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. *
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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)
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.