Market Indicators (Week of May 27)

Each weekend, I will list signals from the most useful market indicators.*

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

May 30th PM update: Selloff into the close, another distribution day. This is the time to take defensive action.

May 30th Update: Investor’s Business Daily identified three distribution days (heavy institutional selling), and world markets are selling off. Bond market acting unusual. It is not the time to be afraid, but be defensive in case there is a real storm. Bonds could be more dangerous than stocks at first.

May 29th Breaking Note: Markets sold off for three days.  It is time to take defensive actions, i.e. inverse nonleveraged ETFs, put options, reduce individual stocks. In my opinion, correction more probable than a crash. I hope I’m wrong, but if not, I like having stock insurance. 

 

AAII survey (5/22/2013)

49.0% bullish. 21.6% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (5/22/2013):

55.2% bullish. 18.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .73

Sell Signal: Lower than .75 is a sell (more call options are being bought). Less than .50 is a screaming sell.

Buy signal: Higher than 1.0 is a buy (more put options are being bought)

 

VIX: 13.99

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages: S&P 500 above the 50-day, 100-day and 200-day MA.

 

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over MA.

 

MACD: MACD is above the zero line and is above the red 9-day signal line. MACD turned down slightly. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.) 

 

Sell signal: MACD line (black line) crosses below zero line. MACD line crosses below 9-day (red or gray) signal line.

Buy Signal: MACD line crosses above zero line. MACD line crosses above 9-day signal line.

 

Analysis: After a volatile week, the bull market continues. Financial newsletter writers remain bullish (II) while retail investors are just starting to believe in this bull market (AAII). Put-Call ratio is a sell but otherwise all indicators are bullish.

Opinion: One of Jesse Livermore’s discoveries was that a strong bull market is unstoppable (it even ignored a world war). In other words, don’t fight the tape. He used to “pyramid,” that is, buy more shares of stock as the price went higher. Most people do the opposite; they buy weak stocks that appear on sale, but are actually damaged goods. But Livermore was also a genius at detecting the end of a bull market, and when it is susceptible to a correction or crash. Livermore famously made over $3 million dollars in one day selling short during the Panic of 1907.

That brings us to our stock market. We’re still in a bull market but you must be on the lookout for any signs it’s over. Japan fell by over 10 percent during the week, but recovered a little. No one knows if what is happening in Japan will spread to the U.S. markets. If the bull is intact, it will ignore the bad news and continue higher. But you must remain on guard and defensive, especially if you are trading individual stocks.

According to the AAII survey, the retail investor is more optimistic about the market, but not at euphoric levels. Some have called this four-year bull run the “most hated bull market in history.” It sure seems that way. How long can this bull market continue? No one knows, although every week there is another crash prediction. It is nearly impossible to try and time the top (or the bottom). Once again, follow the indicators and ignore opinions, predictions, and tips. If you can do that, you will not only save money, but you will learn how to read the market yourself without relying on authors, columnists, and TV commentators.

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

Market Indicators (Week of May 20)

Each weekend, I will list signals from the most popular market indicators.*

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

AAII survey (5/15/2013)

38.5% bullish. 29.3% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (5/15/2013):

54.2% bullish. 19.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .50

Sell Signal: Lower than .75 is a sell (more call options are being bought). Less than .50 is a screaming sell.

Buy signal: Higher than 1.0 is a buy (more put options are being bought)

 

VIX: 12.45

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages: S&P 500 above the 50-day, 100-day and 200-day MA.

 

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over MA.

 

MACD: MACD is above the zero line and is above the red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

 

Sell signal: MACD line (black line) crosses below zero line. MACD line crosses below 9-day (red or gray) signal line.

Buy Signal: MACD line crosses above zero line. MACD line crosses above 9-day signal line.

 

Analysis: The bull market continues. Financial newsletter writers are bullish (II) but retail investors are still suspicious of this market (AAII). Put-Call ratio is a screaming sell but otherwise all indicators are bullish. Something to watch: Overall volume was weak on Friday (source: IBD).

Opinion: In the classic book, Reminiscences of a Stock Operator, Jesse Livermore showed up at the brokerage firm and every day one man watching the ticker tape proclaimed, “It’s a bull market!” And Jesse finally figured out what the man meant: It’s useless to fight the tape. In other words, no matter how suspicious you are of the market, and no matter how many reasons you can think of that contradicts why the market is going up, the market has the final word. And the market is telling us, “It’s a bull market.” As the market flies away, many retail investors are hoping to re-enter at 6,000.

You don’t fight the tape. Until I see evidence that this bull market is ending, I am long. It is too risky to short a bull market no matter what you think. The difference this time is that we will try to exit with small losses before it ends. If you are long the market with mutual funds, index funds, index ETFs, and leading stocks, this is an enjoyable ride. Enjoy it while it lasts, and never forget that it won’t last forever.

If you want to see a bear market, look at the gold chart (NYSE:GLD). I traded gold for years but I never fell in love with it. I fortunately got out in November and December based on what I saw in the indicators (moving averages). I am looking forward to buying gold again one day when the gold bear market is over and the trend is up, not down. It may be a while judging by what I see. Is it fair that gold is getting punished? No. But no one said the market is fair. Investor Benjamin Graham said that in the short term the market acts like a voting machine, and of course he is right.

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

Market Indicators (Week of May 13)

Each weekend, I will list signals from the most popular market indicators. *

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

Note to myself on May 14th: In a bull market, nearly all stocks go up, almost every strategy works (except shorting), and don’t think I’m a genius. Stay with the bull market as long as it continues but be prepared to sell when there is evidence it is weakening. Look for evidence, not beliefs, i.e. the belief that the market “can’t” go any higher. It can. 

AAII survey (5/8/2013)

40.8% bullish. 27.4% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (5/8/2013):

52.1% bullish. 19.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .59

Sell Signal: Lower than .75 is a sell. (more call options are being bought)

Buy signal: Higher than 1.0 is a buy (more put options are being bought)

 

VIX: 12.59

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages: S&P 500 above the 50-day, 100-day and 200-day MA.

 

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over MA.

 

MACD: MACD is above the zero line and is above the red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

 

Sell signal: MACD line (black line) crosses below zero line. MACD line crosses below 9-day (red or gray) signal line.

Buy Signal: MACD line crosses above zero line. MACD line crosses above 9-day signal line.

 

Analysis: No major changes in this market. The major technical signals are still bullish. Retail investors are starting to believe in this bull market along with the pros, but not at extreme levels (yet). Trend still up and you follow the trend. Indicators still say the bull market has room to go.

Opinion: I have a very knowledgeable acquaintance who has been shorting this market via inverse ETFs for nearly a year. He’s ready to throw in the towel. He still believes he’ll be able to buy stocks at a much lower price (along with everyone else), but he’s nervous. Hint to my acquaintance: When you’re down more than 5% or 6% (or 7 or 8%), cut your losses.

The trend is still up and I follow the trend until the indicators say it’s over. Still, I am always on guard for a reversal: For example, a strong opening but weak close, two or more days of institutional selling (distribution) per CAN SLIM, and leading stocks that are faltering. I’m also looking for sky high sentiment readings.

Right now, many retail investors are in disbelief (or denial) about this market. After disbelief, we may get hope, optimism, and excitement. That’s when the sentiment readings will go off the chart, and you have to be cautious.

As always, don’t go on margin and have a plan in case there is a worst-case scenario. Having a strategy and a plan helps me to sleep at night. If you’re betting on probabilities, we’re going higher. And yet, the market always finds a way to humiliate the most people it can (billionaire investor Ken Fisher once told me that he calls the market “The Great Humiliator”).

With that in mind, I can’t wait to see what The Great Humilator has in store for us this week.

Followup: In my February 6th MarketWatch column, Amy Smith from Investor’s Business Daily said that Lumber Liquidators (NYSE: LL) fit the CAN SLIM criteria. Since that mention, the stock has gone up by nearly 20 points. In my most recent column, Smith said to watch the biotechnology stocks. If you follow the biotechnology sector with the ETF, IBB, you may have noticed it’s had a very strong run. That could also be the first sector to falter when this bull market slows down. 

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

Why I stopped using stop loss orders

MIAMI (MarketWatch) — I believe in stop loss orders to protect stock positions or to lock in gains. When the stop loss is triggered, your stock is automatically sold at the market at the best available price.

The best available price? Unfortunately, that can be a misnomer.

In a normal market (if there is such a thing), the stop loss can work as intended. You buy a stock at $50, and enter a stop loss order to sell at $47.50, which limits your loss to 5%.

In reality, in a fast market when the stock gaps down (during flash crashes, breaking news, or fake tweets), your stop loss is triggered. The bad news is that it will be triggered at the next available market price, which could be many points lower.

In other words, your stock could be automatically sold at the lowest price, and instead of locking in a 5% loss, you could lose much more.

Another problem with a stop loss order is that when you enter it into the computer, the order is transparent. A game that some market-makers played (these days, it will be computer algorithms) is “run the stops,” when the stock is forced low enough to trigger a large cluster of stop loss orders (usually at round numbers or well-known support and resistance levels). After the stock is sold at a popular stop loss price, the stock reverses direction and rallies.

The biggest problem with stop losses is that you have given up control of your sell order to the computer. During volatile markets, that can cost you money. But there is an alternative.

Price alerts

I still believe in stop losses, but not the automatic kind. Rather than using automatic stop losses, I set up price alerts for the securities I bought (and for those I plan to buy). For example, if I buy XYZ stock at $20 per share, I might set a price alert at $19 (5% loss), and also at $25 (25% gain).

If the $19 alert is triggered, I am notified by email and text message. Next, I’ll turn to my mobile device and decide what action to take. More than likely, I’ll sell depending on market conditions. And if the $25 price alert is triggered, I might sell for a profit or set new price alerts.

The main point is that I am in control of my sell orders. Technology has made price alerts more practicable than in the old days. First, because of mobile devices, you are notified instantly if the target price is triggered. Second, you can take immediate action. Before the Internet, you had to run to a phone and call your brokerage firm. (During the 1987 market crash, phone lines jammed because of the huge influx of orders. By the time brokers entered their clients’ sell orders, stock prices were already at rock bottom.)

Note: Stop loss orders still make sense if you are unable to access your account immediately, for example, if you are on vacation. In addition, if you are not disciplined and ignore price alerts (hoping your stock will come back one day), automatic stop losses might be a better alternative.

Alert prices

Now, let’s take a look how the overall market is doing, and which are the leading stocks within the strongest sectors. Amy Smith, author of “How to Make Money in Stocks Success Stories” and a market expert at Investor’s Business Daily, gave her view of the overall market.

“We’ve been in an uptrend since November and have had a nice move along the way with the indexes moving into new high ground. Although there were a few distribution days (selling), and the market corrected a little bit, we went back into an uptrend. Savvy investors are keeping a close eye on the volume going into the indexes.”

Smith says to watch for heavier volume as the market moves higher. “If volume continues to increase, it indicates institutions are buying shares. The key is whether the major indexes can hold onto their new highs.”

Using the CAN SLIM® investing method, Smith is also looking at how the leading stocks are doing. Are they holding or starting to correct? So far, they are holding on, but that could quickly change. “If you see indexes and leading stocks pulling back on heavier volume, that is an indication that professional buyers are lightening their positions,” Smith says. “That is the time you don’t want to be in the market.”

One group to watch: Biomedical stocks. These companies produce drugs and services to people that need health care. “We have an aging population and people need these products,” Smith says, “but if this group begins to weaken, that could also spell trouble for the overall market unless another sector takes its place.”

According to Smith, stocks in that sector that have had huge earnings increases so far (ranging from 27% to 63%) include Celgene, The Medicines Company , Valeant Pharmaceuticals International, Cigna, and Biogen Idec. There are also several ETFs that focus on biomedical stocks. As always, just because this industry has done well in the past is no guarantee it will do well in the future.

My opinion: Many retail investors are still suspicious of this market. Why? Because they think the market is logical. Well, if you want logic, play chess. Otherwise, until there is evidence of a correction or bear market (indicators turning down, more than two strong down days in a row, strong opening but weak close, and leading stocks unable to advance), this bull market will continue. That said, never let down your guard — this market could turn at any time.

Market Indicators (week of May 6)

Each weekend, I will list signals from the most popular market indicators. *

(A full list of the major indicators with signals can be found in my book, All About Market Indicators (McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

AAII survey (5/1/2013)

31.0% bullish. 35.9% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (5/1/2013):

47.9% bullish. 18.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .61

Sell Signal: Lower than .75 is a sell.

Buy signal: Higher than 1.0 is a buy (more puts are being bought)

 

VIX: 12.85

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages: S&P 500 above the 50-day, 100-day and 200-day MA.

 

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over MA.

 

MACD: MACD is above the zero line and is above the red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

 

Sell signal: MACD line (black line) crosses below zero line. MACD line crosses below 9-day (red or gray) signal line.

Buy Signal: MACD line crosses above zero line. MACD line crosses above 9-day signal line.

 

Analysis: No major change in the indicators except the pros are getting more bullish and the retail investor still seems suspicious of this rally (AAII and II sentiment readings). Trend is still up and you follow the trend until it ends. The indicators say this bull market has some room to go.

My Opinion: Wow! This bull market seems unstoppable, but all bull markets end, eventually replaced by a correction or a bear market. If you’re a beginner, stick with your long positions but be cautious. Everyone is looking for signs of a slowdown such as more than one day in a row of a strong down market; a strong opening but weak close; market indicators turning down; and leading stocks stop advancing.

What I learned: Don’t blindly follow anyone (including me) but do what you think is right. So many people gave so many reasons why this market wouldn’t go up, and they were wrong. The lesson is to rely on market indicators, not on opinions. For years, some of my acquaintances angrily told me why the market “shouldn’t” go up, but the market still did. I’m thankful I discovered indicators or I’d still be relying on bad advice, wrong opinions, and logic. Guess what? The market isn’t always logical, which is why so many extremely smart people do poorly in the market. You want logic? Play chess.

During this bull market, almost everything worked. For now, enjoy the ride while it lasts (but be on guard). I can’t wait to see what the market has in store for us this week. If it goes higher, it will flabbergast a lot of people.

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