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 (1/21/2015)
37.1% Bullish. 30.8% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (1/20/2015)
49.0% Bullish. 17.4% 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: 16.66 (on 1/23/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 53.27 (on 1/23/2015)
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 but pointing down. It’s above its 100-day and 200-day MA.
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 even with 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 1.82% (on 1/23/2015)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: According to the indicators, we could go in either direction this week, and we probably will. The technical indicators are telling us the trend is still up but it’s struggling. Sentiment indicators are telling us that although investors are still complacent, many (but not all) have lost some of their enthusiasm. That can be attributed to increased volatility, worsening world events, and plunging commodities, to name a few. As always, the market has the final word, and this week it has a lot to say.
Opinion: This is an important week. On the optimistic side, we have the FOMC meeting, and they are certain to say little except they will keep interest rates low indefinitely. If the Fed says anything significant, please wake me up.
Last week, we waited to see whether ECB president Mario Draghi was going to initiate QE, and he didn’t disappoint. He reluctantly agreed to buy $60 billion a month in bonds until September 2016. The U.S. market responded by retreating by 100 Dow points before ending the day up by over 200 points. It wasn’t an enthusiastic rally but it was strong enough to give investors hope.
The next day, however, the Dow was under pressure all day until it finally fell by 141 points (the Nasdaq, however, eked out a small gain). Last week, UPS took a 10 percent haircut (lower earnings), SkyMall went bankrupt, 50,000 Wall Street jobs were cut ( http://goo.gl/LTn856 ), and oil keeps falling. We learned on Sunday that the Greeks elected anti-austerity candidate Syriza in a decisive victory. That should increase volatility as markets hate the unknown. Because of oil crashing, countries that rely on oil revenue (such as Venezuela) are turning into a fine mess.
It’s going to be a fascinating week.
If the market can shrug off all of the bad news and believe in the actions of the Fed and ECB, then the Dow may take another stab at 18,000. On the other hand, if the market cannot mount a strong rally, the market will probably fall fast and hard.
In my opinion, the odds favor the bears, even with the FOMC meeting. For six years, the FOMC and other central banks were able to convince investors that QE is a sound strategy that will help the economy. Because of QE, the market goes up, but cracks keep appearing.
The market will tell us a story this week, so watch closely. In my opinion, the bull market is on its last legs, a view I’ve held for nearly six months. As you may know from reading my MarketWatch columns, overly-confident bulls strongly disagree with my view (read the comment section of my columns for proof).
Don’t forget that 96 percent of money managers expect 2015 to be “as good as or better than 2014.” With the central bank on the side of Wall Street, the Fed will do anything in their power to keep this market from plunging by too much. For six years, they have been successful. Soon, however, we will see who is more powerful: the market or central banks.
If this bull market is truly in trouble, you will see even more volatility and failed rallies. As for me, I would rather be safe than sorry, which is why I suggest increasing cash positions. In my opinion, this is no time to risk all of your money when the market is this dangerous.
Bottom line: This is an important week with many crosscurrents. I am looking for the elusive pivot point, i.e. a trend change.