Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.
RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk
My latest MarketWatch column just posted (July 28): http://goo.gl/IIFBtP
AAII survey (7/20/2014)
29.6% Bullish. 29.9% Bearish. 40.4% Neutral.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (7/22/2014)
56.5% Bullish. 17.2% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
VIX: 12.69 (on 7/25/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 is above its 50-, 100-, and 200-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 (S&P 500): MACD is above zero line, and 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 (S&P 500): RSI is at 55 (on 7/25/2014)
Overbought (i.e. Bearish): When RSI rises to 70 or above.
Oversold (i.e. Bullish): 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 2.47% (on 7/25/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
New Highs: Only 93 NYSE stocks out of 3,234 made new 52-week highs as of July 25th. (There were 46 new lows.)
Analysis: The sentiment readings are nearly the same as last week, that is, overbought. The pros and financial writers seem more bullish than retail investors, who don’t want to get burned again. The trend is still up but cracks are starting to form if you know what to look for. Basically, the market continues to crawl higher but with less and less energy and breadth. This divergence is flashing red danger signs, especially to experienced traders. Nevertheless, anything is possible this week as GDP and employment numbers are released along with Fed comments, if any. There are many market-moving events so keep your seatbelt fastened.
Opinion: As expected, it was a rocky week and a rocky ending. On the bright side, it could have been a lot worse, but as usual, the damage was contained by the buy-on-the-dippers, who seem to be using algos to contain the damage. Just when the market appears to crack, powerful buyers enter to buy on the dip. It’s a pattern that has played out for months. I’d love to know who is behind the buying.
A number of market moving events will occur this week, including the Fed meeting on Tuesday and Wednesday. Wednesday is also the release of the GDP, which should move the market. And on Friday is the July employment report. In addition, during the week there will be reports on manufacturing, auto sales, home prices, and consumer prices.
Because of all the information coming out this week, it’s impossible to predict what will happen. Keep your eye on the rallies. If the news is good, and there is a rally, watch to see if it’s strong, and if it carries over into the next day. Most important, if the market cannot rally strongly on good news, that is a clue the market is tired and heavy.
As I’ve written in the past, I believe this bull market is coming to an end, but I can’t predict when. All I can do is wait and watch for clues. It is possible for the S&P to melt up another 5 or 7 percent, perhaps to 2000 or even 2100. It will take a lot of energy for it to make it that far, but it’s possible. It could happen with help from the Fed and fantastic government numbers. And yet, it also wouldn’t take much to send this market south, and quickly.
What would surprise me the most? If the market was flat. If my instincts are right, this will be a week for traders. This week, be a stock detective, and look for clues. I’ll be looking for intraday reversals, two-day selloffs, or perhaps one last parabolic meltup if the housing, auto, or GDP numbers are spectacular. I’m also looking to see how the market reacts to the data, and what the Fed will say so the whole thing doesn’t unravel.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.