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.
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My latest MarketWatch column on how stock bubbles burst: http://goo.gl/alw6R1
AAII survey (4/29/2015)
30.8% Bullish. 47.2% Neutral. 22.0% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (4/28/2015)
57.4% Bullish. 13.9% 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: 12.70 (on 5/1/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 54.18 (on 5/1/2015)
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 above its 50-, 100, and 200-day moving averages and pointing up.
Bearish (Short-term Downtrend): Index crosses under 50-day, 100-day, 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 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 zero line. MACD line crosses above 9-day signal line.
Bonds: U.S. 10-year yield is at 2.11% (on 5/1/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders). Note: Bonds have had a rough week.
Analysis: The indexes were in trouble most of the week until Friday, when it rallied, erasing the week’s losses. Once again, we’re in a standoff. Buyers are not enthusiastic (as reflected in market internals such as the NYSE Tick), and sellers are still not taking action. Eventually, something has to give. Sentiment remains historically complacent as few believe the market is vulnerable. Market trend is unknown at this time, and although pointing up, there are danger signs. Bottom line: It will be another unpredictable week. No one knows where this market is headed.
Opinion: As expected, the market was bearish all week until it pulled a rabbit out of its hat and recovered on Friday. At this time, it is unknown if it can do a repeat performance, and keep investors in the game. Economic numbers were weak across the world but few believe the Fed will allow this market to retreat for very long.
As I wrote last week, it is unknown where this market is going. I’ve noticed that last week the market began to retreat, until buyers stepped in between 10 a.m. and 11 a.m. ET to prevent a massacre. I wonder how long the buy-on-the-dippers will succeed.
Keep in mind that margin is at all-time highs. I also wonder how long buyers will keep adding to their positions on margin. If it turns against them anytime soon, it will get ugly very fast. And yet, so far the market is holding up at Dow 18,000, S&P 2,100, and Nasdaq 5,000. Can it finally surpass its all-time highs, or retreat from exhaustion? This week we should find out.
Bottom line: It will be another fascinating week as we learn what this market is made of. If it’s the real deal, the bulls will be celebrating. If it’s a bubble based on promises and illusions, then watch out below.