Market Indicators (week of October 28)

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 (10/23/2013)

49.2% Bullish. 17.6% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (10/23/2013)

49.5% Bullish. 18.5% 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: 13.09

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 (and Dow) is above its 50-day moving average, and above its 100-day and 200-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 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 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 67.64 (on 10/25/2013)

Overbought signal: When RSI rises to 70 or above, it is possible S&P will reverse direction and fall.

Oversold signal: When RSI falls to 30 or below, it is possible S&P will reverse direction and rise.

Note: RSI can remain overbought or oversold for extended time periods.

 

Bonds: U.S. 10-year yield is at 2.50% (on 10/25/2013)

Note: 3% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Sentiment indicators are high but not extreme. In particular, financial newsletter writers (II) are bullish, which reflects the overall bullishness on Wall Street. Technical indicators are clearly on the bullish side, and if you follow the indicators, we’re going higher. RSI is still on the high side (overbought) but not at extreme levels yet. Yields went down last week, so bonds rallied.

Opinion: Since we follow the indicators, we’re cautiously on the long side. Cautiously means that we’re diversified in cash (but not bonds) and index ETFs. If you look up, all you can see is blue sky, which is where the market is headed. With the Fed unwilling to cut back on QE, and little else on the agenda except earnings, stocks should continue its upward climb.

Many on Wall Street are not in the 1700 Club, but in the 1800 Club (they believe the S&P will hit 1800 before the end of the year). According to many, there is no stopping this market. If they’re right, be prepared for a shock and awe rally right into the end of the year. So far, the bulls have been right (except for a two-week setback).

In my opinion, the market is likely to go higher in the short-term. And yet, there are many potential red flags, so you must be careful. The potential dangers I see in the future are problems in emerging markets (especially China), a falling bond market, poor earnings, or a mistake by the Fed (too much liquidity, for example). Any of these events could hinder the bull market.

Here’s what else I see: I know that a bear market is out there waiting to surprise us. I don’t know when it will happen, but in the meantime, I will follow the advice of Jesse Livermore, who says that the hardest thing for traders to do is sit and wait. Although I am long some of the major indexes, I am looking for clues that the bull market is over.

Although there is still money to be made on the long side, don’t get greedy. When this market turns, it will be vicious. One day you’ll wake up to a huge selloff, but hopefully you’ll get out without major losses. In addition, if you are suspicious of this market and want to go short, be patient. The biggest mistake anyone can make now is making unnecessary trades.

Bottom line: Sit and wait.

 

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

Stock Market Indicators (Week of October 21)

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 MarketWatch article: http://on.mktw.net/18DmLPk

Stocks

AAII survey (10/16/2013)

46.3% Bullish. 24.9% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (10/16/2013)

42.3% Bullish. 21.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .46

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: 13.04

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 (and Dow) is above its 50-day moving average, and above its 100-day and 200-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 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 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is currently at 65.89.

Overbought signal: When RSI rises to 70 or above, it is possible S&P will reverse direction and fall.

Oversold signal: When RSI falls to 30 or below, it is possible S&P will reverse direction and rise.

Note: RSI can remain overbought or oversold for extended time periods.

 

Bonds: U.S. 10-year yield is at 2.58% (on 10/18/2013)

Note: 3% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Sentiment indicators are on the high side but not extreme except for the put/call ratio. For the first time in months, the retail investor is more bullish than financial writers. Technical indicators are clearly on the bullish side, so according to MACD and MA, we’re going higher in the short term. The September jobs report is on Tuesday, which could be a market moving event.

Opinion: Now that the shutdown and debt crisis are over, buyers stepped in from the sidelines. Volume slowly increased throughout the week on increased demand, a bullish signal. With Yellen about to take over the ship, QE will continue indefinitely, no matter how often they threaten the markets with tapering. No time is a good time to taper as it will cause a major market dislocation, and the Fed doesn’t want that. Therefore, in the short term, the bulls are in control.

As I mentioned above, there is a jobs report on Tuesday, so any surprises could light up the market, or cause a one-day pullback. Judging by the bullish sentiment, the odds are we’re going higher. Also, it’s earnings season, but negative releases (such as IBM’s)  will be ignored if the market is bullish.

What could derail the bull party? Although in the short-term everything looks peachy, there are many danger signs. First, we’re watching the 10-year yield every week. The higher it goes, the lower bond prices go, which could also disrupt the stock market. When the yield hits 3 percent (and it will one day), it will be a battle between the Fed and the bond market.

The higher the market goes while backed by the Fed’s easy money policies, the greater the chance a bubble is forming. I write about this possibility in my latest MarketWatch article, which should be published this week. If the sentiment readings go through the roof, and RSI (an indicator I’ve added to the list) surpasses 70, the market will be overbought and in the danger zone. Also, the recent parabolic chart pattern on the S&P can’t go on indefinitely.

In my opinion, although we appear to be going higher in the immediate future, there are many risks: Emerging markets, the bond market, increased investor enthusiasm, and the Fed overplaying its QE hand. You put it all together and I don’t see blue sky forever.

Bottom line: If you’re a short-term trader, you can play upside momentum, but use stop losses andtake profits quickly. Investors can hold long positions as this market could rally higher than anyone believes, and yet, you must be on guard. Hopefully, you are diversified with a healthy amount of cash. This is not the kind of market where you want to be 100 percent invested (my opinion only). In the future (it could be months), it would not be surprising to wake up one morning to see themarkets plunging. Everyone believes they can get out in time if the markets reverse, but that door will close fast.

Finally, although the markets are destined to go higher this week, if there is a mid-week selloff, that would be a significant bear signal.

 

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

Stock Market Indicators (Week of October 14)

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).

Bonds: U.S. 10-year yield is at 2.58% (on 10/17/2013)

Note: 3% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Stocks

AAII survey (10/9/2013)

41.3% Bullish. 33.6% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (10/9/2013)

45.4 % Bullish. 20.6% 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: 15.72

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 (and Dow) is above its 50-day moving average, and above the 100-day and 200-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.

Note: S&P and Dow still not out of the danger zone because of outside political events. 

 

MACD: MACD is on the zero line, is below the red 9-day signal line, but pointing up. (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.

 

RSI: RSI is currently at 65.89.

Overbought signal: When RSI rises to 70 or above, it is possible S&P will reverse direction and fall.

Oversold signal: When RSI falls to 30 or below, it is possible S&P will reverse direction and rise.

Note: RSI can remain overbought or oversold for extended time periods.

 

Analysis: Early in the week, the market was below its moving averages and headed lower, the VIX (fear index) shot up to 20, and MACD gave a sell signal. Everything changed on Thursday and Friday when the market reversed direction. Because of the political games, the indicators are not as useful, which is where we’re at now. What happens in Washington will trump the indicators. Caution advised.

Opinion: The market did not disappoint last week. It was leaning bearish for the first three days and then, POW! It lit up like a Christmas tree, aggressively taking back 15,000. And here we go again: We’re leaning bearish. In fact, it feels like deja vu all over again. Judging by the market’s behavior, there will not be a government default. If the market thought so, we would be down 10 or 15 percent, not 1 percent.

Nevertheless, this is still a dangerous sideways market, and anything is possible. Even with a bearish open, logic suggests there should be another relief rally (after they really, really avoid a default).

Here’s what I think: I have no idea what is going to happen. The indicators are slightly bullish thanks to the monster rally. But the feuding politicans could change that scenario. I also remember an old Wall Street saying, “Buy on the rumor, sell on the news.” When the games are over, I wonder how the market will react. In a sideways market, it could go either way.

Savvy market participants aren’t making any dramatic moves, which is reflected in the low volume. Even on Thursday and Friday, volume was quite low on the major market indexes.

Although it’s possible to make money in this market, it is difficult. Long-term investors have closed their eyes, thrilled that the Dow went back above 15,000 again. Traders are looking for short-term opportunities, and they’re still looking.

In a market like this, your number one goal is not to lose money (actually, that’s always your goal). This is the time to evaluate your positions, consider taking small losses now, use hedging strategies, and above all: Don’t make any impulsive trades. Since no one can predict the market’s next move, ignore the noise, and there’s a lot of it.

Sit and Wait: Short or Long

There is so much conflicting advice it’s too early to say who will win the week. If you’re long this market, use stop losses to protect your downside.

If you’re short this market, you have to be even more careful. Jim Chanos, a top professional short seller, says that this has been the toughest market environment for shorting in 29 years. As you learned on Thursday, he’s right. You can try and short this market, but in the future, there will be better opportunities. Unless you’re experienced at shorting, you might want to wait a little longer.

The hardest thing to do right now is to sit and wait, but that is exactly what you should do. It’s easy to find yourself on the wrong side of a trade in this environment. When the games are over in Washington (or delayed), perhaps the volatility will decrease. Meanwhile, let’s be careful out there.

Note: The bond market is closed on Monday. Keep your eye on the 10-year yield, which is climbing out of the basement. Bonds rallied after Ben made his no tapering announcement. But lately, bonds are selling off again. When the yield hits 3 percent one day, there will be ramifications for the bond and stock market (unknown at this time, but it won’t be pretty).

 

* 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 Oct. 7)

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 (10/2/2013)

37.8% Bullish. 30.1% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (10/2/2013)

46.4 % Bullish. 18.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .59

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: 16.74

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 is resting slightly above its 50-day moving average, and above the 100-day and 200-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.

Note: S&P 500 stopped falling but still not out of the danger zone. Dow Jones below 50-day and 100-day MA. 

 

MACD: MACD is above the zero line but crossed slightly 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 9-day signal line. MACD line crosses above zero line.

 

Analysis: Sentiment is mixed along with the technical indicators. Volume has been low as the market takes a wait and see attitude. Dow is under its 50-day and 100-day moving average, a bearish sign. Market could go in either direction according to the indicators. It’s a textbook sideways market.

Opinion: A sideways markets is dangerous. As expected, the market slowly drifted lower all week, especially the Dow, but reversed on Friday.

Most market participants are ignoring the shenanigans in Washington. Volume is low and themarket ended the week almost flat. No one seems to believe the U.S. will default on its debt, which is why there is complacency, and no panic. Meanwhile, the game of chicken continues.

Many investors are positive about the economy and believe we’ll go higher after we get through the government sideshow. After all, with the Fed watching your back, how can the market go down?

What will cause the market to rally? If the Fed announces that QE will continue indefinitely, if Janet Yellen is appointed Fed chairman, if corporate earnings surpass expectations, if there is an end tothe government shutdown, or if the U.S. doesn’t default.

What will cause the market to plunge? If the Fed tapers, if there really is a government default (unlikely), if earnings disappoint more than they already have, or if this uncertainty continues.

If you are new to the market (and even if you’re not), stay on the sidelines. In the meantime, look for clues where the market will go next. For example, if there is a rally, see if it lasts more than a day. If it doesn’t, that would be bearish.

According to the futures, the week should start with a bearish tone, but that could change quickly. When the market is this uncertain, staying on the sidelines is really the safest move. A low volume, confused environment could bring more volatility. Let the market prove itself before you commit too heavily to one side or the other. It’s easy to get it wrong.

Even if the political standoff ends this week, be on guard. If there is anything I’ve learned about the market, when you think you are home free, that’s when you get smashed in the face. With the Dow over 15,000 and stocks like Priceline surpassing $1,000 per share, it’s almost like 1999 again. Priceline is a great company, but $1,000 per share? I wonder.

Bottom line: The smart money is on the sidelines with a wait and see attitude. That’s where you should be, that is, until you determine which way the market is going. At the moment, we’re leaning bearish, but not at extreme levels…yet. If the Washington sideshow ends, there could be a relief rally, but we’ll see if it lasts. Finally, keep your eye on the bond market. If interest rates start to creep up again, bonds will get hit once again, which could affect the stock market. For now, it will take a major market event to turn this complacency into fear. We’re not there yet.

 

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