Each weekend, I will list signals from some of the most useful market indicators.*
A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).
AAII survey (10/23/2013)
49.2% Bullish. 17.6% Bearish.
Sell signal: Over 60% bullish.
Buy signal: Over 50% bearish.
Investor’s Intelligence (10/23/2013)
49.5% Bullish. 18.5% 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)
Sell signal: Lower than 12.
Buy signal: Over 40.
Moving Averages (daily): S&P 500 (and Dow) is above its 50-day moving average, and above its 100-day and 200-day MA.
Sell signal: Index crosses below 50-, 100-, or 200-day MA.
Buy signal: Index crosses over 50-day, 100-day, and 200-day MA.
MACD: MACD is above the zero line, and above the red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)
Sell signal: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.
Buy signal: MACD line crosses above 9-day signal line. MACD line crosses above zero line.
RSI: RSI is at 67.64 (on 10/25/2013)
Overbought signal: When RSI rises to 70 or above, it is possible S&P will reverse direction and fall.
Oversold signal: When RSI falls to 30 or below, it is possible S&P will reverse direction and rise.
Note: RSI can remain overbought or oversold for extended time periods.
Bonds: U.S. 10-year yield is at 2.50% (on 10/25/2013)
Note: 3% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Sentiment indicators are high but not extreme. In particular, financial newsletter writers (II) are bullish, which reflects the overall bullishness on Wall Street. Technical indicators are clearly on the bullish side, and if you follow the indicators, we’re going higher. RSI is still on the high side (overbought) but not at extreme levels yet. Yields went down last week, so bonds rallied.
Opinion: Since we follow the indicators, we’re cautiously on the long side. Cautiously means that we’re diversified in cash (but not bonds) and index ETFs. If you look up, all you can see is blue sky, which is where the market is headed. With the Fed unwilling to cut back on QE, and little else on the agenda except earnings, stocks should continue its upward climb.
Many on Wall Street are not in the 1700 Club, but in the 1800 Club (they believe the S&P will hit 1800 before the end of the year). According to many, there is no stopping this market. If they’re right, be prepared for a shock and awe rally right into the end of the year. So far, the bulls have been right (except for a two-week setback).
In my opinion, the market is likely to go higher in the short-term. And yet, there are many potential red flags, so you must be careful. The potential dangers I see in the future are problems in emerging markets (especially China), a falling bond market, poor earnings, or a mistake by the Fed (too much liquidity, for example). Any of these events could hinder the bull market.
Here’s what else I see: I know that a bear market is out there waiting to surprise us. I don’t know when it will happen, but in the meantime, I will follow the advice of Jesse Livermore, who says that the hardest thing for traders to do is sit and wait. Although I am long some of the major indexes, I am looking for clues that the bull market is over.
Although there is still money to be made on the long side, don’t get greedy. When this market turns, it will be vicious. One day you’ll wake up to a huge selloff, but hopefully you’ll get out without major losses. In addition, if you are suspicious of this market and want to go short, be patient. The biggest mistake anyone can make now is making unnecessary trades.
Bottom line: Sit and wait.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.