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 (2/18/2015)
47.0% Bullish. 17.9% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (2/17/2015)
56.6% Bullish. 14.1% 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: 14.30 (on 2/20/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 64.07 (on 2/20/2015)
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 is pointing up.
Bearish (Short-term Downtrend): crosses under 50-day, 100-day, 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 above 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 zero line. MACD line crosses above 9-day signal line.
Bonds: U.S. 10-year yield is at 2.13% (on 2/20/2015)
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 signals are almost identical to last week except sentiment surveys are close to generating a sell signal. The VIX is in the basement again (bearish signal), and RSI is nearly overbought. On the other hand, the trend is up as the indexes make all-time highs. If you are strictly a trend-follower, more than likely, you are still long. The wild card is Janet Yellen, who is speaking this week. Based on past performances, the market will attempt to rally on her words. More than likely, she will attempt to let the market know that raising interest rates is not a high priority at this time. Bottom line: There are many mixed signals.
Opinion: As mentioned above, there are many conflicting forces at hand (both bullish and bearish) so its impossible to predict which way the market will go.
This should be a volatile week as Janet Yellen testifies on Tues. and Wed. and the market attempts to keep the bull party going. I still believe the major indexes are topping out, which is why I’m primarily on the sidelines watching to see if the current rally fails.
Because of the Fed’s power, few people believe the market will retreat this week. In the past, the Fed has managed to rally the market on little or no news. We’ll be watching if the same pattern plays out. If it does, the rally continues. If it doesn’t, traders will take notice. Speaking of trading, volatility should return to the indexes this week, so be prepared.
Bottom line: There are a lot of conflicting news events and earnings reports intersecting with Yellen’s testimony. It is anyone’s guess which way the market will go. The technical indicators are primarily leaning to the bull side but with a number of danger signs: For example, we have a sideways market that hasn’t yet broken out of its narrow range. Oil is plunging again, which may affect the market. Volume continues to be anemic, and Greece and Ukraine are still in the news. Patience will be needed this week as we see what Mr. Market has in store for us.