Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment, it may help you to create profitable trading strategies.
RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk
AAII survey (2/25/2015)
45.4% Bullish. 20.3% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (2/24/2015)
59.5% Bullish. 14.1% Bearish
Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is at historic lows. 13.3 % is the 1987 low.)
Bullish: If sentiment is over 60% bearish.
VIX: 13.34 (on 2/27/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 60.27 (on 2/27/2015)
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.
Moving Averages (daily): The S&P is above its 50-, 100, and 200-day moving averages and is pointing sideways.
Bearish (Short-term Downtrend): crosses under 50-day, 100-day, 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 above 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 zero line. MACD line crosses above 9-day signal line.
Bonds: U.S. 10-year yield is at 2.00% (on 2/27/2015)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: According to the indicators, the trend is still up although there was a slight pullback on Friday. Because of the uptrend and encouraging words from the Fed (they’ll delay raising interest rates as long as possible), investors are becoming more bullish. Most pros are true believers now, which has rubbed off on the retail crowd. Many investors really believe this market will never go down, and so far, they have been right. In summary, we have a rising market with rising investor exuberance. If you look behind the curtain, however, there are cracks (i.e. negative money flow, reduced volume, extreme valuations, and poor earnings). Nevertheless, the bulls won February. Everyone wants to know if the indexes can do a repeat performance.
Opinion: Although the indexes appear to be topping out, and could be reaching bubble territory, the herd is not selling. Until there is a reason to sell, the market will continue its tap dance at the top.
As expected, the market went higher on Janet’s testimony, but there was little volatility (to my surprise). The market seems sluggish on the rallies as well as on the pullbacks. It’s almost as if the heart of the market has been ripped out. Traders and investors go through the motions but there is little volume. Nevertheless, the market slowly grinds higher.
If you are cautiously bearish, it’s frustrating to watch the market go higher, sometimes on bad news. Many long-time bears have thrown in the towel recently, and it’s understandable. Even with financial turmoil across the world, and less than spectacular earnings, the market goes higher. Even minor pullbacks are met with a wave of algo buying. It’s not surprising that many bears have given up.
As for me, patience is the only way to win. Taking too strong a position on either side could cause financial damage. Whether you are long or short, you need to cut losses or lock in gains, and be sure you are not overexposed. Although no one knows the catalyst, one day this market will have a severe correction. By being cautious at these elevated levels, you can avoid losing money unnecessarily.