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

 

AAII survey (12/17/2014)

38.7% Bullish. 26.9% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (12/16/2014)

49.5% 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: 16.49 (on 12/19/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 58.91 (on 12/19/2014)

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.

 

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 below 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 2.17% (on 12/19/2014) 

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

 

Analysis and Opinion will be posted on Sunday night after 9:00 p.m. ET

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 MarketWatch column: http://goo.gl/ozdUTp

 

AAII survey (12/10/2014)

45.0% Bullish. 22.3% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (12/9/2014)

51.5% Bullish. 14.8% 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: 21.08 (on 12/12/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 37.39 (on 12/12/2014) NOTE: RSI of Dow is at 35.78.

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 lying slightly above its 50-day moving average and pointing down. (Note: All major indexes sliced through their 20-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, 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 zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.10% (on 12/12/2014) NOTE: Bonds rallied last week. 

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 indicators aren’t perfect but they worked last week, notifying us of an imminent market pullback. To refresh your memory, sentiment indicators were extreme last week as most investors were overly bullish. This week, sentiment came back to earth, although most investors are still bullish. The indicators also tell us that most investors do not believe there will be a major correction, or even a bear market. Nevertheless, the VIX zoomed from 12 to 21, which erased much of the extreme complacency. RSI went from overbought levels to nearly oversold. Yes, we went from one extreme to the other in the short term. RSI is also telling us we could have a bounce this week. However, moving averages are pointing down, and the market sliced through the 20-day MA like it was butter. Bottom line: Many investors were surprised that the market retreated (we weren’t). The indicators are telling us the market can go either way this week, so be on guard. The volatility should continue before and after the Fed meeting.

Opinion:  Last week was fascinating. The market struggled all week except for a 225-point Thursday morning rally, which faded by the end of the day, setting up the 300-point pullback on Friday. That’s what I call volatility. Wall Street had its worst week in three years.

This is an important week. We’ll soon learn how much influence the Fed has. I am sure the Fed will not do or say anything to upset the markets (unless they make a mistake). That means low interest rates indefinitely, and perhaps no change in language (that should rally the market).

If the market rallies before or after the Fed’s minutes are released, observe if the market can climb back to 18,000. If it can, then the uptrend is intact and in the short-term the market will go higher. On the other hand, if the expected rally fails during the week, the uptrend may be in danger.

Until a downtrend is confirmed, and that could take a while,  consider short-term trading strategies. That means taking profits quickly (and cutting losses when wrong). Those not comfortable with short-term trading should stay on the sidelines until the trend direction is clear.

All week, the financial television programs brought out the bulls, who predicted 50 shades of bullishness. The analysts recommended that you buy on the dip. Why? Because it worked in the past. Last week, many of the same bullish analysts told us to buy because you will “miss out on the year-end rally.” Dow 18,000 is a sure thing, according to them. In fact, every major analyst predicted the S&P will be at 2100 to 2200 next year. Guess what? These are educated guesses, not facts. If there’s anything I’ve learned, it’s that you should follow the market, not predictions. The market is giving us a message right now, and to be profitable, you must interpret that message correctly.

Bottom line: Right now, the indicators are telling us the market could go in either direction. It’s possible we’ll have a short-lived bounce followed by a decline. On the other hand, if the Fed is overly dovish, that bounce could turn into a longer-term rally. In my opinion, however, this bull market is on its last legs and it’s only a matter of time before it folds. (I’ve been saying that for several months.)

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

My latest MarketWatch column: http://goo.gl/3FfYtD

 

AAII survey (12/3/2014)

42.7% Bullish. 25.9% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (12/2/2014)

53.4% Bullish. 13.9% Bearish

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

Bullish: If sentiment is over 60% bearish.

 

VIX: 11.82 (on 12/5/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 67.89 (on 12/5/2014) NOTE: RSI of Dow is at 75.96.

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-day, 100-day, 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 even with its red 9-day signal line and pointing sideways. (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 2.31% (on 12/5/2014) NOTE: Bonds retreated last week. 

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’s almost a repeat of last week with a few exceptions. Sentiment indicators are still sky-high although retail investors grew more cautious. (Maybe they don’t want to be left holding the bag again.) VIX has once again reached historic lows, and RSI is way overbought. On the technical side, the trend is still up but the MACD signal line went flat. We’ll know this week if that is significant or not. Bottom line: The market is overbought. Only a pullback or correction can bring it back to earth.

Opinion: I had a MarketWatch column deadline so my opinion will be shorter than usual. As expected, a little more volatility returned to the market, but only a little. The market chugged higher, but market breadth was awful all week.

On Friday, after a blowout jobs numbers, the market finished the day only slightly higher thanks to a last minute buy program. Investors are wondering why the Fed is keeping interest rates so low when the economy is improving. On Dec. 16th and 17th, we’ll hear from the Fed, and that should be interesting.

In my opinion, the Fed will delay raising interest rates for as long as possible. Meanwhile, when I look at the chart, I see a parabolic market that has reached near bubble territory. Obviously, many people disagree, but only the market is right.

Meanwhile, I’m looking for clues the market has topped out. For example, intraday reversals, gap ups and selloffs, and late day selloffs. There’s been a lot of strange market behavior such as the collapse in oil. At this point, keep your powder dry and be prepared to take action, especially if volatility increases.

Traders, get ready to start your engines.

 

Note: Beginning immediately, the comment button will be removed. Email me directly if you’d like to comment. 

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

My latest MarketWatch column: http://goo.gl/pjQUxV

 

AAII survey (11/26/2014)

52.1% Bullish. 20.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (11/25/2014)

55.4% Bullish. 14.8% Bearish

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

Bullish: If sentiment is over 60% bearish.

 

VIX: 13.33 (on 11/28/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 70.69 (on 11/28/2014) NOTE: RSI of Dow is at 75.39.

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-day, 100-day, 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 9-day signal line. MACD line crosses above zero line.

 

Bonds: U.S. 10-year yield is at 2.19% (on 11/28/2014) NOTE: Bonds are 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: Sentiment indicators continue to spike higher, which is a bearish signal. AAII is above 50% and the number of bears in Investors Intelligence has reached historic lows. In addition, VIX remains in the basement, and RSI is above 70 (and 75 on the Dow). When you put it all together, you have excessive bullishness. Only a handful of investors expect the market to fall this month. Another unusual development is the smashing of commodities, especially oil. It is unknown at this time how this will affect the stock market. The good news: If you follow the trend, you are all in. The trend is up, moving averages are flashing green, and MACD is positive. Once again, it’s the sentiment indicators vs the technicals. We should know the winner soon.

Opinion: It’s been a long time since I’ve seen the sentiment indicators so skewed in one direction (up). Most investors are certain that December will be good to the market, and we’ll have that Christmas rally. After the “Bullard Bounce” last month, the market has been on a tear. To the unknowledgeable, this appears to be a raging bull market. The sweetener is the Fed, which is willing and ready to interject itself into the market when it falls. As I write this today, many people believe that the powers that be will not let this market go down.

If you study market history, whenever people believe “the market will never go down,” the market does, and abruptly. Right now, bullish investors are dreaming of Dow 18,000, and they might get it…or not. I know from experience whenever the herd believes they are fully protected, they’re really not.

Sometimes it takes a while, which is why my latest MarketWatch article (http://goo.gl/pjQUxV) is about being patient and waiting for the right opportunity. I don’t believe that it’s “different this time.” By this, I mean that no one has the power to prevent the market from falling indefinitely. The day will come (and I believe sooner rather than later) when the Fed’s words will be ignored and the market will plunge by more than anyone can imagine.

I’m not saying this will happen this week, or even next. I do know that the market is even more dangerous than six months ago (when I first started warning investors). The facts are these: The market keeps going higher while the rest of the world is struggling, while commodities are getting smashed, while bonds are rallying, while sentiment is at an all-time high, and while market breadth is terrible (i.e. New High-New Low and NYSE Tick).

When I look at reality, and then at the sentiment numbers, I am more convinced than ever this market is vulnerable. I believe the odds are very good that December will be a volatile month. Almost no one believes it.

At the moment, the market is trading in a very tight range, which will end in one of two ways. After consolidating, it will go higher. Or second, it will keep churning but go nowhere, eventually plunging faster and farther than anyone can imagine. That would be the scenario that absolutely no one is thinking of right now.

Bottom line: Sit tight and let the market have the final word. Be ready to pounce when the time is right.

 

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

Remember: The stock market is closed on Thanksgiving (November 27). 

 

AAII survey (11/19/2014)

49.1% Bullish. 23.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (11/18/2014)

56.4% Bullish. 14.9% Bearish

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

Bullish: If sentiment is over 60% bearish.

 

VIX: 12.90 (on 11/21/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 73.23 (on 11/21/2014)

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-day, 100-day, 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 9-day signal line. MACD line crosses above zero line.

 

Bonds: U.S. 10-year yield is at 2.31% (on 11/21/2014)

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 sentiment indicators are at historic levels, including the AAII and II surveys, RSI, and VIX. As you can see above, there are very few bears left, a very negative sign. In the past, at market tops such as 1987, 2000, and 2007, these are the kind of sentiment numbers you will see. This doesn’t mean there will be an immediate correction because sentiment can get even more extreme. However, it does mean that this a glaring red flag. On the technical side, the market was flat all week until China announced they were lowering interest rates, and the Dow zoomed higher by 170 points. It lost almost half of its gains by the end of the day. Bottom line: The market keeps climbing higher but gets more dangerous each day.

Opinion: Since I’ve been doing this blog, I have never seen the sentiment indicators turn so bullish, which is a huge warning. When too many people believe the market will never go down, when most bears have disappeared, when bullish investors feel invincible, you have the makings of a market top.

In addition, the New-Highs New-Lows are reflecting weak market breadth along with the NYSE Tick. When you put it all together, you see a market going higher on fumes. Yes, the market could go even higher, especially if central banks around the world keep announcing programs to lower interest rates or increase QE. We are really in uncharted territory here, so no one can predict how this will end. My opinion: It will not end well, but the timing is impossible to predict.

One day we might look back and say it was so obvious that the market was topping out. After all, China is slowing down, Japan is in a deflationary nightmare, and Europe is teetering into a recession. The U.S. is hanging in there although it’s unknown how long it can last when the rest of the world is struggling. We’ll know more as Christmas approaches. Judging by the sentiment surveys, most investors believe there will be a massive rally at the end of the year.

If you are long this market and have profits, this is the time to take something off the table. If you agree this market is in the stratosphere, it is very tempting to go short. My advice: In my most recent MarketWatch column coming out this week, I recommend being patient.

If you are shaking your head in disbelief how fast and furious this market zoomed, sit back and watch what happens. It could be this week or next, or perhaps early next year, but parabolic markets get exhausted and reverse. Ever since the “Bullard Bounce,” the market went straight up without stopping. That cannot last.

If you are one of the few bears still standing and you’re wondering what has happened to the market, this is how I felt in 1999 and in 2007. For now, I am waiting for the “shot across the bow,” or a 50 to 75-point drop in the S&P 500. That would be a significant clue the rally is in trouble.

Finally, this is a holiday week so volume should be light. It’s possible that nothing significant will occur this week, but watch closely. Have a great Thanksgiving and I’ll be back next week.