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 (6/18/2014)
35.2% Bullish. 24.1% Bearish. 40.7% Neutral.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (6/17/2014)
61.4% Bullish. 16.3% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
VIX: 10.85 (on 6/20/2014)
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 up.
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 above 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 71 (on 6/20/2014)
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 2.62% (on 6/20/2014).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: The sentiment indicators are still in the exuberant stage, and will remain there until the market snaps. Professional financial writers are the most bullish, while retail investors are more neutral than bullish. I assume many investors will try and get out if the market goes south. The VIX is at historic lows, which reflects extreme complacency. RSI tells us the market is overbought and vulnerable to a pullback. And yet, the market continues to go higher (with a little help from the Fed). The trend is still up (which is why the bulls are so confident), but fewer and fewer stocks are joining the party. There are many danger signals even as the market climbs higher.
Opinion: Imagine how it must have felt like in 1929 when the market went up high and fast, the economy seemed to be on fire, and the financial experts of the day kept predicting the market was unstoppable. And yet, Jesse Livermore saw that fewer and fewer stocks were participating in the rally, and in fact were deteriorating. Livermore kept adding to his short positions, which caused him great financial pain, but he was certain the market was going to snap. Many days, while he waited for the day of reckoning, he went fishing. He said that it’s not hard to be right about the market. The hardest part is having the patience to wait until the market comes back to its senses. When the market finally broke in 1929, first slowly, and then with a huge crash, Livermore made more money than he ever did in his life. Even he was shocked by how fast and far the market went down.
In 2014, we have a market that is being talked higher by the Fed using a variety of tools and programs, some which we know about (low interest rates), and others we don’t know about. Last week, Janet threw a bit more gasoline on the market, and it responded with a 100 point rally (.73%). I found it interesting that the market did not have a strong followup rally. In my opinion, this market is running out of steam, although the Fed is doing everything in its power to keep the party going (with help from high frequency traders and financial writers).
Everything that I know about the market tells me it’s in trouble. Although I cannot predict the time or day when the first break will occur, it’s coming. The bulls have been lulled to believe the market is in a permanent plateau. The few bears that still remain are frustrated that the market seems unstoppable. One of my bearish acquaintances (who is not a professional) angrily said the market could remain levitated for years. Perhaps, I told him, but I don’t think so.
In fact, if you look at the Dow stocks, more and more are slowly turning negative. Like a game of Three-Card Monte, most investors are looking in the wrong place for the money card. Look underneath the hood, not at the “all-time” highs. For your information, the Nasdaq just made a 14-year high. On the other hand, volume is weak, complacency is high, the internals are deteroriating, and the herd is a little too bullish. It takes a tremendous amount of patience to wait until the market snaps. More than likely, the first crack will come out of nowhere. Until then, wait. For me, being primarily in cash is the most prudent place to be. Keep in mind that most people, including most pros, disagree with me. They are all in.
This is a market that can lull you to sleep as it slowly climbs higher. It is deceptively dangerous because few realize their portfolios are vulnerable. The higher and longer the market climbs, the more risky it becomes. Margin will increase, the Fed will seem in control of the market, inflation will slowly creep higher, and the bubble will grow bigger. Unfortunately for bears, this could go on for a while longer, so be prepared to wait.
Bottom line: This is not going to end well.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.