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
My latest book (eBook) has just been released: Prepare Now and Survive the Coming Bear Market. Here’s a link to the Amazon edition: http://goo.gl/2wWC8X, the Nook, http://goo.gl/VQstmr, or if you are international or don’t have an Amazon account: http://goo.gl/eBpYBT (Smashwords).
My latest MarketWatch column on managing bear markets: http://goo.gl/njIQkQ
AAII survey (1/14/2015)
46.1% Bullish. 21.5% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (1/13/2015)
48.0% 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: 21.07 (on 1/16/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 45.90 (on 1/16/2015)
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 fell below its 50-day moving average and pointing up. It’s slightly above its 100-day moving average but firmly above the 200-day MA (At 1960)
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 slightly below its 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 zero line. MACD line crosses above 9-day signal line.
Bonds: U.S. 10-year yield is at 1.82% (on 1/16/2015) Note: Bonds keep rallying. World currencies are in turmoil.
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Sentiment indicators are still on the high side but not extreme, and won’t be until there is a sustained rally. The uptrend is struggling and the indicators reflect that. On the technical side, MACD turned negative and all the indexes are below their 50-day moving averages. That could change in a day depending on how this week plays out. Therefore, it’s too early to proclaim that the uptrend has ended.
Opinion: Swirling around the market is more bad news than usual. Chinese stocks got smashed on Monday by 8 percent as a reaction to the government’s tightening up margin requirements. The government took steps to reduce speculation by retail investors. Europe shrugged off the Asian selloff because they have their eye on Mario Draghi and the European Central Bank (more on this below).
The financial world is still stunned by the actions of the Swiss National Bank (their central bank), which removed the cap that prevented the Swiss franc from rising too high. After the SNB removed the cap, the franc soared higher. The Swiss stock market plunged by 10 percent and a number of foreign exchange trading firms who were shorting the Swiss franc went bankrupt when their clients lost all their money. Trading currencies is an extremely risky endeavor because of the high leverage (between 50 or 100 to 1). For example, clients of these firms who bet $50,000 or more against the Swiss franc theoretically lost between $3 million to $5 million, and went bankrupt. The ramifications of the SNB are still being felt. It’s possible that more traders and firms will fail.
That brings us to this week. Mario Draghi, president of the European Central Bank, is expected to do something dramatic. On January 22, it is anticipated that he will purchase $640 billion in bonds, i.e. quantitative easing. For years, Draghi has been promising to do QE, but never did. This time he really, really means it. (Bloomberg says he’s doing it to “steer Europe away from deflation.”) Source: http://goo.gl/nCyIAL
Immediately after Draghi initiates QE, European stocks should rally along with the U.S. market. Then it will get interesting. Although the initial reaction will be positive, I will be looking to see if the QE rally can be sustained. I am also starting to wonder how this much QE will affect the world’s financial markets.
There is no doubt that strange things are happening. For example, oil got crushed along with other commodities, the actions of the Swiss bank were a shock, volatility has increased here and around the world, a number of stock markets have fallen by 10 percent in one day, and the yield on the 10-year Treasury is at all-time lows. Very strange.
I am not smart enough to predict how this QE party is going to end, but it doesn’t feel right. It’s easy to initiate, but getting out is the hard part. If investors get the feeling that central banks did not think through the end game, all hell will break loose in the financial markets.
Bottom line: The market should rally this week as a reaction to the ECB’s QE. Traders can try and profit from the volatility but investors will get whipsawed, especially if QE causes indigestion.