Bullish or Bearish? Week of August 30, 2021

Notice: My publisher, McGraw-Hill, informed me that two of my books, Understanding Options, and Understanding Stocks, have sold more than 100,000 copies each. They are putting a special “sticker” on the cover of each book advertising that fact. (I want to thank my readers for helping to make this happen.)

WHAT THE INDICATORS ARE TELLING US 

This is what the technical indicators are telling us this week: 

One-week trend = Higher. The bulls took control during the week and ran with the ball. SPX rose from 4441 to 4509, a strong 68-point advance. Exuberance has gone through the roof as indexes flirt with all-time highs. Futures are FLAT on Sunday night.

SPX 20-day moving average (WEEKLY): Uptrend. SPX is above its 20-day moving average in a strong uptrend. Everything looks wonderful in the short term but moving averages don’t predict the future.

RSI: (S&P 500) @72.50 (WEEKLY) = Extremely Overbought. The skunk at the bull party is RSI, reflecting extremely overbought readings on SPX. While indexes can stay overbought for long time periods, the potential for a severe pullback is high. No one can say when, unfortunately, but we are looking for signs.

MACD (WEEKLY) = Neutral. Nothing to see here. The weekly MACD is still giving mixed signals. MACD is above the zero line, which is bullish. The MACD line is even with its 9-day signal line, a neutral reading. Note: MACD does not work well if SPX volatility is low but MACD does work with volatile individual stocks.

Daily Intraday Volatility (VIX) = 16.39 = It’s a mad, mad, mad world. The VIX fell a few points as fear went back on holiday. One of these days, volatility will return with a vengeance, but until then, enjoy the ride higher, but please put on your seatbelt.

Comment:  The over-confident bulls took the market into the stratosphere. As long as you’re not selling short, it’s easy to make money in the market. Not only has fear been on holiday but so has risk. Buy and hold the indexes or any old stock and you can’t lose. If I sound sarcastic, it’s because I am.

An entire generation of investors believe that it’s EASY to make money in the market. That is a scary thought. I never could have predicted that the market would rise for 13 years straight with only a few weeks pullback along the way.

The overbought reading from RSI is a red flag that should not be ignored. While it’s common for some stocks to remain overbought for long time periods, rarely have I seen the indexes remain this overbought for very long. I would not be surprised to see a major pullback, but no one can say when. My advice is to look for clues because they will appear one day.

As the market moves higher and VIX moves lower, the market gets more and more overbought. At these statistically stupid price levels, it wouldn’t take much to pop the bubble and bring us back to reality. No, it doesn’t mean to sell everything and move to cash. It does mean to evaluate what you own, the risks you are taking, and what would happen to your portfolio in a worst-case scenario.

Bottom line: We are in untested waters so anything is possible. Hint: Keep your eyes on the Fed.

___________________________________________________________

Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts’ latest newsletter:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

Bullish or Bearish? Week of August 23, 2021

WHAT THE INDICATORS ARE TELLING US 

This is what the technical indicators are telling us this week: 

One-week trend = Sideways. The bears took control early in the week but were unable to defend against a late-week bull assault. SPX dropped from 4468 to 4441, a moderate 27-point decline. Futures are FLAT on Sunday night as the indexes flirt with all-time highs. 

SPX 20-day moving average (WEEKLY): Uptrend. The SPX 20-day MA fits into our short-term weekly trading strategy. The 20-day is above its moving average, which is bullish.

RSI: (S&P 500) @69.64 (WEEKLY) = Extremely Overbought. SPX is extremely overbought according to a near-70 RSI. The algos will have to work overtime to prevent a major selloff.

MACD (WEEKLY) = Neutral. The weekly MACD is still giving mixed signals. MACD is above the zero line, which is bullish. The MACD line is even with its 9-day signal line, a neutral reading (although if you look closely it’s a smidgen below). As mentioned in the past, MACD does not work in a low-volatility environment.

Daily Intraday Volatility (VIX) = 18.56= The VIX jumped a few points on a little fear early in the week. VIX is still low but it climbed out of the basement. One of these days, volatility will return with a vengeance, but until then, be patient. 

Comment:  After RSI went above 70 last week, just as we warned, the market sold off hard for a couple of days. RSI even dropped to 65 during the week, still overbought but not at extreme levels. As predicted, the algos pounced later in the week, saving the SPX but also spiking RSI.

It is what it is: RSI is extremely overbought and VIX displayed a slight increase in fear as option traders initiated put protection hedges. We are still in the volatile season (August to October) for the stock market, but volatility hasn’t lasted longer than a day.

So where does that leave us? Until further notice, the algos are the main market mover. A touch of fear appears on occasion but the algos swoop in quickly to reverse the negativity. I’d hate to be a short seller right now, although their day is coming. No one knows when, but I wouldn’t be surprised if it’s soon.

Bottom line: We’re at a stalemate for now. The bulls are defending against a very weak bear team. The market could go in either direction this week so it’s a mistake to put much money on the outcome. If you’re an investor, the market is still in an uptrend. If you’re a trader, it’s better to wait and see which way the wind will blow.

___________________________________________________________

Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

Bullish or Bearish? Week of August 16, 2021

WHAT THE INDICATORS ARE TELLING US 

This is what the technical indicators are telling us this week: 

One-week trend = Uptrend. The bulls squeaked out another win last week. SPX rose from 4436 to 4468, a 32-point advance. Futures are LOWER on Sunday night as the indexes flirt with all-time highs. 

RSI: (S&P 500) @72.36 (WEEKLY) = Extremely Overbought. I have not seen RSI this high since right before the March 2020 Covid crash. Does this mean the market is going to crash again? No one knows. I will have more to say about this below.

MACD (WEEKLY) = Neutral. The weekly MACD is still giving mixed signals. The MACD line is above the zero line, which is bullish. The MACD line is even with its 9-day signal line, a neutral reading. As mentioned in the past, MACD does not work in a low-volatility environment. Until volatility returns, use another indicator. 

Daily Intraday Volatility (VIX) = 15.45= The VIX keeps moving lower and lower (as the RSI keeps moving higher and higher). One day volatility will return with a vengeance, but until then, be patient.

Comment:  A ridiculously low VIX and an extremely overbought RSI during the traditionally worst two months of the year (for stocks). I am not in the prediction business so I won’t even try, but I can say there are red flags everywhere.

As I wrote above, RSI on the SPX hasn’t been this high since last year, and that ended badly. I have no doubt this market is going to end badly, but I sure wouldn’t make a bet on when. Why? Because the algos are overriding all of the technical and fundamental signals. We are really in uncharted territory, and have been for a long time.

Can the algos keep running the market higher while RSI gets even more overbought? Yes, indeed. Just be aware that something will probably come out of left field one day and catch everyone by surprise. Just be on guard. At RSI 72.36, I am in awe. And yet, overbought markets can get more overbought (especially when your best friend is an algo).

Bottom line: Be defensive and that means not taking big risks in this environment. The market is moving higher on hopes and wishes, and not much else.

___________________________________________________________

Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

Bullish or Bearish? Week of August 9, 2021

WHAT THE INDICATORS ARE TELLING US 

As you know, one of my favorite indicators is the weekly RSI. I wrote a timely column on RSI for MarketWatch that is out today, and here is the link: https://on.mktw.net/3lLcj4Y .

This is what the technical indicators are telling us this week: 

One-week trend = The bulls squeaked out a win last week. SPX rose from 4395 to 4436, a 41 point advance. Futures are LOWER on Sunday night as the indexes flirt with all-time highs.

RSI: (S&P 500) @71.10 (WEEKLY) = Extremely Overbought. Read my column on RSI (link above). RSI is in the danger zone so it’s not surprising that the futures are lower on Sunday night. If RSI is correct, the market is in imminent danger of reversing. However, the algos will fight furiously to defend against any downturn.

MACD (WEEKLY) = The weekly MACD is as flat as a pancake. It is above its zero line and even with its 9-day Signal Line. Sadly, MACD does not work in a low-volatility environment, so until volatility returns, use another indicator.

Daily Intraday Volatility (VIX): 16.16= Fear remains in the Twilight Zone. With a high RSI and a low VIX, trouble is coming. Prepare for a rocky road market environment in the near future.

Comment:  The star of the show is RSI, which is giving an extreme overbought signal. Combined with a low VIX and all-time highs on SPX, prepare for some fireworks in the near future, perhaps even this week. On the plus side, the jobs number was excellent last week, which helped to propel the markets higher.

On one hand, the algos will work furiously to negate any sell signals, so expect a battle. On the other hand, since RSI has been so accurate, I am putting my money on the indicators: It is telling us the market is ripe for a pullback. (No one knows how far it will go.)

This will be an interesting week. I want to see how much power the algos will use to pump the market higher, and whether they succeed to override the technical signals. I would personally be surprised if we rally this week, but anything is possible.

Bottom line: If you trust the indicators and oscillators, play defense this week. That means trading small and smart. Be prepared for any scenario, even if it is not what you expect.

___________________________________________________________

Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

Bullish or Bearish? Week of August 2, 2021

WHAT THE INDICATORS ARE TELLING US 

This is what the technical indicators are telling us this week: 

One-week trend = The bulls and bears fought it out last week. The bears won the week by a small margin, even while the Fed had their monthly meeting. SPX fell from 4411 to 4395, a puny 16 point drop. Futures are HIGHER on Sunday night. After hitting an all-time high a couple of weeks ago, the bulls may try to break more records.

RSI: (S&P 500) @69.42 (WEEKLY) = Overbought. Once again, RSI warned us the market was overbought and in the danger zone (70 and above). It could have been a disaster last week but the algos did their best to negate the technical signals. If SPX rallies strongly this week, be on the lookout for a strong reversal (especially if RSI blows past 70).

MACD (WEEKLY) = MACD is as flat as a pancake. It is above its zero line and even with its 9-day Signal Line. As you may remember, MACD is not very effective in a low-volatility environment. Be patient, as this brilliant indicator will shine in the future when volatility returns.

Daily Intraday Volatility (VIX): 18.24 = Fear is still on holiday. NOTE:  VIX rose a point during the week but remains moderately low. That tells me that traders are a bit cautious as the market reaches all-time highs. 

Barchart Stock Evaluator for SPY and QQQ (link below): SPY are both 100 percent strong buys (according to this indicator). 

Comment:  The market (SPX) remains overbought and in the danger zone. RSI has given us excellent signals over the last few months. This week, it’s possible RSI will rise above 70 (on SPX). If that happens, be on guard for a reversal. But don’t take heavy short positions as the algos will be ready to pounce on any pullback.

Additional analysis from Lance Roberts: “With that said, we are entering into the two weakest trading months of the year. Stocktrader’s Almanac had a good note on why the rally could experience a “pause” over the next two months. 

“For the past 33 years from 1988-2020 August and September are the worst two months of the year for DJIA, S&P 500, and NASDAQ. August is the worst for DJIA and S&P 500 and September is worst for NASDAQ. 

Despite the persistence and resilience of this bull rally market internals and technicals are showing some signs of fatigue. END

And there you have it: The indexes are overbought and we are entering the most difficult two to three month trading period. Volume is low but the algos don’t care. They pounce on any pullback.

Bottom line: We are getting many mixed signals so predicting what will happen this week is near impossible. There are so many cross currents from so many sources it’s hard to know which “side” will win. Be patient but also be flexible. Be on the lookout for a major trend change one of these days.

Good luck out there and stay safe.

___________________________________________________________

Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com