Bullish or Bearish? Week of January 15, 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 @ 2700

 

Sentiment Indicators (+RSI)

II survey: (Jan. 10): 64.4% Bulls; 13.5% Bears = Bearish (*Note: The last time these sentiment levels were reached was April 1986, 18 months before the 1987 crash.)

AAII survey: (Jan. 11): 48.67% Bulls; 25.07% Bears = Bearish

VIX: @ 10.16= Bearish

RSI: (S&P 500) @ 83.42 = Overbought (Extremely!)

Comment: The market keeps going higher, breaking records along the way. The most overbought market since 1929, the highest margin in history, and the highest sentiment readings in decades. In addition, millions of dollars are moving from mutual funds to leveraged ETFs. Many investors truly believe the market is not going to go down (I heard that in 1999 and 2007).

Obviously, one day reality will return to the market as we continue through the exuberance stage. It’s not a question of if but when the market cracks. When that day comes, many amateurs are going to learn a lesson on leveraged funds: easy to buy, hard to sell when everyone tries to sell at once.

For now, however, the bulls rule and there is no evidence of a reversal. Until the market cracks, shorting the indexes is too risky (there are individual stocks that can be shorted for decent profits). The market is reaching levels that are impossible to sustain for long. The only question is if there will be a mild correction that recovers quickly, or a severe correction, or worse. As I wrote last week, it’s not wrong to ride this wave higher but use hedges or have a strategy for getting out when all hell breaks loose (and it will one day).

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