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 (3/25/2015)
38.4% Bullish. 24.4% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (3/24/2015)
56.6% Bullish. 14.1% Bearish
Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low.)
Bullish: If sentiment is over 60% bearish.
VIX: 15.07 (on 3/27/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 45.12 (on 3/27/2015)
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 slightly below its 50-day moving average and slightly above its 100-day moving average.
Bearish (Short-term Downtrend): Index 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 but 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 zero line. MACD line crosses above 9-day signal line.
Bonds: U.S. 10-year yield is at 1.95% (on 3/27/2015)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Last week the market gave back all of the gains it had made after the Fed meeting. The indicators are not telling us much right now, so the market could go in either direction. Sentiment is not extreme although the pros seem more bullish than the retail investor. Financial articles are still leaning bullish, so any severe pullback would surprise the media. Technical indicators appear to show a stalled market, but it’s too early to know for sure. If indexes stay below their 50-day moving averages, the next target is the 100-day MA. This could be a pivotal week…and month.
Opinion: After Janet Yellen spoke last week, the bulls were ready to party. The market sliced through Dow 18,000 like butter and 19,000 was within reach. Overly confident bulls appeared on TV to assure investors that the market was bullet proof.
As I (and others) have warned for months, although the market kept climbing higher, it was not based on true, broad-based strength. Not surprisingly, the Fed-induced rally stalled out once again.
According to the indicators, the market could go in either direction this week. In my opinion, the market is topping out. If I’m right, volatility will increase and the market will continue to struggle. Trend changes do not happen overnight, and in fact often occur slowly.
Few believe or want to believe that the bull market is nearing an end. Perhaps they are right, but there are enough red flags to suggest that trouble is coming. As traders and investors, all we can do is observe and react accordingly. In my opinion, it’s too dangerous to be long, but it’s still too early to be heavily short. We need more evidence and clues to determine which direction the market is going. Hopefully, the market will tell us soon.
If the market plunges this week, that would be significant. Bull markets do not end quietly so be prepared for a lot of red herrings. This is the time to focus, to keep your eye on the facts, and to be alert to a trend change. As I’ve said repeatedly in this blog, this is the time to play it safe by moving some money into cash (the amount, if any, is your decision).
Many investors are complacent right now and don’t believe that anything can go wrong. Often, it’s when you let down your guard that something comes out of left field and smacks you in the face. Right now, do not let down your guard.