Market Indicators (Week of November 4)

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).

 

AAII survey (10/30/2013)

45.0% Bullish. 21.5% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (10/30/2013)

52.6% Bullish. 16.5% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .61

Sell signal: Less than or near .50 is a sell (more call options are being bought).

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

 

VIX: 13.28

Sell signal: Lower than 12.

Buy signal: Over 40.

 

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

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

Buy signal: Index crosses over 50-day, 100-day, and 200-day 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 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 64.06 (on 11/01/2013)

Overbought signal: When RSI rises to 70 or above, it is possible S&P will reverse direction and fall.

Oversold signal: When RSI falls to 30 or below, it is possible S&P will reverse direction and rise.

Note: RSI can remain overbought or oversold for extended time periods.

 

Bonds: U.S. 10-year yield is at 2.62% (on 11/01/2013)

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 readings are on the frothy side (which is a negative sign), with newsletter writers in the super bullish camp. They obviously believe the Fed will continue to add liquidity to the markets with their bond buying experiment. Technical indicators are all bullish. The yield on the 10-year surged, which is not a good sign for bonds. There’s a rush out of bonds as we speak, and a rush into stocks.

Opinion: After staying on the sidelines for years, the retail investor, along with financial newsletter writers, discovered the bull market. As bond mutual funds lose money to rising interest rates, investors are pouring money into stock mutual funds. Inflows are at their highest in years. As mentioned above, sentiment indicators are sky high, and some analysts say the bullishness is thehighest since 2008 (right before the crash).

I’m amazed that it’s happening again, that is, panic buying. Remember that sentiment indicators can remain high for a long time. But it is a red flag, and there are many red flags. An orange flag: We haven’t had a 10 percent correction in two years.

Wait! Maybe it’s different this time, and because of the Fed, the market will never go down again! (Okay, I’m joking).

Here’s the way I see it: On one hand, this market could go parabolic as all that mutual fund money is put to work into the stock market. On the other hand, this market is also reaching a dangerous tipping point. Unfortunately, I can’t tell you which is going to happen first but since the market will be aTwitter next week (i.e. Twitter goes public), I assume we’re going higher. And the indicators are all pointing up.

And yet, remember to buy when others are afraid and sell when others are greedy (Warren Buffett’s words). Therefore, instead of getting caught up with the mania, if you want to reduce risk, you might want to slowly scale out of positions.

Nevertheless, if you do, you could miss out on a final climatic rally that could be amazing. No one, and I mean no one, believes the Fed will taper in December, so it should be blue sky as far as the eye can see. That is, unless interest rates spike, emerging markets implode, and if someone on the Fed tries to deflate the bubbly market by talking it down.

Bottom line: The market will likely go up but the risks increase each week. A market correction would not be a surprise, but you may have to wait a while.

 

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

I will notify you of my blog posts via twitter @michaelsincere

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