Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues and indicators to determine if we are in a bullish, bearish, or sideways market environment.
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AAII survey (4/16/2014)
27.2% Bullish. 34.3% Bearish
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (4/15/2014)
50.5% Bullish. 20.6% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .57
Bearish: Less than or near .50 is bearish (more call options are being bought).
Bullish: Higher than or near 1.0 is bullish (more put options are being bought)
VIX: 13.36 (on 4/18/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 is above its 50-day moving average, and pointing up.
Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.
Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.
MACD: MACD is above zero line, but 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 9-day signal line. MACD line crosses above zero line.
RSI: RSI is at 53.03 (on 4/18/2014)
Overbought: When RSI rises to 70 or above.
Oversold: When RSI falls to 30 or below.
Note: RSI can remain overbought or oversold for extended time periods.
Bonds: U.S. 10-year yield is at 2.72% (on 4/18/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Retail investors are less bullish about the market but they’re also not very bearish, either. Some are being told by their brokerage firms and the media to expect a “10 or 15 percent correction (the message is it will be “a healthy pullback and a buying opportunity”). Conversely, financial writers and money managers are exceedingly bullish, a remarkable dichotomy. In addition, the VIX and put/call ratio indicate complacency on the part of traders. On the technical side, the market indexes are churning, which means it’s moving back and forth without clear direction (except for the Nasdaq, which is still below its 50-day moving average). For your information, churning often leads to a break to the downside.
Opinion: It seemed like a long time ago, but the market indexes were on the verge of a major pullback last week when Janet appeared again to proclaim she would do anything to help the economy (translation: the market). Traders loved what she said, the selloff was averted, and the bulls won the week. Perhaps Janet will come out every week to remind investors this will be themost dovish Fed in market history.
I have no idea “why” Janet keeps appearing to calm the market. I’ll leave that to the financial pundits. I do know, however, that a churning market is not healthy. I also know that the Nasdaq is a whisper away from a bear market. That’s a fact that cannot be ignored. In addition, many of the leading stocks from last year are struggling. It appears that many investors, including pros, believe too much in the power of the Fed. I don’t blame them since the Fed has had their way for five years. Unfortunately, the Fed can’t talk the market up forever.
There are other ominous signs. Even though the cheapest cialis market is churning its way higher, the selloff of many leading stocks means that astute pros are selling to the public (or to blindly bullish money managers). Although the S&P is still in an uptrend, fewer and fewer stocks are participating. That is another huge danger sign.
I still believe the market is going through a topping out process, which can take a while to complete. While this is happening, there will be mixed signals and confusion. When you include the actions of the Fed, which seems determined to keep the market levitated until the economy recovers, it gets even more confusing.
Many people believe you can’t time the market. In fact, the buy and hold mentality is so ingrained in the minds of investors they are planning to do nothing as the market gets more dangerous. To me, the danger is holding when storm clouds appear. This is the time to increase cash or hedge with put options if you own long stock positions. It’s true that no one can say when a bear market will arrive. It could be a month or six months. But this I’m sure: Bear markets are as inevitable as bull markets. The Fed may try to prevent the inevitable, but then we’d be in uncharted territory. No one, not even the Fed, has the power to keep the market up indefinitely.
If this was the beginning of a bull market, I’d suggest holding long positions. But this bull market is nearing an end (unfortunately, I can’t say when it will end). As I said last week, I am testing the short side with inverse ETFs and put options (I don’t recommend that beginners do this). Last week, my put options went on another wild ride, first with a healthy gain, and ending with a considerable loss. That tells me I’m a little early with shorting strategies.
If you’ve been reading this blog, I’ve been warning of a dangerous market since December, and especially since March 4, when the market began topping out. Beginners should move to cash while experienced investors can prepare for shorting opportunities. There will be many in the future.
The change from a bull to a bear market is a huge event. This trend change may take many investors by surprise, but if you are prepared, it can be profitable. The most important clue to look for right now are failed rallies. If the market rallies higher but fails to make a new high, and reverses, that would be an important signal. Last week, the market did just that until Janet appeared.
Bottom line: This market has a date with destiny, and a bear market is long overdue. I am not trying to scare you but prepare you for the inevitable. The Nasdaq is already selling off so it’s only a matter of time before it spreads to the Dow. The Fed still has a few tricks up its sleeve so shorting will be as dangerous as going long for the time being. For now, sit back and enjoy the show because it will be a good one. I’m waiting for the day when the fireworks start.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.