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
AAII survey (3/11/2015)
31.6% Bullish. 25.4% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (3/10/2015)
53.6% Bullish. 14.1% 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: 16.0 (on 3/13/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 43.51 (on 3/13/2015)
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 below its 50-day moving average and is pointing down. It’s above its 100-day and 200-day moving average.
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 above its zero line but below 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 2.11% (on 3/13/2015)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: The indicators aren’t telling us that much as we enter the week. Investor sentiment has retreated a bit as volatility increased. In particular, individual investors are not quite as bullish as last year, but most pros are in the bull camp. The technical indicators have also pulled back and are teetering on the edge of their moving averages. If it wasn’t for the Fed (read below), the market might have continued its descent. Because the Fed might change a word or two in their statement this week, all bets are off. Put another way, the Fed is the only game in town.
Opinion: Investors are obsessed with whether Janet and company will remove the word, “patient,” from its FOMC statement. In other words, the world waits patiently to see if the Fed is impatient about raising interest rates. It’s pretty sad that the Fed’s actions will trump every fundamental and technical indicator.
In the future, investors will look back and wonder how our markets got so detached from reality. For now, however, we have the market that we have, and there is nothing we can do about it except observe and react. In my opinion, the Fed will delay raising interest rates as long as possible.
Janet may or not remove the word, “patient.” But it is guaranteed she will have some very soothing words for investors. Judging by past FOMC meetings, the market should rally. The only surprise will be if Yellen says something that unnerves the market. This has rarely happened in the past, so the odds are good the bulls will win the week. If they don’t, that would be a very significant development.
Longer term, I do believe this market is topping out and that it will take a while for it to play out. Those who believe a correction is getting ever closer (such as me) must be patient. To survive these unusual times, one must not lose his or her head. This year could be a wild one so be focused and as unemotional as possible.
Since the only thing that matters is what the Fed might or might not do, here are the facts: The FOMC will release its interest rate statement and Janet Yellen will speak at a press conference on March 18th at 2:00 p.m. ET. Day traders should have some fun, but the rest of us may get whiplash.