Bullish or Bearish? Week of February 5, 2018

Here are the latest indicators:

S&P 500 one-month trend = Neutral

S&P 500 is above its 50-day moving average but pointing down = Neutral

RSI: (S&P 500) @46.08 = Neutral

Intraday Volatility: High (Ideal for traders). 

Comment:My latest MarketWatch article came out on Thursday morning, one day before the Dow 665 selloff, which was well-timed (for once). Here is the link: https://goo.gl/Kz4x4F

I made changes (above) to my indicators. First, I am no longer using the VIX because it was worthless as a predictive indicator. Instead, I added my own indicator, Intraday Volatility, which I will evaluate each week. I also removed the weekly sentiment indicators, but I will mention them if they reach extreme levels (as they did a few weeks ago). If you want to monitor technical and sentiment indicators, go to https://goo.gl/eT3fzA . Dr. Yardeni keeps a daily list of multiple indicators. I think you’ll find them very useful. 

For the first time in a long time, volatility returned to the market. This is good news for traders but not so much for investors. Bullish investors have had a wonderful ride for the last nine years, and they will not go down without a fight. Although there are signs the party is almost over and the police are at the door, the bulls don’t seem worried. 

And why should they?  For nine years, every time there was a major or minor pullback (it’s been two years since the last one), the market rebounded, then continued even higher. In fact, some analysts are predicting S&P 3000 in the future (although many expect a short term pullback first). Most investors see the 2 percent pullback as a “buying opportunity.” They could be right, but they could also be wrong. 

If the bulls are wrong, and we get a full fledged correction (5 to 15 percent), investors will feel pain. This week is very important: all we can do is see if the market rebounds during the day or continues to sell off. Pay close attention to the market close. For years, any selloff was met with a late-day rally. If the market keeps plunging during the week, that would be a significant change (a negative one). In addition, keep your eye on the 10-year yield, which is currently at 2.85%. At 3%, there will be fireworks. 

Bottom line: The bears have the ball and are running with it, but the bulls are prepared to stop them in their tracks. 

 

Bullish or Bearish? Week of Jan. 29, 2018

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 one-month trend = Bullish

S&P 500 is above its 50-day moving average = Bullish

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is above its signal line = Bullish

S&P 500 support @ 2810

 

Sentiment Indicators (+RSI)

II survey: (Jan. 23): 64.7% Bulls; 12.8% Bears = Bearish (*Historic sentiment levels)

AAII survey: (Jan. 24): 45.5% Bulls; 24.0% Bears = Neutral

VIX: @ 11.08= Bearish

RSI: (S&P 500) @86.69 = Overbought (Extremely!)

Comment: I got a call from a well-respected market technician who told me the S&P was three standard deviations above its 200-day moving average. He was nearly screaming. He tried to explain that this was statistically ridiculous. He added that we just doubled the old high in the S&P within two years. Think of it this way: If the market can double in two years, then it could also return back to its mean,( i.e its average), also referred to as “mean reversion.”

Put another way, we are in the euphoric stage of the bull market. The CEO of TD Ameritrade recently warned that cash levels at the brokerage were at historic lows. In other words, customers are buying at the all time highs, going on margin, buying leveraged ETFS, all trying to make money before its too late. There is little cash on the side. Forget about telling investors to sell because they are afraid to miss out.

Never forget that throughout history investors always sell in a panic at the bottom and greedily buy at the top. Obviously, they are buying at the top. Does this mean the market will crash? No, the euphoria could continue for a while longer, it’s anyone’s guess. But I can tell you this: Although last week the S&P ended  at its all-time highs, volatility returned for the first time in a long while. There were wild intraday swings early in the week. That is a clue to me the market is changing. I also saw this happen in 2007.

Keep your eye on the intraday volatility and be prepared. Learn about bear markets, learn how to buy put options (I don’t recommend shorting), and review your portfolio for vulnerable positions. The best way to survive what’s coming is knowledge. Study history, study bear market strategies, study what happens at the end of a bull market. These final, euphoric stages of the bull market could go on for a while longer because the alternative is so frightening. Even a typical 10- 15% pullback will seem like a crash to most investors because it’s been so long since the market did anything but go higher.

 

Bullish or Bearish? Week of January 22, 2018

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 one-month trend = Bullish

S&P 500 is above its 50-day moving average = Bullish

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is above its signal line = Bullish

S&P 500 support @ 2748

 

Sentiment Indicators (+RSI)

II survey: (Jan. 17): 66.7% Bulls; 12.7% Bears = Bearish (*Historic sentiment levels)

AAII survey: (Jan. 18): 54.1% Bulls; 21.4% Bears = Bearish

VIX: @ 11.27= Bearish

RSI: (S&P 500) @ 80.60 = Overbought (Extremely!)

Comment: We’re still in an uptrend as the technical indicators reflect. The sentiment indicators are also telling us the uptrend can’t be sustained for long, as they have reached nosebleed levels of optimism. Nevertheless, the wild card this week is the government shutdown. If the market ignores the shutdown, the market should move even higher. Obviously, one day the bull market will crack but it’s impossible to guess when. Keep looking for clues, not opinion or predictions. I’m watching how the market reacts to the shutdown, and whether investors even care. Based on history, when the bull market ends, it will end for reasons that are not immediately apparent to the public or even newsworthy (at first). 

Bullish or Bearish? Week of January 15, 2018

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 one-month trend = Bullish

S&P 500 is above its 50-day moving average = Bullish

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is above its signal line = Bullish

S&P 500 support @ 2700

 

Sentiment Indicators (+RSI)

II survey: (Jan. 10): 64.4% Bulls; 13.5% Bears = Bearish (*Note: The last time these sentiment levels were reached was April 1986, 18 months before the 1987 crash.)

AAII survey: (Jan. 11): 48.67% Bulls; 25.07% Bears = Bearish

VIX: @ 10.16= Bearish

RSI: (S&P 500) @ 83.42 = Overbought (Extremely!)

Comment: The market keeps going higher, breaking records along the way. The most overbought market since 1929, the highest margin in history, and the highest sentiment readings in decades. In addition, millions of dollars are moving from mutual funds to leveraged ETFs. Many investors truly believe the market is not going to go down (I heard that in 1999 and 2007).

Obviously, one day reality will return to the market as we continue through the exuberance stage. It’s not a question of if but when the market cracks. When that day comes, many amateurs are going to learn a lesson on leveraged funds: easy to buy, hard to sell when everyone tries to sell at once.

For now, however, the bulls rule and there is no evidence of a reversal. Until the market cracks, shorting the indexes is too risky (there are individual stocks that can be shorted for decent profits). The market is reaching levels that are impossible to sustain for long. The only question is if there will be a mild correction that recovers quickly, or a severe correction, or worse. As I wrote last week, it’s not wrong to ride this wave higher but use hedges or have a strategy for getting out when all hell breaks loose (and it will one day).

Bullish or Bearish? Week of Jan. 8, 2018

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 one-month trend = Bullish

S&P 500 is above its 50-day moving average = Bullish

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is above its signal line = Bullish

S&P 500 support @ 2700

 

Sentiment Indicators (+RSI)

II survey: (Jan. 2): 61.9% Bulls; 15.2% Bears = Bearish

AAII survey: (Jan. 3): 59.8% Bulls; 15.6% Bears = Bearish

VIX: @ 9.22= Bearish

RSI: (S&P 500) @ 78.31 = Overbought 

Comment: According to the sentiment indicators, we are in the euphoric stage of the bull market, and if history is any guide, it will eventually end in tears. In addition, the eye-popping indicators include the RSI, which is reaching extremely overbought levels (70 is overbought), and the AAII sentiment survey, the highest bullish number since 2010. Retail investors have been relatively neutral through 2017, and now they’re “all in,” which is a huge danger sign. Add in the extreme levels of margin and you have the makings of a severe correction.

And yet, it’s risky to bet against the euphoric stage of this bull market as it can trample over any shorts. Just like bitcoin taught us, extreme levels can get even more extreme. Nevertheless, be prepared to buy puts at the “right” time. If you’re too early, you will lose money (see the great movie, “The Big Short,” for a refresher course). I believe that 2018 is going to be a lot more challenging than 2017, so keep your pencils sharpened. If I’m right, volatility will not only increase, it will skyrocket this year.

If you’re long and feeling euphoric (as one reader wrote me), enjoy the party but stay close to the exit. It’s not wrong to reduce your long positions. If you’re skilled, you can ride the end of the bull market a bit longer. The euphoric stage is the most delicious and satisfying, and the most deceiving. It’s where every investor is a genius simply for being in the right place at the right time. Meanwhile, I can hear those police sirens coming closer while the party rages on into the night. Few believe the party will end this year (maybe next year, they always say).

Get out the popcorn, this is going to be a fascinating year.

 

Bullish or Bearish? Week of Jan. 1, 2018

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 one-month trend = Bullish

S&P 500 six-month trend = Bullish

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is slightly below its signal line = Bearish

S&P 500 support @ 2670

 

Sentiment Indicators (+RSI)

II survey: (Dec. 19): 64.1% Bulls; 15.1% Bears = Bearish

AAII survey: (Dec. 27): 52.7% Bulls; 20.6% Bears = Bearish

VIX: @ 11.04= Bearish

RSI: (S&P 500) @ 60.95 = Neutral

Comment: It’s the first time in a very long time that the AAII sentiment survey surpassed 50% bullish. Like other sentiment surveys, it is telling us that the retail investor finally believes this bull market is for real. Typically, that tells us the end of the bull market is near.

If you add in the huge amount of margin debt (highest in history), and a market that hasn’t retreated by more than a few percent all year, you have the makings of a monster correction. The timing of any correction is difficult, if not impossible, but the clues are everywhere.

This is the time to be more on guard than at anytime in the last year. The odds are good this will be a volatile year, which means it will be time to get to work if you are a short-term trader. This manufactured low-volatility environment can only last so long before reality returns.  Nevertheless, I follow the trend, and we are still in an uptrend (1-month and 6-month). Because of that, it’s still too early to short, but it’s too dangerous to be aggressively long. Advice? Be patient…very patient. Let the market reveal its hand.

As expected, after bitcoin made an all-time high a few weeks ago (20k per coin), it plunged to 11k before recovering to 16k, then falling back to 13k. Those in the know tell me they are “all in” if bitcoin falls to $11,200, but I stand by my original opinion: Bitcoin should be left to the professional traders because its true value is unknown. 

Bullish or Bearish? Week of Dec. 18, 2017

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 one-month trend = Bullish

S&P 500 six-month trend = Bullish 

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is above its signal line = Bullish

S&P 500 support @ 2670

 

Sentiment Indicators (+RSI)

II survey: (Dec. 12): 61.9% Bulls; 15.2% Bears = Bearish

AAII survey: (Dec. 13): 45% Bulls; 28.1% Bears = Neutral

VIX: @ 9.42= Bearish

RSI: (S&P 500) @ 72.86 = Bearish

Comment: Even with a bullish bias last week, the S&P 500 ended flat (with a few intraday rallies and selloffs along the way). The bulls are still in control but we’re in the late stages of a bull market. No one knows when but a correction is guaranteed, most likely in 2018. Based on past markets, the odds are we’re going flat to higher to finish off the year. However, as I’ve repeatedly warned, 2018 is likely to be challenging. I am guessing volatility will return in 2018, but I’ll wait first before plunging.

Meanwhile, I’m convinced that bitcoin is in a bubble based on the usual signs:

  1. At Starbucks, I’ve been watching various bitcoin brokers signing up clueless customers. 
  2. Friends of mine who know nothing about investments are buying bitcoin.
  3. Look at the chart!
  4. All anyone wants to talk about is bitcoin and other cryptocurrencies. Those who got in early could do very well (assuming they sell at the right time). Latecomers will get hurt.
  5. Most who own bitcoin have no intention of selling. After all, some pros are predicting bitcoin at $40,000, and even $100,000. (That’s why few are selling.)

Can bitcoin, etc. go higher? Oh, definitely. This is the exuberance stage and it could skyrocket to levels that are inconceivable. But a major plunge is due, perhaps sooner rather than later, but no one can predict when. After bitcoin plunges, then we’ll get a better idea of its true value. At this time, no one knows what cryptocurrencies are worth, and that is why this investment is risky.

Bullish or Bearish? Week of Dec. 11, 2017

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 is well above all its moving averages = Bullish

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is above its signal line = Bullish

S&P 500 support @ 2640

 

Sentiment Indicators (+RSI)

II survey: (Dec. 5): 64.2% Bulls; 15.1% Bears = Bearish

AAII survey: (Dec. 6): 36.9% Bulls; 34.2% Bears = Neutral

VIX: @ 9.58= Bearish

RSI: (S&P 500) @ 71.63 = Bearish

Comment: Last week was a little rocky but the market recovered quite nicely, so the bull market continues. Everyone everywhere is talking about bitcoin. I see a bubble while others see opportunities. So far, the opportunists have been right as bitcoin goes to the moon. Its chart is the textbook version of parabolic, and yet no one wants to sell because they’re afraid to miss out on the next 100% rally. Bubbles are so much fun on the way up, but they destroy wealth on the way down. The problem with bitcoin is we all know its price but not its value. I’ll bet even shoe shiners are telling their customers to buy bitcoin. 

This week is a Fed meeting, which is typically bullish. Add in the holidays and you have the making of a low volatile, moderately bullish environment for stocks. However, astute traders are on guard right now. After all, red flags are everywhere, but few see them. Here is Lance Robert’s view of the current market environment, and I think he nailed it perfectly: https://goo.gl/Yka497

Bullish or Bearish? Week of Dec. 4, 2017

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 is well above all its moving averages = Bullish

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is above its signal line = Bullish

S&P 500 support @ 2640

 

Sentiment Indicators (+RSI)

II survey: (Nov. 28): 62.3% Bulls; 15.1% Bears = Bearish

AAII survey: (Nov. 29): 36.0% Bulls; 31.6% Bears = Neutral

VIX: @ 11.43= Bearish

RSI: (S&P 500) @ 73.11 = Bearish

Comment: I’m not going to be a party pooper. There is little doubt we are entering the “euphoria” stage of the bull market, so enjoy it while it lasts. Although euphoria always ends in tears, the fun part is in the late stages. Just be sure you don’t get trapped when the party ends, and it will end. Since the Fed is meeting in a week and the holidays are approaching, the odds are with the bulls. Be on the lookout for an intraday reversal (from euphoria to reality), but if none occurs, going long is your best bet. As for me, I’m flat on Fridays. By the way, look at how extreme the RSI is, but it could get even more extreme. 

FYI: My MarketWatch column on speculating with put options will be out tomorrow at www.marketwatch.com. It’s a good time to learn how to buy puts (it’s less risky than shorting). In the future you will be glad you learned how to buy puts (that is, when the bubble pops in spectacular fashion). 

Bullish or Bearish? Week of Nov. 27, 2017

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 is above its 50-day MA = Bullish

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is below its signal line = Bearish

S&P 500 support @ 2580

 

Sentiment Indicators (+RSI)

II survey: 

AAII survey: (Nov. 22): 35.5% Bulls; 29% Bears = Neutral

VIX: @ 9.65 = Bearish

RSI: (S&P 500) @ 64.51 = Neutral

Comment: As expected, the S&P 500 rallied during the holiday week. Bitcoin also rallied and has reached bubble levels, but don’t tell that to bitcoin buyers. They seem to think bitcoin’s spectacular rise is normal. I beg to differ. At this time, no one knows the true value of bitcoin, which is what makes it such a dangerous trade.

Regarding the S&P, we’re due for a nasty correction but no one can predict when, although a likely target is a few weeks to a few months from now. One possible scenario: A sudden and severe correction followed by a huge rally. That’s the setup I’m looking for, but I will play it week by week because the market can change on a dime. Meanwhile, the bulls are in control so let’s see how far they can run with the ball. It’s been an impressive rally, but what goes up eventually comes down. I admit this has been a much longer wait than almost anytime in history.