Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.
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AAII survey (7/9/2014)
37.6% Bullish. 28.7% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (7/8/2014)
60.6% Bullish. 15.2% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
VIX: 12.08 (on 7/11/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 is above its 50-, 100-, and 200-day moving averages, and pointing sideways.
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 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 (S&P 500): RSI is at 57.98 (on 7/11/2014)
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.
Bonds: U.S. 10-year yield is at 2.52% (on 7/11/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Money flows out of domestic stock mutual funds: Week of July 2: $8.8 billion (Source: ICI)
Note: The week before, only $1.3 billion was sold. There was a significant increase in selling during the last week.
Analysis: Sentiment is still on the frothy side, as reflected in Investors Intelligence and the VIX. Other sentiment indicators such as RSI retreated on last week’s pullback. In addition, the uptrend was temporarily halted. This is earnings week, options expiration Friday, and Janet is speaking on Tuesday. The bulls are hopeful that all three will guide the market higher. Prudent traders are still on the sidelines.
Opinion: Because of the above three events, this market has a bullish bias. On the other hand, if earnings disappoint, geopolitical problems escalate, and Janet’s soothing words don’t work, the market could continue selling off. If there is a selloff, we’d be closer to snapping time, i.e. a pivot point that can change the market trend. Right now, it’s too early to confirm, so once again, it’s best to sit tight and wait for evidence.
For the first time in a long time, volatility returned to the market last week. The market has been in a long, boring slumber for months. And for one day, when the market plunged 180 points intraday, short-term traders and day traders woke up. It’s not unusual to have volatility. In fact, a “normal” stock market has lots of volatility. The unusual part is that volatility has been sucked out of the market, which is why investors have become so complacent.
I have no doubt that the market is going through a topping out period. What is unknown right now is when the market rolls over. Although overly bullish investors are blinded by the Fed and the current uptrend, this market will enter a bear market in the future. All we can do is look for clues when that will happen. Because of the actions of the Fed, the bull market uptrend has gone on a lot longer than is typical. But it will end one day, but not yet. I repeat: The uptrend is still intact as I write this but it will end either with a whimper or a bang.
A number of money managers have appeared on TV and said that they wouldn’t be surprised by a 10 percent pullback, which will be followed by a stronger bull market. First, no one can predict how much the market will plunge. And second, after a severe pullback or a major correction, it could be a long while before another bull market appears.
For an idea of what could happen to the stock market, look at the gold ETF, GLD. It was in a long-term bull market when no one wanted to pay a penny more, so it topped out near $180. And now GLD is at $128 with more room to fall. One day GLD will be a fantastic buying opportunity, but not yet. I would not be surprised to see SPX develop a similar chart pattern.
Bottom line: This is an important week. Because of Janet speaking, options expiration Friday, earnings week, and the bullish financial media, the odds favor the bulls this week. However, if the selloff continues from last week because of geopolitical tensions, more failed banks, or poor earnings, all bets are off.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.