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 (4/23/2014)
34.5% Bullish. 26% Bearish
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (4/22/2014)
51.6% Bullish. 21.7% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .71
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: 14.06 (on 4/25/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 is slightly above its 50-day moving average, and pointing down. Nasdaq below 50- and 100- day moving averages.
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 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 9-day signal line. MACD line crosses above zero line.
RSI (S&P 500): RSI is at 51.01 (on 4/25/2014)
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 2.66% (on 4/25/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: The most bullish investors continue to be financial writers and money managers. Retail investors, however, are still anxious over current market conditions. Nevertheless, sentiment indicators did not reach extreme levels, although the put/call ratio spiked on Friday as traders bought puts to protect long positions. Technical indicators took a turn for the worse on Friday, and many individual stocks (such as Amazon) got slammed. Ukraine is simmering below the surface and has the potential to disrupt the market. Technicians will tell you that the market is still in an uptrend (and they’re right), but the clues and evidence tell us the market is getting more dangerous. Note: There is a FOMC meeting this week so Janet may take another shot at calming (i.e. give a shot of whiskey to) the markets.
Opinion: You may have noticed that a number of prominent stock analysts and guests on financial programs seem confused. A few make a bear call one week, and reverse their prediction the following week. As the market goes through a topping out process, there will be more confusion andcontradictory advice. When the market makes a major break down in the near future, that will jolt most bulls to accept reality: the bull market is in trouble.
The best case for the bulls right now is the Fed, who does have the power to delay the inevitable, or at least confuse investors into thinking the bull market is intact. Although the Dow appeared to be in good shape most of the week, underneath the surface many individual securities were being sold off. In reality, the so-called rally was not what it seemed. Only on Friday did investors believe that something bad happened.
Because the Fed can swoop in and change market direction at anytime, shorting will continue to be a challenging strategy. Eventually, though, even the Fed won’t be able to stop a bear market from becoming a bear market.
As I write in my latest book, bear markets can begin with a bang or a whimper. It’s too early to say exactly when and how the next bear market will begin. But this I am certain: There will eventually be a bear market, and it’s getting closer. The Fed may pull out all stops to try and delay it, but you can’t change human nature. Once the retail investor begins to lose money, and realize that others have been selling positions for weeks, they will want to sell. Money managers will be working overtime to calm investors’ nerves and prevent a full-scale panic.
Investors have been told to prepare for a 10 to 15 percent correction. Although they are told it will only be temporary, no one can predict how much the market will drop or for how long. It will take a severe pullback for investors to think about selling. After all, even after previous corrections and bear markets, the market has come back.
As for me, I have avoided this dangerous market by being primarily in cash, and I’m also using inverse ETFs and put options to speculate (beginners should not use this strategy). The SPY put options I bought struggled all week, and then Friday arrived. Although my puts are still in the red, this week could be a turning point.
Buying inverse funds is less risky than shorting individual stocks (in my opinion), but it’s still a challenging strategy. When there are storm clouds above, you pull in your sails and seek cover in cash until the skies are blue again. Storm clouds are approaching, and in my opinion, the 5 percent potential upside is not worth the huge downside risk. That is a decision only you can make, however.
Anything can happen this week because of the Fed meeting. More than likely, the market will rally for a day or two before or during the Fed meeting (i.e. before Fed minutes are released). If I’m right about this being a dangerous market (so far I have been), then the volatility will continue. I am very curious what Janet will say, and more important, how the market will react.
Bottom line: It feels good to be in cash even though Janet will do everything in her power to keep the markets levitated. Prepare for more volatility during the week as the bulls and bears fight it out.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.