Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.
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AAII survey (8/13/2014)
39.8% Bullish. 30.9% Bearish. 27% Neutral.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (8/12/2014)
46.4% Bullish. 16.2% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
VIX: 13.15 (on 8/15/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 is even with its 50-day moving average, and pointing up. The Dow is below its 50-day MA and slightly above its 100-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 (S&P 500): MACD is below its zero line, and 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 (S&P 500): RSI is at 52.54 (on 8/15/2014)
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.
Bonds: U.S. 10-year yield is at 2.35% (on 8/15/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Last week, the S&P continued to rally after almost falling off the cliff the week before. The rally continued through the week until Friday, when there was an intraday reversal (supposedly based on Ukraine). Actually, Friday could have been a lot worse as the market was down 135 points mid-day when the computerized buy-on-the-dip program minimized the damage. Sentiment indicators are a bit frothy, especially the VIX, although less extreme than a few weeks ago. MACD is still giving a negative signal, but other technical indicators are mixed. Bottom line: It’s too early to say if the uptrend is broken, or simply consolidating before moving higher.
Opinion: The world remains dangerous, and so far the market has shrugged off most of the bad news. Nevertheless, the market rallies have seemed somewhat sluggish and indecisive. The buy-on-the-dip algos continue to reduce the damage, preventing the market from falling off the cliff. One of these days, sellers will overwhelm buyers, similar to what happened a few weeks ago.
If you are an astute market observer, you want to see if the market can regain its lost 400-points. In the short-term, the S&P needs to rise above 1,960. If successful, the market could try for the big one, 2,000. This week is important, as how the market reacts will tell us whether the bull market continues, or if there is technical damage. It is impossible to predict what will happen right now.
In addition to the buy-on-the-dip programs, Janet is speaking this week from Jackson Hole. The bulls are hopeful that Janet will say something bullish. Perhaps she’ll say that inflation is under control and that the Fed will do everything in its power, including initiating QE4, to keep this market from going down. It’s not so important what Janet says, but the reaction to what she says. (For your information, futures are up Sunday night. Hope is in the air, but let’s see if there is an intraday reversal.)
I usually have a fairly good idea of which direction the market may go during the week. I can honestly say I have no idea this week. My instincts tells me the market is near a pivot or inflection point, and that the bull market is coming to a very slow end. But I could be early as this may take some time to play out.
If the market sells off hard during the week, that would be a clue the pivot point is here, and a correction is probable. If the market rallies hard during the week, then the bull market continues for a while longer. And if the market goes nowhere, then sit tight and wait another week.
Actually, sitting tight is the correct strategy this week. This is not the time to make any big plays in either direction, at least until you see how the market responds to Janet, and breaking geopolitical news.
Bottom line: Sit tight and watch.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.