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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My latest MarketWatch column: http://goo.gl/3FfYtD
AAII survey (12/3/2014)
42.7% Bullish. 25.9% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (12/2/2014)
53.4% Bullish. 13.9% Bearish
Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is at historic lows. 13.3 % is the 1987 low)
Bullish: If sentiment is over 60% bearish.
VIX: 11.82 (on 12/5/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 67.89 (on 12/5/2014) NOTE: RSI of Dow is at 75.96.
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-day, 100-day, and 200-day moving averages 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 above its zero line, and even with its red 9-day signal line and pointing sideways. (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 2.31% (on 12/5/2014) NOTE: Bonds retreated last week.
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: It’s almost a repeat of last week with a few exceptions. Sentiment indicators are still sky-high although retail investors grew more cautious. (Maybe they don’t want to be left holding the bag again.) VIX has once again reached historic lows, and RSI is way overbought. On the technical side, the trend is still up but the MACD signal line went flat. We’ll know this week if that is significant or not. Bottom line: The market is overbought. Only a pullback or correction can bring it back to earth.
Opinion: I had a MarketWatch column deadline so my opinion will be shorter than usual. As expected, a little more volatility returned to the market, but only a little. The market chugged higher, but market breadth was awful all week.
On Friday, after a blowout jobs numbers, the market finished the day only slightly higher thanks to a last minute buy program. Investors are wondering why the Fed is keeping interest rates so low when the economy is improving. On Dec. 16th and 17th, we’ll hear from the Fed, and that should be interesting.
In my opinion, the Fed will delay raising interest rates for as long as possible. Meanwhile, when I look at the chart, I see a parabolic market that has reached near bubble territory. Obviously, many people disagree, but only the market is right.
Meanwhile, I’m looking for clues the market has topped out. For example, intraday reversals, gap ups and selloffs, and late day selloffs. There’s been a lot of strange market behavior such as the collapse in oil. At this point, keep your powder dry and be prepared to take action, especially if volatility increases.
Traders, get ready to start your engines.
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