Market Indicators (Week of August 5)

Each weekend, I will list signals from some of the most useful market indicators.*

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media). Finally, I write a monthly column on long-term trading for MarketWatch.com.

AAII survey (7/31/2013)

35.6% bullish. 25.1% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (7/31/2013)

48.4% bullish. 19.6% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .58

Sell Signal: Lower than .75 is a sell (more call options are being bought). Less than .50 is a screaming sell.

Buy signal: Higher than 1.0 is a buy (more put options are being bought)

 

VIX: 11.98

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above its 200-day MA, above its 100-day, and above its 50-day MA.

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

Buy signal: Index crosses over MA.

 

MACD: MACD is above the zero line and above the red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Sell signal: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Buy Signal: MACD line crosses above zero line. MACD line crosses above 9-day signal line.

 

Analysis: Once again, we’re getting mixed signals. The technical indicators are telling us the bull market will continue while the VIX and Put/Call ratio are flashing caution signs. If you follow the technical indicators, you are bullish, but also concerned there is too much complacency (i.e. VIX). Surprisingly, retail investors were less bullish last week but that could change quickly if the market keeps going higher.

Opinion: I was expecting fireworks last week but it was more like a sleeper (except for one exuberant day). Last week, it seemed like all of the problems of the world went away. The U.S. economy got a little stronger (manufacturing improved and unemployment was lower), China had fixed its economic problems (it only took a week), and Europe was finally getting out of recession. Across the world, markets went much higher including a 3% gain in the Chinese stock market and even higher in Japan. The S&P went above 1700 for the first time.

And on Friday, even with a disappointing jobs report, the market rallied at the close, pleased that the Fed will continue with QE indefinitely, or until they are forced to stop (more on this later). In addition to the Fed, central banks across the globe flooded their countries with easy money. After all, it worked here, so why not try it everywhere? With the Fed behind you, which is like a slow moving freight train, you don’t want to get in the way. Short sellers, be gone! Everyone else, what is there not to like?

And yet, QE can’t go on indefinitely. In a must-read column for MSN Money, Bill Fleckenstein wrote that you should keep your eye on the bond market, and I agree. The bond market, as Fleckenstein pointed out, could give the first clues that the Fed has lost control as interest rates go up (which has already started). If this continues, QE might end sooner rather than later. Here’s a link to Fleckenstein’s column: http://on-msn.com/12NnTzk

For four years, being bullish has been the right strategy, and that may continue as long as the Fed has their foot on the gas. As I’ve said before, the market could still go up an additional 4 or 5 percent (or higher) this year. Nevertheless, the downside risks keeps increasing. Yes, the indicators are pointing up but you must also look at other factors (such as rising interest rates and money flow). It may be hard to believe right now but bull markets eventually end, although no one knows when. Until then, the market could go up higher than anyone believes. Yes, anything is possible.

With the market reaching all time highs pumped up by the Fed, you just have to be on guard. The good news is that the U.S. economy is showing signs of strength, but not enough for the Fed to stop QE. That is why it is not a good time to aggressively short this market (unless you are an experienced trader looking for short-term opportunities). The bad news is we’re in uncharted territory.

I’d like to tell you to go full speed ahead on the long side but I know from past experience that a catalyst could quickly reverse the upward momentum. I am sure about this: When the market turns from bullish to bearish, it will be brutal and swift, even if the Fed is pumping.

Bottom line: There is still upside momentum in the U.S. market but that could change in a heartbeat, so be prepared. If you’re long, be cautious and ready to move to cash if there are signs of trouble. Cash is terrific for short-term protection but you don’t want to be there indefinitely. Also, being short the US market has not been a great strategy, but shorting bonds and emerging markets has been profitable, although it’s not for risk adverse investors. Again, watch the bond market to see if interest rates move higher. If that happens, it should be a very interesting summer.

 

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

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