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 (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.

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 (9/10/2014)

40.4% Bullish. 26.6% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (9/9/2014)

57.6% Bullish. 14.1% Bearish (Note: This is one of the lowest bearish reading since 1987, i.e. it’s a bearish signal).

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

VIX: 13.31 (on 9/12/2014)

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 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 50.75 (on 9/12/2014)

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 2.61% (on 9/12/2014)

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 is still on the high side, especially the VIX, which reflects the lack of volatility and complacency in the market. Last week, each morning the market sold off but recovered somewhat, making multiple “V” patterns each day. Nevertheless, the market seemed heavy and sluggish, and Friday it just didn’t have the energy to turn positive. (The S&P ended the week lower by 1.1%.) The next two weeks should give us many clues as to market direction. Keep your eye on the bond market, as yields rose and bond prices fell. The Fed meets Tuesday and Wednesday, with Janet giving a press conference on Wednesday after the release of the FOMC policy statement. Inquiring minds want to know: After eight years, will the Fed hint that they may raise interest rates? (Answer: I doubt it.)

Opinion: Market watchers such as myself are seeing a number of strange events. Even with the geopolitical problems, oil is going down along with gold. Bond prices fell last week as yields spiked. The stock market seems unnaturally sluggish as if the path of least resistance is down. The Fed says there is no inflation but shoppers believe otherwise. The Fed is supposed to stop tapering next month, and as you read above, they are having their FOMC meeting. If they even hint at raising interest rates, bonds and stocks may react negatively. That is why I personally doubt Janet will say anything that upsets anyone.

The next two weeks are very important, and we’ll soon learn who is in control of this market. If the Fed can convince everyone that rising interest rates are good for the market, or if they can continue to suppress rates, then the bull market may continue. But if there is a Black Swan event, or if the Fed spooks investors, the much anticipated correction may finally arrive.

One of the downsides of keeping interest rates ridiculously low for so many years is that bubbles form. Although it will be argued in the history books for decades, when you look at the stock market on a chart, it appears to be in a bubble. Then again, many will argue that the Fed has the tools and power to keep the market from crashing or correcting (2000 and 2008 didn’t work out so well, but the optimists believe the Fed will get it right this time).

Unfortunately, bubbles cannot be controlled. The Fed will learn one day that keeping interest rates artificially low is the easy part. The hard part is exiting. Once again, if the Fed even hints at raising interest rates, many savvy market players will take that as a sell signal. As for me, I just can’t wait to hear what Janet has to say on Wednesday, along with the FOMC minutes. If you go by history, the Fed will let the game go on as long as possible.

Bottom line: The smart money is betting that the Fed will do nothing.

Here’s a great interview with Art Cashin, one of the most experienced floor traders on the NYSE. Here’s the entire interview:

http://www.fuw.ch/article/the-first-thing-i-look-for-is-the-exit-sign/

 

* 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

Here is my latest MarketWatch column. I was being sarcastic :) http://goo.gl/90Fhgs

Backstory: I got a lot of flack for my tongue-in-cheek column for MarketWatch: “What-Me Worry? Why the Stock Market Will Never Go Down.” My editor left out the “What-Me Worry?” Nevertheless, many bearish traders at Zero Hedge assailed me for writing the article, using colorful language, but I assume most did not read the entire article. I thought the guy who said I should be forced to wear a tattoo of my article on my face was clever. 

Bottom line: Anyone who has been following my blog and columns know what I think of this market. But I did learn a valuable lesson: Many people just scan the headlines. 

 

 

AAII survey (9/3/2014)

44.7% Bullish. 24.0% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (9/2/2014)

56.1% Bullish. 13.3% Bearish (Note: This is the lowest bearish reading since 1987, which is extremely bearish). 

Bearish: If sentiment is over 60% bullish. 

Bullish: If sentiment is over 60% bearish.

 

VIX: 12.09 (on 9/5/2014)

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 66.37 (on 9/5/2014)

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 2.46% (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: The number of bears from the Investors Intelligence survey is at a 1987 low. Last week they sent an alert to their subscribers warning of an imminent correction. Retail investors are not quite as enthusiastic, but are still participating. The VIX and other sentiment indicators are at all-time lows, which are bearish signals. On the other hand, the trend is still up. This market has been resilient in the face of geopolitical concerns, a slowdown in hiring, sky-high P/Es on many popular stocks, and low volume. If you follow the trend, you are still long but cautious. If you follow sentiment, you’re on the sidelines making zero. The next two months should give us some clues if and when the uptrend ends.

Opinion: There aren’t many bears left, and short-sellers have had a difficult year. Even with all of the problems mentioned above, the only game in town is the stock market. If you’re not in, you may miss out on another 5 percent end-of-year rally. If you’re on the sidelines, you’re protected but not making any money. Right now, very few investors believe this market will ever go down.

This story is similar to 1987 and 1999. I know there will be a correction or crash, but no one can say when. All we can do is look for clues. When the S&P fell by nearly 100 points last month, it was significant. If it had fallen below S&P 1900, that could have been the start of a major correction. But at 1908, the market held, and it made back its 100 points in no time. Therefore, the bull market continues.

Unless there is a major Black Swan event, the only thing that can stop this market is the Fed. If the Fed raises interest rates (or even seriously mentions a date), there will be a selloff. However, it is extremely unlikely the Fed is going to raise interest rates anytime soon. In fact, they will try and keep interest rates as low as possible as long as possible. I can’t prove this but I bet they are terrified of what could happen if they raised interest rates. That would stop this faux bull market in its tracks.

Until then, however, the market climbs higher, and no one knows when it will come back to earth. Many of the indicators and oscillators that worked in the past have been flashing red alert signals for many months. But the market keeps going higher.

Of course it’s going to end badly one day. Meanwhile, it’s annoying to know you are missing out on opportunities. As for me, I remember what trader Livermore said. To paraphrase, most people do not have the patience to sit and wait for the right opportunity. It’s the sitting and waiting that is so difficult.

 

* 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 (8/27/2014)

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.