Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.
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My latest MarketWatch column: http://goo.gl/pjQUxV
AAII survey (11/26/2014)
52.1% Bullish. 20.8% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (11/25/2014)
55.4% Bullish. 14.8% Bearish
Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is at historic lows. 13.3 % is the 1987 low)
Bullish: If sentiment is over 60% bearish.
VIX: 13.33 (on 11/28/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 70.69 (on 11/28/2014) NOTE: RSI of Dow is at 75.39.
Overbought (i.e. Bearish): When RSI rises to 70 or above.
Oversold (i.e. Bullish): When RSI falls to 30 or below.
Note: RSI can remain overbought or oversold for extended time periods.
Moving Averages (daily): The S&P is above its 50-day, 100-day, and 200-day moving averages and pointing up.
Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.
Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.
MACD (S&P 500): MACD is above its zero line, and above its red 9-day signal line and pointing up. (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.
Bonds: U.S. 10-year yield is at 2.19% (on 11/28/2014) NOTE: Bonds are rallying.
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 indicators continue to spike higher, which is a bearish signal. AAII is above 50% and the number of bears in Investors Intelligence has reached historic lows. In addition, VIX remains in the basement, and RSI is above 70 (and 75 on the Dow). When you put it all together, you have excessive bullishness. Only a handful of investors expect the market to fall this month. Another unusual development is the smashing of commodities, especially oil. It is unknown at this time how this will affect the stock market. The good news: If you follow the trend, you are all in. The trend is up, moving averages are flashing green, and MACD is positive. Once again, it’s the sentiment indicators vs the technicals. We should know the winner soon.
Opinion: It’s been a long time since I’ve seen the sentiment indicators so skewed in one direction (up). Most investors are certain that December will be good to the market, and we’ll have that Christmas rally. After the “Bullard Bounce” last month, the market has been on a tear. To the unknowledgeable, this appears to be a raging bull market. The sweetener is the Fed, which is willing and ready to interject itself into the market when it falls. As I write this today, many people believe that the powers that be will not let this market go down.
If you study market history, whenever people believe “the market will never go down,” the market does, and abruptly. Right now, bullish investors are dreaming of Dow 18,000, and they might get it…or not. I know from experience whenever the herd believes they are fully protected, they’re really not.
Sometimes it takes a while, which is why my latest MarketWatch article (http://goo.gl/pjQUxV) is about being patient and waiting for the right opportunity. I don’t believe that it’s “different this time.” By this, I mean that no one has the power to prevent the market from falling indefinitely. The day will come (and I believe sooner rather than later) when the Fed’s words will be ignored and the market will plunge by more than anyone can imagine.
I’m not saying this will happen this week, or even next. I do know that the market is even more dangerous than six months ago (when I first started warning investors). The facts are these: The market keeps going higher while the rest of the world is struggling, while commodities are getting smashed, while bonds are rallying, while sentiment is at an all-time high, and while market breadth is terrible (i.e. New High-New Low and NYSE Tick).
When I look at reality, and then at the sentiment numbers, I am more convinced than ever this market is vulnerable. I believe the odds are very good that December will be a volatile month. Almost no one believes it.
At the moment, the market is trading in a very tight range, which will end in one of two ways. After consolidating, it will go higher. Or second, it will keep churning but go nowhere, eventually plunging faster and farther than anyone can imagine. That would be the scenario that absolutely no one is thinking of right now.
Bottom line: Sit tight and let the market have the final word. Be ready to pounce when the time is right.