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.
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AAII survey (9/24/2014)
41.8% Bullish. 28.2% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (9/23/2014)
48% Bullish. 15.3% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
VIX: 14.85 (on 9/26/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 is slightly above its 50-day moving average, and pointing up. Note: The Russell 2000 is well below its 200-day moving average.
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 its zero line, and 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 (S&P 500): RSI is at 61.99 (on 9/26/2014)
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 2.59% (on 9/26/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: As you can see above, the market indicators are not giving a clear signal. Sentiment indicators are still on the high side, but fell back a bit after the market retreated. The Dow and S&P are still pointing up but the Russell 2000 is well below its 200-day moving average. The Nasdaq also had a difficult week. Next Friday’s jobs number should be a market-moving event. Otherwise, anything is possible this week. Right now, let’s see if the market has enough energy to keep Friday’s rally going.
Opinion: Just as the S&P 500 fell below its 50-day moving average and seemed to be headed into the abyss, once again, it was saved by a massive computer-buying program. There are many theories who is behind the buying sprees that constantly stops the downward momentum in its tracks.
Right now, it is too early to say if Friday’s turnaround was a one-day wonder or a continuation of the faux bull market. I call it a “faux” bull market because without the help of the computer algos, the line of least resistance appears to be down. If this market was left to its own devices, I believe the selling would accelerate. Nevertheless, you never argue with the tape, which always has the final word. This is why this market has become so dangerous for both bulls and bears.
There are many crosscurrents (such as Bill Gross’s departure from Pimco, which could have an effect on the bond market). Obviously, there are also many geopolitical events swirling around but so far they have had little effect, at least not yet. (Add the protests in Hong Kong to the long list of geopolitical events.)
Nevertheless, I still believe the market is vulnerable, so be sure you’ve taken steps to protect your positions. In addition, this market will become more dangerous as the Fed tries to extricate itself from its own policies.
As I’ve warned many times before, this is the time of the year to be especially alert. Until we get a confirmed bear signal such as a 100 to 150 point break in the S&P, sitting and waiting is the recommended strategy. This is the time to protect profits, have stop losses, and be prepared for anything. Once the market starts selling off, it will be vicious, and difficult to escape harm. No one can say when that will happen, however.
Judging by the sentiment surveys, few believe the market is in any danger. My instincts (and history) tell me when too many people believe the market can only go up, that is the time to put up your guard.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.