Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues and indicators to determine if we are in a bullish, bearish, or sideways market environment.
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MARKET CLOSED ON MONDAY, MAY 26th
AAII survey (5/21/2014)
30.4% Bullish. 26.4% Bearish. 43.2% Neutral.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (5/20/2014)
57.2% Bullish. 18.3% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .58 (on 5/23/2014)
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: 11.36 (on 5/23/2014)
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, and pointing up on low volume. Nasdaq slightly above its 50- and 100- 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 zero line, and even with 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 9-day signal line. MACD line crosses above zero line.
RSI (S&P 500): RSI is at 59.06 (on 5/23/2014)
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 2.53% (on 5/23/2014).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Financial writers are so bullish about the market it’s near the danger zone. The VIX may drop below 11 this week, an extreme level that indicates few option traders believe this market isrisky. Many retail investors are unsure what to think, which is reflected in the AAII survey results (overwhelmingly neutral). Technical indicators are telling us the S&P is still in an uptrend but moving at a turtle’s pace. Bottom line: This is a market that slowly moves higher, defying logic. If you want to survive the next year, logic is what you’ll need.
Opinion: This remains a dangerous market for many of the reasons that I have discussed in previous MarketWatch columns and blogs. Many people are willing to ignore reality and keep buying as the market tops out. The reason this market is so dangerous is that it has caused investors to forget the lessons of the past (2000 and 2007), red flags (i.e sky high margin rates), and reality (bull markets don’t last forever). The longer this slow-moving market moves higher, the crazier it will get.
Here is what I know: This is a dangerous market that must end one day. One day there will be a catalyst that will send the markets much, much lower (and back to reality), but no one can predict what that catalyst will be. Even more annoying, no one knows when that catalyst will occur. More than likely, the retail investor will once again be the last to get out.
How do you protect yourself? It will take extreme patience to manage this market, more patience than most investors have. You already know that I am not long this market at all. I am more than willing to give up 5 to 7 percent potential upside to avoid a 20 percent or more downside. That’s my opinion, but many people are all in the market because they don’t want to miss out on future rallies. Right now, the stock market is the only game in town if you want to make big money (which is another red flag). Only you can decide how much risk you are willing to take, and it’s not an easy decision. Sitting and waiting on the sidelines is not a comfortable position, which is why so many investors are going to lose money in the future. (Hint: Aggressive traders may want to initiate hedged short positions).
I know how the stock market story is going to end (very badly), but it could be a medium to long wait (depending on geopolitical and economic conditions, or rising interest rates). Until then, I will be patient. My main goal is minimizing risk while preparing for the debacle that is destined to occur.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.