The Weekly Trader

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).

 

FRIDAY ALERT: Late-day selloff, not a good sign. Be careful if you’re long.

 

AAII survey (9/11/2013)

45.5% Bullish. 24.6% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/11/2013)

37.1 % Bullish. 22.7% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .60

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: 14.16

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 50-day, 100-day, and 200-day MA.

 

MACD: MACD is at 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.

 

Analysis: We went from bearish to bullish in one week. Individual investors are feeling a bit more bullish while financial writers lost some of their enthusiasm. (Another survey says that a majority of money managers are expecting a correction.) Technical indicators made a dramatic turnaround, and this week we’ll see if it’s for real. Unfortunately, the Fed meeting and other news will trump the indicators. Because we’re still in a sideways market, the market can go in either direction. Once again, look for late day selloffs on high volume. A head and shoulders pattern is starting to develop on the S&P 500, which is very negative (thanks to trader Toni Turner for pointing this out).

Opinion: Last week was an important lesson about market indicators. At the start of the week, most of the indicators were pointing down, and it seemed like a slam-dunk to sell the market short. And then, unexpectedly, there was the Syria relief rally, and the bulls had the best week in months. Most important, at the end of each day, the market did not sell off like it had in the past. It was a glorious day if you were long the market, and we’ll soon see if it can last.

The lesson of the week is that you can never make a trade based only on indicators. Although market indicators help put the odds on your side, they can’t predict the future. Last week, unexpected good news trumped the indicators and everything else. It was a breathtaking turnaround for the bulls. It also goes to show that anything is possible in the stock market, which is why protective call or put options make sense when the market is moving sideways.

This week will be exciting. The FOMC meeting begins on Tuesday, Sept. 17, and it’s sure to increase market volatility before and after the meeting (especially after). Here are three possible scenarios ofwhat could happen:

1. Action: Ben and the Fed announce that they are not going to taper now but at the next meeting (after Ben has said his goodbyes).

Possible Result: Market goes wild, rises by 2 or 3 percent. S&P is firmly in the 1700 Club. Gold explodes higher. Emerging markets also go higher and Ben is a hero on Wall Street. Short sellers get crushed.

Concern: If the Fed delays tapering, it must mean there are more problems with the economy than the Fed is letting on. By delaying, it will only make things worse when they taper in the future.

My opinion: This is a possible scenario, which is why it’s dangerous to short without call option protection. Nevertheless, the market would be pleasantly surprised if they delayed tapering. I would also be surprised if they delayed tapering.

 

2. Action: Ben and the Fed announce that QE is going to end by more than the market expected.

Possible Result: Market sells off by more than 3 percent, gold gets crushed, and emerging markets have the worst week in years.

Concern: Ending liquidity this abruptly would upset the markets.

My opinion: There is a .00001 percent chance that the Fed will end QE abruptly.

 

3. Action: The Fed tapers a little (the mini-taper), no more than 5 to 10 billion dollars a month.

Possible Result: Market will be volatile.

Concern: The markets will see this as the end of QE in the future and won’t like it one bit.

My opinion: This is the most likely scenario. The Fed will taper a little and hope the market will accept it. In fact, articles are already appearing that the market “priced in” mild tapering and won’t be surprised. If markets start to sell off, perhaps there will be an announcement that Janet Yellen will be the new Fed chairman, a decision Wall Street will like (this is pure speculation on my part). That will reduce the tapering pain.

With one wave of his magic Fed wand, Ben can crush the markets or let the party go on a bit longer. Either of the two extremes (no tapering or a lot of tapering) will cause big reactions, and I don’t think the Fed wants that. By tapering a tiny little bit, they are hoping they can slowly wean the markets off of the QE liquidity trap. No one can predict how the market will react, but there will be a reaction, even though it might be delayed.

Once again, the safest bet is to move to the sidelines until the market calms down, which could take a while. There are other events (such as the debt ceiling talks) that have taken a back seat to Syria, but these events could emerge once again.

I still like using call or put options to protect long or short positions (as I described last week). Nevertheless, the market will be volatile so managing stock and option positions will be a challenge. I can honestly say that the market indicators, although leaning bullish at the moment, could reverse again this week (and intraday). Once again, you must be prepared for anything since it’s in the Fed’s hands at the moment.

And as I’ve repeatedly said, this market is dangerous, and more so this week. Traders will be looking to make money off of the volatility. Investors, however, are hoping that Ben can maneuver the market into calmer waters before he sails off into the sunset.

Bottom line: It’s time for the Fed to fish or cut bait. This is their moment, and they are either going to pump up the market higher or taper a little and hope for the best. I wouldn’t be surprised to see their public relations team spread the word that mini-tapering is a good thing for the market. The Fed will probably want to telegraph their intentions early so the market doesn’t throw a temper tantrum. Be cautious no matter what side of the market you are on.

Additional: With the futures up over 1% on the Summers’ news, and the S&P in the 1700 Club for the moment, the market will have to hold its gains through the week or look out below. Look for a selloff into the close. If there is a late day selloff and the S&P can’t hold its gains, it would be very bearish. We’ll know this week if this bull market has legs or is in trouble.

 

* 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 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 (9/4/2013)

35.5% Bullish. 31.3% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/4/2013)

37.1 % Bullish. 23.7% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .52

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: 15.85

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 slightly below its 50-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 below the zero line and below 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: Overall, sentiment indicators are not at extreme levels (except for the put-call ratio), but they do show investor indecision and complacency (especially the VIX, which is on the low side). Technical indicators, on the other hand, are firmly in the bear camp. As long as the S&P remains below its 50-day moving average (1665), the market remains vulnerable. However, keep in mind that two known market-moving events (the Syria vote by Congress on Wednesday and the FOMC meeting on September 17th) are approaching fast. Therefore, market volatility and intraday reversals should continue all week (and beyond).

Opinion: Last week, the bulls started off strong with a 100-point head start on Monday, which disappeared by the close. The bulls made some headway during a volatile week but ultimately fell short. The bears didn’t fair much better as the expected correction failed to appear. After the smoke cleared on Friday, it was almost a draw. Nevertheless, there were numerous late day selloffs, which was not bullish.

If you look at the market indicators, you can see that the market is struggling. The problems are well known: Syria, emerging markets, rising interest rates, and a possible end to QE. Therefore, it would seem like a slam dunk to short the market using inverse ETFs (I do not recommend shorting individual stocks). However, this is a complex market, and what seems obvious may not be the right move.

As I mentioned earlier, the Syria vote is on Wednesday, and it is unknown how the market will react. In addition, it’s quite possible that Bernanke will delay tapering, which would cause a short-term rally (the Friday’s job numbers were lackluster, which helps with his decision). Because the market could go strongly in either direction, one suggestion is to use options to protect your stock portfolio for the next few weeks. (If you’re not sure how to buy options, feel free to buy my book,Understanding Options (McGraw-Hill), which is aimed at rookie traders. Here are a few ways to use options for protection:

Scenario #1: You are on the sidelines. Strategy: Stay on the sidelines. If you are temporarily on the sidelines in cash, then you can enjoy the volatile market without losing sleep. Your goal is to wait for a substantial pullback and buy when prices are more competitive.

Scenario #2: You are long the market. Strategy: If you are primarily long, you may buy put options (on SPY, for example) for protection.

Scenario #3: You are short the market. Strategy: If you are primarily short, you may buy call options (on SPY, for example) for protection.

Remember that if you buy options for insurance, you can potentially lose 100 percent of your investment. In fact, if you do lose all of the money you invested for call or put protection, think of it as unused insurance protection. In other words, if you didn’t need the protection (and you lost money on the options), that is a good outcome.

On the other hand, if your stocks go in the wrong direction, then the value of your options will go up. They will not provide 100 percent protection, but they will help limit losses. In addition, buying protection with options is not cheap, although it is less expensive than using other hedging strategies.

Bottom line: Although the market indicators are pointing down and this market is vulnerable, I know that the Fed can rally this market. Therefore, it is risky to take too heavy a position on either side. As we get closer to the FOMC meeting, we may get a clue what Ben is going to do. At the very least, expect multiple intraday reversals for the next two weeks (or longer). If the market sells off, the buy-on-the-dippers will enter. If the market rallies, bearish traders will sell into the rally. As I’ve repeatedly said, the market is unpredictable and dangerous. Although it’s too early to say whether we’re close to a bear market, if the market begins to weaken, there could be a severe drop. Until then, be prepared for anything. Wall Street is hoping for and predicting a year end rally, and with the Fed on their side, they could get it. On the other hand, a bear market could be starting while the bull market is still ending. If that is true, then this market will start to weaken with or without the Fed. Sit tight, be patient, and let the market reveal its hand.

Finally, here are more lessons that I learned from Jesse Livermore’s book, Reminscences of a Stock Operator. It could be reflecting what is happening now.

When Livermore was 27 years old, he saw a bear market approaching. There were numerous warnings, but also a number of bear market rallies. So Livermore started shorting stocks. Here’s what happened next in his own words: “I decided that I began {shorting} too soon, but that I really couldn’t help it. Then the market began to sell off. That was my opportunity. I sold short all I could, and then stocks rallied again, to quite a high level. It cleaned me out. There I was — right andbusted! I tell you it was remarkable.”

Livermore went on to explain how easy it looked, that the market was flashing dollar signs. But he was wrong. The bear market he saw was a mirage. Here’s what he did wrong, he says. “I didn’t wait to determine whether the time was right for plunging on the bear side. On the one occasion when I should have invoked the aid of my tape reading, I didn’t do it. That is how I came to learn that even when one is properly bearish at the very beginning of a bear market, it is well not to begin selling in bulk until there is no danger of the engine backfiring.”

After selling short too soon in 1906, Livermore saw another opportunity to short the market in 1907, and this time he was certain he was right. He even shorted the strongest stock at that time, Reading Railroad. Wall Street was pushing the stock higher, but Livermore noticed that underlying market conditions had gotten worse. “General conditions, my true allies, said “Down!”, he wrote. At first, Reading didn’t go down because Wall Street was afraid to sell it. But once the market cracked, so did Reading, and Livermore made fantastic profits shorting Reading and a lot of other stocks in the Panic of 1907, when the market fell by over 50 percent from its 1906 peak.

What did I learn from this? Among other things, you can be right about the market and still lose money if you are too early. Also, if you are bearish right now, you have to be patient. When the market eventually cracks, it will be brutal.

* 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 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 the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

 

AAII survey (8/28/2013)

33.5% Bullish. 35.7% Neutral. 30.7% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (8/28/2013)

38.1 % Bullish. 23.8% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .67

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

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

Note: I adjusted the sell signal of the put/call ratio to .50. (More on the reason for this change below.)

 

VIX: 17.01

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above its 200-day MA, below its 100-day, and below its 50-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 below the zero line and below 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: The market indicators took a turn for the worse last week. Sentiment is moderately bullish (which is bearish), and the put/call ratio plunged during the week before recovering. The VIX is still in the complacent zone although anxiety is creeping back (just turn on the news to find out why). The most dramatic change was in MACD, which fell below its zero line, a negative signal. The S&P and Dow are below its 50-day and 100-day moving averages (Dow is weaker), and pointing down. According to the indicators, expect more volatility and negativity. The bears won August, but it’s too early to say who will win September. As of Tuesday morning, the futures are pointing higher so the bulls should put up an aggressive fight.

Opinion: Last week, the bears won decisively. This week, the tug-of-war continues as the bulls try and regain control. They are off to a good start as the market may open 100 points higher according to the futures. As you already know, Syria will be a market-moving event, so volatility will continue. In addition, a number of economic reports will be released this week.

This is an important week for the bulls. If they can gain back control now and move the market higher, they will be in a good position before the FOMC meeting on September 17th. On Friday, the U.S. jobs report numbers will be released. In the topsy-turvy world of Wall Street, a good report could send the market down because the Fed might reduce QE. A bad employment report could send the market higher as tapering may be delayed.

As traders, we are looking for late-day selloffs on higher volume (a bearish signal). On the other hand, if the market moves higher on higher volume during the week, the bulls will take back control. No matter what happens, you must be defensive. As I warned last week (and the week before), this is a dangerous, volatile market. The uncertainty over Syria, the Fed, and emerging markets aren’t going away. If you follow the indicators, you are extremely cautious.

I am speculating, but if the bulls do not win the week and the market starts to plunge after theemployment report and geopolitical concerns, I believe that Bernanke will announce he will delay tapering. In my opinion, I don’t think he wants to leave the chairmanship while the market is falling (let the next person deal with it). If there is a correction, I’d be surprised if he went ahead and cut QE. No matter what happens to the market, Bernanke is the bull’s ace in-the-hole.

And yet, although the indicators are bearish and the market is vulnerable, the bulls do not want this party to end. They will do anything possible to move this market higher. Even if the market falls, the buy-on-the-dippers will step in to buy their favorite stocks at bargain prices. That is why you should expect multiple market reversals (i.e. volatility) for the next two weeks (or longer).

Bottom line: The market remains dangerous and unpredictable. According to the indicators, the bears are firmly in control but a sustained rally is possible. Once again, the safest strategy is to move to the sidelines. Aggressive traders can buy inverse ETFs (on market selloffs) or ETFs such as SPY on market rallies. Emerging markets are still vulnerable even though China had positive PMI numbers. The S&P is also vulnerable, but so is the entire world. Therefore, let’s be careful out there.


If you’re unsure how to manage this market, you’re not alone. Read the following two paragraphs from my favorite financial book, Reminiscences of a Stock Operator. This is how trader Jesse Livermore sized up market conditions in the early 1900s. His advice is as valuable now as then:

“Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks: get out for keeps! Wait until you see, or if you prefer, until you think you see, the turn of the market; the beginning of the reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear.”

Later in his life (and in the book), Livermore discovered the importance of taking a position and waiting:

“After spending many years on Wall Street and after making and losing millions of dollars, I want to tell you this: It was never my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve know many {traders} who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which would show the greatest profit. And their experience invariably matched mine — that is, they made no real money out of it. {Traders} who can be both right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.”

Finally, on a side note, I received an email from a reader who wondered why the put-call ratio has ranged between .72 and .78 for almost two years. In other words, if you followed the put-call signal, you’d have been bearish for the last two years. First, the put-call ratio does change over time, so the reader is correct, which is why I changed the signal to .50, an extreme level. With the put-call ratio and other sentiment indicators, there is no magic number, only guidelines. Second, you must never rely on one indicator to determine whether to buy or sell. Sentiment indicators in particular should not be used to time the market, but only to give you a view of what the crowd thinks (so you can do the opposite). I’d much rather rely on technical indicators for a more accurate view of current market conditions. That being said, if crowd sentiment is extremely bullish or extremely bearish, that is a sign the market is too frothy, or fearful. Use other indicators, and research, to confirm. Finally, no one indicator is the holy grail, a point made by those who created the indicators (I interviewed the indicator creators in my book, All About Market Indicators). Analyzing the market using indicators is an art, not a science. Thanks to the reader, JH, for writing me and letting me know that the put/call ratio needed to be updated.

 

* 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 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 the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

AAII survey (8/21/2013)

29.0% Bullish. 42.9% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (8/21/2013)

43.3 % Bullish. 21.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .60

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: 13.98

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 slightly above its 50-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 below 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. If you don’t include anxious retail investors, sentiment is generally bullish (which is a bearish signal). In addition, the VIX and put/call ratio are still showing complacency. On the technical side, the S&P was able to climb slightly above its 50-day moving average. This week, we’ll learn if that can last. On the other hand, the Dow is still below its 50-day moving average. MACD is below its signal line (bearish) and pointing down (also bearish). In summary, the market is not out of the woods yet, but it’s less dire than last week.

Opinion: As we anticipated, the market put on a good show. The week began with the bears in control. The S&P (and Dow) started to sell off according to script, that is, until mid-week, when the Nasdaq stopped trading for three hours due to a technical glitch. Instead of a sell-off, however, the market reversed direction, and went higher. Usually, the market doesn’t like technical problems so the positive reaction was surprising.

To be honest, right now this market is hard to predict. A lot depends on whether Bernanke cuts back (i.e. tapers) on QE, or whether he delays it. If institutional investors perceive that Bernanke will delay tapering, the market will climb, and quickly. This is a real possibility. In that case, the market will rise well above its 50-day moving average, and retail investors, who became increasingly bearish last week, will join the party. In addition, mainstream analysts who predicted a rally (i.e. the 1700 Club) will be right. And short sellers, who had waited four years for a market correction, will have to wait a bit longer to be rewarded.

On the other hand, if interest rates continue to rise, if the market perceives that Bernanke will taper more than expected, if emerging markets continue to implode, then the pullback we have anticipated will occur. The consensus, however, is that Bernanke will taper only a little off the top so as not to upset the market.

No matter what Bernanke does, this market is dangerous. Right now, you need to be observant andflexible. If you are a rookie (and even if you’re not), being in cash is a comfortable place to be. Another idea is to hedge your positions with call or put options. The market is volatile, and this will continue. As we move into the fall (put September 17th on your calendar, the day of the next FOMC meeting), the volatility will increase.

Experienced traders can do well in this environment (playing both sides), but investors are going to get whipsawed. If the market starts to sell off, the buy-on-the-dip crowd will jump in. At the moment, there is some anxiety about the market, but little fear. It will take a dramatic (and unexpected) event to change complacency into fear. It might be too soon now, but we’re getting closer.

Bottom line: This is a complicated and risky market environment. The market could go in either direction so be prepared for anything. The market is vulnerable so it wouldn’t take much for a severe pullback. However, most institutional investors believe in Bernanke and are certain he will not do anything to upset the market. Who is right, the bulls or the bears? We may not know for a while, but this week should give us important 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 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). In addition, I write a monthly column on long-term trading for MarketWatch.com.

IMPORTANT NOTE: Read my interview with Investor’s Business Daily market expert Amy Smith below the line.

Note: Here is my latest MarketWatch article, this one from the Twilight Zone – http://on.mktw.net/16Cjdxc

 

AAII survey (8/14/2013)

34.5% Bullish. 37.3 % Neutral. 28.2% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (8/14/2013)

47.4 % bullish. 20.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .60

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: 14.37

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 slightly below its 50-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 below 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: Investor sentiment has turned cautious but there is little panic (for now). Financial newsletter writers are still bullish about the long term prospects of the market. The VIX is on the low end and the put/call ratio still shows excessive bullishness. These are all negative signals. In addition, the technical indicators turned negative, and there is more room for the market to fall. If you follow the indicators, you are cautious and prepared for a rough ride. The negative scenario could take some time to play out, so be patient.

Opinion: The market revealed its hand, and it was not pretty (if you are bullish). As I wrote last week, this is a dangerous market. As it turned out, MACD gave us an early warning signal that the market was in trouble. Now, the indicators are firmly bearish. This doesn’t mean the bull market is over, only that a market pullback or correction is highly likely in the next few weeks or months.

Hopefully, you are temporarily in cash or you scaled into inverse, non-leveraged ETFs (Be careful with leveraged ETFs because they are so unpredictable, and can viciously turn against you if you hold more than a few days, or weeks). If you are new to the market, I’d also be cautious about selling short individual stocks, as that takes experience and discipline.

Even many long-time bulls went on TV last week and admitted that a 10 percent correction is likely. They were quick to add they see this as a buying opportunity. The bulls suggest that you don’t panic, that you don’t sell what you own, and that the market will end up higher at the end of the year than now. Only one mainstream equity analyst believes the S&P 500 will end the year below 1700. Everyone else is in the “1700 Club.” They are right about one thing: You should not panic.

The bulls are also confident because they (wink, wink) have insurance. Let me explain. When you trade options, you can buy protective puts, an option strategy that helps protect your stock positions. Instead of protective puts, however, the bulls have something better: the Bernanke put. In other words, if the market starts to plunge, they know that Uncle Ben is going to say two magic words, ”No Tapering,” and everything will be all right. On the day he says these words, the markets will reverse direction and the bull market will continue. At least that is the story many people are telling. After all, when the market plunged by 700 points in June, it bounced back. The theory is that any future pullback will be temporary.

When the selloff does begin, it may start off slow, but could turn fast and furious. To alleviate the damage, in addition to the Bernanke put, the name of the new Fed chairman could be leaked or announced (Janet Yellen is the current favorite). The market will likely approve.

Unfortunately, if there is anything that I learned about the market, it’s that anything is possible. In Florida (where I live), when a hurricane is headed in your direction, you prepare. You protect your house, buy supplies, and if the storm is bad enough, you leave the area. Sometimes the hurricane makes a direct hit, and sometimes it’s a lot less damaging than originally thought. Right now, a financial hurricane is headed our way. It may not be a disaster, but it could be.

Keep in mind that a lot of new money entered the stock market in the last two weeks. Some of that came from bond mutual fund holders who wanted a better return. (Welcome to the stock market, bond holders!) If the market starts to falter, the new buyers will be the first to panic. Right now, there is little fear as people assume there will only be a temporary pullback. But no one can predict if the pullback will be temporary or not. If investors panic, they might flee the stock market in droves. If that happens, the market may not recover immediately.

Bottom line: Keep an open mind. As you know, there are a lot of conflicting and converging developments throughout the world that could create a perfect storm. The technical indicators have turned bearish and a pullback is imminent. No one knows how vicious it will be or how long it will last. This is a difficult market environment, even for the pros, so you must be nimble and observant. For now, take out the popcorn and see if this tired market can rise back above its 50-day moving average (that would be bullish). The market should put up a good fight.


Interview with Amy Smith, Market Expert at Investor’s Business Daily

Amy Smith, author of “How to Make Money in Stocks Success Stories” and a market expert at Investor’s Business Daily, gave her view of the overall market.

How do you see the overall market?

There’s been sideways action in both indexes for awhile, and then the uptrend came under pressure after two Fed officials suggested quantitative easing could start being scaled back this fall.  Yet, as we know the Fed’s thinking can sometimes change day to day.  Just another reason that in the market you want to remain flexible and nimble, and monitor the market each day.  If you see a lot of heavy selling days in a short period of time, that would spell trouble for the market.  But if you see heavy volume to the upside and stocks breaking out of price consolidation, then we are in a good market.

The S&P 500 went just above 1,700 last week, and hit an all time high on August 2. That was very positive. There have been a lot of stocks report positive earnings, and that is also positive for the market. But there also have been some high profile earnings misses, so it pays to be cautious and watch the overall market for signs of strength or weakness each day.

How do you look at industry groups?

We look at the New High List in Investors Business Daily© (IBD). It’s a good sign when you see a lot of stocks making new highs.  Stocks came from a number of different groups such as medical and retail. One stock from the medical group that reported strong earnings was QuestCore Pharmaceuticals (QCOR). They have a gel that treats multiple sclerosis. Their earnings rose 96 percent and sales were up 64 percent in the most recent quarter.  There are also a lot of stocks in retail doing extremely well.  For example, Starbucks reported strong earnings and did some cost cutting. That stock has been an institutional favorite.

How can investors take advantage of earnings?

The key is to keep your watch list up to date, look for stocks showing strength, that have good fundamentals, and that are setting up solid bases, also known as price consolidations.  That’s the most complete way to analyze a stock’s potential.

LinkedIn was an example of how great earnings can move a stock.  Last quarter its earnings were up  138 percent compared to the same quarter a year earlier.  Institutions always look for positive earnings.

Why should investors buy stocks high?

First, you don’t buy stocks that are too extended in price past a potential buy point. You want stocks that are showing strength in the market, and when you see stocks hitting new highs, it’s usually because there is good news, and it’s usually because of solid earnings numbers. Stocks with the best potential often report stellar earnings, which captures the attention of institutional investors.

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