Market Indicators (Week of July 1)

Each weekend, I will list signals from some of 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).

 

AAII survey (6/26/2013)

30.3% bullish. 35.2% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (6/26/2013)

41.7% bullish. 25% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .66

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: 16.86

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above its 200-day MA, above its 100-day, and slightly below its 50-day MA.

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

Buy signal: Index crosses over MA.

 

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

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

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

 

Analysis: The S&P was unable to rise above its 50-day moving average, and barely above the 100-day MA. MACD is still flashing a sell signal and is on the verge of dropping below the zero line (a negative sign). Because of the rally last week, option buyers bought more calls (not surprising), a negative sign. Bottom line: The market is once again at a crossroads. The indicators are telling us to sell. If that is going to change, it will have to be a very good week for the bulls.

Opinion: This is a trader’s week as the Chinese purchasing manager’s index (PMI) (released on Sunday night) and the U.S. monthly jobs report (Friday) could be market-moving events. Anything below 50 for the Chinese PMI indicates contraction. FYI: The market is closed on Thursday, July 4, and will reopen on Friday to a lower-volume (but perhaps more volatile) day.

As expected, last week was also volatile, but the bulls took control for a rousing performance. Those multiple 100-point days erased the pain from the week before, although the gains were on lighter volume.

Once again, when compared to the rest of the world, the U.S. economy appears strongest. The big unknown is how the problems in other countries will affect ours. Emerging markets are in a bear market and are continuing to fall (although they did have one excellent day). Bond prices appear to be going in the wrong direction as interest rates creep up, and not that slowly at times. (Perhaps the worst investment right now is bonds in emerging markets.) China is still the big unknown, but Sunday night we will get a glimpse when the manufacturing numbers are released. (Breaking news: PMI was 50.1, in line with estimates)

The unpredictable piece of the puzzle is the U.S. market. On the bull side, we are still above the 200-day moving average. Also, the economy is showing some strength along with more jobs (on Friday we’ll get the jobs numbers). In the topsy-turvy world of Wall Street, a stronger economy means the Fed will reduce the stimulus, which could cause the market to fall. A weaker economy could cause the market to rise, and for bonds to recover. Can anyone predict how the market will react to the jobs numbers? No, except there will be a reaction.

The bear side is still stronger, at least in the short term. The S&P is below its 50-day moving average (and above the 100-day), and MACD is a flashing a sell signal. If the bulls can manage another up week on strong volume, those technical indicators will change for the better.

Not surprisingly, the average retail investor is feeling suspicious of this market, and who can blame them? The bear sentiment is slowly creeping up, but not at extreme levels. It will take a few more plunges for retail investors to fear this market. We’re not there yet.

Here’s the way I see it: Emerging markets (EEM) are in a bear market according to the charts. The bond market is in turmoil and prices will continue to fall. I believe we are not immune to the economic problems spreading throughout the world, and our market could take a short-term hit. However, I think we would also be the first to recover.

If you are a trader, this will be a wonderful week as the volatility will continue. If you’re an investor, you can step to the side in cash or be willing to ride out the storm, knowing that in the long term our market will go up. In an interview that I did with author and economist Bernard Baumohl, he is estimating that the Dow will end this year around 15,500. In the past, he has been uncanningly accurate with his estimates. Nevertheless, there are potential pitfalls that concern him (the full interview will be published on MarketWatch in a week).

Bottom line: This will be another tumultuous week so be alert, especially on Friday (July 5th) when most market participants are on vacation. If the bull market is not over, then the bulls must prove it. As always, the tape doesn’t lie.

 

* 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 June 24)

Each weekend, I will list signals from some of 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).

 

AAII survey (6/19/2013)

37.5.0% bullish. 30.0% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (6/19/2013)

46.8% bullish. 21.9% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .82

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: 18.90

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above its 200-day MA, slightly above its 100-day, and below its 50-day MA. 

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

Buy signal: Index crosses over MA.

 

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

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

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

 

Analysis: The sentiment indicators are indecisive, and showing complacency (maybe anxiety), but not fear. Financial writers are more positive than the retail investor. The S&P went below its 50-day moving average, a significant short-term sell signal. MACD is also below its signal line, and correctly gave us an early warning signal. That warning remains. Bottom line: Indicators are telling us the short-term pain and volatility will continue.

Opinion: Even after the 500-point drop in the Dow last week, people are not afraid. In fact, some experts see the pullback as a healthy sign, and an opportunity to buy at a lower price. Some investors are feeling more anxious than the pros right now, as they remember the pain they went through in 2008. Here’s the way I see it:

The Good News: Compared to the rest of the world, the US economy is strongest, and the markets may not get hit as hard as everyone else. There are positive signs in housing (in Florida, housing prices are rising so fast people are concerned there might be another bubble), and the US economy appears to be recovering, although slowly. If you are a foreigner looking to invest in stocks, the US is the best place right now. (Another possible scenario is that billions of dollars leaving the bond market could also find its way to the stock market.)

The Bad News: Last week was just a taste of what is coming. Emerging markets had their worst month in years, and there are no signs the EM destruction is going to stop anytime soon. Interest rates shot up last week (keep your eye on the 10 year Treasury yield), and billions of dollars fled the bond market. When people open their statements at the end of this month and see how much money they lost in bond funds, it will not be pretty. Many people incorrectly thought that bond mutual funds and ETFs were risk free, and they are just starting to wake up to reality: bond funds are not a safe place to be right now.

Right now, I can confidently say that you do not want to own bond funds or emerging markets. The Chinese economy, although growing, appears to be slowing down, so don’t be surprised if you wake up to a huge correction (or worse) in Asia. Because it’s hard to know what is really going on in China, that makes it more uncertain.

In the US, the technical indicators have taken a turn for the worse. The S&P went under its 50-day moving average, and MACD is flashing a danger signal. If you are an individual investor, you have the flexibility to move in or out of the market. Right now, the stock market is uncertain and dangerous. We could have a pullback (3 to 9 percent) or a correction (10 to 20 percent). And if that happens, it’s also possible we could bounce right back. What is uncertain is if we will enter a bear market, which would be more painful, and last longer than a correction.

I remember in 2007 when people were anxious but also in denial that the housing market crash would affect our stock market. If anything, back then, TV commentators suggested that you buy stocks (especially those low priced financial stocks such as Lehman and Bear Sterns) on the dip.

And now, just like in 2007, many people seem unconcerned. Unfortunately, no one knows what will happen to the US stock market if emerging markets continue to implode, and if there is a mad dash out of both emerging market bonds and US bonds. It will not be pretty, and the worse is yet to come.

If you are a beginner investor, you will find that moving to cash is a comfortable place to be. You will not stay in cash for the long term, but only until this financial storm passes. Similar to a hurricane heading your way, you need to protect yourself. I would be very wary about holding individual stocks right now, but that is a decision only you can make. If the storm is not as dangerous as we originally thought, then you only missed out on a few months of potential gains. If the storm is destructive, then you will have protected your portfolio. Some brokers tell you that you can’t time the markets, but I think they are wrong.

If you are an experienced trader, this is an ideal opportunity to make money if you are on the short side. Inverse ETFs and put options are working right now, but this market could reverse direction at anytime, so be careful. Only the most experienced traders should short individual stocks. If you’re a beginner, do not short individual stocks, as the volatility can cause major losses.

Bottom line: A financial storm is brewing and it’s a good time to take cover in cash. More aggressive traders can take advantage of the volatility with bear market strategies.

* 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 June 24)

Each weekend, I will list signals from some of 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).

 

AAII survey (6/19/2013)

37.5.0% bullish. 30.0% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (6/19/2013)

46.8% bullish. 21.9% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .82

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: 18.90

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above its 200-day MA, slightly above its 100-day, and below its 50-day MA. S&P slightly below its 20-day MA.

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

Buy signal: Index crosses over MA.

 

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

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

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

 

Analysis: The sentiment indicators are indecisive, and showing complacency (maybe anxiety), but not fear. Financial writers are more positive than the retail investor. The S&P went below its 50-day moving average, a significant short-term sell signal. MACD is also below its signal line, and correctly gave us an early warning signal. That warning remains. Bottom line: Indicators are telling us the short-term pain and volatility could continue.

Opinion: Even after the 500-point drop in the Dow last week, people are not afraid. In fact, some experts see the pullback as a healthy sign, and an opportunity to buy at a lower price. Some investors are feeling more anxious than the pros right now, as they remember the pain they went through in 2008. Here’s the way I see it:

The Good News: Compared to the rest of the world, the US economy is strongest, and the markets will not get hit as hard as everyone else. There are positive signs in housing (in Florida, housing prices are rising so fast people are concerned there might be another bubble), and the US economy appears to be recovering, although slowly. If you are a foreigner looking to invest in stocks, the US is the best place right now. (Another possible scenario is that billions of dollars leaving the bond market could also find its way to the stock market.)

The Bad News:

Last week was just a taste of what is coming. Emerging markets had their worst month in years, and there are no signs the EM destruction is going to stop anytime soon. Interest rates shot up last week (keep your eye on the 10 year Treasury yield), and billions of dollars fled the bond market. When people open their statements at the end of this month and see how much money they lost in bonds, it will not be pretty. Many people incorrectly thought that bonds were risk free, and they are just starting to wake up to reality: bonds are not a safe place to be right now.

Right now, I can confidently say that you do not want to own bonds or emerging markets. The Chinese economy, although growing, appears to slowing down, so don’t be surprised if you wake up to a huge correction (or worse) in Asia. Because it’s hard to know what is really going on in China, that makes it more uncertain.

Warning: Investing in emerging markets and bonds are too dangerous right now.

In the US, the technical indicators have taken a turn for the worse. The S&P went under the 50-day moving average, and MACD is signaling that more pain is coming. If you are an individual investor, you have the flexibility to move in or out of the market. Right now, the stock market is uncertain and dangerous. According to the indicators, we could have a pullback (3 to 9 percent) or a correction (10 to 20 percent). And if that happens, it’s also possible we could bounce right back. What is uncertain is if we will enter a bear market, which would be more painful, and last longer than a correction.

I remember in 2007 when people were anxious but also in denial that the housing market crash would affect our stock market. If anything, back then, experts on TV suggested that you buy stocks (especially those low priced financial stocks) on the dip.

And now, just like in 2008, many people seem unconcerned. Unfortunately, no one knows what will happen to the US stock market if emerging markets continue to implode, and if there is a mad dash out of both emerging market bonds and US bonds. It will not be pretty, and the worse is yet to come.

If you are a beginner investor, you will find that moving to cash is a comfortable place to be. You will not stay in cash for the long term, but only until this financial storm passes. Similar to a hurricane heading your way, you need to protect yourself. I would be very wary about holding individual stocks right now, but that is a decision only you can make. If the storm is not as dangerous as we originally thought, then you only missed out on a few months of potential gains. If the storm is destructive, then you will have protected your portfolio. Some brokers tell you that you can’t time the markets, but I think they are wrong.

If you are an experienced trader, this is an ideal opportunity to make money if you are on the short side. Inverse ETFs and put options are working right now, but this market could reverse direction at anytime, so be careful. Only the most experienced traders should short individual stocks. If you’re a beginner, do not short individual stocks, as the volatility can cause major losses.

Bottom line: A financial storm is brewing and it’s a good time to take cover in cash. More aggressive traders can take advantage of the volatility with bear market strategies.

* 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 June 17)

Each weekend, I will list signals from some of 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).

 

AAII survey (6/12/2013)

33.0% bullish. 34.6% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (6/12/2013)

43.8% bullish. 22.9% 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: 17.14

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above its 100-day and 200-day MA, and slightly above its 40-day and 50-day. S&P slightly below its 20-day MA.

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

Buy signal: Index crosses over MA.

 

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

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

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

 

Analysis: Signals are mixed. Sentiment indicators reflect mixed opinions from retail investors and financial journalists (retail investors less bullish). S&P sitting on top of its 40-day and 50-day moving average, but it did drop below its 20-day MA, a short-term sell signal. MACD is flashing an early warning signal but it’s too early to know if it’s significant. Bottom line: Signals are mixed.

Opinion: If you’re a short-term trader, step right up, this will be your kind of week. There will be market moving news from the Fed on Wednesday (at 2:00 p.m. ET), and the odds are good that traders will like something (anything) Ben Bernanke has to say, at least at first. After all, the bull market must continue. Traders, look for reversals: there should be a few.

No one can predict which way the market will go except that it will go in both directions. If I were going to play the odds and probabilities, I’d say we’ll have a short-term rally, that is, until reality hits, and it reverses (or vice versa).

Here’s the bigger picture about the current market: 1. We could be having a short-term breather before the market continues on its bullish way. 2. Perhaps the bulls are trying to fool you into thinking everything is wonderful when in reality the market is ready to plunge.

There is a third choice, which what is what the indicators are telling us: The market is at a crossroads, and it’s very risky right now. Traders should love this week as the indecision and volatility should continue. Looking at the indicators, the S&P is sitting on top of its 50-day moving average. If it drops firmly below, it’s not going to be pretty. If it can stay firmly above (like it has three times this year), then the bull market will continue a bit longer.

My opinion, (which is as meaningless as everyone else’ opinions), is that the bull market is getting tired. Eventually, all of the problems around the world will negatively affect this market (but I will let the indicators be my guide). So far, we’ve been relatively immune to the world’s problems. Since we’re still the best place to invest right now (compared to everyone else), it’s no wonder this market is so resilient. But, be cautious as this market can turn on a dime.

Like I said last week, having cash right now isn’t such a bad place to be while the market figures out which way it is going to go. If you’re a trader, have fun. If you’re a long-term investor, sit tight and try to enjoy the show.

Bottom Line: Stock market is still indecisive so remain cautious. The winner of the battle between the bulls and bears will be known eventually (hopefully).

* 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 June 10)

Each weekend, I will list signals from some of 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).

Note: Here is my latest article from MarketWatch on surviving market crashes: http://on.mktw.net/10YNz5S

AAII survey (6/5/2013)

29.5% bullish. 38.6% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (6/5/2013)

45.8% bullish. 20.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .67

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: 15.14

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above the 100-day and 200-day MA. S&P below 20-day, 40-day MA, and slightly above 50-day. 

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

Buy signal: Index crosses over MA.

 

MACD: MACD is still above the zero line but is firmly below 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 crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

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

Analysis: Signals are mixed. Retail investors and financial journalists got spooked by last week’s market (AAII and II). As a contrarian indicator, that is a good sign. On the other hand, their confidence may have been restored on Friday (survey comes out on Thursday). MACD and Moving Averages are telling us the trend is in trouble. Also, volume on Friday told us the institutions weren’t participating 100 percent, another negative sign. Bottom line: Mixed signals.

Opinion: If you read the clues from the major indicators last week, the short-term pullback was not surprising (as I warned early last week). First, there were several distribution days, i.e. institutions sold off at the end of the day. Second, the market had sliced through its 20-day and 40-day moving averages, and on Thursday morning temporarily dropped below its 50-day moving average.

We’ll never know if the 50-day was a signal to buy or if the positive payroll number report was leaked, but on Thursday afternoon, the market made a bullish reversal, which continued into Friday (although on lighter volume). The S&P 500 is now slightly above its 50-day moving average thanks to Friday’s rally.

For the fourth time this year, the S&P 500 fell below its 50-day moving average and bounced back. It will be interesting to see if the bulls can keep the party going a little longer. In fact, if the market follows the same scenario as before, it will have a short-term run this week. But because of what is happening in the bond market here and overseas (the bond bull market is ending), this is a volatile market. In addition, emerging markets are still in turmoil, and an Asian selloff could affect our market.

Near the end of a bull market, the bulls will fight ferociously to keep the uptrend in place. There is a war going on between the bulls and bears, and it’s too early to say who will win. In my opinion, the bears have an edge.

Although the market could continue to rally, the indicators tell me that the market is indecisive. As I suggested last week, it makes sense to reduce individual stocks, especially any losers; and perhaps hedge with inverse ETFs (non-leveraged only). If you’re not comfortable hedging, then don’t do it. Suddenly, having cash on the side feels comfortable for the moment.

The best advice I can give is let the market (and the indicators) tell us where it will go, and not let opinions influence you.  My other advice is not to make a huge bet on either direction.

Bottom Line: Stock market will continue to be indecisive so remain cautious. The winner of this battle will be known eventually. 

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

How to survive a stock market crash

MIAMI (MarketWatch) — Investors who are deeply afraid of a stock market crash suffer from a condition I call “crashitis.” Symptoms include anxiety, insomnia, anger, and negative thoughts about the market. People in this condition often move all their money to cash even in bull markets. In extreme cases, investors may avoid the market for a lifetime.

After getting burned in the market twice in the last 10 years, it’s not surprising that many investors are suspicious of this market. It’s been said this is the most hated bull market in history.

Unfortunately, the fear of a market crash — crashitis — is worse than a crash itself. In truth, and based on probabilities and history, there are usually warnings before a correction or crash.

The boy who cried ‘crash’

The worst part of being afraid is the lost financial opportunity. Listening to doomsayers who constantly cry “crash” hurts your portfolio. Just like Chicken Little who thought the sky was falling when an acorn hit her on the head, a market correction will bring forth a wave of new crash predictions.

If there is a correction, don’t be surprised if the market disappoints everyone. Consider: The market bounces back after a pullback or sharp correction. Those expecting a huge crash (so they can buy at lower prices) won’t get it. Those thinking the bull market will continue indefinitely will lose money.

The cure for crashitis

Rather than succumb to your fears, prepare for the worst. Eventually, there will be a bear market. Create a diversified portfolio, understand the stocks and mutual funds you own, and develop portfolios for both long-term and short-term goals.

The cure for crashitis is a healthy dose of knowledge. This will help you to control your emotions and focus on the facts (such as market indicators) rather than your fears.

What the indicators say

Although a major market crash is a relatively rare event, a pullback (3% to 9%) or even a large correction (10% to 20%) is more probable. The odds of a pullback or correction have recently increased.

In fact, the indicators are flashing caution signs:

MACD dropped below the signal line, the Standard & Poor’s 500-stock index (SNC:SPX) fell below its 20-day moving average (a short-term signal), and the put-call ratio is below .75 (option buyers are too bullish, a contrarian signal). It is too early to know if these signals are significant, so we look at outside events for additional clues.

1. Japan’s Nikkei stock index fell by 7 % in a day, rallied somewhat, but was off its peak by 15% at one point.

2. There was an uptick in yields in the U.S. bond market, a signal that bond investors could get hurt, especially as the Fed slows down its bond buying program. Bill Gross, the bond guru at Pimco, warned that the bond rally is over.

3. Emerging market currencies got crushed (South Africa, Thailand, Turkey, Peru) and bond yields spiked (Turkey, South Africa, Mexico, Hungary, Poland). The governments in these countries could react by raising interest rates.

4. A distressing development for the bulls was institutional selling at the end of four days last week (i.e. distribution). This was not a good sign.

Prepare for the worst

When storm clouds appear, you should take defensive actions. This doesn’t mean to panic and sell everything. Here are a few steps you can take to prepare for a correction:

1. Cut back on individual stocks, especially if you have losing positions. If there is a correction, those small losers turn into big losers.

2. Hedge with non-leveraged inverse ETFs. (Avoid leveraged ETFs, which contain questionable securities and have a tendency of doing reverse-splits.)

3. Buy protective put options. Start small with a few contracts. Although you can make money during a correction, it’s not easy; you have to be right about the timing and direction.

4. Have cash set aside for emergencies and to buy into future bull markets.

5. If you know what you own and are comfortable holding, you can survive a correction. It will not be the end of the markets as we know it, but if you believe that, you have crashitis.

The biggest danger is that fear causes you to do something irrational like selling at the bottom or keeping all of your money in cash for years and years.

If there is a correction or crash, the market will survive. No matter how many times the market has been hit, it always comes back eventually.

Market Indicators (Week of June 3)

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).

UPDATE: Here is my latest article from MarketWatch on surviving market crashes: http://on.mktw.net/10YNz5S

AAII survey (5/29/2013)

36.0% bullish. 29.6% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (5/29/2013)

52.1% bullish. 19.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .66

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: 16.30

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages: S&P 500 above the 50-day, 100-day and 200-day MA, but signal line pointing down. S&P below 20 day MA.

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

Buy signal: Index crosses over MA.

 

MACD: MACD is still above the zero line but dropped below 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 crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

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

 

Analysis: The bull market stalled last week. Financial newsletter writers remain bullish while retail investors’ confidence in the market fell. Retail investors never trusted this bull market after getting burned twice in the last ten years. The Put-Call ratio is a sell, the S&P fell below its 20-day MA (short-term sell signal), and MACD crossed below the signal line. Indicators are signaling caution.

Opinion: In the last week, the mood of the market changed dramatically along with the indicators. The most distressing development for the bulls was institutional selling at the end of each day (i.e. distribution), with Friday being the strongest. That is not a good sign.

To correctly read the market, you need to look not only at indicators but at outside events. During a bull market, even negative news is ignored, until it is no longer ignored. Here are other events that’s affecting our stock market:

  1. Last week, Japan’s market fell by 7 percent in a day, attempted to make a comeback, and ended down over 15 percent at one point.
  2. There was an uptick in yields in the U.S. bond market, a signal that bond investors could get hurt, especially as the Fed slows down its bond buying program (i.e. stimulus). Bill Gross, bond guru at Pimco, warned that the bond rally is over.
  3. Emerging market currencies are getting crushed (South Africa, Thailand, Turkey, Peru) and bond yields have spiked (Turkey, South Africa, Mexico, Hungary, Poland). The governments in these countries could react by raising interest rates.

Right now, many investors are hopeful that world events won’t affect our stock market. In fact, the positive view is that investors will flock to our markets for safety. That is possible, and if true, our bull market would continue.

For four years, people warned of a stock market crash, and for four years, they were wrong. Fortunately, we follow market indicators rather than predictions. Although a crash is always possible, a market correction of 10 to 15 percent (similar to Japan) is more probable. But be forewarned: If there is a correction, it might not last long if the Fed steps in along with other world governments.

As I wrote all week in my blog, now is the time to take defensive action. It doesn’t mean to panic, but hedge until the storm clouds dissipate. Defensive action includes cutting back on individual stocks, buying inverse (but not leveraged) ETFs in market indexes, buying protective put options, or moving to cash. These are not recommendations but something to consider. If you are properlydiversified, you should be protected from a correction (but in a severe correction, nearly all asset classes go down).

The mood of the market turned from bullish to cautious. It is too early to say if the bull market has ended or if the market is simply taking a breather. I can say with certainty that emerging market currencies and bonds are in turmoil. If and when that affects our stock market is anyone’s guess, but we should have a better idea during the week.

Bottom line: The probability of a U.S. stock market pullback (3% to 9%) or correction (10% to 20%) has increased.

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