Bull or Bear? (Week of December 23)

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. *

I have two new (2nd Edition) books that are available now on Amazon and Barnes and Noble: Understanding Options (McGraw-Hill, 2E): and Understanding Stocks (McGraw-Hill, 2E). Click here for the links: http://bit.ly/1bl0ZNk I think you will be very pleased with how they turned out. I’m especially pleased with the options book, which was completely rewritten.

I write a monthly column for MarketWatch. Here is my latest (November): http://on.mktw.net/1epjUhL

 

AAII survey (12/18/2013)

47.5% Bullish. 25.1% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (12/18/2013)

58.2% Bullish. 14.3% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

CBOE Equity Put/Call Ratio: .50

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: 13.79

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 (and Dow) is above its 50-day moving average, its 100-day and 200-day MA, and pointing up.

Bearish: Index crosses below 50-, 100-, or 200-day MA.

Bullish: Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is above the zero line, but is below its red 9-day signal line but 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 62.83 (on 12/20/2013)

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 2.89% (on 12/20/2013)

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 still bullish, and even individual investors are starting to believe the market has nowhere to go but up. It’s not a mania yet but it might be if the market keeps climbing into 2014. Indicators are pointing up but sentiment is telling us the market is getting frothy.

Opinion: This will be a shortened week so I will keep it short. Ben pulled off an amazing feat last week by finally tapering while telling the market that the Fed will continue to be accommodative (i.e., support the market). I’m sure he giggled at the way he shocked the market, but in a good way (most people, including me, thought that tapering would cause a negative reaction). But Ben thread the needle brilliantly, and on the basis of his soothing words, the market went 300 points higher.

I’m hearing a rumor that some of the biggest market players are expecting a 15 percent correction. In fact, a lot of people are expecting a correction. Meanwhile, Ma and Pa are dutifully adding more of their hard earned money into company 401ks and IRAs. I guess they didn’t get the message.

On the other hand, ignorance is bliss. Can the market go to 16,500 or 17,000? Certainly. But as the clock keeps ticking, as the market climbs primarily on the Fed’s future promises, the red flags increase. Right now, the Fed is running the whole show, and in my opinion, that is not healthy.

One day (which cannot be predicted), there will be a catalyst, an unknown event that will knock this market off its mighty perch. As I said last week, prudent investors are pulling back, similar to watching an approaching hurricane. We know it’s going to hit, but we don’t when or where.

There are a lot of dangerous crosscurrents between the bond market and stock market. When the 10-year yield surpasses 3 percent, it should be interesting how the stock market reacts. For years, savers have been punished, and in fact, almost forced into the stock market. As interest rates keep rising, that scenario will change.

Bottom line: We should know soon which way the financial winds are headed. In my opinion, a storm is approaching, but I have no idea when it will hit. Nevertheless, now might be a good time to put up those storm shutters. (Keep your eye on emerging markets as the canary in the coal mine.)

Have a great Christmas, happy holiday, and a wonderful New Year. Unless there is a market moving event, my next blog entry will be on January 6th, 2014.

 

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

I will notify you of my blog posts via twitter @michaelsincere

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