Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is todetermine if we are in a bullish, bearish, or sideways market environment. *
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My book, Predict the Next Bull or Bear Market and Win (Adams Media), comes out in May.
AAII survey (2/4/2014)
27.9% Bullish. 36.4% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investor’s Intelligence (2/4/2014)
45.9% Bullish. 17.4% Bearish.
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .68
Bearish: Less than or near .50 is bearish (more call options are being bought).
Bullish: Higher than or near 1.0 is bullish (more put options are being bought)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 dropped below its 50-day moving average (but above its 100-day and 200-day MA), and pointing up.
Bearish (Downtrend): Index crosses below 50-, 100-, or 200-day MA.
Bullish (Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.
MACD: MACD is below 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: RSI is at 49.69 (on 2/7/2014)
Overbought: When RSI rises to 70 or above.
Oversold: 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 2.67% (on 2/7/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: After a rough start (at one point, the Dow was down over 400 points over two days), the market recovered all of its losses. Sentiment indicators fell during the week as nervous retail investors fled to bonds for safety. The S&P is still below its 50-day moving average but pointing straight up. MACD still giving a negative signal. With Janet Yellen testifying before Congress on Tuesday morning, it could be a market-moving event. Based on the last two days, the uptrend continues as we start the week. That could change on a dime.
Opinion: What a week! Just when the Dow seemed doomed, and broke below its 100-day (and 50-day) moving averages, it made a dramatic turnaround. That was an important signal, one that can’t be ignored.
What we have right now is a short-term uptrend in a dangerous market. If you get whiplash this week, it’s understandable. This is a trader’s market, which means you better take any profits fast or they could disappear.
It’s possible the uptrend will continue for a while (similar to what happened in June). On the other hand, because it’s a dangerous market, bad breaking news could send the market lower. In other words, this week is a coin flip.
If the short-term uptrend continues (with the assistance of a dovish Janet), let it ride. However, if this uptrend stalls and reverses, then the chances of a downtrend (or worse) increases. The bulls have an advantage based on Thursday and Friday’s action, so all we can do is wait and see. Anything is possible, which means the market could run back above 16,000 (if you’re short, be prepared). A failed rally, however, will not be pretty for the bulls (if you’re long, be prepared).
Keep in mind that retail investors lost some faith in the market over the last month. It would be some achievement to run the market past 16,000, but anything is possible in an unpredictable market. If you’re a short-term trader, you can take advantage of the volatility and trade with the trend (but be ready to take profits or cut losses quickly). If you have a longer term perspective, being on the sidelines is a comfortable place to be.
Because the market is so unpredictable, thousands of articles and commentary will appear on “why” the market is going up or down. Focus on “what” is happening rather than why. The why won’t be known until later. (Note: I discuss this thoroughly in my upcoming book, Predict the Next Bull or Bear Market and Win (Adams Media).
Bottom line: This is a dangerous market. Based on the indicators, this market could go in either direction. That 300-point drop in the Dow along with a bearish month cannot be forgotten. Therefore, it will take more than a two-day rally to convince me that the worst is over. However, I also know that the short-term uptrend could continue for a while. Patience is needed until we find out what is really going on with this market.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.