Bull or Bear Market? (Week of February 3)

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to determine if we are in a bullish, bearish, or sideways market environment. *

JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk

Here is my latest column for MarketWatch: http://on.mktw.net/1bUWY3w

My book, Predict the Next Bull or Bear Market and Win (Adams Media), comes out in May.

 

AAII survey (1/29/2014)

32.2% Bullish. 32.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (1/29/2014)

53.1% Bullish. 15.3% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .54

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

 

VIX: 18.41

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 dropped below its 50-day moving average (but above its 100-day and 200-day MA), and pointing down.

Bearish (Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

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

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

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 39.82 (on 1/31/2014)

Overbought: When RSI rises to 70 or above.

Oversold: When RSI falls to 30 or below.

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

 

Bonds: U.S. 10-year yield is at 2.66% (on 1/31/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: The technical indicators took a turn for the worse during the week, ending on a sour note late Friday. The S&P and other indexes are firmly below their 50-day moving averages and close to slicing through the 100 MA. Although not a disaster (yet), this could be the start of a longer-term downtrend. Sentiment indicators are giving mixed signals: Financial writers and many Wall Street pros remain bullish while individual investors are feeling anxious.

Opinion: As I warned for several months, emerging markets are in serious trouble and the problems are not going away. Central bankers may work together to try and alleviate the problems, and if unsuccessful, it could get ugly. Be prepared for more volatility, churning, and indecisiveness. If EM does get out of control, it will cause havoc across all markets.

I’m not trying to scare you but prepare you. Most investors believe that the 5 percent pullback isonly temporary, and are taking a wait and see attitude. After all, the market has always come back before. Unfortunately, the world has changed, and not in a good way right now. Of course you want to be positive but you must also be realistic or you will lose money.

If you follow the indicators and look only at the evidence, then it’s essential you protect your portfolio or increase cash. Best case: The current pullback could be temporary. Worse case: The downtrend will continue and we’ll enter a bear market. In my opinion, the downtrend will continue although it’s too early to proclaim a bear market.

The indicators are telling us this market is dangerous. Although there will still be short-term rallies, it’s unlikely they will last for long. This week will give us a much better idea how bad things could get. If the market rallies during the week, then the bull market continues. If the market struggles and heads lower, continue to protect your portfolio. You don’t want to get trapped if there is a mad exit out of emerging markets, which could spread across the world.

Last week I spoke about testing the market to determine where is the line of least resistance. Right now, the line of least resistance is down, and until that changes, I continue to lean bearish. Your first goal in this market environment is to protect profits and limit losses. Your second goal is to find profitable opportunities.

Bottom line: This is a dangerous market so be careful out there. This is the time to focus on the market and not get distracted by misleading information and hype (positive or negative). As I said last week, investors will have to work hard for their money this year.

 

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

Bull or Bear? (Week of January 27)

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is todetermine if we are in a bullish, bearish, or sideways market environment. *

JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk

 

AAII survey (1/22/2014)

38.1% Bullish. 23.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (1/22/2014)

57.6% Bullish. 15.1% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .65

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

 

VIX: 18.14

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 dropped below its 50-day moving average (but above its 100-day and 200-day MA), and pointing down.

Bearish (Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

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

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

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 36.82 (on 1/24/2014)

Overbought: When RSI rises to 70 or above.

Oversold: When RSI falls to 30 or below.

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

 

Bonds: U.S. 10-year yield is at 2.73% (on 1/24/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: The selloff knocked some of the frothiness out of the market, but it’s still there. Sentiment readings (which were released before the recent pullback) were on the high side. Although the VIX spiked, it’s still in the complacent zone. More important, the selloff caused technical damage to the market as the S&P (and other indexes) fell below its 50-day moving average. Next stop: the 100-day moving average. First, we’ll see this week if the damage can be repaired. For now, the markets are starting the week with a bearish bias thanks to emerging markets. (Can Janet save the day? We shall see.)

Opinion: Little did I know how right I was when I wrote last week that emerging markets were going to crumble, and it would spread to the U.S. Although the indicators and clues were showing this would occur, I did not know when. I was surprised when the wheels starting coming off a few days after my post.

One important lesson: It doesn’t matter until it matters. In other words, although emerging markets were in trouble for a year, no one cared until the market started to sell off. Now you will read a thousand articles on why the market sold off. Guess what? It’s not important “why” the market sold off as that it did sell off. The selloff is an important signal.

As you know, Janet Yellen takes over this week at the Fed. It is going to be fascinating to see what the Fed will do. If they continue to taper, it will pressure emerging markets. If they stop tapering, there will be a short-lived rally (short-lived because it means the Fed has lost credibility). Personally, I don’t see how the Fed and other governments around the world are going to turn the markets around. Perhaps someone will pull a new program out of their bag of tricks and delay the inevitable.

Most investors are hopeful that the Fed will save them, but hope is dangerous for investors. In fact, hope can help damage your account if you let it. Instead of hope, be prepared for the possibility of a correction or bear market, but only if there is evidence.

To prepare (which I write about in my upcoming book, Predict the Next Bull or Bear Market and Win), consider scaling out of positions into cash. If you have losing positions, this is a good time to trim them or dump them if the losses are severe. If you have profitable positions, watch them carefully. Do not allow winning positions to turn into losers. This is also a time to consider buying protective put options if you believe the market is headed down (but this strategy is only for those who fully understand how to use puts). Aggressive traders can consider non-leveraged inverse ETFs (if there is evidence of a bear market).

Personally, I wouldn’t be buying on the dip in this market. The risk is too high. For now, it’s permissible to wait and see how this week develops. It’s possible that all the governments of the world will work in unison to support the market and the economy. If that happens, the market will rally. The real key is whether the rally (if one occurs this week) holds.

A popular theory by many money managers is that as emerging markets fall, investors will eventually find their way to the U.S. stock market. It’s a good theory, but if the market really unravels, my guess is investors will first move to the safety of Treasuries and gold (as they did on Thursday and Friday).

This is also not the time to panic. Only you can decide how much pain you can take if this selloff is significant. Because of the last selloff in June, many investors believe the market will quickly bounce back. In my opinion, the problems in emerging markets are deeper than anyone thinks right now. When this becomes evident, hope will turn to fear, and it could get ugly fast. A correction or pullback may or may not happen this week, but the odds are that it will happen in the near future.

Bottom line: Right now, there is a war between the bulls and the bears. As I said last week, I am leaning to the bear side, and until I see evidence of a significant reversal, I am sticking to that position.

 

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

Bull or Bear? (Week of January 20)

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is todetermine if we are in a bullish, bearish, or sideways market environment. *

JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk

 

AAII survey (1/15/2014)

39.0% Bullish. 21.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (1/15/2014)

56.1% Bullish. 15.3% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .53

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

 

VIX: 12.44

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

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

Bearish (Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

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

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

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 56.49 (on 1/17/2014)

Overbought: When RSI rises to 70 or above.

Oversold: When RSI falls to 30 or below.

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

 

Bonds: U.S. 10-year yield is at 2.83% (on 1/17/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: The rollercoaster week reduced some of the bullish market sentiment, but it’s still on the frothy side. Even more interesting, few investors are expecting a bear market. In fact, there is a level of complacency in the market (look at the low VIX for evidence) that is remarkable. On the technical side, the S&P stalled last week, as reflected in moving averages and MACD. Once again, we enter the week with mixed signals.

Opinion: One of the most important tasks of a trader is to identify when one trend ends and another begins. After a lengthy bull market (five years and counting), it’s essential to look for signs that the bull market might be in trouble. Failing to do so can cost you money.

Rather than trying to predict what the market will do next, it’s more important to observe the market, and look for danger signs.

One way of determining whether the market is about to roll over is by testing your positions. Rather than stepping into a confused market with a handful of buy (or sell) orders, start by probing the market to see which way the financial winds are blowing. For example, you could buy 100 shares or more of a stock or index (or sell short 100 shares or more depending on the size of your account). If you are right, then you will own a profitable position. If wrong, cut your losses at 7 or 8 percent. Rule: Add to profitable positions but never add to unprofitable positions.

I believe that the market is struggling and is about to turn over. In my opinion, the first hit will come from emerging markets (EEM, the emerging market index, recently fell below its 200-day MA), which will spread to the U.S. I have no idea when this may occur or how long it will last. I also don’t know if I’m right. To test my opinion, I will probe the market (something I learned from Jesse Livermore).

Obviously, if the market does take a hit, the Fed may come to the rescue by announcing that they have stopped tapering until further notice. The markets will rally on that news. Because of the Fed, the market has become much more unpredictable. It’s essential, however, that you not get trapped on one side or the other, and remain objective. (I’m leaning bearish but I’ll change my mind if the market proves me wrong.)

Bottom line: I believe that investors will have to work for their money this year, unlike in 2013, which was a cakewalk. Astute investors must be alert, and in my opinion, be properly diversified or on the sidelines ready to pounce.

 

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

Bull or Bear? (Week of January 13)

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to determine if we are in a bullish, bearish, or sideways market environment. *

JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk

My latest MarketWatch article (January): http://on.mktw.net/1bEjAEc

 

AAII survey (1/8/2014)

43.6% Bullish. 25.0% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (1/8/2014)

60.6% Bullish. 15.2% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .53

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

 

VIX: 12.14

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

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

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

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

 

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

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

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 64.03 (on 1/10/2014)

Overbought: When RSI rises to 70 or above.

Oversold: When RSI falls to 30 or below.

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

 

Bonds: U.S. 10-year yield is at 2.86% (on 1/10/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: As you can see, sentiment indicators are still a bit frothy but technical indicators are leaning bullish. Once again, the Fed will trump the indicators when they meet in two weeks. Until then, stay alert and cautious.

Opinion: The market continues to give mixed signals. Technical indicators, while still pointing up, are less bullish than a few weeks ago. At the risk of sounding like a broken record, this is the time tobe prudent while the market reveals its next move.

Before Friday, emerging markets and bonds were getting whacked (as expected), but the reverse occurred on Friday after the lackluster jobs numbers were released. After all, poor economic news means no tapering, which is good for emerging markets and bonds.

Put January 28th on your calendar as Janet Yellen takes over the Fed. Plan for two weeks of “taper or no taper” guessing games. I don’t ever remember a time when the market was so dependent on the words of the Fed. Is it going to be this way forever? I hope not. One thing for sure: If the Fed makes a mistake in how it handles the unwinding of QE, there will be hell to pay.

Bottom line: Be cautious as the market could go in either direction 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.

Bull or Bear? (Week of January 6)

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to determine if we are in a bullish, bearish, or sideways market environment. *

JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk

My latest MarketWatch article (January): http://on.mktw.net/1bEjAEc

 

AAII survey (1/1/2014)

43.1% Bullish. 29.3% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (1/1/2014)

61.6% Bullish. 15.2% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .56

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

 

VIX: 13.76

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

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

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

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

 

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

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

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 60.53 (on 1/3/2014)

Overbought: When RSI rises to 70 or above.

Oversold: When RSI falls to 30 or below.

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

 

Bonds: U.S. 10-year yield is at 3.00% (on 1/3/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Sentiment is still on the high side, but not extreme. Technical indicators, although bullish, are giving mixed signals. This is the time to sit back and let the market lead the way.

Opinion: As I’ve said for several months, emerging markets are struggling, as are bonds. As you know, the yield on the 10 year is at 3 percent and will likely go higher. This will put pressure on emerging markets as well as bonds. If you still own bond mutual funds, this might be the time to reduce your holdings. Interest rates will continue to rise.

Even with all the problems in the world, the majority of money managers and most connected to Wall Street believe the U.S. bull market will continue. In fact, the theory is that as the rest of the world struggles, and bond investors flee, they will go to stocks. It’s a good theory and billions ofdollars are riding on this idea.

Nevertheless, even though Wall Street always has an upside bias, the contrarian in me is suspicious when too many people are leaning to only one side. Even long time bears have thrown in the towel, and are reluctantly going long. I know from experience that the market always finds a way of fooling the most amount of people. Let’s see if it can do so again.

Also, just because last year was easy doesn’t mean this year will be. In hindsight, all you had to do was stick your money in an index fund or any equity mutual fund and you would have done well. With all the problems brewing in the world, do you really think it will be as easy this year? In my opinion, investors will have to work for their gains. Nevertheless, I will let the market do the talking, so let’s see what it has in store for us this week. (As you may know, Asia is getting hit tonight.)

Bottom line: Sit back and wait for the market to reveal its hand. The market is leaning to the upside but there are many danger signs.

 

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