Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment, it may help you to create profitable trading strategies.
RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk
My latest book (eBook) has just been released: Prepare Now and Survive the Coming Bear Market. Here’s a link to the Amazon edition: http://goo.gl/2wWC8X, the Nook, http://goo.gl/VQstmr, or if you are international or don’t have an Amazon account: http://goo.gl/eBpYBT (Smashwords).
In the book, I interview market wizard Mark Cook, who helps readers navigate what he believes will be a devastating bear market. If you buy it, let me know what you think. Thanks in advance :).
My latest MarketWatch column on managing bear markets: http://goo.gl/njIQkQ
AAII survey (1/7/2015)
41.0% Bullish. 27.7% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (1/6/2015)
50.5% Bullish. 15.2% Bearish
Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low)
Bullish: If sentiment is over 60% bearish.
VIX: 17.55 (on 1/9/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 49.53 (on 1/9/2015)
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 resting on its 50-day moving average and pointing down. It’s still above its 100- and 200-day moving averages.
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, but 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 zero line. MACD line crosses above 9-day signal line.
Bonds: U.S. 10-year yield is at 1.97% (on 1/9/2015) Note: Bonds keep rallying. Can you spell, “bubble”?
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 tell from the indicators, there is no clear direction. Typically, when that occurs, volatility increases. While some sentiment surveys are reflecting more cautiousness, investors are plowing into equity ETFs and index funds. On the technical side, the increased volatility (Dow is up 1000 one week, down 1000 the next week) has made many technical indicators less effective. Many of the indicators help you stay on the right side of the trend. Right now, the uptrend is still intact but struggling. Bottom line: The indicators are telling us we could go in either direction.
Opinion: Not surprisingly, the market attempted but failed to reach Dow 18,000 last week. It was a volatile week, and month. If you’re new to the market, these 1000 point rallies and plunges are not healthy or normal. To me, this indicates the market is topping out. On the other hand, we’ve seen this story before last year, so we must wait and see how far the market may rally.
My latest MarketWatch column is coming out this week. As I wrote in the column, a mind-boggling 85 percent of investment advisors believe that “the markets will be as good, or better, than they were in 2014.” With numbers like that, it’s understandable why so few investors seem worried.
And yet, when I look at the facts, I don’t see blue skies as far as the eye can see. Right now, the crowd believes the Fed has their back, so complacency is widespread.
Most important, if the markets do unravel, as I expect, there will be a mad rush out of ETFs and index funds. Judging by what has happened in the past, investors will do most of their selling after they’ve already lost 20 percent or more.
As you may know, I wrote a book with Mark D. Cook, Prepare Now and Survive the Coming Bear Market. Mark makes a very strong case for a bear market. He believes the market will retreat during this quarter, but he is waiting for confirmation. Confirmation means that future rallies will fail, and there will be lower lows and lower highs on a chart.
With so many experts convinced that 2015 will be another good year (professor and author Jeremy Siegel predicted we’ll be at Dow 20,000 by year end), it is hard to convince anyone to take money off the table. This is what happens at market tops. As the market goes higher, and the bubble gets bigger, people believe that a bubble is the new norm. It takes an extreme correction to bring them back to reality, and even then, they will be told it’s a buying opportunity. When the market gets this ridiculous, it’s time to take some profits.
Yes, the market could still go higher, which is what makes this market so confusing. The crowd believes the market will rally this week. As for me, I will wait for Mr. Market to reveal its hand.