Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is todetermine if we are in a bullish, bearish, or sideways market environment. *
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AAII survey (1/15/2014)
39.0% Bullish. 21.5% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investor’s Intelligence (1/15/2014)
56.1% Bullish. 15.3% 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)
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 down slightly.
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 the zero line, and slightly lower than 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: RSI is at 56.49 (on 1/17/2014)
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 2.83% (on 1/17/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: The rollercoaster week reduced some of the bullish market sentiment, but it’s still on the frothy side. Even more interesting, few investors are expecting a bear market. In fact, there is a level of complacency in the market (look at the low VIX for evidence) that is remarkable. On the technical side, the S&P stalled last week, as reflected in moving averages and MACD. Once again, we enter the week with mixed signals.
Opinion: One of the most important tasks of a trader is to identify when one trend ends and another begins. After a lengthy bull market (five years and counting), it’s essential to look for signs that the bull market might be in trouble. Failing to do so can cost you money.
Rather than trying to predict what the market will do next, it’s more important to observe the market, and look for danger signs.
One way of determining whether the market is about to roll over is by testing your positions. Rather than stepping into a confused market with a handful of buy (or sell) orders, start by probing the market to see which way the financial winds are blowing. For example, you could buy 100 shares or more of a stock or index (or sell short 100 shares or more depending on the size of your account). If you are right, then you will own a profitable position. If wrong, cut your losses at 7 or 8 percent. Rule: Add to profitable positions but never add to unprofitable positions.
I believe that the market is struggling and is about to turn over. In my opinion, the first hit will come from emerging markets (EEM, the emerging market index, recently fell below its 200-day MA), which will spread to the U.S. I have no idea when this may occur or how long it will last. I also don’t know if I’m right. To test my opinion, I will probe the market (something I learned from Jesse Livermore).
Obviously, if the market does take a hit, the Fed may come to the rescue by announcing that they have stopped tapering until further notice. The markets will rally on that news. Because of the Fed, the market has become much more unpredictable. It’s essential, however, that you not get trapped on one side or the other, and remain objective. (I’m leaning bearish but I’ll change my mind if the market proves me wrong.)
Bottom line: I believe that investors will have to work for their money this year, unlike in 2013, which was a cakewalk. Astute investors must be alert, and in my opinion, be properly diversified or on the sidelines ready to pounce.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.