S&P 500 - Are There Too Many Crash Calls for Stocks to Actually Crash (or Correct)

July 16, 2014

Does stock chart analysis work? I'd like to think so.

But the recent effectiveness of charts pales in comparison to a deceptively simple sentiment gauge - the media headline indicator.

The Blind Tricking the Blind

The financial media never reveals or admits how much bunk it actually churns out, so allow me to do it.

The next few minutes will be entertaining, if you did not listen to their alleged 'expert analysis.'

Unfortunately, many retail investors do listen to the media, making financial press headlines a helpful contrarian indicator, and a 'force' that continues to fuel stock market gains. In fact, the extremely pessimistic press is one reason why the S&P 500 (SPY) keeps crawling higher.

Without further ado, here is a brief chronicle of the media’s uncanny prowess to support the wrong side of the trade along with commentary by the Profit Radar Report.


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April 30, 2014 – S&P 500 at 1,884

April 30, Profit Radar Report: “The old and chewed-out ‘sell in May and go away’ adage is getting a lot of play these days. I get suspicious when our carefully crafted outlook becomes the trade of the crowd and a crowded trade. How will the market fool the crowded trade?”

The media’s take:

  • CNBC: “Why sell in May adage makes sense this year: Strategist”
  • IBD: “Why investors expect to sell in May and go away”
  • MarketWatch: Risk of 20% correction highest until October

May 11, 2014 – S&P 500 at 1,878.48

May 11, Profit Radar Report: “How will the market fool the crowded trade? A breakout to the up side with the possibility of an extended move higher.”

The media’s take:

  • Bloomberg: “The next liquidation crisis: What are the signals?”
  • CNBC: “I’m worried about a crisis bigger than 2008: Dr Doom”
  • Bloomberg: “U.S. markets on brink of 11% correction”
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June 11, 2014 – S&P 500 at 1,944

June 11, Profit Radar Report: “Different day, same story: Stocks are near their all-time highs, but the media treats this advance with outright contempt. Below is a small selection of today’s headlines. We can’t dismiss media sentiment as retail investors (unfortunately) listen to the media.”

The media's take:

  • CNBC: "Cramer: Prepare for stock decline"
  • WSJ: "How long can stocks maintain all-time highs?"
  • MarketWatch: "3 reasons why the Dow Jones shouldn’t be at 17,000"

June 25, 2014 – S&P 500 at 1,959

June 25, Profit Radar Report: “It only took one small down day (Tuesday) to reinvigorate media fear mongers.”

The media's take:

  • Yahoo: “S&P’s Stovall says be careful before jumping into stagnant market”
  • Yahoo: “’It looks like a peak:’ Robert Shiller’s CAPE is waving the caution flag”
  • CNBC: “Wall Street’s biggest bull calls for a correction.”

Irony at its Worst

A correction would actually be healthy, but a watched pot doesn’t boil.

The June 25 Profit Radar Report explains: “The media’s continuous market top calling, artificially extends every rally. We saw this in April/May. Although media pessimism isn’t as pronounced today as it was in April/May, it’s enough to be considered a bullish wild card.

Bull markets die or correct because of ‘starvation.’ The market needs potential buyers to fuel rallies. That’s why good news tops are dangerous, because they suck in so many buyers and leave few sellers. Where there’s no buyer, there’s no price increase. ‘Scary’ media headlines disturb this cycle and provide continuous ‘ammunition’ for the bull.”

At Recent All-time High – S&P 500 at 1,985

What was the media's take on the most recent all-time high?

  • CNBC: “Why this could be as good as it gets for stocks”
  • Yahoo: "Common sense says look out for a market top"
  • USA Today: “History says July is cool time to own stocks”
  • WSJ: "Dow nears 17,000 as rally gains steam"

Yes, you read correctly, there are actually two headlines with a bullish connotation, but the most fitting headline comes from MarketWatch.

Dow flirts with 17,000, but most people missed the ride

Hmmm, let’s see if the media can crack the mystery behind the missed rally.

Based on media sentiment, the S&P 500 (IVV) and Dow Jones (DIA) are not even near major market tops. That doesn't mean stocks can't correct though.

In 1990, the CBOE devised a 'sudden drop' indicator, which has a flawless record since the beginning of the QE bull market in 2009. This 'sudden drop' index is at a historic high. Is it reason to worry?

Here is a detailed look at the 'sudden drop' index: S&P 500 'Sudden Drop' Index at Historic Extreme

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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