatists in Eastern Ukraine be defeated by the Pro-Western Kiev Central Government? No chance!

7. Does anyone think that the latest crisis in the Mideast involving ISIS (or ISIL) will be resolved anytime soon? No chance!

8. U.S. Durable Goods Orders were up a record 22.6% in July as reported today, and U.S. Consumer Confidence jumped to a 7-year high this month. The Federal Reserve is already well into a "stealth" tightening with its "taper" of monthly bond purchases. How long now before Yellen & Company have to telegraph the real tightening that's just around the corner? Bullish investors are so delirious now that I actually read a report today which suggested that Fed rate hikes would be good for stock prices! Simply incredible!! What's clear to me is as soon as the Fed telegraphs its first rate hike (for later this year or in Q-1 2015), four more rate hikes will be immediately priced into the market. The 10-year T-note yield will rise above 3.00% from its current level near 2.39% before you can say "Bear Market"!!

9. Does anyone really know what's happening in China's economy right now? Is there a housing price collapse now underway there that will dwarf the post-Lehman housing collapse in this country in 2008? The debt crisis in China looks very real and is now an imminent threat to the entire global economy.

10. In my humble view, the level of corporate stock buy-backs has peaked; the level of M&A activity has peaked; and corporate profit margins have peaked.

In the interest of full disclosure, I am short the S&P 500 Index in my managed accounts. I fully expect to capitalize on a major correction in the U.S. stock market over the very near term horizon.

Postscript (added Wednesday Night August 27th): A daily chart sell signal was triggered today in the U.S. Dollar Index (DXY). This sell signal is especially noteworthy given the apparent recent strength in the U.S. economy vis-a-vis the Euro Zone and across Asia and also given higher relative U.S. interest rates. It is my view that a bearish turn in the U.S. Dollar here would be another negative for U.S. stock prices (and maybe even the key "straw" that breaks the back of this incredible bull market).

U.S. Dollar Index (DXY) Daily Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market: Semiconductor Sector Sell Signal Triggered Today!

Just a quick update here.

Daily chart sell signals were triggered by my computer trading system today in the Philadelphia Semiconductor Index (SOX) and the Semiconductor Holders ETF (SMH). Since the semiconductor stocks as a group are among the top performers so far this year (up about 20% YTD), I think these sell signals are noteworthy.

In the interest of full disclosure, I expanded my short position in the S&P 500 Index this morning.

Philadelphia Semiconductor Index (SOX) Daily Chart with Computer-generated Buy & Sell Signals

Semiconductor Holders ETF (SMH) Daily Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market: Bulls Still In Control?

Given the new all-time record high posted last week in the S&P 500 Index, perhaps there shouldn't be a question mark in the title of this column today. Bearish pundits (like me) must be shaking their heads at the extraordinary resilience of the current bull market which has now lasted 65 months. 

The S&P 500 Index bottomed in March 2009 at 666.80. It peaked last week at 1994.75, almost triple the intra-day low set 5 1/2 years ago. 

Despite very minor losses in some indexes this past Friday, most major indexes posted gains last week of between 1.50% and 2.00%. And among these major benchmarks, only the Russell 2000 Index is in negative territory year-to-date so far in 2014. Even this laggard is only down 0.28% on the year. It seems like almost everything is up nicely. Biotech stocks lead the way with average gains near 26%. Semiconductor stocks are up almost 20% year-to-date, utility stocks are up about 13%, and transportation stocks are up about 14%. Heck, even gold/silver stocks are up, with the Philadelphia Gold/Silver Index ahead 18% on the year. And as incredible as it sounds, long-term Treasury bonds are actually up 15% this year so far!

Explanations for all this positive price action are certainly possible in hindsight, but even with this "perfect" vision I personally would not like to be the one to explain it all. And I doubt there is anyone on Wall Street who had a forecast that matched reality over these last 8 months. 

Fed Chair Janel Yellen appears to be facing a slightly more hawkish voting membership at the FOMC, but she doesn't appear ready for any dramatic changes in the current path of relatively accommodating monetary policy. The so-called "taper" of quantitative easing (QE) is steadily progressing and will probably end as expected in October 2014. However, ZIRP (zero interest rate policy) is likely to continue into at least mid-2015, if Ms. Yellen's latest speech (at Jackson Hole) is any indication.

The latest investor sentiment surveys reflect too much bullishness by often-wrong investors (AAII in particular), but this forecasting tool has been almost worthless over the last five years. There are many bearish divergences and negative non-confirmations in the technical data, but these tools have also been less than helpful in recent years. For most investors, two tried and true formulas have worked better than almost every other guideline or system. Those two are "the trend is your friend" and "don't fight the Fed".

My own computer trading system flashed the first monthly chart sell signals last month since July 2007. Of course, the S&P 500 Index is already above its July peak, and the Nasdaq Composite Index is now at its highest level since March 2000.

In the interest of full disclosure, my short position in the S&P 500 Index is still in place, but every day is a challenge with respect to the choice of liquidating or adding to this losing position. I think most investors are underestimating the negative impact on liquidity from the ongoing taper of the Fed's quantitative easing program (now down to $25,000/month vs a high of $85,000/month last year). However, ZIRP seems to more than offset this negative for now, and bullish stock investors are the clear winners year-to-date.

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

Special Update: U.S. Stock Market - Nirvana? Or Time To Be 100% Short?

In my last column dated Sunday, August 17th, I disclosed that I had executed 25% of my overall planned short position in the S&P 500 Index late Thursday, August 14th and another 25% on Friday, August 15th. Today, August 19th, I completed my planned short position by executing the remaining 50%. For trading purposes, I like to use the ProShares UltraShort SDS ETF when attempting to capitalize on any expected downturn in the S&P 500 Index. This product is extremely liquid and  has a nice "kick" to it when the trade goes your way. 

For bullish traders and investors, today's NYSE afternoon close has to be "nirvana" with the Nasdaq Composite Index now at its highest level since March 2000 (which was arguably the greatest stock market top on record). Apple posted a record closing high today, eclipsing its previous high set in September 2012. However, it may be noteworthy that the record intra-day high for Apple from September 2012 was missed by a few cents today. No worries, though, as I am sure the new iPhone will be great. Home Depot jumped 5.55% today on better-than-expected earnings and a positive outlook from management for the next several quarters. And most major stock market indexes are now within a stone's throw of their all-time highs as set last month. Like I said, nirvana is a perfect description for the feelings that bullish traders and investors must be experiencing right now.

And maybe there will be a couple of more days of this bullish glow and nirvana-like feelings, but the tide has already turned and the expected downturn in the U.S. stock market will be sharp and swift. In 1987, the high for the year in the S&P 500 was posted on August 25th. There are three more trading days this week before Monday's August 25th anniversary date. Do the bulls even have this much time (three days) before the expected market slide begins? Probably not!

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market: Heroic Price Action

On Friday, August 15th, the U.S. stock market was nothing short of "heroic" in the face of more potentially disturbing news from Ukraine. While this latest report was less than clear, the pro-western central government in Kiev announced that a Russian military incursion into Ukraine's sovereign territory had taken place and that Kiev military forces completely destroyed these Russian forces. The U.S. stock market was nicely higher in first-hour NYSE  trading on Friday, but then plummeted on this news. By noon eastern time, the S&P 500 Index had fallen about 1.1% from its morning high before finding meaningful support. At that time, the Russian Government then announced that Kiev's version of the latest military landscape in western Ukraine was pure "fantasy", and that no Russian military incursion had ever taken place. The S&P 500 Index then rallied back to unchanged on the day. Most major U.S. stock market averages gained between 1% and 2% last week, with the Dow Jones Industrial Average lagging slightly with only a 0.66% gain.

In the interest of full disclosure, for my managed accounts I executed 25% of my planned short position in the S&P 500 Index late Thursday and the second 25% in the first hour of trading on Friday. I consider myself extremely fortunate to have covered 100% of my shorts the previous Friday, August 8th, and last week's rally allowed me to re-establish a 50% position at excellent prices relative to one week ago.

In my humble view, the bearish and bullish cases for the U.S. stock market haven't changed very much. The bulls point to solid 2nd quarter corporate earnings and a relatively friendly low interest rate environment, among other positive factors. The bears point to historically high stock market valuations, global unrest, a Fed that appears to be scaling back its stimulus, and other negative technical factors. 

When I was the Editor and Publisher of the Sutton Advisory Letter for the 10-year period between 1988 and 1998, I penned more than 2,500 daily and weekly advisories. I know from that very personal experience that I could easily make a convincing bullish or bearish case whenever I needed to support my forecast at the time. While I rarely gave away my key forecasting tools, my successful forecasts over that time period were almost always tied to two or three market factors that stood out from the rest. And there was no shortage of "strong hunches" in the mix that were based upon decades of experience.

So where do we stand now? Are there two or three factors that stand out now? Or maybe even a "strong hunch" in play here? Unfortunately, the answer to both questions is NO. All I have is my computer trading system and its monthly chart sell signals as triggered in most major U.S. stock market indices at the end of July. For me, that's all I need !

NY Composite Index Monthly Chart with Computer-generated Buy & Sell Signals

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

S&P 500 Index Monthly Chart with Computer-generated Buy & Sell Signals

U.S. Stock Market: Is The Correction Over Already?

From its all-time record high at 1991.39 on July 24th, the S&P 500 Index corrected 4.35% to a low last Thursday at 1904.78. The Russell 2000 Index had a more serious correction from its record high at 1213.55 on July 1st. This benchmark of small-cap stocks fell 8.75% to its recent low at 1107.30 on August 1st. And the Nasdaq Composite Index fell the least recently, posting a correction of just 3.65% between July 25th and August 7th.

Is the correction over now? 

Not likely in my view!

If the overnight price action is included in yesterday's activity (Friday, August 8th), then most major U.S. stock market indexes posted a one day range of approximately 2%. Given that there have been very few daily ranges greater than 1% this year so far, yesterday's volatility is noteworthy.

The financial press highlights two major announcements as the catalysts for Friday's extreme price action. Late Thursday, the Obama Administration announced that the U.S. will provide humanitarian aid and also initiate military action (air strikes) in Iraq. The S&P futures promptly dropped 20 points (about 1%) on this news. Then early Friday morning, the Russian government announced that it was prepared to take actions that would relieve tensions in Ukraine. The S&P futures reacted immediately and rebounded to plus territory prior to the NY opening. After a relatively flat U.S. opening on Wall Street, stock prices found a strong bid and then rallied sharply to post exceptional gains of approximately 1% across-the-board.

On a technical basis, if we include the entire 24-hour range from yesterday, the S&P 500 Index found major support at its 150-day moving average line. For additional support, there was also an uptrend line in the S&P 500 Index that goes back almost two years, and there was also a 3-standard deviation lower Bollinger Band very near the bottom of the early A.M. Friday overnight range.

With respect to my managed accounts, on Thursday night I remember thinking clearly that Friday would probably be a monster plus day for me (with my significant S&P 500 short position). Even though I knew ahead of time that major support was lurking about 1% below Thursday's NY closing prices, I wasn't sure how I was going to react to Friday's expected lower opening. In my imagination, I was thinking "complete collapse of the system", but in my gut I knew that maybe I should respect these key support levels and lock in the significant paper profits that I had accumulated in recent weeks. 

Early Friday morning, when Russia announced (for the 10th time) that maybe it would "step back" from the brink of all-out war in Ukraine, paper profits in my S&P short positions evaporated and soon turned to losses against the prior day closing prices. It was an especially long ride to work Friday morning, as Bloomberg radio announced every 10 minutes that S&P futures were rebounding sharply into positive territory following steep overnight losses. My window of opportunity to lock-in exceptional profits was gone, and now I had to decide whether or not to "take the pain" of any potential rally over the short-term horizon or liquidate with decent profits on the overall trade of the last several weeks. When I was younger, I am sure that I would have "stuck to my guns" and rationalized a strategy for keeping my shorts and risking "minor" short-term losses in favor of major possible gains in the new bear market that I have proclaimed in the strongest of terms that is now underway. But now that I am older (and maybe just a little bit wiser), I liquidated my entire S&P 500 short position within 10 minutes of Friday's NY opening. Of course, in hindsight, covering my shorts turned out to be a very fortuitous trade, but 35 years of instinct was all that save me yesterday from a giant single-day loss. Even after the fact, I still can't see the justification for the incredible 2% rebound off yesterday's overnight intra-day lows. 

So where to we go from here?

A daily chart buy signal was triggered by my computer trading system in the Dow Jones Transportation Average yesterday (please see chart below). This key stock market barometer had declined about 7% from its July 23rd peak to yesterday's intra-day low. Even though I strongly believe that the monthly chart sell signal in this index is the dominant signal (see chart below), we should probably respect the shorter-term daily chart buy signal for at least a few days, to clear the air and determine if any possible rally here has legs.

Bottom Line: I think U.S. stock prices will move sideways to slightly higher over the next few days and then resume the downtrend that began in July. My best forecast here is that the 50-day moving averages in most major indexes will NOT be exceeded on this rebound before the primary bear market resumes in earnest later this coming week. Cash is KING right now! I see very little upside potential in T-Bond prices, and I don't even want to own Gold, Silver, or related precious metals mining shares right now. I further believe that conditions are now ripe for a minor liquidity squeeze to develop over the very near term as the negative impact of the Fed's 8-month old "taper of QE" becomes more apparent. And, to add insult to injury, I anticipate increasingly hawkish rhetoric from Federal Reserve officials in their speeches to the marketplace as they attempt to brace investors for upcoming interest rate hikes and tighter monetary conditions.

Dow Jones Transportation Average Daily Chart with 3-Std Dev. Bollinger Bands and Computer Buy & Sell Signals

Dow Jones Industrial Average Monthly Chart with 3-Std Dev. Bollinger Banks and Computer Buy & Sell Signals

U.S. Stock Market: A Broken Clock Is Right Twice A Day

The following headline was posted on Reuters yesterday afternoon: "Despite sharp selloff, too early to worry about correction". After the worst week in more than two years (since June 2012), this headline and the related storyline are nothing short of astounding to me. If last week's decline is not a worry, then when should we worry?

I've been negative on the U.S. stock market for quite some time now, and I recently stepped up my bearish rhetoric in this column with the backing of key sell signals triggered this past month by my computer trading system. A quick review of my recent columns might be worthy of your attention. A monthly chart sell signal was triggered in mid-July in the Russell 2000 Index for the first time since July 2007 (the exact top of the 2002 - 2007 bull market). Monthly chart signals are rarely triggered in my computer trading system, but they are the most reliable as compared to daily and weekly chart signals.

While I don't consider myself a "perma-bear" by any measure, I clearly underestimated the staying power of the 2009 - 2014 bull market. Credibility is a fragile commodity in the investment advisory business, and I sincerely hope that my correct call on last week's steep decline is not viewed by readers in the same vane as the proverbial "broken clock that is right twice a day".

With last week's 467-point decline in the Dow Jones Industrial Average (-2.75%), this venerable index is now actually down on the year (0.50%). And the Russell 2000 Index is down 4.19% on the year so far!

The S&P 500 Index fell 2.69% last week, but it's still up 4.15% on the year. And the NY Composite Index fell 2.67% last week, but it's still up 2.81% this year so far.

However, monthly chart sell signals were triggered by my computer system last week in both the S&P 500 Index and the NY Composite Index (see charts below). Monthly chart sell signals were also triggered the following indexes: DJIA, DJTA, OEX, OSX, and SOX. And among major stocks, monthly chart sell signals were triggered in AXP, CAT, CLX, KO, CL, CMCSA, XOM, F, FWLT, GT, HON, IP, JNJ, KMB, LLY, MMM, NFLX, NVX, PCAR, PEP MO, QCOM, UPS, VIA, and WY, among others.

Bottom Line: Not only should stock investors be worried, they should probably start selling before it's too late! A major stock market correction is now underway.

NY Composite Index Monthly Chart with Computer-generated Buy & Sell Signals

S&P 500 Index Monthly Chart with Computer-generated Buy & Sell Signals

xxx

Dow Jones Transportation Average Monthly Chart with Computer-generated Buy & Sell Signals

Minnesota Mining (MMM) Monthly Chart with Computer-generated Buy & Sell Signals

Pepsico (PEP) Monthly Chart with Computer-generated Buy & Sell Signals