Each weekend, I analyze market conditions 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. In addition, each week, I will go long or short depending on market conditions.
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AAII survey (4/2/2014)
35.4% Bullish. 26.8% Bearish
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investor’s Intelligence (4/1/2014)
50.5% Bullish. 18.6% Bearish.
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .59
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: 13.99 (on 4/4/2014)
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, but pointing down. Nasdaq is below its 50-day and 100-day moving averages and pointing down.
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: RSI is at 51.35 (on 4/4/2014)
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 2.73% (on 4/4/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Once again, the sentiment indicators are not giving extreme signals except for the financial writers (and many money managers): They are much more bullish than the retail investor. On Friday, there was technical damage done to the market, especially to the Nasdaq. The intraday reversal, the late day selloff, and the breaking of support levels was significant. This week we will learn if the market can shrug off Friday and power higher.
Idea: If the market continues to sell off, maybe they can wheel Fed Chairman Janet out to give a dovish speech, which will rally the market. Bottom line: Wait and see if Friday’s selloff continues into this week.
Opinion: Now you know what a dangerous market looks like. If you’ve been following this blog, you know I’ve been warning of the danger signs. The clues are everywhere: As mentioned above, the multiple intraday reversals, the late day selloffs, the unwillingness of many bulls to imagine a bear market, the lower lows, and the smashing of the high flying stocks last week is significant. As I wrote last week, if you own any of the high flyers like Twitter and Priceline, you’re at risk. If there is a market selloff, they will be the first to get hit.
In my MarketWatch column last month, I wrote that the market showed signs of topping, and that has not ended. In fact, last week was turning into a disaster (except for emerging markets, which rallied). And then, on Monday, Janet Yellen calmed investors with sweet, reassuring promises. As a result, the market partied for two days, reversing the damage from the week before. Then party pooper Michael Lewis came out of nowhere to tell everyone the market was rigged, and the selloff continued.
That brings us to this week. First, you will hear endless commentary on “why” the market sold off. Guess what? Who cares “why” the market sold off because the reasons aren’t known until later, if at all. All I care about is that the markets sold off, which is an important signal. Yes, studying the market for clues is essential if you are investing or trading. The market almost always gives hints what’s coming next.
Over the weekend, I met a junior investment banker at a major bank who described the training he received. It was fascinating. Since he interacts directly with customers, most of the training was how to calm customers down when the market goes south. Brokers and bankers are told to listen to upset customers and not take anything personally. It’s not a surprise that almost all of the major brokerage firms and banks are bullish. After five years of an up market, many pros don’t believe that the market will go down until several years have passed (around the time the Fed says they’ll raise interest rates). Although the pros could be right (anything is possible), it’s risky to believe the market goes in only one direction. If you study market history, the market is full of surprises, and I’m certain this market has a few up its sleeve. Here’s an idea: Instead of forming an opinion and then finding evidence to support your view, do the reverse: Look at the evidence and then form an opinion.
As I wrote last week, I bought a handful of puts to test the market. At first, the puts got smashed when Janet dropped in to calm the market. By Friday, however, my puts were back to even. If the puts are profitable next week, I will add to my short positions, and even more important, I will take profits quickly.
According to the indicators and the Friday selloff, I am leaning bearish. Nevertheless, I will wait for the market to give a signal. In particular, I’ll be watching the highflying tech stocks like Tesla, Priceline, and Netflix to see if they continue to fall. I don’t know or care why they are being sold, but that these stocks are plunging is significant.
Bottom line: If the highflyers on the Nasdaq continue to selloff, and my puts become more valuable, I know I’m on the right track. Then it will only be a matter of time before the Dow stocks are affected.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.