The Weekly Trader

Here are the latest indicators:

S&P 500 one-month trend = Neutral to Bearish

S&P 500 is near its 50-day moving average = Neutral

RSI: (S&P 500) @51.08 = Neutral

Intraday Volatility: Neutral (but with potential to increase)

Daily results of multiple indicators (from Yardeni Research): https://goo.gl/eT3fzA

Comment: After a five-day rally, the market is due to take a breather, or worse. We went too far and too fast on questionable buying. “Questionable” because it appears as if the algos and other entities ran the market higher, as often happens. We went far and fast but could only surpass the S&P’s 50-day moving average by no more than a few points. This week, if the market soundly rises above its 50-day moving average, the bull market continues. If, on the other hand, it fails, then the market will be in for a rough week. 

Because severe technical damage was done to the market in early February, I would not be surprised to see a pullback this week. A one-week party cannot erase the damage done, so be prepared for volatility to increase moving forward. Many investors believe the worst is over so any pullback will be a surprise. As always, keep your eye on the 10-year yield (the closer it gets to 3%, the more volatility will increase), and also on the 50-day moving average. As always, the market is always right and the 50-day moving average is the line in the sand.

Here are the latest indicators:

S&P 500 one-month trend = Bearish

S&P 500 is below its 50-day and 100-day moving averages = Bearish

RSI: (S&P 500) @34.83 = Oversold

Intraday Volatility: Extremely High (Ideal for traders). 

Daily results of multiple indicators (from Yardeni Research): https://goo.gl/eT3fzA

Comment: What a difference a week makes! The financial media are reporting that last week was the most volatile in market history. After nine years, some of the riskiest strategies such as selling naked puts, shorting volatility, and buying on the dip stopped working. As you know, shorting volatility worked for years, until it didn’t. I’m also sure more than a few people blew up their accounts selling naked puts. The surprising part is how long these strategies worked without any pullback or correction.

I could write a chapter on what happened last week, and what might happen in the future. First, it’s too early to say what the market will do this week. In the past, after a pullback (we haven’t had a correction for years), the market bounced back. I’ve been talking to investors who are expecting the market to “bounce back.” They could be right. On the other hand, and this is where it will get interesting, the correction could get worse. As traders, we are open to any possibility. That means we go short (buying puts is less risky if you know how to trade options) if the market continues down. Or we will go long if the market bounces back strongly above the 100-day MA and 50-day MA.

The best advice is to follow the oldest advice: Buy low and sell high. The market was at all-time highs and yet, investors were going on margin, buying leveraged ETFs, and buying at the top. I talked to these investors a few weeks ago and they never imagined that the market could go down. And now, they are hopeful the bull market will continue. Like I said, they could be right, but they also could be wrong. I just hope these investors are properly diversified in case a worst case scenario develops.

If you read my blog from January 29, I had received a call from a market technician who told me that the market was at ‘statistically stupid” levels. As it turned out, he was right. Eventually, statistics win out. The idea that we were 3 standard deviations above the 200-day moving average was ridiculous. Reality finally returned to the markets and many investors are feeling the pain.

As I have written for weeks, this is the time to learn about bear markets, corrections, buying put (and call options) and managing volatile markets. There is a good chance that volatility will be here to stay for a while. But then again, I remember thinking that in 2016, and eventually volatility was artificially suppressed and the markets continued higher. This time, however, interest rates are rising, causing havoc in the bond market. It will be interesting to see how the new guy at the Fed handles it. Pay close attention to the bond market and interest rates.

One of my neighbors went to her broker two weeks ago and sold her ETFs and stocks (she kept her mutual funds) right before the 2,000 point drop. The broker tried to discourage her from selling, and told her that “You shouldn’t panic.” She told him what I had once told her: “It’s not panic if you’re the first out the door!”

On one hand, you don’t want to sell everything in a panic because you might miss out on a tremendous rally. On the other hand, you don’t want to be leveraged up to the hilt when the market takes another hit. Everyone has to find their own personal comfort zone. During times of high volatility, like now, many trading strategies do well while buy-and-hold strategies suffer. It’s a lesson that is learned every few years.

Bottom line: This week is very important. We are at a key pivot point that will determine market direction for months or years. In the past, the market recovered from short-term damage. If the market continues to fall, there are more serious problems than we know. If the market continues to fall, it means the bubble is deflating, and that will not be good news for investors who are being told to “not panic” and “the market always comes back.” My other advice: Listen to what the market is telling you. Only the market is right (and everything else is just noise).

Baseball analogy: The bears got a few home runs last week but the bulls are not giving up. Only time will tell if the bears can run up the score or if the bulls can tie the game with a little help from their friends at the Fed.

Here are the latest indicators:

S&P 500 one-month trend = Neutral

S&P 500 is above its 50-day moving average but pointing down = Neutral

RSI: (S&P 500) @46.08 = Neutral

Intraday Volatility: High (Ideal for traders). 

Comment:My latest MarketWatch article came out on Thursday morning, one day before the Dow 665 selloff, which was well-timed (for once). Here is the link: https://goo.gl/Kz4x4F

I made changes (above) to my indicators. First, I am no longer using the VIX because it was worthless as a predictive indicator. Instead, I added my own indicator, Intraday Volatility, which I will evaluate each week. I also removed the weekly sentiment indicators, but I will mention them if they reach extreme levels (as they did a few weeks ago). If you want to monitor technical and sentiment indicators, go to https://goo.gl/eT3fzA . Dr. Yardeni keeps a daily list of multiple indicators. I think you’ll find them very useful. 

For the first time in a long time, volatility returned to the market. This is good news for traders but not so much for investors. Bullish investors have had a wonderful ride for the last nine years, and they will not go down without a fight. Although there are signs the party is almost over and the police are at the door, the bulls don’t seem worried. 

And why should they?  For nine years, every time there was a major or minor pullback (it’s been two years since the last one), the market rebounded, then continued even higher. In fact, some analysts are predicting S&P 3000 in the future (although many expect a short term pullback first). Most investors see the 2 percent pullback as a “buying opportunity.” They could be right, but they could also be wrong. 

If the bulls are wrong, and we get a full fledged correction (5 to 15 percent), investors will feel pain. This week is very important: all we can do is see if the market rebounds during the day or continues to sell off. Pay close attention to the market close. For years, any selloff was met with a late-day rally. If the market keeps plunging during the week, that would be a significant change (a negative one). In addition, keep your eye on the 10-year yield, which is currently at 2.85%. At 3%, there will be fireworks. 

Bottom line: The bears have the ball and are running with it, but the bulls are prepared to stop them in their tracks. 

 

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 one-month trend = Bullish

S&P 500 is above its 50-day moving average = Bullish

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is above its signal line = Bullish

S&P 500 support @ 2810

 

Sentiment Indicators (+RSI)

II survey: (Jan. 23): 64.7% Bulls; 12.8% Bears = Bearish (*Historic sentiment levels)

AAII survey: (Jan. 24): 45.5% Bulls; 24.0% Bears = Neutral

VIX: @ 11.08= Bearish

RSI: (S&P 500) @86.69 = Overbought (Extremely!)

Comment: I got a call from a well-respected market technician who told me the S&P was three standard deviations above its 200-day moving average. He was nearly screaming. He tried to explain that this was statistically ridiculous. He added that we just doubled the old high in the S&P within two years. Think of it this way: If the market can double in two years, then it could also return back to its mean,( i.e its average), also referred to as “mean reversion.”

Put another way, we are in the euphoric stage of the bull market. The CEO of TD Ameritrade recently warned that cash levels at the brokerage were at historic lows. In other words, customers are buying at the all time highs, going on margin, buying leveraged ETFS, all trying to make money before its too late. There is little cash on the side. Forget about telling investors to sell because they are afraid to miss out.

Never forget that throughout history investors always sell in a panic at the bottom and greedily buy at the top. Obviously, they are buying at the top. Does this mean the market will crash? No, the euphoria could continue for a while longer, it’s anyone’s guess. But I can tell you this: Although last week the S&P ended  at its all-time highs, volatility returned for the first time in a long while. There were wild intraday swings early in the week. That is a clue to me the market is changing. I also saw this happen in 2007.

Keep your eye on the intraday volatility and be prepared. Learn about bear markets, learn how to buy put options (I don’t recommend shorting), and review your portfolio for vulnerable positions. The best way to survive what’s coming is knowledge. Study history, study bear market strategies, study what happens at the end of a bull market. These final, euphoric stages of the bull market could go on for a while longer because the alternative is so frightening. Even a typical 10- 15% pullback will seem like a crash to most investors because it’s been so long since the market did anything but go higher.

 

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 one-month trend = Bullish

S&P 500 is above its 50-day moving average = Bullish

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is above its signal line = Bullish

S&P 500 support @ 2748

 

Sentiment Indicators (+RSI)

II survey: (Jan. 17): 66.7% Bulls; 12.7% Bears = Bearish (*Historic sentiment levels)

AAII survey: (Jan. 18): 54.1% Bulls; 21.4% Bears = Bearish

VIX: @ 11.27= Bearish

RSI: (S&P 500) @ 80.60 = Overbought (Extremely!)

Comment: We’re still in an uptrend as the technical indicators reflect. The sentiment indicators are also telling us the uptrend can’t be sustained for long, as they have reached nosebleed levels of optimism. Nevertheless, the wild card this week is the government shutdown. If the market ignores the shutdown, the market should move even higher. Obviously, one day the bull market will crack but it’s impossible to guess when. Keep looking for clues, not opinion or predictions. I’m watching how the market reacts to the shutdown, and whether investors even care. Based on history, when the bull market ends, it will end for reasons that are not immediately apparent to the public or even newsworthy (at first).