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 latest MarketWatch article (January): http://on.mktw.net/1bEjAEc
AAII survey (1/1/2014)
43.1% Bullish. 29.3% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investor’s Intelligence (1/1/2014)
61.6% Bullish. 15.2% Bearish.
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .56
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.
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, above its red 9-day signal line, and pointing down (slightly). (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 60.53 (on 1/3/2014)
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 3.00% (on 1/3/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Sentiment is still on the high side, but not extreme. Technical indicators, although bullish, are giving mixed signals. This is the time to sit back and let the market lead the way.
Opinion: As I’ve said for several months, emerging markets are struggling, as are bonds. As you know, the yield on the 10 year is at 3 percent and will likely go higher. This will put pressure on emerging markets as well as bonds. If you still own bond mutual funds, this might be the time to reduce your holdings. Interest rates will continue to rise.
Even with all the problems in the world, the majority of money managers and most connected to Wall Street believe the U.S. bull market will continue. In fact, the theory is that as the rest of the world struggles, and bond investors flee, they will go to stocks. It’s a good theory and billions ofdollars are riding on this idea.
Nevertheless, even though Wall Street always has an upside bias, the contrarian in me is suspicious when too many people are leaning to only one side. Even long time bears have thrown in the towel, and are reluctantly going long. I know from experience that the market always finds a way of fooling the most amount of people. Let’s see if it can do so again.
Also, just because last year was easy doesn’t mean this year will be. In hindsight, all you had to do was stick your money in an index fund or any equity mutual fund and you would have done well. With all the problems brewing in the world, do you really think it will be as easy this year? In my opinion, investors will have to work for their gains. Nevertheless, I will let the market do the talking, so let’s see what it has in store for us this week. (As you may know, Asia is getting hit tonight.)
Bottom line: Sit back and wait for the market to reveal its hand. The market is leaning to the upside but there are many danger signs.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.