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 (12/31/2014)
51.7% Bullish. 19.3% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (12/30/2014)
56.4% Bullish. 14.9% 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: 17.79 (on 1/2/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 51.68 (on 1/2/2015)
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 above its 50-, 100-, and 200-day moving averages and pointing down.
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 above its zero line, and even with its red 9-day signal line and pointing down. (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 2.12% (on 1/2/2015) Note: Bonds keep rallying.
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: The market has been drifting down. In fact, in a few more down days the S&P may fall below its 50-day moving average. Because it was a holiday week, we have to sit and wait to see what the market will do. After the Dow hit 18,000 (again), sentiment has been climbing. As we start the New Year, investors are bullish, hopeful, and complacent (reflected in the sentiment indicators). Don’t forget: The market has the final word, so waiting for it to “speak” is suggested.
Opinion: It’s time to bring your “A” game to the market. As I wrote two weeks ago, although the market went straight up during and after the Fed meeting, I said to watch what happens when it hits 18,000. To the surprise of many, the indexes retreated. This week will be very interesting as we see what the market is really made of.
If it is a strong bull market, it should make another attempt at 18,000 and blow by it. If that happens, then the bulls will remain in control for the time being. In my opinion, a more likely scenario is a struggling market that is unable to make it past its previous highs. This is not a prediction but an opinion based on probabilities. I believe this will be a rough quarter for the market.
And yet, it’s still early to put on the gas on the short side (that could change fast). We need more evidence and clues, and if I’m right, there will be many opportunities to profit. I also believe that volatility will increase this quarter, so be prepared for a wild ride. Short-term trading and day trading could be making a comeback in the near future.
The one wild card, as always, are the central banks. The odds are good that Europe’s central bank will initiate their version of QE. In addition, if our market starts to falter, the Fed will talk up the markets. The competing forces of a market that is weakening and central banks that are accommodating creates more volatility.
In my opinion, rallies and pullbacks will be short-lived (at first). If you make profits, take them quickly.
In other news, I have been working with Mark D. Cook, one of the wizards from Jack Schwager’s book, Stock Market Wizards. In fact, we have published an eBook that should be out next week. It teaches you how to manage and maneuver through a bear market. I will give more details when the book is published.
Speaking of Mark D. Cook, he believes the market is very vulnerable to a correction. If Mark is right, and he is in the minority, this could be the end to this bull market. As you’ll read in our eBook, he believes a bear market is imminent, so be prepared.
Bottom line: There are many unusual market events occuring within a very dangerous world. The U.S. still seems immune to most of the world’s financial problems, but eventually it will affect us. I’m still amazed the market went up this far and this fast. I’m more amazed that so many people still think the market is out of the danger zone. As I’ve written in previous columns, the air is getting very heavy up here.
As for me, I’d rather err on the side of caution.