Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to determine 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 (2/12/2014)
40.1% Bullish. 27.3% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investor’s Intelligence (2/11/2014)
41.8% Bullish. 17.4% Bearish.
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .57
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 is above its 50-day moving average, 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 even with zero line, above 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 9-day signal line. MACD line crosses above zero line.
RSI: RSI is at 60.18 (on 2/14/2014)
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 2.74% (on 2/14/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Last week, the uptrend continued until Friday, as reflected in the sentiment numbers (i.e. bearish sentiment decreased while bullish sentiment increased). The VIX moved back to thecomplacent zone along with the put-call ratio. Technical indicators made a remarkable recovery, and as we start the week, the uptrend is intact. That’s the good news. The bad news: Keep reading.
Opinion: Following the market trend would have produced excellent returns over the last five years if you had bought and held the major market indexes. In a bull market, that was the right move. Unfortunately, bull markets don’t last forever (although many investors think they do). In fact, one of the most important jobs you have is to determine when one trend ends and another begins. In my opinion, we are getting very close to a trend change.
As the market has changed, I have changed strategies. I used to sit back and take advantage of long-term trends (especially bullish ones). Recently, the uptrends and downtrends are not long term, but short term. As a result, I’ve had to switch to short-term trading strategies. Put another way, in this dangerous market environment, uptrends and downtrends don’t last long: days or weeks, and sometimes months.
Because the market has become more challenging, astute traders will take profits quickly, look for intraday reversals and other evidence that the trend is changing. I can’t stress enough how treacherous this market is. If you’re caught on the wrong side of a trade, you could lose a lot of money. (One method I use to protect profits or minimize losses is using call and put options with short expiration dates. Although not for everyone, I’ll discuss this strategy in a future column.)
Many retail investors who made easy money last year without too much effort may think this year will be the same. Perhaps they are buying on the dip, assuming the market will run up indefinitely. Few are aware that underlying market conditions are changing. Therefore, the higher the market goes, the more dangerous it becomes. Although novice investors believe the sky is blue, there are storm clouds brewing.
In the near future, we’re going to have short-term uptrends followed by short-term downtrends. But one of these days, a winner will be declared, bull or bear. Right now, this market is difficult to predict, which is why I follow trends. Unfortunately, when the trend changes every few days or weeks, it’s not easy to get it right.
As I’ve repeatedly said, one of the biggest known (and unknown) dangers are in emerging markets. Millions of dollars have been pulled from emerging markets over the last few months, which is probably why the CEOs of several brokerage firms as well as some money managers said that emerging markets are a long term buying opportunity (“be long, not short,” one CEO suggested). I hope you don’t listen to them. In my opinion, the pain from EM will get much worse before it gets better. Buying EM now is too risky. Over the next three to six months, I will remember those who urged investors to buy emerging markets on the dip. It will be interesting to see if they were right.
Bottom line: Be ready to take profits quickly in this volatile market. Buyers ran the Dow past 16,000, which I said was possible. But lurking in the shadows are unknown pitfalls. This is the time to be cautious and alert. According to the indicators, we are going higher, but it’s not a slam-dunk. As for me, I am on the lookout for failed rallies and other evidence this bull market is coming to an end.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.