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. *
JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk
My book, Predict the Next Bull or Bear Market and Win (Adams Media), comes out in May.
My latest MarketWatch article: http://on.mktw.net/1cCpJrV
AAII survey (3/5/2014)
40.6 % Bullish. 26.6% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investor’s Intelligence 3/4/2014)
54.6% Bullish. 15.1% Bearish.
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .53
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: 14.11 (on 3/7/2014)
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 66.40 (on 3/7/2014)
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 2.79% (on 3/7/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: It feels like Groundhog Day. The technical indicators are still pointing up, so the uptrend continues. On the other hand, sentiment indicators are showing signs of exuberance, i.e. margin debt is rising and retail investors (and many pros) don’t believe a bear market is near. If you follow the trend, you are long. If you follow the trend and also study underlying market conditions, you see red flags (as I discussed in my latest MarketWatch article above).
Opinion: As I’ve warned repeatedly for several months, emerging markets are still vulnerable. Even though some major brokerage firms are recommending that you buy on the EM dip, I strongly disagree. One day EM will be a buy, but it’s not now.
The theory is that if emerging markets continue to weaken, investors will flock to the U.S. stock market. It’s a good theory but if things unravel quickly, I think that all markets will be punished, at least temporarily.
I’ve studied the market for many years and although it’s not as maniacal as in 1999 (or as insane as the real estate buying frenzy of 2005, 2006, and 2007), I see a lot of worrisome signs. Yes, the market could go higher from here, but the risks keep increasing.
After my MarketWatch article was published, there were over 500 comments. Some people were angry at me for warning investors that the market is dangerous. This anger is a clue. When too many investors refuse to even consider a bear market or correction is possible, that is a huge red flag. The market does not go up forever.
In my next MarketWatch article, I will write some of the strategies that investors and traders should take when the market gets dangerous. If you’re an investor, start by talking with your financial advisor or brokerage firm. Be sure you are protected (as much as possible) in a worst-case scenario. Other steps include using protective put options (this strategy is not for everyone because puts can be expensive), being diversified, taking profits on occasion, sticking to index funds instead of individual stocks (but that depends on the stock).
Let me be clear: I cannot predict when the market has reached a top, or whether there will be a crash or correction. But I can recognize a dangerous market, and that’s what we have now. I have been cautious for some time but I also recognize that the uptrend is intact. It’s too risky to short the market (primarily because of the Fed), but it’s also risky to be 100 percent invested in equities. Each person has to find his or her comfort zone and risk tolerance. Some people can’t stand to lose out on a potential 5 or 10 percent upside. Others are willing to accept much lower returns but with less risk. Only you can decide what works for you.
Bottom line: Be prepared for another volatile week. Although the market begins the week with a slightly negative bias (because of world events), the uptrend is still intact. Nevertheless, I’m watching for clues that investor’s perceptions have changed (we’re not there yet).
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.