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.
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AAII survey (2/4/2015)
35.5% Bullish. 32.4% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (2/3/2015)
49.0% Bullish. 16.3% 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: 17.29 (on 2/6/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 54.04 (on 2/6/2015)
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 slightly above its 50-day moving average and is pointing down.
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 on its zero line and 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 zero line. MACD line crosses above 9-day signal line.
Bonds: U.S. 10-year yield is at 1.94% (on 2/6/2015)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders). Big spike in yield this week (largest weekly gain since 2013). Is this the beginning of a new trend? We shall soon know.
Analysis: When I look at the indicators I follow, I don’t see a lot of extremes, which means the market could go either way. I also follow the NYSE Cumulative Tick, which is flashing a warning signal. It’s interesting that retail investors have lost some of their exuberance, while a majority of professionals are still bullish. Last week, the indexes recovered from the abyss and rallied near their old highs. We will see if the latest rally is the real deal or another dead cat bounce.
Opinion: I have noticed that in the past when the indicators I follow don’t give a clear signal, it’s a danger sign. The market rallied strongly from a terrible January. If the rally was accompanied by stronger volume, I might be more impressed. Based on the indicators and market internals, however, this rally seems about as real as a three dollar bill. I could be wrong, but if I’m not, then be very careful this week.
Last week I expected a rally, but I was surprised that it continued for longer than a few days. Based on past history and the indicators, I would not be surprised to see a strong pullback this week. This is not a prediction but the odds favor a retreat.
No matter what the market does, we’re still in dangerous territory and have been for a long time. Investors remain complacent, and few see any danger signs (thanks to the Fed’s policies). That in itself is a danger sign.
If you’ve been following my blog for the last few months, you know how suspicious I’ve become of this rally. From Dec. 29 to Feb. 6, the market has gone nowhere. A churning market is not a healthy market, so beware. A market going in circles needs to break out of its sideways trend or it will go down.
What to look for: Look to see if the indexes fall below their moving averages again.