Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to determine if we are in a bullish, bearish, or sideways market environment. *
JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk
My book, Predict the Next Bull or Bear Market and Win (Adams Media), comes out in May.
My latest MarketWatch article: http://on.mktw.net/1cCpJrV
AAII survey (3/12/2014)
41.3% Bullish. 26.8% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investor’s Intelligence 3/11/2014)
55.1% Bullish. 17.4% Bearish.
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .69
Bearish: Less than or near .50 is bearish (more call options are being bought).
Bullish: Higher than or near 1.0 is bullish (more put options are being bought)
VIX: 17.82 (on 3/14/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 is pointing down although slightly above its 50-day moving average, its 100-day, and 200-day MA. Dow is below its 50-day moving average.
Bearish (Downtrend): Index crosses below 50-, 100-, or 200-day MA.
Bullish (Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.
MACD: MACD is above zero line, 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 9-day signal line. MACD line crosses above zero line.
RSI: RSI is at 48.18 (on 3/14/2014)
Overbought: When RSI rises to 70 or above.
Oversold: 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 2.64% (on 3/14/2014)
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 technical indicators took a turn for the worse last week, especially MACD, which turned down. The S&P 500 is still above its 50-day moving average but is pointing down. Keep in mind that in a volatile market, moving averages aren’t as effective (they are most effective in a trending market). Sentiment indicators are still a bit frothy, but not as extreme as the week before (because of the market pullback). Beginning tomorrow, outside events such as Ukraine and the Fed will trump the indicators. Bottom line: Anything is possible so be prepared.
Opinion: As I wrote in this blog last week, the market is in the danger zone. Although the technical indicators were pointing up, there were other clues (such as frothy sentiment indicators) that reflected excessive bullishness.
As you may know, I wrote a column for MarketWatch (link above) about the reasons this bull market is coming to an end (or could be topping out). After I wrote the column, the Nasdaq suffered the worst weekly decline since April 2013, and other indexes got hit hard.
Although no one can call the exact top or bottom, it is possible to recognize a dangerous market using clues and indicators. Not surprisingly, several individuals and at least one money manager mocked the idea the bull market might end. In my opinion, it is a mistake to not plan and prepare for a correction, pullback, or bear market. Yes, the market has an upward bias, but that doesn’t mean there will always be a bull market. Perpetually bullish money managers and investors who believe the market goes up forever will eventually learn another 2008 lesson. If you are going to participate in the market, be open to any possibility.
As for me, I’d rather be cautious than blindly bullish like so many on Wall Street. To not even entertain the possibility the market is or could get dangerous is ridiculous. For example, to urge investors to buy emerging market dips is even more foolish. I know that buying on the dip worked in the past (it works in a bull market), but not when EM is struggling (suggestion: wait until EM stops falling).
Once again, the U.S. market begins the week in the danger zone. With Russia and Ukraine looming in the background, and unusual financial events coming from China and emerging markets, this should be another volatile week.
Nevertheless, it’s possible that Janet and the Fed will light the market on fire. Based on previous Fed meetings, if the market sells off early in the week, investors and traders will be looking for any reason to buy. Perception is everything: If investors perceive that Janet is going to save them, the market could rally even with all of the negative news coming from so many directions.
Bottom line: Fasten your seatbelts because the odds are good this market is going to take us on a rocky ride.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.