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), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

This is my latest MarketWatch article (Oct. 13): http://goo.gl/8pEsCL

 

AAII survey (10/15/2014)

42.7% Bullish. 33.7% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (10/14/2014)

37.8% Bullish. 17.3% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 21.99 (on 10/17/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): All the indexes are below their 50-, 100-, and 200-day moving averages, and pointing up. Note: The Russell 2000 is in a correction.

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

 

RSI (S&P 500): RSI is at 37.19 (on 10/17/2014)

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 2.19% (on 10/17/2014)

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

 

Analysis: It was another wild week. Sentiment retreated along with the stock market, especially among pros and financial writers. Nevertheless, most are still hopeful we’ll have a year-end rally. Retail investor sentiment took a dive during the week, although I’m sure they were cheered by Friday’s bounce. The VIX also spiked as volatility returned to the market. After a 1000-point drop in the Dow in two weeks, some investors were caught off guard. Even with Friday’s Fed-inspired rally, technical damage has been done to the indexes. It seemed impossible two weeks ago but all the indexes are below their 200-day moving averages. Because of the Fed, however, it should be another unpredictable week.

Opinion: Last week was profitable for the bears. Nevertheless, the market was headed even lower when Fed member James Bullard single-handily reversed the market’s plunge (down 460 on Thursday at the low before reversing), which also helped to move the market higher on Friday. The market was saved by the Fed, who always seems to appear at just the right time.

This week will be very important. It will take a lot of smooth talking by the Fed (and Wall Street) to win back those 1000 lost points. As you know, the Fed has done it before: Remember QE2 (Nov. 2010), Operation Twist (Sept. 2011), and QE3 (Sept. 2012). There is little doubt in my mind that if the market keeps plunging, the Fed will initiate a new program.

If you are new to the stock market, you might think that the Fed has always interfered in the market. In reality, before Fed chairman Greenspan, the Fed generally took a hands-off attitude towards the markets. The interference of the Fed into the markets is unprecedented. One thing is certain: If the Fed tries to talk up the stock market or create a new program, and the market keeps falling, all hell will break loose. Put another way, investors believe the Fed and their programs. If the Fed ever loses credibility, the markets will plunge. There is an old Wall Street adage: “No one is bigger than the market.” We will put this proverb to the test this week.

As I’ve warned for weeks and months, this is still a dangerous market. In fact, I stand by my last MarketWatch column (http://goo.gl/oC9rEJ). If you are shorting with inverse ETFs or put options, be prepared for dramatic Friday-type spikes. If you are long, however, your main hope is that the Fed will save the day.

At the moment, it’s too early to say we’re in a bear market, but signs are pointing in that direction. In a bear market, those amazing one-day rallies are common, but they don’t last long. If the market fails to make back those lost points and the rally fails, the odds are good the bear has arrived.

However, most investors believe the correction is over and it’s a buying opportunity. If they’re wrong (and I believe they are), no matter what the Fed says or does, the market will keep falling. On the other hand, if I’m wrong, those 1000 points will be made up lickety-split (i.e. quickly). I can’t wait to see who is right.

Bottom line: It’s not nice for the Fed to fool with Mr. Market. There could be unexpected and dangerous consequences. For now, be on the lookout for failed rallies. If the Fed gets its wish this week, the market will calm down and volatility will decrease. It’s possible they will get their wish — for now.

 

* 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), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

This is my latest MarketWatch article (Oct. 13): http://goo.gl/8pEsCL

 

AAII survey (10/8/2014)

39.9% Bullish. 31.0% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (10/7/2014)

45.5% Bullish. 14.1% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 21.24 (on 10/10/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): All the indexes are below their 50- and 100-day moving averages, and pointing down. All the indexes are either below or at their 200-day moving average and pointing down. Note: The Russell 2000 is in a correction.

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

 

RSI (S&P 500): RSI is at 35.12 (on 10/10/2014)

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 2.31% (on 10/10/2014)

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 a tug-of-war but the bears won, especially on the Friday close. The bulls had one good day during the week but it was a head fake. Technically speaking, serious damage was done to the indexes. In fact, the charts look horrendous. If all the indexes fall below their 200-day moving averages (the Dow and S&P are slightly above), expect more pain if you are long. Sentiment has pulled back a little but most financial writers and the Wall Street crowd are still bullish. (It takes time for people to believe there is a trend change.) The VIX spiked as volatility increased, so expect to see more VIX spikes as investors wake up to a new reality. The odds are good that the bears are going to have a good week.

Opinion: I hope you are paying attention. A few commentators recommended that this is the time to go fishing, but they are wrong. This is not the time to relax. As you know, I’ve recommended “sitting and waiting” for a long time, but that’s over now. Now it’s time to get off the fishing boat and bring your “A” game to the market.

Right now, it appears the uptrend is faltering and that the bull market is coming to an end. This week will give us more clues. If the bull market is really ending, expect a lot more volatility. Judging by the charts and indicators, this seems like the real deal. As always, the Fed is ready to step in and try to prevent a stock market disaster. Everyone will be watching to see what they will do and say. In fact, if the market falls into the abyss, it’s guaranteed the Fed will announce a new program (Operation Twist 2?), a new promise (low interest rates forever?), or anything to stop the carnage. That’s when it will get interesting (and more volatile).

As I wrote in my newest column for MarketWatch (http://goo.gl/8pEsCL), instead of buying on the dip, it may be time to sell on the rallies. As for me, I added heavily to my short positions during the week, usually on the rallies. I also speculated with put options (read my book, Understanding Options, if you’ve never bought or sold options). My short trades were very successful, which tells me I’m on the right track. Still, it takes more than one good week to confirm a trend change.

Currently, most investors do not believe the market is any imminent danger. Only two weeks ago, investors were convinced the market will go up for the next two years: Dow 18,000 was within reach. Nevertheless, it takes a long time for investors to change from overconfidence to fear. As the market gets more volatile, this is also when day traders will shine, but again, take profits quickly (although that is an individual decision).

If you are not comfortable trading during a bear market, it’s understandable. It’s not an easy environment. In that case, it’s best to stay on the sidelines in cash until the bear market is over (it can take months and even a year). If this is a confirmed bear market, it can start slowly but end in a spectacular fashion (i.e. crash or capitulation).

The most bullish investors are still all in, and probably believe this recent pullback was a “buying opportunity,” or a chance to buy favorite stocks cheap. That’s what some analysts are saying on TV, but I disagree. Buying on the dip is a questionable strategy in a bear market. (Note: Even Warren Buffett is saying to buy the dip during the next correction.)

Hold onto your seats because there should be fireworks this week. With trillions of dollars in long positions, many investors are going to grit their teeth and hold, that is, until the pain gets too great. The most bullish commentators are promising a beautiful year-end rally, but I’m not convinced they are right.

Bottom line: This is going to be a very wild week. Be prepared for anything.

 

* 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), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

 

AAII survey (10/1/2014)

35.4% Bullish. 30.9% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (10/1/2014)

47.5% Bullish. 15.1% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 14.55 (on 10/3/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 is slightly below its 50-day moving average, and pointing up. Note: The Russell 2000 is well below its 200-day moving average and is in a correction.

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

 

RSI (S&P 500): RSI is at 45.80 (on 10/3/2014)

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 2.45% (on 9/26/2014)

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

 

Analysis: It was a volatile week for the markets. The Russell 2000 entered into a correction with a 10 percent YTD loss. The Dow ended the week in the red although it was saved from the abyss by a Friday rally. The S&P 500 is slightly below its 50-day moving average, but it could have been a lot worse. Because of last week’s volatility, retail investors lost some of their hubris (sentiment fell), but professional investors remain bullish. Financial writers are also in the bullish camp, and Friday’s job reports helped make them believers (although the data was mixed). Not surprisingly, cracks keep appearing. For example, technical indicators such as MACD turned down. All of these mixed signals is a clue the market is still dangerous.

Opinion: If you only watch the Dow, as most people do, you may think that all is well. After all, although the S&P was down for the week, the Friday blowout rally gave hope to the bulls, who do not want to believe the party has ended. But if you dig below the surface, there are a lot of red flags, some of which I mentioned above.

Brewing beneath the surface, you have the Ebola virus. This virus must be kept under control, or the emotional, physical, and economic damage will be severe. You already know of the other geopolitical problems, including Hong Kong, which could get messy. Any of these events could turn into a Black Swan.

This week will tell us if Friday’s rally was a one-day wonder or the continuation of the uptrend. In my opinion, jumping in the market at all time highs with low volume is too dangerous. Yes, the market could go higher, but based on sentiment and technical indicators, I believe we’re topping out. It will take a lot of buying power to move this market higher, which is why I’m watching and waiting.

If the market sells off during the week, it will confirm this market is topping out. A tremendous amount of energy was used to keep the market from falling last week. What I mean by energy are massive computer buying programs. I can’t say who is doing all of the buying at key times during the day but it’s not retail investors.

The next week (and the next two months) are extremely important. This is the time to bring your A-game to the market. In addition, keep your eye on the bond market, which may create future problems. It’s also fascinating that commodities are getting crushed.

It seems as if the investing world is split into two major camps. The bulls believe the market will keep going higher and higher with help from their friend, the Fed. This side believes that Dow 18,000 will be reached by January. Their strategy is buy and hold because everything is going to be all right with few hiccups.

The other side (the one I am on) is suspicious of this so-called bull market. Even if you ignore all the geopolitical problems, the market is telling us that all is not well underneath the surface. Of course the market can still go higher, but one day there will be a price to pay. In my opinion, that day is coming ever closer. The best advice is let the market have the final word (it always does). Although testing the market with small positions is recommended, it’s not the time to make extremely big plays (unless you are a confident speculator or brave).

Bottom line: Judging by the indicators and clues, it is impossible to predict which way the market will go this week. I am on the lookout for failed rallies.

 

* 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 (9/24/2014)

41.8% Bullish. 28.2% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (9/23/2014)

48% Bullish. 15.3% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 14.85 (on 9/26/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 is slightly above its 50-day moving average, and pointing up. Note: The Russell 2000 is well below its 200-day moving average. 

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

 

RSI (S&P 500): RSI is at 61.99 (on 9/26/2014)

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.

 

Bonds: U.S. 10-year yield is at 2.59% (on 9/26/2014)

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

 

Analysis:  As you can see above, the market indicators are not giving a clear signal. Sentiment indicators are still on the high side, but fell back a bit after the market retreated. The Dow and S&P are still pointing up but the Russell 2000 is well below its 200-day moving average. The Nasdaq also had a difficult week. Next Friday’s jobs number should be a market-moving event. Otherwise, anything is possible this week. Right now, let’s see if the market has enough energy to keep Friday’s rally going.

Opinion:  Just as the S&P 500 fell below its 50-day moving average and seemed to be headed into the abyss, once again, it was saved by a massive computer-buying program. There are many theories who is behind the buying sprees that constantly stops the downward momentum in its tracks.

Right now, it is too early to say if Friday’s turnaround was a one-day wonder or a continuation of the faux bull market. I call it a “faux” bull market because without the help of the computer algos, the line of least resistance appears to be down. If this market was left to its own devices, I believe the selling would accelerate. Nevertheless, you never argue with the tape, which always has the final word. This is why this market has become so dangerous for both bulls and bears.

There are many crosscurrents (such as Bill Gross’s departure from Pimco, which could have an effect on the bond market). Obviously, there are also many geopolitical events swirling around but so far they have had little effect, at least not yet. (Add the protests in Hong Kong to the long list of geopolitical events.)

Nevertheless, I still believe the market is vulnerable, so be sure you’ve taken steps to protect your positions. In addition, this market will become more dangerous as the Fed tries to extricate itself from its own policies.

As I’ve warned many times before, this is the time of the year to be especially alert. Until we get a confirmed bear signal such as a 100 to 150 point break in the S&P, sitting and waiting is the recommended strategy. This is the time to protect profits, have stop losses, and be prepared for anything. Once the market starts selling off, it will be vicious, and difficult to escape harm. No one can say when that will happen, however.

Judging by the sentiment surveys, few believe the market is in any danger. My instincts (and history) tell me when too many people believe the market can only go up, that is the time to put up your guard.

 

* 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

My latest column for MarketWatch: http://goo.gl/90Fhgs

 

AAII survey (9/17/2014)

42.2% Bullish. 23% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (9/16/2014)

52.5% Bullish. 15.2% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 12.11 (on 9/19/2014)

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.  Note: The Russell 2000 is below its 200-day moving average. 

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. (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 61.99 (on 9/19/2014)

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 2.59% (on 9/19/2014)

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

 

Analysis: Sentiment remains elevated, especially the VIX, which is at historic lows. Most market participants do not believe this market is in any danger, which is reflected in the sentiment surveys. Although the Dow and Nasdaq are above their 50-, 100-, and 200-day moving averages, the Russell 2000 is below its 200-day moving average. In addition, 47% of the stocks in the Nasdaq Composite Index are down more than 20%, evidence that smaller cap stocks have been topping out for months. Finally, during the second quarter, “stock buybacks have fallen year-over-year for the first time since 2012,” says Barron’s. Stock buybacks have helped support this market. Bottom line: The Dow is making all-time highs while small caps are deteriorating.

Opinion: In my latest column for MarketWatch, which is coming out this week, I write how many long-time bears are capitulating. With the Dow making all-time highs, with the Fed willing to keep interest rates low for as long as possible, and with all bad news ignored, this market seems unstoppable. It’s not surprising that many bears have given up.

And yet, at market tops, the bears capitulate. Also, at market tops, bullish investors think they are geniuses (they confuse brains with a bull market), and some even write taunting emails or comments. I’ve received a few. As a result, I’m convinced this bull market is coming to an end sooner rather than later (but unfortunately I can’t predict when). I am well aware this is not popular as those with bearish opinions are at historic lows.

Although the market smells like a rose, inside there are very dangerous thorns. In addition to the extreme bullish sentiment, there is evidence the market is deteriorating. As mentioned above, the small caps are falling like dominos. Like the game of Three-Card Monte, while everyone is transfixed on the Dow, other stocks are selling off.

When you put all the clues together, you can see that this is going to end badly. Because of the Fed’s action, many investors believe this market “will never go down,” as I sarcastically wrote in a previous MarketWatch article. Little did I know how many people really believe it.

In addition to the capitulating bears, many bulls are making outlandish predictions. I have seen this before but in reverse. It was 2008 and the market was crashing. That was when bullish investors thought the market would never go up again. It was also when it seemed crazy to buy in the market as it continued to fall.

Here we are six years later and the positions are reversed. Now the herd is firmly on the side of the bulls, and some bears believe this market will never go down, so they are giving up. No one can predict the future but there are more than enough red flags around to tell me this is a dangerous market.

Could the market go up by another 5% and reach 18,000 by January? Yes, many people are convinced that is “certain” to happen, especially after author and professor Jeremy Seigel made that prediction. But in reality, no one knows what will happen.

I have a better suggestion: If you are long and have huge gains, consider taking money off the table. If you are bearish and believe the market is due for a fall, sit and wait. If you know how to manage risk and are willing to use stop losses, you can buy inverse ETFs (or buy put options). If the market keeps going higher, then set a predetermined target price to get out.

This I know for sure: Stock markets do not go up forever. I don’t know when but there always is a day of reckoning, and when that day occurs, the 90 percent bulls who are celebrating with their paper profits will be caught with their pants down. What if I’m wrong? If I’m wrong, then we’ll get to Dow 18,000 on strong volume. In addition, the Nasdaq and Russell 2000 will stop deteriorating, and will also make new highs. If that happens, I will be surprised, but anything is possible.

 

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