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 (6/24/2015)
35.6% Bullish. 42.8% Neutral. 21.7% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (6/23/2015)
51.6% Bullish. 15.4% 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: 14.19 (on 6/26/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 48.18 (on 6/26/2015)
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 below its 50-day moving average, 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 slightly below its zero line and even with 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 2.48% (on 6/26/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders). Note: Bonds got slammed again last week.
Analysis: Last week, bullish sentiment rose slightly among retail investors and financial professionals. On the technical side, the major indexes fell slightly below their 50-day moving averages. Because of the Greek debacle, the Dow futures on Sunday night are down over 200 points and technical levels will be broken at the open. The Fed may attempt to come to the rescue if the markets plunge by too much, which will set up an interesting battle. Watch the VIX spike on Monday. Bottom line: It will be a very wild week and anything is possible.
Opinion: In my interview with Jim Rogers (link at top of page), he told me that if the market starts to unravel, Wall Street will be screaming for the Fed to “do something,” and the Fed will arrive on a white horse and “attempt to save Western civilization.” He said the Fed will come up with a new program (not named QE) that will allow them to buy more bonds. According to Rogers, at first it will work, but then it will fail spectacularly.
On Monday, the market will retreat at the open, and then it will get interesting. The talking heads will appear to keep investors calm. You will hear this is a buying opportunity, that what is happening in Greece will not affect the U.S. market., that the Fed has everything under control (if the market falls by enough, the Fed will appear, too), and not to panic or sell.
The Fed (and Wall Street) needs a calm, low-volatile market environment with little fluctuations or disruptions. That keeps investors invested, calm, and worry-free. Unfortunately, the Fed has worked overtime to artificially reduce volatility using QE and low interest rates, which worked like a charm for many years. The problem is, it’s artificial stimulation. The other problem is that when you get an outside black swan event such as Greece, it disrupts the algo programs. That is what is happening now. Added to the uncertainty, the Chinese market has fallen nearly 20% in the last two weeks, the most since 1996.
It’s guaranteed that the world’s central banks are discussing how to reduce volatility and prevent a panic. To do that, they must talk up the market or initiate another program to instill confidence. It’s a dangerous game. We’re in uncharted territory.
No one can predict what will happen this week. It will be rough for the bulls early on but perhaps the Fed can prevent a catastrophe. However, and this is important, what is happening in Greece could cause disruptions in other markets (i.e. currencies, bonds, commodities). It is unknown what lies ahead, but as I’ve repeatedly said, this is a dangerous market, and it’s just getting started.
Bottom line: Be very, very careful whether bullish or bearish. Rumors, false hope, and problems we don’t even know about will whipsaw this market. (There is also the chance the Greek government will give into the creditor’s demands.) In other words, be prepared for any scenario.