The Weekly Trader

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is 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.

My latest MarketWatch article: http://on.mktw.net/1cCpJrV

 

AAII survey (3/19/2014)

36.8% Bullish. 26.1% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence 3/18/2014)

52.0% Bullish. 17.4% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .55

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: 15.03 (on 3/21/2014)

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, its 100-day, and 200-day MA, but 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 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 55.87 (on 3/21/2014)

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 2.75% (on 3/21/2014)

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

 

Analysis: Just like last week, many of the technical indicators and sentiment indicators are not giving strong signals. In fact, if you study the indicators, they are saying the market could go in either direction. Nevertheless, if you dig a little deeper, you will detect ominous signs. Commodities have been hit hard (copper is the latest), biotechs were taken to the woodshed on Friday and smashed, and the market made a dramatic intraday reversal (the Dow was up 130 but ended down 28). That intraday reversal was an interesting clue, although it’s too early to say if it’s significant (perhaps traders didn’t want to hold over the weekend and sold). Other worrisome clues are the large number of IPOs set to go public and the high margin debt (at an all-time historic high). In summary, the market is still in the danger zone.

Opinion: In my upcoming book, Predict the Next Bull or Bear Market and Win (Adams Media), I discuss that detecting a trend change is essential for traders and investors. I discuss the clues and indicators that help you to identify those changes. Last week, the market acted irrationally. The market appeared to rally early in the week based on a chance that Janet was going to be more dovish than Ben. After Janet spoke, the market sold off, recovered, and sold off again. These are all red flags. In my opinion, this topsy-turvy, unpredictable market is a clue that something big is headed our way, but I don’t know what. As a market observer, it confirms the market is getting more dangerous every day.

I have spoken to a number of professional traders who are sitting this market out. Many short-sellers are patiently waiting for a better opportunity to short. And those who want to go long are also waiting for better opportunities. In other words, there is nothing wrong with sitting on the sidelines in cash, waiting for the market to reveal its hand.

There are those who disagree with sitting on the sidelines. In their opinion, you should always be 100 percent invested in the market at all times. I disagree. There are times when the most prudent choice is to sit and patiently wait for an opportunity to pounce. I believe this is one of those times. To be patient while waiting for the right opportunity is difficult for most people. During those times, Jesse Livermore used to go fishing until he was certain he was right. At the moment, nothing is clear, although many people are sure they know what the market will do next. No one knows!

If you are heavily invested in the stock market, I’m not suggesting that you sell everything and move to cash. I am saying, however, that it’s a good time to review what you own, discuss it with your brokerage firm or money manager, and be sure you are protected in case the market does fall in the future (one day it will). Only you can decide how much risk you are willing to take. (Warning: If you own any of the high-fliers such as Tesla or Priceline, you’re at risk. You’re also at risk if you are buying stocks on margin.)

Over the next few weeks, we should have a better idea where this market is headed. It’s possible it will rise well above its all time highs (maybe even go parabolic). Money managers a lot smarter than me believe that is exactly what is going to happen, and it could. On the other hand, if more red flags appear (intraday reversals to the downside, continued selloff in commodities, a failure for market to rise above its previous high, and market leaders selling off), then I will be more confident this current uptrend is ending.

Bottom line: Long or short, this market is unpredictable right now. Be on the lookout for danger signs and red flags. (I’m watching emerging markets and the bond market (i.e. interest rates) for clues).

 

* 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 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.

My latest MarketWatch article: http://on.mktw.net/1cCpJrV

 

AAII survey (3/12/2014)

41.3% Bullish. 26.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence 3/11/2014)

55.1% Bullish. 17.4% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .69

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: 17.82 (on 3/14/2014)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

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

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, below its red 9-day signal line, and pointing down. (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 48.18 (on 3/14/2014)

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 2.64% (on 3/14/2014)

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 technical indicators took a turn for the worse last week, especially MACD, which turned down. The S&P 500 is still above its 50-day moving average but is pointing down. Keep in mind that in a volatile market, moving averages aren’t as effective (they are most effective in a trending market). Sentiment indicators are still a bit frothy, but not as extreme as the week before (because of the market pullback). Beginning tomorrow, outside events such as Ukraine and the Fed will trump the indicators. Bottom line: Anything is possible so be prepared.

Opinion: As I wrote in this blog last week, the market is in the danger zone. Although the technical indicators were pointing up, there were other clues (such as frothy sentiment indicators) that reflected excessive bullishness.

As you may know, I wrote a column for MarketWatch (link above) about the reasons this bull market is coming to an end (or could be topping out). After I wrote the column, the Nasdaq suffered the worst weekly decline since April 2013, and other indexes got hit hard.

Although no one can call the exact top or bottom, it is possible to recognize a dangerous market using clues and indicators. Not surprisingly, several individuals and at least one money manager mocked the idea the bull market might end. In my opinion, it is a mistake to not plan and prepare for a correction, pullback, or bear market. Yes, the market has an upward bias, but that doesn’t mean there will always be a bull market. Perpetually bullish money managers and investors who believe the market goes up forever will eventually learn another 2008 lesson. If you are going to participate in the market, be open to any possibility.

As for me, I’d rather be cautious than blindly bullish like so many on Wall Street. To not even entertain the possibility the market is or could get dangerous is ridiculous. For example, to urge investors to buy emerging market dips is even more foolish. I know that buying on the dip worked in the past (it works in a bull market), but not when EM is struggling (suggestion: wait until EM stops falling).

Once again, the U.S. market begins the week in the danger zone. With Russia and Ukraine looming in the background, and unusual financial events coming from China and emerging markets, this should be another volatile week.

Nevertheless, it’s possible that Janet and the Fed will light the market on fire. Based on previous Fed meetings, if the market sells off early in the week, investors and traders will be looking for any reason to buy. Perception is everything: If investors perceive that Janet is going to save them, the market could rally even with all of the negative news coming from so many directions.

Bottom line: Fasten your seatbelts because the odds are good this market is going to take us on a rocky ride.

 

* 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 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.

My latest MarketWatch article: http://on.mktw.net/1cCpJrV

 

AAII survey (3/5/2014)

40.6 % Bullish. 26.6% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence 3/4/2014)

54.6% Bullish. 15.1% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .53

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: 14.11 (on 3/7/2014)

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, its 100-day, and 200-day MA, and pointing up.

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, above its red 9-day signal line, and pointing up. (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 66.40 (on 3/7/2014)

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 2.79% (on 3/7/2014)

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

 

Analysis: It feels like Groundhog Day. The technical indicators are still pointing up, so the uptrend continues. On the other hand, sentiment indicators are showing signs of exuberance, i.e. margin debt is rising and retail investors (and many pros) don’t believe a bear market is near. If you follow the trend, you are long. If you follow the trend and also study underlying market conditions, you see red flags (as I discussed in my latest MarketWatch article above).

Opinion: As I’ve warned repeatedly for several months, emerging markets are still vulnerable. Even though some major brokerage firms are recommending that you buy on the EM dip, I strongly disagree. One day EM will be a buy, but it’s not now.

The theory is that if emerging markets continue to weaken, investors will flock to the U.S. stock market. It’s a good theory but if things unravel quickly, I think that all markets will be punished, at least temporarily.

I’ve studied the market for many years and although it’s not as maniacal as in 1999 (or as insane as the real estate buying frenzy of 2005, 2006, and 2007), I see a lot of worrisome signs. Yes, the market could go higher from here, but the risks keep increasing.

After my MarketWatch article was published, there were over 500 comments. Some people were angry at me for warning investors that the market is dangerous. This anger is a clue. When too many investors refuse to even consider a bear market or correction is possible, that is a huge red flag.  The market does not go up forever.

In my next MarketWatch article, I will write some of the strategies that investors and traders should take when the market gets dangerous. If you’re an investor, start by talking with your financial advisor or brokerage firm. Be sure you are protected (as much as possible) in a worst-case scenario. Other steps include using protective put options (this strategy is not for everyone because puts can be expensive), being diversified, taking profits on occasion, sticking to index funds instead of individual stocks (but that depends on the stock).

Let me be clear: I cannot predict when the market has reached a top, or whether there will be a crash or correction. But I can recognize a dangerous market, and that’s what we have now. I have been cautious for some time but I also recognize that the uptrend is intact. It’s too risky to short the market (primarily because of the Fed), but it’s also risky to be 100 percent invested in equities. Each person has to find his or her comfort zone and risk tolerance. Some people can’t stand to lose out on a potential 5 or 10 percent upside. Others are willing to accept much lower returns but with less risk. Only you can decide what works for you.

Bottom line: Be prepared for another volatile week. Although the market begins the week with a slightly negative bias (because of world events), the uptrend is still intact. Nevertheless, I’m watching for clues that investor’s perceptions have changed (we’re not there yet).

 

* 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 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 (2/26/2014)

39.7% Bullish. 21.1% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (2/25/2014)

53.5% Bullish. 17.2% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .58

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 2/28/2014)

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, its 100-day, and 200-day MA, and pointing up.

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, above its red 9-day signal line, and pointing up. (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 64.09 (on 2/28/2014)

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 2.66% (on 2/28/2014)

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

 

Analysis: Last week was similar to the week before. Technical indicators were pointing upwards, and sentiment indicators weren’t at extreme levels. However, retail investors poured money into equities last week, and as usual, at the wrong time. In addition, all bets are off this week because ofUkraine and China. If you follow only technical indicators, you’d still be bullish. On the other hand, if you look at the bigger picture, caution is advised.

Opinion: In my upcoming book, Predict the Next Bull or Bear Market and Win, I discuss the many signals and clues that can help determine market direction. For example, last week appeared to be positive but those late day selloffs were a significant red flag. Another red flag was the huge inflows into stock mutual funds.

As you know, I have written how emerging markets are in the danger zone and should be avoided. The evidence was everywhere, and yet, the CEOs of major brokerage firms went on TV and urged retail investors to buy, buy, buy emerging markets. Hopefully you didn’t listen.

Because of Ukraine (and other problems around the world), it will be a difficult week for the bulls (at least at the beginning). Judging by the futures (they are negative at this writing), the market will get hit early. Nevertheless, it won’t take much for the market to reverse direction later (a positive comment by the Fed might do it).

As I wrote last week, I am taking profits quickly. More than likely, volatility will continue. If you’re experienced, you can take advantage of this dangerous market using short-term trading strategies. If you’re a beginner, either stay on the sidelines or trade with very small share size. Red flags are everywhere.

Bottom line: Take this market one day at a time. It’s too early to determine if there will be a significant correction now or later. We’ve had too many false pullbacks, so caution is advised onboth sides. The last thing you want to be is a sitting duck, so be careful out there. Soon, retail investors will learn that 2014 will not be a cakewalk (like in 2013). Only the most astute traders and investors will make a substantial profit.

 

* 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 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 (2/19/2014)

42.2% Bullish. 22.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (2/18/2014)

46.5% Bullish. 17.2% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .58

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: 14.68 (on 2/21/2014)

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, its 100-day, and 200-day MA, and pointing up.

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, above its red 9-day signal line, and pointing up. (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 57.86 (on 2/21/2014)

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 2/21/2014)

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 sentiment indicators aren’t at extreme levels so they aren’t offering much guidance. The market is in a sluggish uptrend, but it’s still an uptrend. As always, don’t fight the trend. Nevertheless, the Friday selloff during the last minutes of the trading day might be significant, so we’ll have to wait and see. Right now, taking a wait and see attitude is recommended. The goal is to find the right opportunity to pounce. It’s only a matter of time before that opportunity appears.

Opinion: In my opinion, we’re getting closer to a major pivot point, but it’s difficult to predict. Based on a number of clues and indicators (which I discuss in my book, Predict the Next Bull or Bear Market and Win), this tired bull market is in a fight for its life.

I spoke with a professional trader friend of mine about the current market. He’s a conservative trader. Like me, he knows the day of reckoning is coming. He is waiting on the sidelines, unwilling to short, but also unwilling to go long. His strategy is to wait until the market plunges (and there is blood in the street), and then go long. Right now, there are few bargains. Similar to 1999, some popular stocks have obscene P/E levels. Based on market history, that won’t last indefinitely.

Emerging markets are still in turmoil, and more pain is expected. As I said last week, don’t listen to those who recommend buying EM on the dip, even if they are the CEOs of major brokerage firms. It’s financial suicide to buy when so many EM countries are struggling. Yes, one day EM will be a buying opportunity, but it isn’t now (in my opinion).

It’s possible that the bulls will pull a magical rabbit out of its hat and push this market higher (with help from the Fed). And that’s why shorting is so dangerous now. It takes discipline to patiently sit and wait for the right opportunity.

Not much has been said about bonds but the odds are good that the yield on the 10-year will surpass 3 percent in the future. That will be an interesting development. When bonds get crushed again, the million-dollar question is what happens next. Will bondholders move to the safety of cash for near zero returns, or will they run to the stock market? We will discuss that scenario when it happens.

As I said last week, it’s a trader’s market, so if you’re participating, take profits fast. If we do switch from a bull to a bear market in the future, there will be opportunities to short (or buy inverse ETFs), but until then, be prepared for anything. It’s not the time to commit too heavily to one side of the other.

Bottom line: When the market is ornery like this, and even “a skunk can’t make a scent,” as Jesse Livermore says, it’s best to watch and wait for the market to give us guidance. The uptrend is intact, but it’s very tepid. And that is another reason why this market is so difficult to manage.

 

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