The Long-Term Trader

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment, it may help you to create profitable trading strategies.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest book (eBook) has just been released: Prepare Now and Survive the Coming Bear Market. Amazon: http://goo.gl/2wWC8X Nook: http://goo.gl/VQstmr  Smashwords:http://goo.gl/eBpYBT 

My latest MarketWatch column on managing bear markets: http://goo.gl/njIQkQ

 

AAII survey (1/21/2015)

37.1% Bullish. 30.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (1/20/2015)

49.0% Bullish.  17.4% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

 

VIX: 16.66 (on 1/23/2015)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 53.27 (on 1/23/2015)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P is slightly above its 50-day moving average but pointing down. It’s above its 100-day and 200-day MA.

Bearish (Short-term Downtrend): crosses under 50-day, 100-day, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is even with its zero line and even with its red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 1.82% (on 1/23/2015)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: According to the indicators, we could go in either direction this week, and we probably will. The technical indicators are telling us the trend is still up but it’s struggling. Sentiment indicators are telling us that although investors are still complacent, many (but not all) have lost some of their enthusiasm. That can be attributed to increased volatility, worsening world events, and plunging commodities, to name a few. As always, the market has the final word, and this week it has a lot to say.

Opinion: This is an important week. On the optimistic side, we have the FOMC meeting, and they are certain to say little except they will keep interest rates low indefinitely. If the Fed says anything significant, please wake me up.

Last week, we waited to see whether ECB president Mario Draghi was going to initiate QE, and he didn’t disappoint. He reluctantly agreed to buy $60 billion a month in bonds until September 2016. The U.S. market responded by retreating by 100 Dow points before ending the day up by over 200 points. It wasn’t an enthusiastic rally but it was strong enough to give investors hope.

The next day, however, the Dow was under pressure all day until it finally fell by 141 points (the Nasdaq, however, eked out a small gain). Last week, UPS took a 10 percent haircut (lower earnings), SkyMall went bankrupt, 50,000 Wall Street jobs were cut ( http://goo.gl/LTn856 ), and oil keeps falling. We learned on Sunday that the Greeks elected anti-austerity candidate Syriza in a decisive victory. That should increase volatility as markets hate the unknown. Because of oil crashing, countries that rely on oil revenue (such as Venezuela) are turning into a fine mess.

It’s going to be a fascinating week.

If the market can shrug off all of the bad news and believe in the actions of the Fed and ECB, then the Dow may take another stab at 18,000. On the other hand, if the market cannot mount a strong rally, the market will probably fall fast and hard.

In my opinion, the odds favor the bears, even with the FOMC meeting. For six years, the FOMC and other central banks were able to convince investors that QE is a sound strategy that will help the economy. Because of QE, the market goes up, but cracks keep appearing.

The market will tell us a story this week, so watch closely. In my opinion, the bull market is on its last legs, a view I’ve held for nearly six months. As you may know from reading my MarketWatch columns, overly-confident bulls strongly disagree with my view (read the comment section of my columns for proof).

Don’t forget that 96 percent of money managers expect 2015 to be “as good as or better than 2014.” With the central bank on the side of Wall Street, the Fed will do anything in their power to keep this market from plunging by too much. For six years, they have been successful. Soon, however, we will see who is more powerful: the market or central banks.

If this bull market is truly in trouble, you will see even more volatility and failed rallies. As for me, I would rather be safe than sorry, which is why I suggest increasing cash positions. In my opinion, this is no time to risk all of your money when the market is this dangerous. 

Bottom line: This is an important week with many crosscurrents. I am looking for the elusive pivot point, i.e. a trend change.

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment, it may help you to create profitable trading strategies.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest book (eBook) has just been released: Prepare Now and Survive the Coming Bear Market. Here’s a link to the Amazon edition: http://goo.gl/2wWC8X, the Nook, http://goo.gl/VQstmr, or if you are international or don’t have an Amazon account: http://goo.gl/eBpYBT (Smashwords). 

My latest MarketWatch column on managing bear markets: http://goo.gl/njIQkQ

 

AAII survey (1/14/2015)

46.1% Bullish. 21.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (1/13/2015)

48.0% Bullish.  16.3% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

 

VIX: 21.07 (on 1/16/2015)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 45.90 (on 1/16/2015)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P fell below its 50-day moving average and pointing up. It’s slightly above its 100-day moving average but firmly above the 200-day MA (At 1960) 

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is slightly below its zero line and below its red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 1.82% (on 1/16/2015) Note: Bonds keep rallying. World currencies are in turmoil. 

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Sentiment indicators are still on the high side but not extreme, and won’t be until there is a sustained rally. The uptrend is struggling and the indicators reflect that. On the technical side, MACD turned negative and all the indexes are below their 50-day moving averages. That could change in a day depending on how this week plays out. Therefore, it’s too early to proclaim that the uptrend has ended.

Opinion: Swirling around the market is more bad news than usual. Chinese stocks got smashed on Monday by 8 percent as a reaction to the government’s tightening up margin requirements. The government  took steps to reduce speculation by retail investors. Europe shrugged off the Asian selloff because they have their eye on Mario Draghi and the European Central Bank (more on this below).

The financial world is still stunned by the actions of the Swiss National Bank (their central bank), which removed the cap that prevented the Swiss franc from rising too high. After the SNB removed the cap, the franc soared higher. The Swiss stock market plunged by 10 percent and a number of foreign exchange trading firms who were shorting the Swiss franc went bankrupt when their clients lost all their money. Trading currencies is an extremely risky endeavor because of the high leverage (between 50 or 100 to 1). For example, clients of these firms who bet $50,000 or more against the Swiss franc theoretically lost between $3 million to $5 million, and went bankrupt. The ramifications of the SNB are still being felt. It’s possible that more traders and firms will fail.

That brings us to this week. Mario Draghi, president of the European Central Bank, is expected to do something dramatic. On January 22, it is anticipated that he will purchase $640 billion in bonds, i.e. quantitative easing. For years, Draghi has been promising to do QE, but never did. This time he really, really means it. (Bloomberg says he’s doing it to “steer Europe away from deflation.”) Source: http://goo.gl/nCyIAL

Immediately after Draghi initiates QE, European stocks should rally along with the U.S. market. Then it will get interesting. Although the initial reaction will be positive, I will be looking to see if the QE rally can be sustained. I am also starting to wonder how this much QE will affect the world’s financial markets.

There is no doubt that strange things are happening. For example, oil got crushed along with other commodities, the actions of the Swiss bank were a shock, volatility has increased here and around the world, a number of stock markets have fallen by 10 percent in one day, and the yield on the 10-year Treasury is at all-time lows. Very strange. 

I am not smart enough to predict how this QE party is going to end, but it doesn’t feel right. It’s easy to initiate, but getting out is the hard part. If investors get the feeling that central banks did not think through the end game, all hell will break loose in the financial markets.

Bottom line: The market should rally this week as a reaction to the ECB’s QE. Traders can try and profit from the volatility but investors will get whipsawed, especially if QE causes indigestion. 

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment, it may help you to create profitable trading strategies.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest book (eBook) has just been released: Prepare Now and Survive the Coming Bear Market. Here’s a link to the Amazon edition: http://goo.gl/2wWC8X, the Nook, http://goo.gl/VQstmr, or if you are international or don’t have an Amazon account: http://goo.gl/eBpYBT (Smashwords). 

In the book, I interview market wizard Mark Cook, who helps readers navigate what he believes will be a devastating bear market. If you buy it, let me know what you think. Thanks in advance :). 

My latest MarketWatch column on managing bear markets: http://goo.gl/njIQkQ

 

AAII survey (1/7/2015)

41.0% Bullish. 27.7% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (1/6/2015)

50.5% Bullish.  15.2% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

 

VIX: 17.55 (on 1/9/2015)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 49.53 (on 1/9/2015)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P is resting on its 50-day moving average and pointing down. It’s still above its 100- and 200-day moving averages. 

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is above its zero line, but below its red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 1.97% (on 1/9/2015) Note: Bonds keep rallying. Can you spell, “bubble”? 

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: As you can tell from the indicators, there is no clear direction. Typically, when that occurs, volatility increases. While some sentiment surveys are reflecting more cautiousness, investors are plowing into equity ETFs and index funds. On the technical side, the increased volatility (Dow is up 1000 one week, down 1000 the next week) has made many technical indicators less effective. Many of the indicators help you stay on the right side of the trend. Right now, the uptrend is still intact but struggling. Bottom line: The indicators are telling us we could go in either direction.

Opinion: Not surprisingly, the market attempted but failed to reach Dow 18,000 last week. It was a volatile week, and month. If you’re new to the market, these 1000 point rallies and plunges are not healthy or normal. To me, this indicates the market is topping out. On the other hand, we’ve seen this story before last year, so we must wait and see how far the market may rally.

My latest MarketWatch column is coming out this week. As I wrote in the column, a mind-boggling 85 percent of investment advisors believe that “the markets will be as good, or better, than they were in 2014.” With numbers like that, it’s understandable why so few investors seem worried.

And yet, when I look at the facts, I don’t see blue skies as far as the eye can see. Right now, the crowd believes the Fed has their back, so complacency is widespread.

Most important, if the markets do unravel, as I expect, there will be a mad rush out of ETFs and index funds. Judging by what has happened in the past, investors will do most of their selling after they’ve already lost 20 percent or more.

As you may know, I wrote a book with Mark D. Cook, Prepare Now and Survive the Coming Bear Market. Mark makes a very strong case for a bear market. He believes the market will retreat during this quarter, but he is waiting for confirmation. Confirmation means that future rallies will fail, and there will be lower lows and lower highs on a chart.

With so many experts convinced that 2015 will be another good year (professor and author Jeremy Siegel predicted we’ll be at Dow 20,000 by year end), it is hard to convince anyone to take money off the table. This is what happens at market tops. As the market goes higher, and the bubble gets bigger, people believe that a bubble is the new norm. It takes an extreme correction to bring them back to reality, and even then, they will be told it’s a buying opportunity. When the market gets this ridiculous, it’s time to take some profits. 

Yes, the market could still go higher, which is what makes this market so confusing. The crowd believes the market will rally this week. As for me, I will wait for Mr. Market to reveal its hand.

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment, it may help you to create profitable trading strategies.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

 

AAII survey (12/31/2014)

51.7% Bullish. 19.3% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (12/30/2014)

56.4% Bullish.  14.9% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

 

VIX: 17.79 (on 1/2/2015)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 51.68 (on 1/2/2015)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P is above its 50-, 100-, and 200-day moving averages and pointing down

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is above its zero line, and even with its red 9-day signal line and pointing down. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.12% (on 1/2/2015) Note: Bonds keep rallying. 

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: The market has been drifting down. In fact, in a few more down days the S&P may fall below its 50-day moving average. Because it was a holiday week, we have to sit and wait to see what the market will do. After the Dow hit 18,000 (again), sentiment has been climbing. As we start the New Year, investors are bullish, hopeful, and complacent (reflected in the sentiment indicators). Don’t forget: The market has the final word, so waiting for it to “speak” is suggested.

Opinion: It’s time to bring your “A” game to the market. As I wrote two weeks ago, although the market went straight up during and after the Fed meeting, I said to watch what happens when it hits 18,000. To the surprise of many, the indexes retreated. This week will be very interesting as we see what the market is really made of.

If it is a strong bull market, it should make another attempt at 18,000 and blow by it. If that happens, then the bulls will remain in control for the time being. In my opinion, a more likely scenario is a struggling market that is unable to make it past its previous highs. This is not a prediction but an opinion based on probabilities. I believe this will be a rough quarter for the market.

And yet, it’s still early to put on the gas on the short side (that could change fast). We need more evidence and clues, and if I’m right, there will be many opportunities to profit. I also believe that volatility will increase this quarter, so be prepared for a wild ride. Short-term trading and day trading could be making a comeback in the near future.

The one wild card, as always, are the central banks. The odds are good that Europe’s central bank will initiate their version of QE. In addition, if our market starts to falter, the Fed will talk up the markets. The competing forces of a market that is weakening and central banks that are accommodating creates more volatility.

In my opinion, rallies and pullbacks will be short-lived (at first). If you make profits, take them quickly.

In other news, I have been working with Mark D. Cook, one of the wizards from Jack Schwager’s book, Stock Market Wizards. In fact, we have published an eBook that should be out next week. It teaches you how to manage and maneuver through a bear market. I will give more details when the book is published.

Speaking of Mark D. Cook, he believes the market is very vulnerable to a correction. If Mark is right, and he is in the minority, this could be the end to this bull market. As you’ll read in our eBook, he believes a bear market is imminent, so be prepared.

Bottom line: There are many unusual market events occuring within a very dangerous world. The U.S. still seems immune to most of the world’s financial problems, but eventually it will affect us. I’m still amazed the market went up this far and this fast. I’m more amazed that so many people still think the market is out of the danger zone. As I’ve written in previous columns, the air is getting very heavy up here.

As for me, I’d rather err on the side of caution.

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment, it may help you to create profitable trading strategies.

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

 

AAII survey (12/24/2014)

50.9% Bullish. 18.9% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (12/23/2014)

52.5% Bullish.  15.8% Bearish

Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low)

Bullish: If sentiment is over 60% bearish.

 

VIX: 14.5 (on 12/26/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 62.56 (on 12/26/2014)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P is above its 50-, 100-, and 200-day moving averages and pointing up

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is above its zero line, and above its red 9-day signal line and pointing up. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.25% (on 12/26/2014) 

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis and Opinion will not be posted this week. Have a great New Year and I’ll catch up with you the week of January 5th.