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 (12/17/2014)
38.7% Bullish. 26.9% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (12/16/2014)
49.5% Bullish. 14.9% 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: 16.49 (on 12/19/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 58.91 (on 12/19/2014)
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.
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 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 below its red 9-day signal line and pointing up. (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 2.17% (on 12/19/2014)
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 indicators are not giving strong signals. Sentiment indicators are mixed: Retail investors are not overly bullish (but the results were calculated before the two-day 700-point blowout). Other sentiment indicators such as RSI and VIX are also not extreme. On the technical side, moving averages are pointing up thanks to last week’s rally, but MACD is neutral. Bottom line: Indicators are not telling us much this week.
Opinion: Holy Smoke! 700 points in two days? A week ago, the Dow was teetering on the edge as it fell from 18,000 to 17,100. Then Janet spoke and lit the market on fire. I expected volatility and a rally last week, but not like that. As predicted, Janet said nothing, but the market didn’t care. It became a buying frenzy. Janet could have said “the sky is blue” and there would have been a rally. The big question is whether this rally has any substance or if it’s another head fake.
First, this week will be quiet because the market closes at 1:00 p.m. ET on the 24th, and will be closed all day on Christmas. Based on past markets, volume should be light. Unless there is an unexpected world crisis, the market should stay within a relatively tight range.
Once again, the market could go in either direction. After the holidays are over, we need to see what happens when this parabolic market reaches 18,000. If this is a true bull market with strong fundamentals, it will blow past 18,000 without looking back. In that case, although there will be a spectacular correction eventually, it will occur at a later date.
On the other hand, if the market struggles to surpass 18,000, that expected correction may come much earlier. All we can do is take it one week at a time, and look for clues.
I’ve said it before, but it’s worth repeating: The higher this market goes, the more dangerous it gets. I’ve talked to traders who don’t recall a market acting this ridiculous. Those with short memories may believe it’s normal for the market to climb this high and this fast, but it’s not normal. There will be a price to pay.
In 2007, I was on an airplane with a guy who invested in real estate. He said to me, “I’m making money but I don’t know how.” A year later, he was nearly bankrupt. In 2014, investors are making money and they don’t know how.
Bottom line: In my opinion, this market is topping out. It takes incredible patience to wait for reality to return to the market. Unfortunately, with the world’s central banks determined to keep markets levitated, we have to wait longer than any rational person anticipated.