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. *
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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.