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 (2/19/2014)
42.2% Bullish. 22.8% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investor’s Intelligence (2/18/2014)
46.5% Bullish. 17.2% Bearish.
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .58
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: 14.68 (on 2/21/2014)
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.
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 zero line, 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.
RSI: RSI is at 57.86 (on 2/21/2014)
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 2/21/2014)
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 sentiment indicators aren’t at extreme levels so they aren’t offering much guidance. The market is in a sluggish uptrend, but it’s still an uptrend. As always, don’t fight the trend. Nevertheless, the Friday selloff during the last minutes of the trading day might be significant, so we’ll have to wait and see. Right now, taking a wait and see attitude is recommended. The goal is to find the right opportunity to pounce. It’s only a matter of time before that opportunity appears.
Opinion: In my opinion, we’re getting closer to a major pivot point, but it’s difficult to predict. Based on a number of clues and indicators (which I discuss in my book, Predict the Next Bull or Bear Market and Win), this tired bull market is in a fight for its life.
I spoke with a professional trader friend of mine about the current market. He’s a conservative trader. Like me, he knows the day of reckoning is coming. He is waiting on the sidelines, unwilling to short, but also unwilling to go long. His strategy is to wait until the market plunges (and there is blood in the street), and then go long. Right now, there are few bargains. Similar to 1999, some popular stocks have obscene P/E levels. Based on market history, that won’t last indefinitely.
Emerging markets are still in turmoil, and more pain is expected. As I said last week, don’t listen to those who recommend buying EM on the dip, even if they are the CEOs of major brokerage firms. It’s financial suicide to buy when so many EM countries are struggling. Yes, one day EM will be a buying opportunity, but it isn’t now (in my opinion).
It’s possible that the bulls will pull a magical rabbit out of its hat and push this market higher (with help from the Fed). And that’s why shorting is so dangerous now. It takes discipline to patiently sit and wait for the right opportunity.
Not much has been said about bonds but the odds are good that the yield on the 10-year will surpass 3 percent in the future. That will be an interesting development. When bonds get crushed again, the million-dollar question is what happens next. Will bondholders move to the safety of cash for near zero returns, or will they run to the stock market? We will discuss that scenario when it happens.
As I said last week, it’s a trader’s market, so if you’re participating, take profits fast. If we do switch from a bull to a bear market in the future, there will be opportunities to short (or buy inverse ETFs), but until then, be prepared for anything. It’s not the time to commit too heavily to one side of the other.
Bottom line: When the market is ornery like this, and even “a skunk can’t make a scent,” as Jesse Livermore says, it’s best to watch and wait for the market to give us guidance. The uptrend is intact, but it’s very tepid. And that is another reason why this market is so difficult to manage.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.