Market Indicators (as of Sept. 30)

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 (9/25/2013)

36.1% Bullish. 30.6% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/25/2013)

44.3 % Bullish. 20.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .70

Sell Signal: Less than or near .50 is a sell (more call options are being bought).

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

 

VIX: 15.46

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 pointing sharply down just above its 50-day moving average. 

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

Buy signal: Index crosses over 50-day, 100-day, and 200-day MA.

Danger: Index about to cross below its 20-day and 50-day moving average.

 

MACD: MACD is above the zero line and above the red 9-day signal line, but moving sideways. (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 9-day signal line. MACD line crosses above zero line.

 

Analysis: Sentiment was mixed last week, but that should change this week. Moving averages are reflecting last week’s bearish mood, and are pointing straight down. The odds are good that the S&P will fall below its moving averages this week, a bearish sign. In addition, expect reversals. Put another way, this is a trader’s market. Side note: Volume was surprisingly low last week. Judging by the opening, the big money is placing their bets on the downside, but that could change quickly.

Opinion: By now, you know that the D.C. sideshow has moved center stage. The chances are good there will be a government shutdown, but no one knows how long it will last. Nevertheless, there should be major fireworks, that is, unless Congress reaches an agreement on Monday night. If there is a rally into the close on Monday, perhaps a deal is in the works. If the market sinks faster and further, watch out below.

(If you’re shorting this market, be careful: Market could strongly reverse direction on Tuesday if shutdown is averted.)

If this stalemate drags on for more than a few days, the market will take a hit. And as soon as it’s finally resolved, the market should rally. The problem is that we’re in unknown territory, so the market could go lower than anyone anticipated, and perhaps climb higher when it’s over. Either way, it will not be pretty.

In addition to this sideshow, the jobs numbers are released on Friday. That could also be a market-moving event. And if the market starts to unravel, perhaps Bernanke will announce that happy days are here again and there will be no tapering for the rest of the year. And if those job numbers disappoint, QE will go on.

All of this uncertainty is going to create volatility. I warned you last week it is a dangerous market, and it is. Risk adverse investors should already be on the sidelines. If you’re fully invested, this is one of those times when you grit your teeth and hope that everything will be all right, as Bob Marley might say. It should be a fascinating week, and also frustrating if you’re an investor.

For the moment, bond prices have rallied (thanks, Ben!), surprising almost everyone. But keep your eye on the 10-year Treasury for any unusual movements (if the yield goes up, bond prices go down). While everyone is distracted by Washington, look for market moving events that can alter the market. Sometimes there are clues what might happen next (such as selloffs or rallies during the last hour).

Bottom line: If you’re a rookie, watch and learn, hopefully from the sidelines. There are a number of conflicting events that will increase volatility. If the market comes out of this on Friday unscathed, I would be surprised. But never forget that anything is possible. A worst-case scenario for the week is 1500 on the S&P 500. Best case is we end where we started at or near 1700. Put on your seatbelts now because the market is going to take us for a bumpy ride (thanks to Congress).

* 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 (as of Sept. 23)

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 a link to my latest column on MarketWatch: http://on.mktw.net/19CIYLo

 

AAII survey (9/18/2013)

45.1% Bullish. 29.7% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/18/2013)

42.3 % Bullish. 21.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .60

Sell Signal: Less than or near .50 is a sell (more call options are being bought).

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

 

VIX: 13.12

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 50-day, 100-day, and 200-day MA.

 

MACD: MACD is at 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 9-day signal line. MACD line crosses above zero line.

 

Analysis: As expected, it was a volatile week. Although most market indicators are still pointing up, looming outside events may trump the signals. Sentiment is still more bullish than bearish but not at extreme levels. VIX continues to show complacency (not a good sign). I also looked at the indicator, RSI, which shows the market as overbought. if you look at the bigger picture, we’re getting mixed signals. Technically, we’re still in a bull market, according to the charts, but there is evidence we could go sideways or down.

Opinion: I promised you a volatile market, and that’s what you got, thanks to Ben and the Fed. Ben pulled a fast one and surprised nearly everyone. What was he thinking? Or should I ask, what is he seeing that we don’t see?

Looking back, if Ben had cut QE by even a smidgen, the market would have had a gigantic temper tantrum, which would have ruined his legacy. Because the Fed decided to delay tapering, the market rallied by 1 percent, gold rallied, emerging markets rallied, and bonds rallied. Ben is a hero! Warren Buffett said in a CNBC interview that Ben Bernanke is the best Fed chairman we ever had, and he should stay on for another term. Thanks to Ben, happy days are here again.

For a day.

On Friday, the market gave back all of the gains that it had made during the week. Basically, the market ended nearly flat. And that is the definition of a dangerous sideways market. The bulls do not want the party to end, and the bears, who have had few opportunities in the last four years, are slowly waking up from a deep slumber.

Some blamed the Friday selloff on St. Louis Federal Reserve President James Bullard, who said that they might taper in October. This time, they really, really mean it (fool me once, shame on you, fool me twice…). If the Fed really did taper in October, they’d have to pull a rabbit out of a hat to stop the market from plunging. Wait, I think I see Janet Yellen getting ready to take center stage. Maybe she will save the day by continuing quantitative easing. After all, the show must go on.

Right now, there are so many sideshows it’s hard to know what will move the markets. For starters, we have the debt debacle, the threat of a government shutdown, and a dysfunctional Congress. As we enter this week, any “crisis du jour” could turn into a huge headache.

If I were a doctor, I’d say the market was addicted to QE. And like any addict, getting off of that sweet liquidity will be hard. Even talking about cutting back on QE upsets the market. The Fed has really gotten itself in a pickle this time, and there is no easy way out. The longer they wait, the worse it’s going to be when it happens. (If I was the Fed, I’d wait for a huge rally and then make thetaper announcement.)

Meanwhile, Ben is going to sail off into the sunset soon, having saved the market from 2008. Bernanke has always been fascinated by the 1929 crash, and studied how the Fed mishandled it, which helped to create the Great Depression. That was one of the reasons that Ben injected the market with so much liquidity. He didn’t want a 1929 style bubble to happen on his watch. It’s ironic, but there is a downside to adding so much liquidity: bubbles.

At the moment, the Fed doesn’t see a bubble, but they are looking everywhere. In reality, asset bubbles are an interesting phenomenon. During the Dutch tulip bubble, the housing bubble, and the 1929 stock bubble, you don’t realize you’re in one until it pops. No one knows if the current bull market is a bubble, but this I can say for sure: if the Fed doesn’t start to cut back on the liquidity soon, there will be no doubt.

Bottom line: In my opinion, the markets will feel some short-term pain, and soon. The next week will be volatile once again with a number of rallies and reversals (if not this week, then next week). Those late-day selloffs are very bearish, and that could continue. Investors are hoping that any selloff will be followed by a huge rally. It’s possible because there is a lot of cash on the side itching to get into this market at a lower price. This market remains dangerous, and more so in the next two weeks. If the market can come out unscathed through October, I’d be surprised. Nevertheless, sometimes the worse market events occur when people least expect them. You already know that I like using options for protection whether you’re bullish or bearish. This is the time to be disciplined and flexible, so be on your toes, and good luck. We could be in for a rough ride over the next few weeks and months.

* 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 Sept. 16)

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).

 

FRIDAY ALERT: Late-day selloff, not a good sign. Be careful if you’re long.

 

AAII survey (9/11/2013)

45.5% Bullish. 24.6% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/11/2013)

37.1 % Bullish. 22.7% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .60

Sell Signal: Less than or near .50 is a sell (more call options are being bought).

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

 

VIX: 14.16

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 50-day, 100-day, and 200-day MA.

 

MACD: MACD is at 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 9-day signal line. MACD line crosses above zero line.

 

Analysis: We went from bearish to bullish in one week. Individual investors are feeling a bit more bullish while financial writers lost some of their enthusiasm. (Another survey says that a majority of money managers are expecting a correction.) Technical indicators made a dramatic turnaround, and this week we’ll see if it’s for real. Unfortunately, the Fed meeting and other news will trump the indicators. Because we’re still in a sideways market, the market can go in either direction. Once again, look for late day selloffs on high volume. A head and shoulders pattern is starting to develop on the S&P 500, which is very negative (thanks to trader Toni Turner for pointing this out).

Opinion: Last week was an important lesson about market indicators. At the start of the week, most of the indicators were pointing down, and it seemed like a slam-dunk to sell the market short. And then, unexpectedly, there was the Syria relief rally, and the bulls had the best week in months. Most important, at the end of each day, the market did not sell off like it had in the past. It was a glorious day if you were long the market, and we’ll soon see if it can last.

The lesson of the week is that you can never make a trade based only on indicators. Although market indicators help put the odds on your side, they can’t predict the future. Last week, unexpected good news trumped the indicators and everything else. It was a breathtaking turnaround for the bulls. It also goes to show that anything is possible in the stock market, which is why protective call or put options make sense when the market is moving sideways.

This week will be exciting. The FOMC meeting begins on Tuesday, Sept. 17, and it’s sure to increase market volatility before and after the meeting (especially after). Here are three possible scenarios ofwhat could happen:

1. Action: Ben and the Fed announce that they are not going to taper now but at the next meeting (after Ben has said his goodbyes).

Possible Result: Market goes wild, rises by 2 or 3 percent. S&P is firmly in the 1700 Club. Gold explodes higher. Emerging markets also go higher and Ben is a hero on Wall Street. Short sellers get crushed.

Concern: If the Fed delays tapering, it must mean there are more problems with the economy than the Fed is letting on. By delaying, it will only make things worse when they taper in the future.

My opinion: This is a possible scenario, which is why it’s dangerous to short without call option protection. Nevertheless, the market would be pleasantly surprised if they delayed tapering. I would also be surprised if they delayed tapering.

 

2. Action: Ben and the Fed announce that QE is going to end by more than the market expected.

Possible Result: Market sells off by more than 3 percent, gold gets crushed, and emerging markets have the worst week in years.

Concern: Ending liquidity this abruptly would upset the markets.

My opinion: There is a .00001 percent chance that the Fed will end QE abruptly.

 

3. Action: The Fed tapers a little (the mini-taper), no more than 5 to 10 billion dollars a month.

Possible Result: Market will be volatile.

Concern: The markets will see this as the end of QE in the future and won’t like it one bit.

My opinion: This is the most likely scenario. The Fed will taper a little and hope the market will accept it. In fact, articles are already appearing that the market “priced in” mild tapering and won’t be surprised. If markets start to sell off, perhaps there will be an announcement that Janet Yellen will be the new Fed chairman, a decision Wall Street will like (this is pure speculation on my part). That will reduce the tapering pain.

With one wave of his magic Fed wand, Ben can crush the markets or let the party go on a bit longer. Either of the two extremes (no tapering or a lot of tapering) will cause big reactions, and I don’t think the Fed wants that. By tapering a tiny little bit, they are hoping they can slowly wean the markets off of the QE liquidity trap. No one can predict how the market will react, but there will be a reaction, even though it might be delayed.

Once again, the safest bet is to move to the sidelines until the market calms down, which could take a while. There are other events (such as the debt ceiling talks) that have taken a back seat to Syria, but these events could emerge once again.

I still like using call or put options to protect long or short positions (as I described last week). Nevertheless, the market will be volatile so managing stock and option positions will be a challenge. I can honestly say that the market indicators, although leaning bullish at the moment, could reverse again this week (and intraday). Once again, you must be prepared for anything since it’s in the Fed’s hands at the moment.

And as I’ve repeatedly said, this market is dangerous, and more so this week. Traders will be looking to make money off of the volatility. Investors, however, are hoping that Ben can maneuver the market into calmer waters before he sails off into the sunset.

Bottom line: It’s time for the Fed to fish or cut bait. This is their moment, and they are either going to pump up the market higher or taper a little and hope for the best. I wouldn’t be surprised to see their public relations team spread the word that mini-tapering is a good thing for the market. The Fed will probably want to telegraph their intentions early so the market doesn’t throw a temper tantrum. Be cautious no matter what side of the market you are on.

Additional: With the futures up over 1% on the Summers’ news, and the S&P in the 1700 Club for the moment, the market will have to hold its gains through the week or look out below. Look for a selloff into the close. If there is a late day selloff and the S&P can’t hold its gains, it would be very bearish. We’ll know this week if this bull market has legs or is in trouble.

 

* 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 Sept. 9)

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 (9/4/2013)

35.5% Bullish. 31.3% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/4/2013)

37.1 % Bullish. 23.7% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .52

Sell Signal: Less than or near .50 is a sell (more call options are being bought).

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

 

VIX: 15.85

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 50-day, 100-day, and 200-day MA.

 

MACD: MACD is below the zero line and 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: Overall, sentiment indicators are not at extreme levels (except for the put-call ratio), but they do show investor indecision and complacency (especially the VIX, which is on the low side). Technical indicators, on the other hand, are firmly in the bear camp. As long as the S&P remains below its 50-day moving average (1665), the market remains vulnerable. However, keep in mind that two known market-moving events (the Syria vote by Congress on Wednesday and the FOMC meeting on September 17th) are approaching fast. Therefore, market volatility and intraday reversals should continue all week (and beyond).

Opinion: Last week, the bulls started off strong with a 100-point head start on Monday, which disappeared by the close. The bulls made some headway during a volatile week but ultimately fell short. The bears didn’t fair much better as the expected correction failed to appear. After the smoke cleared on Friday, it was almost a draw. Nevertheless, there were numerous late day selloffs, which was not bullish.

If you look at the market indicators, you can see that the market is struggling. The problems are well known: Syria, emerging markets, rising interest rates, and a possible end to QE. Therefore, it would seem like a slam dunk to short the market using inverse ETFs (I do not recommend shorting individual stocks). However, this is a complex market, and what seems obvious may not be the right move.

As I mentioned earlier, the Syria vote is on Wednesday, and it is unknown how the market will react. In addition, it’s quite possible that Bernanke will delay tapering, which would cause a short-term rally (the Friday’s job numbers were lackluster, which helps with his decision). Because the market could go strongly in either direction, one suggestion is to use options to protect your stock portfolio for the next few weeks. (If you’re not sure how to buy options, feel free to buy my book,Understanding Options (McGraw-Hill), which is aimed at rookie traders. Here are a few ways to use options for protection:

Scenario #1: You are on the sidelines. Strategy: Stay on the sidelines. If you are temporarily on the sidelines in cash, then you can enjoy the volatile market without losing sleep. Your goal is to wait for a substantial pullback and buy when prices are more competitive.

Scenario #2: You are long the market. Strategy: If you are primarily long, you may buy put options (on SPY, for example) for protection.

Scenario #3: You are short the market. Strategy: If you are primarily short, you may buy call options (on SPY, for example) for protection.

Remember that if you buy options for insurance, you can potentially lose 100 percent of your investment. In fact, if you do lose all of the money you invested for call or put protection, think of it as unused insurance protection. In other words, if you didn’t need the protection (and you lost money on the options), that is a good outcome.

On the other hand, if your stocks go in the wrong direction, then the value of your options will go up. They will not provide 100 percent protection, but they will help limit losses. In addition, buying protection with options is not cheap, although it is less expensive than using other hedging strategies.

Bottom line: Although the market indicators are pointing down and this market is vulnerable, I know that the Fed can rally this market. Therefore, it is risky to take too heavy a position on either side. As we get closer to the FOMC meeting, we may get a clue what Ben is going to do. At the very least, expect multiple intraday reversals for the next two weeks (or longer). If the market sells off, the buy-on-the-dippers will enter. If the market rallies, bearish traders will sell into the rally. As I’ve repeatedly said, the market is unpredictable and dangerous. Although it’s too early to say whether we’re close to a bear market, if the market begins to weaken, there could be a severe drop. Until then, be prepared for anything. Wall Street is hoping for and predicting a year end rally, and with the Fed on their side, they could get it. On the other hand, a bear market could be starting while the bull market is still ending. If that is true, then this market will start to weaken with or without the Fed. Sit tight, be patient, and let the market reveal its hand.

Finally, here are more lessons that I learned from Jesse Livermore’s book, Reminscences of a Stock Operator. It could be reflecting what is happening now.

When Livermore was 27 years old, he saw a bear market approaching. There were numerous warnings, but also a number of bear market rallies. So Livermore started shorting stocks. Here’s what happened next in his own words: “I decided that I began {shorting} too soon, but that I really couldn’t help it. Then the market began to sell off. That was my opportunity. I sold short all I could, and then stocks rallied again, to quite a high level. It cleaned me out. There I was — right andbusted! I tell you it was remarkable.”

Livermore went on to explain how easy it looked, that the market was flashing dollar signs. But he was wrong. The bear market he saw was a mirage. Here’s what he did wrong, he says. “I didn’t wait to determine whether the time was right for plunging on the bear side. On the one occasion when I should have invoked the aid of my tape reading, I didn’t do it. That is how I came to learn that even when one is properly bearish at the very beginning of a bear market, it is well not to begin selling in bulk until there is no danger of the engine backfiring.”

After selling short too soon in 1906, Livermore saw another opportunity to short the market in 1907, and this time he was certain he was right. He even shorted the strongest stock at that time, Reading Railroad. Wall Street was pushing the stock higher, but Livermore noticed that underlying market conditions had gotten worse. “General conditions, my true allies, said “Down!”, he wrote. At first, Reading didn’t go down because Wall Street was afraid to sell it. But once the market cracked, so did Reading, and Livermore made fantastic profits shorting Reading and a lot of other stocks in the Panic of 1907, when the market fell by over 50 percent from its 1906 peak.

What did I learn from this? Among other things, you can be right about the market and still lose money if you are too early. Also, if you are bearish right now, you have to be patient. When the market eventually cracks, it will be brutal.

* 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 Sept 2)

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 the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

 

AAII survey (8/28/2013)

33.5% Bullish. 35.7% Neutral. 30.7% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (8/28/2013)

38.1 % Bullish. 23.8% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .67

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

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

Note: I adjusted the sell signal of the put/call ratio to .50. (More on the reason for this change below.)

 

VIX: 17.01

Sell signal: Lower than 12.

Buy signal: Over 40.

 

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

 

MACD: MACD is below the zero line and 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 market indicators took a turn for the worse last week. Sentiment is moderately bullish (which is bearish), and the put/call ratio plunged during the week before recovering. The VIX is still in the complacent zone although anxiety is creeping back (just turn on the news to find out why). The most dramatic change was in MACD, which fell below its zero line, a negative signal. The S&P and Dow are below its 50-day and 100-day moving averages (Dow is weaker), and pointing down. According to the indicators, expect more volatility and negativity. The bears won August, but it’s too early to say who will win September. As of Tuesday morning, the futures are pointing higher so the bulls should put up an aggressive fight.

Opinion: Last week, the bears won decisively. This week, the tug-of-war continues as the bulls try and regain control. They are off to a good start as the market may open 100 points higher according to the futures. As you already know, Syria will be a market-moving event, so volatility will continue. In addition, a number of economic reports will be released this week.

This is an important week for the bulls. If they can gain back control now and move the market higher, they will be in a good position before the FOMC meeting on September 17th. On Friday, the U.S. jobs report numbers will be released. In the topsy-turvy world of Wall Street, a good report could send the market down because the Fed might reduce QE. A bad employment report could send the market higher as tapering may be delayed.

As traders, we are looking for late-day selloffs on higher volume (a bearish signal). On the other hand, if the market moves higher on higher volume during the week, the bulls will take back control. No matter what happens, you must be defensive. As I warned last week (and the week before), this is a dangerous, volatile market. The uncertainty over Syria, the Fed, and emerging markets aren’t going away. If you follow the indicators, you are extremely cautious.

I am speculating, but if the bulls do not win the week and the market starts to plunge after theemployment report and geopolitical concerns, I believe that Bernanke will announce he will delay tapering. In my opinion, I don’t think he wants to leave the chairmanship while the market is falling (let the next person deal with it). If there is a correction, I’d be surprised if he went ahead and cut QE. No matter what happens to the market, Bernanke is the bull’s ace in-the-hole.

And yet, although the indicators are bearish and the market is vulnerable, the bulls do not want this party to end. They will do anything possible to move this market higher. Even if the market falls, the buy-on-the-dippers will step in to buy their favorite stocks at bargain prices. That is why you should expect multiple market reversals (i.e. volatility) for the next two weeks (or longer).

Bottom line: The market remains dangerous and unpredictable. According to the indicators, the bears are firmly in control but a sustained rally is possible. Once again, the safest strategy is to move to the sidelines. Aggressive traders can buy inverse ETFs (on market selloffs) or ETFs such as SPY on market rallies. Emerging markets are still vulnerable even though China had positive PMI numbers. The S&P is also vulnerable, but so is the entire world. Therefore, let’s be careful out there.


If you’re unsure how to manage this market, you’re not alone. Read the following two paragraphs from my favorite financial book, Reminiscences of a Stock Operator. This is how trader Jesse Livermore sized up market conditions in the early 1900s. His advice is as valuable now as then:

“Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks: get out for keeps! Wait until you see, or if you prefer, until you think you see, the turn of the market; the beginning of the reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear.”

Later in his life (and in the book), Livermore discovered the importance of taking a position and waiting:

“After spending many years on Wall Street and after making and losing millions of dollars, I want to tell you this: It was never my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve know many {traders} who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which would show the greatest profit. And their experience invariably matched mine — that is, they made no real money out of it. {Traders} who can be both right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.”

Finally, on a side note, I received an email from a reader who wondered why the put-call ratio has ranged between .72 and .78 for almost two years. In other words, if you followed the put-call signal, you’d have been bearish for the last two years. First, the put-call ratio does change over time, so the reader is correct, which is why I changed the signal to .50, an extreme level. With the put-call ratio and other sentiment indicators, there is no magic number, only guidelines. Second, you must never rely on one indicator to determine whether to buy or sell. Sentiment indicators in particular should not be used to time the market, but only to give you a view of what the crowd thinks (so you can do the opposite). I’d much rather rely on technical indicators for a more accurate view of current market conditions. That being said, if crowd sentiment is extremely bullish or extremely bearish, that is a sign the market is too frothy, or fearful. Use other indicators, and research, to confirm. Finally, no one indicator is the holy grail, a point made by those who created the indicators (I interviewed the indicator creators in my book, All About Market Indicators). Analyzing the market using indicators is an art, not a science. Thanks to the reader, JH, for writing me and letting me know that the put/call ratio needed to be updated.

 

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