The Long-Term Trader

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

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

 

AAII survey (8/27/2014)

51.9% Bullish. 19.2% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (8/26/2014)

52.5% Bullish. 15.1% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 11.98 (on 8/29/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 and Dow are above their 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. (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 9-day signal line. MACD line crosses above zero line.

 

RSI (S&P 500): RSI is at 66.34 (on 8/29/2014)

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.

 

Bonds: U.S. 10-year yield is at 2.34% (on 8/29/2014)

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

 

Analysis: I’ve seen this story before. The sentiment indicators are reflecting increased exuberance by the financial media and retail investors (that is a bearish sign). After all, the market won back all of its lost points, turning nervous investors into believers again. On the technical side, the trend is up and the sky is the limit. Bottom line: If you believe the sentiment indicators, you are bearish. If you follow the trend or use technical indicators, you are bullish.

Opinion: If the market is going to have a severe correction, the odds are good it will happen within the next two to three months. With the problems in the Middle East, the slowdown in Europe, China’s disappointing PMI numbers, Ukraine, and stocks at all-time highs, the U.S. market (and the world) is vulnerable.

On the other hand, the Fed and central banks around the world are keeping interest rates low, and are determined to prevent their stock markets from tumbling. So far, it’s been working. If you believe in the Fed and its QE experiment, you will remain long. That strategy has seemingly worked for five years, and there are no signs it will stop working anytime soon.

However, with the geopolitical tensions increasing, and QE supposedly coming to an end, the bears might finally be given a chance. You already know what I think: The market is too dangerous to be long, and it’s too early to be short (although I personally own inverse ETF positions).

The hardest action to take right now is sitting and waiting for the market to reveal its hand. In my opinion, the market seems heavy, as if it’s struggling to go higher, but can’t. Nevertheless, a few positive words from the Fed or an optimistic geopolitical rumor and the market could rocket higher. That’s how it’s been for the last few months, and years.

If the market does not retreat soon, bearish investors will have to wait a little longer. In my opinion, the odds are better than even that the pullback will occur over the next two to three months, and probably much sooner. Because of the Fed, it’s impossible to predict when the market will plunge. I have no doubt that it will, however. Only you can decide if you want to sit on the sidelines and make zero profit, or stay in the game and hope to capture another 5 percent by the end of the year.

Bottom line: The next two weeks are very important. This will give us clues as to whether the U.S. market has enough power to ignore all the bad news and aim for the sky. And yet, don’t forget this proverb: The bigger they are, the harder they fall.

 

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

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

 

AAII survey (8/20/2014)

46.1% Bullish. 23.7% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (8/19/2014)

49.5% Bullish. 16.2% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 11.47 (on 8/22/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 is above its 50-day moving average, and pointing up. The Dow is above its 50-day MA and 100-day moving average, 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 even with its zero line, and above 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 9-day signal line. MACD line crosses above zero line.

 

RSI (S&P 500): RSI is at 62.59 (on 8/22/2014)

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.

 

Bonds: U.S. 10-year yield is at 2.40% (on 8/22/2014)

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

 

Analysis: The bulls needed to win back those 600 lost points and they did. Technical indicators are bullish and sentiment indicators are positive but not extreme, except for the VIX, which reflects extreme complacency. Put another way, no one expects the market to plunge. If you are bullish, you couldn’t ask for a more ideal setup. On the other hand, the geopolitical problems keep getting worse. In addition, although the bulls won the week in spectacular fashion, the market’s reaction to Janet’s speech was a big yawn. According to the indicators, we enter the week with the bulls in charge. The potential party poopers are geopolitical events spiraling out of control, or a failed rally (i.e. unable to hold S&P 2000). Although the bulls are feeling optimistic, caution is still advised.

Opinion: The bulls took control of the week beginning with a 185-point blowout on Monday, which helped keep the market higher most of the week. On Friday, there was a small pullback after Janet’s Jackson Hole speech. Few understood what she said, which is probably how the Fed (and the market), likes it.

As you read above, the short-term trend is up and there’s a good chance the S&P will hit 2000 this week. Dow 17,000 and S&P 2,000: It has a nice ring. I wish I could join the party and tell you that it would be a wonderful time to buy. But I can’t. As I’ve written before, I am more than willing to give up the 5 to 7 percent upside to avoid losing a potential 20 percent or more on the downside. I know I’m in the minority with this view as many long-time bears are giving up. The main reason to be bullish: The Fed. As long as the Fed is using depression-era policies to keep interest rates low, then betting against the Fed is as dangerous as going long.

Here are a few thoughts:

1. Although the market has done a good job of ignoring all of the geopolitical problems, the problems aren’t going away. In fact, it will get worse. One day, the market will have to deal with it, but not yet, it seems.

2. I always thought that the first rule of investing is “buy low and sell high.” With the S&P and Dow making all-time highs, buying at these price levels contradicts that strategy.

3. Although the Fed has trumped all the indicators, and will continue to do so until further notice, the complacency among market participants is incredible. No one expects a correction anytime soon (how soon they forget). On the contrary, one fund manager said that we just survived the 2014 Correction, so it’s full speed ahead. Note to Fund Manager: A 3 or 4 percent pullback is not a correction.

4. The time period (August to October) is traditionally the weakest three months of the year. If the bulls can get through this period unscathed, the bull market will continue, but at even more dangerous levels, in my opinion.

With the Fed running the show, the only thing the bulls have to worry about is what the Fed will do. I know this experiment is not going to end well but at the moment, I can’t say when. There are clues the market is overbought and at dangerous levels, but until reality sets in, all you can do is sit and wait. Bull markets don’t last forever, especially markets that bubble higher and higher on nothing more than what the Fed might or might not do.

In my opinion, it’s too dangerous to short, but it’s also too dangerous to go long. As for me, I’m comfortable sitting on the sidelines until we get that first snap, i.e. a 50- to 75-point plunge in the S&P.

 

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

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

 

AAII survey (8/13/2014)

39.8% Bullish. 30.9% Bearish. 27% Neutral.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (8/12/2014)

46.4% Bullish. 16.2% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 13.15 (on 8/15/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 is even with its 50-day moving average, and pointing up. The Dow is below its 50-day MA and slightly above its 100-day moving average, 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 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 9-day signal line. MACD line crosses above zero line.

 

RSI (S&P 500): RSI is at 52.54 (on 8/15/2014)

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.

 

Bonds: U.S. 10-year yield is at 2.35% (on 8/15/2014)

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

 

Analysis: Last week, the S&P continued to rally after almost falling off the cliff the week before. The rally continued through the week until Friday, when there was an intraday reversal (supposedly based on Ukraine). Actually, Friday could have been a lot worse as the market was down 135 points mid-day when the computerized buy-on-the-dip program minimized the damage. Sentiment indicators are a bit frothy, especially the VIX, although less extreme than a few weeks ago. MACD is still giving a negative signal, but other technical indicators are mixed. Bottom line: It’s too early to say if the uptrend is broken, or simply consolidating before moving higher.

Opinion: The world remains dangerous, and so far the market has shrugged off most of the bad news. Nevertheless, the market rallies have seemed somewhat sluggish and indecisive. The buy-on-the-dip algos continue to reduce the damage, preventing the market from falling off the cliff. One of these days, sellers will overwhelm buyers, similar to what happened a few weeks ago.

If you are an astute market observer, you want to see if the market can regain its lost 400-points. In the short-term, the S&P needs to rise above 1,960. If successful, the market could try for the big one, 2,000. This week is important, as how the market reacts will tell us whether the bull market continues, or if there is technical damage. It is impossible to predict what will happen right now.

In addition to the buy-on-the-dip programs, Janet is speaking this week from Jackson Hole. The bulls are hopeful that Janet will say something bullish. Perhaps she’ll say that inflation is under control and that the Fed will do everything in its power, including initiating QE4, to keep this market from going down. It’s not so important what Janet says, but the reaction to what she says. (For your information, futures are up Sunday night. Hope is in the air, but let’s see if there is an intraday reversal.)

I usually have a fairly good idea of which direction the market may go during the week. I can honestly say I have no idea this week. My instincts tells me the market is near a pivot or inflection point, and that the bull market is coming to a very slow end. But I could be early as this may take some time to play out.

If the market sells off hard during the week, that would be a clue the pivot point is here, and a correction is probable. If the market rallies hard during the week, then the bull market continues for a while longer. And if the market goes nowhere, then sit tight and wait another week.

Actually, sitting tight is the correct strategy this week. This is not the time to make any big plays in either direction, at least until you see how the market responds to Janet, and breaking geopolitical news.

Bottom line: Sit tight and watch.

 

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

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

 

AAII survey (8/6/2014)

30.9% Bullish. 30.9% Bearish. 38.2% Neutral.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (8/5/2014)

50.5% Bullish. 17.1% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 15.77 (on 8/8/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 is below its 50-day moving average, and pointing up. The Dow is below its 50-day and 100-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 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 9-day signal line. MACD line crosses above zero line.

 

RSI (S&P 500): RSI is at 43.04 (on 8/8/2014)

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.

 

Bonds: U.S. 10-year yield is at 2.42% (on 8/8/2014)

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

 

Analysis: The S&P 500 was ready to fall below the line-in-the-sand technical level of 1900 when the market was saved by Friday’s monster rally, but on low volume. Nevertheless, the two-week downtrend was temporarily interrupted, and on Monday we’ll see if there will be another rally, or a continued selloff. The downtrend is still intact (according to the moving averages), but that could change in a heartbeat, especially if Janet unexpectedly appears. MACD is still signaling trouble, but like moving averages, it’s a lagging indicator. On the sentiment side, retail investors are feeling less bullish now, but financial writers are still all in (with a few exceptions). Bottom line: Sentiment indicators have fallen a bit after the two-week drubbing, but few investors are excessively bearish. Technical and fundamental indicators are giving confusing signals, so watch the market itself for clues.

Opinion: It was another crazy, volatile week. Because of geopolitical concerns and economic problems we don’t know about, the market continued selling off. And then Friday arrived, and Bam! Out of the blue, the market staged a monster rally on low volume. Commentators spent hours of time trying to determine why the market rallied, and I don’t even remember their reason. (I believe it was because Russia appeared to pull back from Ukraine.)

Friday’s rally proved once again why shorting stocks has been so difficult for the last five years. In fact, many short sellers are sitting on the sidelines, and they won’t return until they are convinced the uptrend is broken. Until then, short-sellers are cautious, as well they should.

I can’t tell from the indicators what will happen this week, but I’m looking to see if the Friday rally continues. Even more important, I am looking for clues the rally rolls over and fails. If this rally (or future rallies) fail, it might be time to think about buying inverse ETFs or puts. Once again, shorting strategies are risky in a volatile environment, which is why playing it safe in cash is the preferred strategy for retail investors.

Nevertheless, the majority of retail investors are not in cash. According to the most recent AAII Allocation Survey, cash levels in July dropped to 15.8%, the lowest level since 1999. Once again, it seems like retail investors are buying stocks at the highs. In fact, the worst mistake investors can make now is chasing after lost opportunities in the late stages of a bull market.

On the other hand, many very smart money managers believe the worst is over and the bull market continues. Many appear on TV with exciting predictions of 2,000 on the S&P and beyond. Perhaps they are right. If we get there quickly, the bull market continues and short sellers must retreat.

As you know, I’m not willing to buy at these elevated price levels (the S&P is still only 4% from its all time high). To me, the 5% potential upside is not worth the 20% potential downside. Nevertheless, that’s a decision only you can make.

Bottom line: Once again, because of volatility, geopolitical events, and confusing technical and fundamental signals, it’s impossible to predict what will happen this week. At this writing, I still believe the probabilities are on the side of the bears, but that can change quickly.

 

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

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

 

AAII survey (7/27/2014)

31.1% Bullish. 31.1% Bearish. 37.8% Neutral.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (7/29/2014)

55.6% Bullish. 16.2% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 17.03 (on 8/1/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 is below its 50-day moving average, and pointing down. The Dow is below its 50-day and 100-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 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 9-day signal line. MACD line crosses above zero line.

 

RSI (S&P 500): RSI is at 34.29 (on 8/1/2014)

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.

 

Bonds: U.S. 10-year yield is at 2.47% (on 8/1/2014)

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

 

Analysis: Last week was the worst week for the S&P 500 in two years. In two days, it wiped out all of its year-to-date gains. As a result, technical damage was done to the major indexes including the Dow, which is now below its 50-day and 100-day moving averages. In addition, volatility was introduced back to the market as the VIX climbed from an extremely complacent 12 to a mildly complacent 17. Because of the pullback, sentiment fell across the board, although most in the financial world are still bullish. In addition, RSI dropped dramatically, and is almost in oversold territory. Keep in mind that many consider this a “healthy” pullback that will set the stage for a retest of Dow 17,000 or S&P 2000. Fact: This week will give us important clues where this market is headed.

Opinion: As I predicted, it was a heck of a roller coaster ride. To be blunt, it was a horrible week for the bulls, and real technical damage was done as the indexes breached their 50-day moving averages, and the Dow dropped below its 100-day moving average. And yet, it is too early for the bears to claim victory. After all, we have seen this story before.

For five years, the market has always found a way to reverse direction and move higher. For example, the Fed could introduce a new program such as “Operation Twist and Shout.” That could repair the psychological damage and delight the minions. If the market sells off even more, the Fed could bring out QE4, or suspend tapering. Any of the following actions would send the market to dizzying heights, at least temporarily.

Yes, technical damage was done to the market last week, but it’s also too early to say that a correction has begun. First, keep your eye on the rallies. If the market rallies this week, and it will try, watch if the rally is successful. Successful means that it is able to win back much of the losses sustained last week, and eventually rise above its moving averages. A key price point is 1960 on the S&P 500. If the S&P rises above that price level, the bulls will still be in control.

On the other hand, if the market attempts to rally, and fails, look out below. Even more revealing, if Janet tries to woo the market higher and it doesn’t work, and sells off, that is also significant. The worst-case scenario for the bulls is if the market rallies and fails, or if it plunges right at the beginning of the week. That would catch most investors off guard, and give notice that a correction is underway. This could play out over several weeks or months.

Many pundits are saying that a 5 to 10 percent correction in the Dow is “normal” and “healthy” and will be a “buying opportunity.” Perhaps. If they’re right, an additional 1,600-point plunge (10%) can’t be a pleasant experience for investors. In fact, most investors are still complacent, and cannot fathom the possibility that the bull market is in any danger. If this is a true correction, years of gains could be wiped out in a short time period.

If you’ve been reading this blog, you are already prepared. If you are a beginner investor, you may be sitting primarily in cash, and that’s prudent. As many investors learned last week, making 0% is better than losing money. If you are an experienced investor, you are looking for opportunities to short the rallies using inverse ETFs or options (I don’t recommend shorting individual stocks for retail investors).

Bottom line: This is the time to bring your A-game to the market. If there was ever a time to study and observe the market for clues, it’s now. Although the market is vulnerable, the Fed, with help from Wall Street, might say or do something dramatic to try and keep the party going. All we can do is wait and watch, and be ready for any scenario.

 

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.