The Weekly Trader

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues and indicators 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 book, Predict the Next Bull or Bear Market and Win (Adams Media), is available at any Barnes & Noble store, and on Amazon in May. Here are sample pages: http://amzn.to/1h1rZZu

 

AAII survey (4/23/2014)

34.5% Bullish. 26% Bearish

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (4/22/2014)

51.6% Bullish. 21.7% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .71

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)

 

VIX: 14.06 (on 4/25/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 is slightly above its 50-day moving average, and pointing down. Nasdaq below 50- and 100- day moving averages.

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is above zero line, but even with its red 9-day signal line. (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 (S&P 500): RSI is at 51.01 (on 4/25/2014)

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 2.66% (on 4/25/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: The most bullish investors continue to be financial writers and money managers. Retail investors, however, are still anxious over current market conditions. Nevertheless, sentiment indicators did not reach extreme levels, although the put/call ratio spiked on Friday as traders bought puts to protect long positions. Technical indicators took a turn for the worse on Friday, and many individual stocks (such as Amazon) got slammed. Ukraine is simmering below the surface and has the potential to disrupt the market. Technicians will tell you that the market is still in an uptrend (and they’re right), but the clues and evidence tell us the market is getting more dangerous. Note: There is a FOMC meeting this week so Janet may take another shot at calming (i.e. give a shot of whiskey to) the markets.

Opinion: You may have noticed that a number of prominent stock analysts and guests on financial programs seem confused. A few make a bear call one week, and reverse their prediction the following week. As the market goes through a topping out process, there will be more confusion andcontradictory advice. When the market makes a major break down in the near future, that will jolt most bulls to accept reality: the bull market is in trouble.

The best case for the bulls right now is the Fed, who does have the power to delay the inevitable, or at least confuse investors into thinking the bull market is intact. Although the Dow appeared to be in good shape most of the week, underneath the surface many individual securities were being sold off. In reality, the so-called rally was not what it seemed.  Only on Friday did investors believe that something bad happened.

Because the Fed can swoop in and change market direction at anytime, shorting will continue to be a challenging strategy. Eventually, though, even the Fed won’t be able to stop a bear market from becoming a bear market.

As I write in my latest book, bear markets can begin with a bang or a whimper. It’s too early to say exactly when and how the next bear market will begin. But this I am certain: There will eventually be a bear market, and it’s getting closer. The Fed may pull out all stops to try and delay it, but you can’t change human nature. Once the retail investor begins to lose money, and realize that others have been selling positions for weeks, they will want to sell. Money managers will be working overtime to calm investors’ nerves and prevent a full-scale panic.

Investors have been told to prepare for a 10 to 15 percent correction. Although they are told it will only be temporary, no one can predict how much the market will drop or for how long. It will take a severe pullback for investors to think about selling. After all, even after previous corrections and bear markets, the market has come back.

As for me, I have avoided this dangerous market by being primarily in cash, and I’m also using inverse ETFs and put options to speculate (beginners should not use this strategy). The SPY put options I bought struggled all week, and then Friday arrived. Although my puts are still in the red, this week could be a turning point.

Buying inverse funds is less risky than shorting individual stocks (in my opinion), but it’s still a challenging strategy. When there are storm clouds above, you pull in your sails and seek cover in cash until the skies are blue again. Storm clouds are approaching, and in my opinion, the 5 percent potential upside is not worth the huge downside risk.  That is a decision only you can make, however.

Anything can happen this week because of the Fed meeting. More than likely, the market will rally for a day or two before or during the Fed meeting (i.e. before Fed minutes are released). If I’m right about this being a dangerous market (so far I have been), then the volatility will continue. I am very curious what Janet will say, and more important, how the market will react.

Bottom line: It feels good to be in cash even though Janet will do everything in her power to keep the markets levitated. Prepare for more volatility during the week as the bulls and bears fight it out.

 

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

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues and indicators 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 book, Predict the Next Bull or Bear Market and Win (Adams Media), is available at any Barnes & Noble store, and on Amazon in May. Here are sample pages: http://amzn.to/1h1rZZu

 

AAII survey (4/16/2014)

27.2% Bullish. 34.3% Bearish

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (4/15/2014)

50.5% Bullish. 20.6% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .57

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)

 

VIX: 13.36 (on 4/18/2014)

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, and pointing up.

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is above zero line, but below its red 9-day signal line. (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 53.03 (on 4/18/2014)

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 2.72% (on 4/18/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Retail investors are less bullish about the market but they’re also not very bearish, either. Some are being told by their brokerage firms and the media to expect a “10 or 15 percent correction (the message is it will be “a healthy pullback and a buying opportunity”). Conversely, financial writers and money managers are exceedingly bullish, a remarkable dichotomy. In addition, the VIX and put/call ratio indicate complacency on the part of traders. On the technical side, the market indexes are churning, which means it’s moving back and forth without clear direction (except for the Nasdaq, which is still below its 50-day moving average). For your information, churning often leads to a break to the downside.

Opinion: It seemed like a long time ago, but the market indexes were on the verge of a major pullback last week when Janet appeared again to proclaim she would do anything to help the economy (translation: the market). Traders loved what she said, the selloff was averted, and the bulls won the week. Perhaps Janet will come out every week to remind investors this will be themost dovish Fed in market history.

I have no idea “why” Janet keeps appearing to calm the market. I’ll leave that to the financial pundits. I do know, however, that a churning market is not healthy. I also know that the Nasdaq is a whisper away from a bear market. That’s a fact that cannot be ignored. In addition, many of the leading stocks from last year are struggling. It appears that many investors, including pros, believe too much in the power of the Fed. I don’t blame them since the Fed has had their way for five years. Unfortunately, the Fed can’t talk the market up forever.

There are other ominous signs. Even though the cheapest cialis market is churning its way higher, the selloff of many leading stocks means that astute pros are selling to the public (or to blindly bullish money managers). Although the S&P is still in an uptrend, fewer and fewer stocks are participating. That is another huge danger sign.

I still believe the market is going through a topping out process, which can take a while to complete. While this is happening, there will be mixed signals and confusion. When you include the actions of the Fed, which seems determined to keep the market levitated until the economy recovers, it gets even more confusing.

Many people believe you can’t time the market. In fact, the buy and hold mentality is so ingrained in the minds of investors they are planning to do nothing as the market gets more dangerous. To me, the danger is holding when storm clouds appear. This is the time to increase cash or hedge with put options if you own long stock positions. It’s true that no one can say when a bear market will arrive. It could be a month or six months. But this I’m sure: Bear markets are as inevitable as bull markets. The Fed may try to prevent the inevitable, but then we’d be in uncharted territory. No one, not even the Fed, has the power to keep the market up indefinitely.

If this was the beginning of a bull market, I’d suggest holding long positions. But this bull market is nearing an end (unfortunately, I can’t say when it will end). As I said last week, I am testing the short side with inverse ETFs and put options (I don’t recommend that beginners do this). Last week, my put options went on another wild ride, first with a healthy gain, and ending with a considerable loss. That tells me I’m a little early with shorting strategies.

If you’ve been reading this blog, I’ve been warning of a dangerous market since December, and especially since March 4, when the market began topping out. Beginners should move to cash while experienced investors can prepare for shorting opportunities. There will be many in the future.

The change from a bull to a bear market is a huge event. This trend change may take many investors by surprise, but if you are prepared, it can be profitable. The most important clue to look for right now are failed rallies. If the market rallies higher but fails to make a new high, and reverses, that would be an important signal. Last week, the market did just that until Janet appeared.

Bottom line: This market has a date with destiny, and a bear market is long overdue. I am not trying to scare you but prepare you for the inevitable. The Nasdaq is already selling off so it’s only a matter of time before it spreads to the Dow. The Fed still has a few tricks up its sleeve so shorting will be as dangerous as going long for the time being. For now, sit back and enjoy the show because it will be a good one. I’m waiting for the day when the fireworks start.

 

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

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues and indicators 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 book, Predict the Next Bull or Bear Market and Win (Adams Media), comes out in May: http://amzn.to/1hsl8nE

My latest MarketWatch article on 8 strategies to use in a dangerous market: http://on.mktw.net/1mYlqaS

 

AAII survey (4/9/2014)

28.5% Bullish. 34.1% Bearish

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (4/8/2014)

54.6% Bullish. 18.6% Bearish

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .70

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)

 

VIX: 17.03 (on 4/11/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): All indexes are below their 50-day and 100-day moving averages, and pointing down

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is above zero line, but below its red 9-day signal line. (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 38.61 (on 4/11/2014)

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 2.62% (on 4/11/2014)

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 indicators are mixed: Retail investors are becoming increasingly anxious while many financial pros are extremely bullish. Even the pros who are predicting a short-term correction or pullback believe this year will be a positive one. Unfortunately, the technical indicators have taken a horrendous turn down, with the Nasdaq leading the way south. The 50-day and 100-day have been breached on all indexes. The bulls are nervously watching the 200-day moving average. Once again, the bulls and bears will struggle for control. The edge goes to the bears, but with the Fed on their side, the bulls will not go down without a fight. For five years, everything has gone the bull’s way, and they are not going to retreat willingly.

Opinion: It was another exciting week. As I wrote last week, the market remains dangerous. This is one of those times in market history when you need to pay close attention. There’s a strong possibility that a major trend change is occurring (or will occur in the near future). If I am correct, it will be easy to make or lose money quickly. This is not the time to to be careless or wrong.

Although I jokingly wrote last week that they will have to wheel Janet out to pump up the market again, it was no joke. The market fell on Monday, and on Tuesday Janet appeared out of nowhere like a fairy godmother with a magic wand. The magic worked and the market had a monster rally. Unfortunately, the good times lasted only a day and a half, and the market plunged for the next two days, moving lower than the previous low. (That is a flashing red warning sign.)

Because of the recent selloff, even long-time bulls are preparing investors for a 10 to 15 percent correction. Some money managers are telling their clients a correction is a natural, normal, and a healthy outcome. I believe this is the most predicted correction in recent memory, with seemingly everyone waiting for the inevitable pullback.

First of all, no one can predict when or how low the markets can go. That 15 percent correction could turn into a 30 percent crash if there is a perfect storm (Re: Ukraine). Also, although a 10 to 15 percent pullback doesn’t sound like much, that would be a drop of 1,600 to 2,400 Dow points. That’s not chump change. I wonder how many investors will stay the course if and when the Dow drops by a few thousand points. The answer? They won’t. If that scenario occurs, when the pain gets too great, and the market is falling fast, most investors will pull out in a panic (or threaten to).

Allow me to speculate: If the market plunges in the near future, I believe the Fed will step in again and do anything to rally the market (with a little help from Wall Street). If I’m right, there will be a rally that will blow the socks off of investors. Most important: If that snapback rally fails, then the market will get even scarier.

Right now, be prepared for anything. The puts I bought to test the market a week ago took me on a wild ride, but I have a profit (because of Thursday and Friday). I have slowly been building my short positions with nonleveraged inverse ETFs and put options (and I plan to take profits quickly). I am also buying call options to hedge (I use them to protect my short positions).

If you are new to the market, do not follow these shorting strategies because I could be too early. As I’ve said before, if you are not experienced, you should consider building up a cash position. In my opinion, making 0 percent in cash is better than losing 10 or 20 percent, or more. Too many investors with a buy and hold mentality are prepared to ride out the upcoming storm. I don’t agree with buy and hold during a dangerous market (although the strategy works well in a bull market).

Note: If you do move to cash, consider it a short-term strategy. If you’re holding cash, when the market environment gets more favorable (after many buy and hold investors throw in the towel, which could take a while), then you can look for bargains.

Those who bought stocks on the way up believe their profits are in no danger (perhaps they think the Fed will protect them). Many also feel their profits are so substantial there is little risk of losing much money. This is an unwise belief. The proper response is to get out at once when there is a major trend change (and the market takes a turn for the worse).

For now, look for end of day selloffs, intraday reversals, Fed announcements, and most important, failed rallies. All we can do now is watch. Also, look to see if the Dow goes below its 200-day moving average or bounces back like it’s done in the past. If it slices through the 200-day MA and stays there, that would be a signal to many investors to sell.

Bottom line: The clues are telling us there could be a major trend change. At the moment, we’re moving into a downtrend that started with the Nasdaq and could spread to other indexes. In my opinion, buying on the dip is too dangerous right now although some money managers are encouraging their clients to do so.

 

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

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to use clues and indicators to determine if we are in a bullish, bearish, or sideways market environment. In addition, each week, I will go long or short depending on market conditions.

JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk

My book, Predict the Next Bull or Bear Market and Win (Adams Media), comes out in May: http://amzn.to/1hsl8nE

My latest MarketWatch article on 8 strategies to use in a dangerous market: http://on.mktw.net/1mYlqaS

 

AAII survey (4/2/2014)

35.4% Bullish. 26.8% Bearish

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (4/1/2014)

50.5% Bullish. 18.6% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .59

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)

 

VIX: 13.99 (on 4/4/2014)

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, but pointing down. Nasdaq is below its 50-day and 100-day moving averages and pointing down.

Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is above zero line, but even with its red 9-day signal line. (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 51.35 (on 4/4/2014)

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 2.73% (on 4/4/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Once again, the sentiment indicators are not giving extreme signals except for the financial writers (and many money managers): They are much more bullish than the retail investor. On Friday, there was technical damage done to the market, especially to the Nasdaq. The intraday reversal, the late day selloff, and the breaking of support levels was significant. This week we will learn if the market can shrug off Friday and power higher.

Idea: If the market continues to sell off, maybe they can wheel Fed Chairman Janet out to give a dovish speech, which will rally the market. Bottom line: Wait and see if Friday’s selloff continues into this week.

Opinion: Now you know what a dangerous market looks like. If you’ve been following this blog, you know I’ve been warning of the danger signs. The clues are everywhere: As mentioned above, the multiple intraday reversals, the late day selloffs, the unwillingness of many bulls to imagine a bear market, the lower lows, and the smashing of the high flying stocks last week is significant. As I wrote last week, if you own any of the high flyers like Twitter and Priceline, you’re at risk. If there is a market selloff, they will be the first to get hit.

In my MarketWatch column last month, I wrote that the market showed signs of topping, and that has not ended. In fact, last week was turning into a disaster (except for emerging markets, which rallied). And then, on Monday, Janet Yellen calmed investors with sweet, reassuring promises. As a result, the market partied for two days, reversing the damage from the week before. Then party pooper Michael Lewis came out of nowhere to tell everyone the market was rigged, and the selloff continued.

That brings us to this week. First, you will hear endless commentary on “why” the market sold off. Guess what? Who cares “why” the market sold off because the reasons aren’t known until later, if at all. All I care about is that the markets sold off, which is an important signal. Yes, studying the market for clues is essential if you are investing or trading. The market almost always gives hints what’s coming next.

Over the weekend, I met a junior investment banker at a major bank who described the training he received. It was fascinating. Since he interacts directly with customers, most of the training was how to calm customers down when the market goes south. Brokers and bankers are told to listen to upset customers and not take anything personally. It’s not a surprise that almost all of the major brokerage firms and banks are bullish. After five years of an up market, many pros don’t believe that the market will go down until several years have passed (around the time the Fed says they’ll raise interest rates). Although the pros could be right (anything is possible), it’s risky to believe the market goes in only one direction. If you study market history, the market is full of surprises, and I’m certain this market has a few up its sleeve. Here’s an idea: Instead of forming an opinion and then finding evidence to support your view, do the reverse: Look at the evidence and then form an opinion.

As I wrote last week, I bought a handful of puts to test the market. At first, the puts got smashed when Janet dropped in to calm the market. By Friday, however, my puts were back to even. If the puts are profitable next week, I will add to my short positions, and even more important, I will take profits quickly.

According to the indicators and the Friday selloff, I am leaning bearish. Nevertheless, I will wait for the market to give a signal. In particular, I’ll be watching the highflying tech stocks like Tesla, Priceline, and Netflix to see if they continue to fall. I don’t know or care why they are being sold, but that these stocks are plunging is significant.

Bottom line: If the highflyers on the Nasdaq continue to selloff, and my puts become more valuable, I know I’m on the right track. Then it will only be a matter of time before the Dow stocks are affected.

 

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

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to use clues and indicators 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 book, Predict the Next Bull or Bear Market and Win (Adams Media), comes out in May.

 

AAII survey (3/26/2014)

31.2% Bullish. 28.6% Bearish.wait

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (3/25/2014)

54.7% Bullish. 17.5% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .64

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)

 

VIX: 14.41 (on 3/28/2014)

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, but pointing down. Nasdaq is below its 50-day moving average and pointing down

Bearish (Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is above zero line, but below its red 9-day signal line. (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 51.86 (on 3/28/2014)

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 2.71% (on 3/28/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Once again, the sentiment indicators are not giving strong signals, although the difference in sentiment between financial writers and retail investors is remarkable. The financial writers are still extremely bullish while retail investors have lost some of their enthusiasm (although some sentiment indicators show higher retail enthusiasm) . On the technical side, the Nasdaq fell below its 50-day moving average thanks primarily to biotech. In fact, Nasdaq’s weekly loss was the worst since October 2012. In addition, the technical indicators from other indexes are pointing down (but haven’t broken through their 50-day moving averages). We will have to be patient to see if this is the beginning of a trend change or a temporary pullback.

Opinion: What a week! As I warned last week (and the week before), the market is in the danger zone. The intraday market reversals and late day selloffs were significant, especially as volume increased at the end of the day. All week, the market attempted to rally intraday, which was constantly met by stronger selling pressure. We will have to see if the other indexes follow theNasdaq, or if the Nasdaq recovers.

Hopefully, if you owned any of the highfliers like Tesla, Netlfix, and others, you have been scaling out. Take the profits if you have any in these overbought stocks. Many of these stocks have obscene valuations (over 150 P/E in some cases), and they are too risky to hold for much longer (in my opinion). The risk-reward isn’t favorable.

The only bright spot last week was emerging markets, which had its best one-week rally in many months. With all of the economic and political problems in the world, the market still rallied. Once again, we have to observe if the one-week rally is a true bottom or a bear market rally.

One of the most difficult jobs of a trader is to be patient. At this point, wise traders are on the sidelines with cash ready to pounce. My view is that after five years, the short side will be lucrative, but it’s still too early to commit completely. I have been testing and probing the short side (something I learned from reading Jesse Livermore) with small share sizes and options. Although some Nasdaq stocks are getting slammed, the S&P has not cracked yet.

Bottom line: According to the signals and clues, this market could go in either direction. Nevertheless, the high margin debt, the unwillingness by many to even imagine a bear market, the one-week breakdown in the Nasdaq, and those late day selloffs confirm the market is vulnerable right now. In addition, the accusation by author Michael Lewis that the stock market is rigged by high frequency traders is a development that must be watched. Perhaps one day the SEC will crack down on the unfair practices (but that could take years). And yet, although it’s tempting to commit to one side of the market or the other, it’s essential that you let the market be your guide (one of the reasons I am testing the market).

 

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