Market Indicators (week of July 29)

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 (7/24/2013)

45.1% bullish. 22.6% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (7/24/2013)

51.5% bullish. 19.6% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .64

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: 12.72

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 above its 50-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 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 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 indicators are almost identical to last week. The technical indicators are bullish while the sentiment indicators reflect optimism, but not at extreme levels. However, looks can be deceiving.

Opinion: If you had only looked at last week’s closing prices, you wouldn’t have known the market plunged on two days, including a 150-point drop on Friday before coming back to even. The bulls came out in full force to make sure the market squeaked out a small gain. It was a very impressive performance.

And yet, it’s hard to ignore what is going on in the rest of the world. First, Chinese President Xi Jinping has made an aggressive effort to cut down on government debt, reduce corruption, lower growth expectations, and get control of shadow lending practices. We won’t know for a while whether he succeeds, but we do know the problems in China are deeper than many people realized.

While the U.S. bull market continues, there are other problems around the world. Europe is struggling to get out of a deep recession, many emerging market countries are in serious financial trouble, and the Mideast is still in turmoil. Eventually, these problems will affect the U.S., but no one knows when. In a bull market, bad news is often ignored until it can’t be ignored any longer.

Back in the States, it will be a busy week. Many companies are releasing earnings, the FOMC (Federal Open Market Committee) is meeting for two days, the GDP report will be released on Wednesday morning, and the July employment report will be released on Friday. There should be plenty of fireworks as market participants digest the news, or lack of news.

On the positive side, the U.S. economy seems to be improving but at a lackluster pace. More important, if the Fed lets the market believe that QE will go on and on, we should go nowhere but up (in the short term). On the negative side, the Fed will eventually have to taper QE, or at least remind the market of that fact.

Bottom line: Because of all these cross currents, this is a dangerous market. Although the market might end the year up by an additional 5%, as many people predict, the odds have increased that it will be an extremely bumpy ride. While retail investors are starting to believe in this market again, it might be at the exact wrong time. In my opinion, this four-year bull market is showing signs of wear and tear. Even though the technical indicators are pointing up, the clues point to problems ahead. As for me, I am going to look for those end-of-day reversals. Take out the popcorn, the market is going to put on a very good show this week.

 

* 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 July 22)

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).

UPDATE: Here is my latest column for MarketWatch — http://on.mktw.net/13SBlLY

 

AAII survey (7/17/2013)

47.7% bullish. 21.3% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (7/17/2013)

52.1% bullish. 19.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .54

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: 12.54

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 above its 50-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 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 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: It’s a tale of two indicators. The technical indicators are saying the bull market will continue while the sentiment indicators are warning that it’s getting frothy. Individual investors are hopeful, but they still don’t believe in this market 100%. Once they do, however, it will be a huge warning sign.

Opinion: This time it’s different, or so many people believe. Because Ben Bernanke has us covered, many believe there is little risk in investing in the market. I notice the change in sentiment: It’s been a long time, but in the last week I got two stock tips, one from a customer at the bookstore and another from a bagger at the supermarket.

Early in the week, Bernanke went to Congress and answered questions, calmly reassuring investors that no matter what happened to the economy (or the market), the Fed would use their tools to keep things stable. The market liked what it heard, and it sailed through a difficult week.

In fact, the news was not good. Google and Microsoft missed earnings estimates. Oil prices rose to over $108 per barrel, and Detroit declared bankruptcy. When the market opened on Friday morning, there was a big yawn (except for Microsoft, which got hit by 10 percent). The Dow ended down by only 4 points. In the old days, the market would have plunged on bad earnings by market leaders and a bankrupt city. There is little doubt about it: This market is ignoring reality. (To be fair, however, U.S. economic indicators have been generally positive.)

Here’s the important point: You can complain about the unfairness of the market, and how it “should” react, but opinions don’t matter. No matter what you think should happen, the market is going up. And yet, the sentiment indicators are flashing danger signals, although not at extreme levels (for the moment). Who are you going to believe? Unfortunately, sentiment indicators should not be used to time the market because sentiment can remain extreme for long time periods. But it does tell us that many investors do not see (or care about) the warning signs.

If you believe in the power of the Fed, you won’t care about the slowdown in China, the turmoil in emerging markets (remember?), high oil prices, risky bond funds (at least they were two weeks ago), and the earnings miss by two major technology companies. Retail investors are getting lulled into thinking this bull market is unstoppable, and for the moment they are right. But only for now.

There is no doubt that a pullback or correction is coming, but it is impossible to time. And don’t forget: If there is a pullback, the Fed will step in. With the Fed making people believe that investing is risk-free, it would not be surprising to see this market keep climbing. In reality, investing is not risk-free. Getting off the quantitative medicine is not going to be easy. In fact, just the mention that the medicine might stop is enough to send the market into a tizzy.

In my opinion, it is a dangerous market simply because most people are unaware it’s so dangerous. I am not writing this to scare you, but to prepare you. This market cannot keep going up forever. When the market plunges one day, I am hoping that you will be ready. Unfortunately, we cannot predict when that day will occur. But we can look for clues (including using market indicators).

If you are long (or short) the stock market, use strict money management techniques (see a list at the end of the article) to minimize losses. This is not the time to make huge bets on either side of the market. The safest place to be right now is in cash, but that is a decision only you can make (since it’s quite possible you will miss out on the next 500 points). In my opinion, it’s a trader’s market. There is still enough bad news in the world (and even in the US) to give any realistic investor heartburn.

Bottom line: Because of Bernanke’s soothing words, the market keeps going up, ignoring bad news. It may not be fair, but you can’t fight the tape. One day this bull market will end, perhaps sooner rather than later. Be ready with a trading plan and be nimble if there are signs of an imminent pullback or correction. Aggressive traders can hedge with inverse ETFs while cautious investors can increase cash positions.

 

Four Money Management Rules that Can Save Your Assets

Note: These are not hard and fast rules, but guidelines. Adjust the rules to fit your risk tolerance.

  1. If you lose more than 5 percent on a position, that is a warning sign, so be prepared to sell. At 6 or 7 percent, sell.
  2. Don’t buy any stock or index on the way down.
  3. Never add to a losing position (but it’s okay to add to winning positions).
  4. If you have a gain, and the stock or index pulls back 3 to 5 percent, sell to lock in that gain.

 

* 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 July 15)

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 (7/10/2013)

48.9% bullish. 18.3% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (7/10/2013)

46.9% bullish. 22.9% 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: 13.84

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 above its 50-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 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 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 technical indicators (MACD and moving averages) are clearly saying the trend is up and the bull market continues (jump-started by Ben Bernanke). The sentiment indicators, although not screaming sell signals, are telling us the crowd is feeling a bit too confident about the market. Individual investors are even more bullish than the financial writers. The trend is up, the bull market continues, but if the sentiment gets too exuberant, that would be a signal the good times are going to end. We’re not there yet, however.

Opinion: The bulls put on an spectacular performance during the week thanks to dovish comments by Ben Bernanke. Similar to the “Greenspan put,” the Bernanke put has you covered. Three weeks ago (it seems like an eternity), Bernanke had spoken a bit too clearly about removing stimulus, and the market protested strongly: “Don’t take away our QE!”

Now, the word is out: The Fed will protect you. Therefore, in the short term, the market is destined to go up. In addition, the Wall Street minions have concluded that bond buyers are going to flock to the stock market, where the grass is greener. Also, those who invested in emerging markets are also supposed to move their money to the U.S. stock market. The theory is this: When you look around the world, the U.S. is the safest country for investments. It’s a good theory and it is true right now. Therefore, you are supposed to believe that nothing will stop this bull market from going higher. In addition to Bernanke, positive earnings will also drive this stock market higher, no matter how bad it is in the rest of the world. As long term traders, we follow the trend until it ends, and the trend is up.

However…there are enough warning signs to make astute traders cautious. Eventually, the world’s financial problems (and the problems seem to be getting worse) will affect us. Oil has spiked because of the unrest in the Middle East. Europe is still in a recession but appears to be recovering, although it’s too early to know for sure.

In my opinion, I would not be surprised to see the U.S. take a 7 to 10 percent hit sooner rather than later. (It would be cruel if bond investors, who by nature are a conservative lot, entered the stock market only to get slammed.) I’m in the minority, however, as everyone else is looking at 15,800 on the Dow and beyond. The poor short sellers had only a few really good days in the last four years, the best reason why you follow the trend no matter what you think “should” happen.

If you’re a long term trader, you are long the U.S. stock market (but avoid EM and bonds) but you’re also cautious (in case I am right about the 10 percent hit). For now, look for signs of a selloff at the end of the day. Also, look for a gap up in the morning followed by a quick selloff. Some major institutions or high frequency traders seem to be selling into the rallies. Although my gut tells me this market can’t go up much longer, the market indicators tell me differently. But now that the investing crowd is finally starting to believe in this market, that is also a sign the fun is going to end one of these days.

Whether you are long or short, follow these three rules. They could save your assets: Rule 1: If you have a 5% loss on any position, that is a warning sign: Be prepared to sell. At 6 or 7 percent, sell without looking back. Rule 2: Don’t ever add to a losing position, but you can add to a winning position. Rule 3: Never buy a security on the way down. In my opinion, that is a dumb idea (although many people disagree).

Bottom line: Everyone wants the market to go up so the market is going up even though there are huge storm clouds across the world. I know that we aren’t isolated from the world’s problems, so be prepared to change strategies at anytime. When the sentiment changes from bullish to bearish, it won’t be pretty. Unfortunately, no one can predict when that will happen. All we can do is look for clues.

 

* 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 July 8)

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 (7/3/2013)

42.0% bullish. 23.8% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (7/3/2013)

43.8% bullish. 20.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .60

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: 14.89

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 above 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. (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 rose slightly above its 50-day moving average, but is firmly above the 100-day moving average (in fact, the 100-day acted as support). Sentiment readings are increasingly bullish, but not extreme. It was a good week for the bulls, but we’re still at a crossroads. The sentiment is bullish but the technical indicators, although improved, are still not giving an “all clear.” For that to happen, it will have to be another good week for the bulls, which is what the crowd is expecting to happen.

Opinion: In only a week, it seems as if the technical and fundamental analysts agree that the market is going up. Retail investors and financial investors are bullish again, the S&P crawled over its 50-day moving average, and the Dow is above 15,000. Economic indicators are positive, jobs are improving, and it seems like happy days are here again. People a lot smarter than me says we’re going a lot higher. Forgive me for being a party pooper because I’m still cautious.

The biggest party pooper is emerging markets, which is still in a bear market (over the weekend I heard one commentator recommend buying EM because it is so cheap. In my opinion, buying EM (or gold) on its way down is a sure way of losing all your money.) Bonds are also getting hurt and this could be the beginning. It seems that many investors didn’t realize you could actually lose money buying bonds. Surprise! When interest rate go up, and they are going up, bond prices go down, and some bonds go down faster than others.

Why buy anything that is falling? No one knows how low gold, bonds, or emerging markets can go. I’d rather buy gold (and anything else) on the way up, not on the way down. Trying to time the bottom is for gamblers only.

That brings us to the U.S market. When I look at the indicators, the market isn’t out of the woods yet. It’s struggling to stay above its 50-day moving average. I also have to wonder that if emerging markets and bonds continue to plunge, won’t that affect stocks? The bullish case is that everyone will run to our stock market because it’s the safest place to be. The bearish case is that our market cannot escape the turmoil in other countries, or in bonds.

So what is a long term trader supposed to do? As for me, I am watching to see if the S&P can decisively rise above its moving averages, and not sell off at the end of the day. Therefore, I’m taking a wait and see attitude on the US market. Perhaps the pros are right and the market is on its way upward and skyward, ignoring the world’s problems. The market could be consolidating for a few weeks before it heads higher. Or, this could be a bull trap.

Truthfully, I do not know. Perhaps this week will give us clues. If this is a continuation of the bull market, then the Dow will be well above 15,000 by the end of the week (or month). If this is the beginning of a correction or pullback, the market will continue to struggle, and be volatile.

The indicators will eventually declare a winner. For now, it’s a tie. The bull was knocked off its pedestal a few weeks ago, and it came back strong on low volume. Betting against emerging markets with an inverse ETF such as EUM has worked in the past, although there are no guarantees it will work in the future. Compare the chart of EUM (inverse emerging markets) with EEM (emerging markets).

Bottom line: It will be a fascinating week. The bulls want to believe the U.S. market is ready to take off, but it’s hard to ignore all of the looming problems in the world. I know this for sure: Anything is possible so be prepared. Once again, traders should enjoy the volatility while investors should remain cautious.

 

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