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 (4/22/2015)
31.5% Bullish. 45.3% Neutral. 23.2% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (4/21/2015)
52.5% Bullish. 15.2% 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: 12.29 (on 4/24/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 59.49 (on 4/24/2015)
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 up.
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 and above 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 1.92% (on 4/24/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: After a strong start, the indexes appeared to struggle all week, although the S&P still managed a 1.75% gain. The trend is up but many technical indicators are warning of overbought conditions. Although the market can still climb higher, in the short-term it is on borrowed time. Sentiment indicators haven’t changed much: Retail investors are more neutral than bullish. The financial media is still bullish and in general, everyone is complacent. Very few see any danger signs, which in itself is a danger sign.
Opinion: By the numbers, the bulls won the week. If you look deeper, however, the rallies were tepid and unenthusiastic, and the market internals (measured by the NYSE Tick, for example) were weak. It’s hard to convince most investors that the market is on a slippery slope because as long as the indexes go higher, all appears to be well. Dow 18,000, S&P 2100, and Nasdaq 5,000. What could go wrong?
This is another important week. As I wrote last week, we need to see the indexes fly past these price levels and stay there. Personally, I’d be surprised if the market suddenly bolted higher. In fact, if the market continues to struggle at these price levels, it’s likely there will be a major retreat soon. Buyers are not rushing in at these levels, and yet, investors are not selling. I’d characterize the market as in a standoff. Putting all the indicators and clues together, the edge goes to the bears.
It is going to be a fascinating week. Watch and see how the market handles these elevated price levels. We’ll know soon enough if this is the top of the market, or if there is room to run. The wild card: The Fed will not raise interest rates anytime soon, and they will let everyone know at a most opportune time.
Bottom line: I see many danger signs, but most investors are oblivious.