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
My latest MarketWatch column (June 1) is here: http://goo.gl/Tt7684
AAII survey (5/27/2015)
27.0% Bullish. 47.9% Neutral. 25.1% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (5/26/2015)
48.5% Bullish. 14.9% 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: 13.84 (on 5/29/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 48.90 (on 5/29/2015)
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 pointing down.
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 slightly 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 zero line. MACD line crosses above 9-day signal line.
Bonds: U.S. 10-year yield is at 2.10% (on 5/29/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Once again, the sentiment indicators haven’t budged. Complacency is rampant among most pros while retail investors are neutral. On the technical side, although the indexes are above their 50-day moving averages, it’s pointing down. We will learn this week if Friday’s late day selloff was significant (likely) or the result of the Russell 1000, 2000, and 3000 annual rebalancing (unlikely). Even more interesting, there was a rash of bad news last week: For starters, Q1 GDP was revised to a drop of -0.7%, i.e. in contraction territory. In addition, the University of Michigan Consumer Sentiment slumped to a six-month low of 90.7 from 95.9 in April, a major disappointment. Finally, the Chicago PMI plunged to a 6-month low of 46.2 vs an April reading of 52.3. Analysts expected a reading of 53.0. The only good news for the bulls is that the market didn’t retreat more on these numbers.
Opinion: The spinners were hard at work on the financial programs promising that next month will be better. Perhaps they are right, but objective investors must take notice.
The market rises on hope and falls on fear. Don’t forget that investors are slow to sell as long as there is hope that the market (or their stock) will rise. If investors are afraid, however, they will sell quickly. Right now, there is little fear in the market, but that could change quickly, one of the reasons you need to be on guard.
It is not that useful to try and figure out “why” the market goes up and down each day. Unfortunately, that is exactly what most in the financial media focuses on (along with an endless string of predictions). Instead of focusing on why the market moved, concentrate on what is actually happening.
The facts are that the market has been in a sideways pattern for months. Because the indexes have been unable to break out of this pattern, the market could go in either direction. As long as investors are hopeful that the economy will get better, that Greece will get rescued, that the Fed won’t raise interest rates, then investors won’t sell. For months, buying volume has disappeared, but few are selling.
However, if investors start to doubt that the economy will improve, or that the Fed has everything under control, or that the Greece debt problem will be solved, then investor hopes will be dashed. That’s when you will see fear enter the market for the first time in years.
I do not know when fear will enter the market, but I do know it will happen eventually. And when it happens, the market will plunge quickly as institutions and retail investors cut their losses. By the way, margin debt on the NYSE has hit a new record high ( http://goo.gl/XDzmCo ). Margin debt is a huge red flag and it’s been climbing for years.
Bottom line: Based on the disappointing economic numbers, extreme margin debt, world economic problems, and extreme complacency, the odds are good this sideways market will break down. It may be this week or in a few months, but unless buying volume increases, this market is in danger. This week is extremely important as we may finally find out the truth. Hold onto your seats; it could be another wild ride.