Bullish or Bearish? Week of Jan. 29, 2018

Here are the latest technical and sentiment indicators:

Technical Indicators (daily chart)

S&P 500 one-month trend = Bullish

S&P 500 is above its 50-day moving average = Bullish

MACD (S&P 500; 19,39,9) is above its zero line = Bullish

MACD (S&P 500; 19,39,9) is above its signal line = Bullish

S&P 500 support @ 2810

 

Sentiment Indicators (+RSI)

II survey: (Jan. 23): 64.7% Bulls; 12.8% Bears = Bearish (*Historic sentiment levels)

AAII survey: (Jan. 24): 45.5% Bulls; 24.0% Bears = Neutral

VIX: @ 11.08= Bearish

RSI: (S&P 500) @86.69 = Overbought (Extremely!)

Comment: I got a call from a well-respected market technician who told me the S&P was three standard deviations above its 200-day moving average. He was nearly screaming. He tried to explain that this was statistically ridiculous. He added that we just doubled the old high in the S&P within two years. Think of it this way: If the market can double in two years, then it could also return back to its mean,( i.e its average), also referred to as “mean reversion.”

Put another way, we are in the euphoric stage of the bull market. The CEO of TD Ameritrade recently warned that cash levels at the brokerage were at historic lows. In other words, customers are buying at the all time highs, going on margin, buying leveraged ETFS, all trying to make money before its too late. There is little cash on the side. Forget about telling investors to sell because they are afraid to miss out.

Never forget that throughout history investors always sell in a panic at the bottom and greedily buy at the top. Obviously, they are buying at the top. Does this mean the market will crash? No, the euphoria could continue for a while longer, it’s anyone’s guess. But I can tell you this: Although last week the S&P ended ¬†at its all-time highs, volatility returned for the first time in a long while. There were wild intraday swings early in the week. That is a clue to me the market is changing. I also saw this happen in 2007.

Keep your eye on the intraday volatility and be prepared. Learn about bear markets, learn how to buy put options (I don’t recommend shorting), and review your portfolio for vulnerable positions. The best way to survive what’s coming is knowledge. Study history, study bear market strategies, study what happens at the end of a bull market. These final, euphoric stages of the bull market could go on for a while longer because the alternative is so frightening. Even a typical 10- 15% pullback will seem like a crash to most investors because it’s been so long since the market did anything but go higher.

 

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