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 (3/18/2015)
27.2% Bullish. 31.5% Bearish. Neutral: 41.4%.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (3/17/2015)
52.0% Bullish. 14.3% 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: 13.02 (on 3/20/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 57.44 (on 3/20/2015)
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-day moving average and is pointing up. It’s also 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 is even with its red 9-day signal line and pointing up. (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 1.93% (on 3/20/2015)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders). Comment: Bonds rallied big time last week.
Analysis: Not surprisingly, we’re getting mixed signals. The increased volatility has spooked some retail investors, who are more neutral than anything else. Even though the bulls won the week, even some well-known pros are taking a more cautious approach. Although the market was rocky, it had some good days (primarily on the day that Janet spoke). It ended the week with an uptrend, but there are so many conflicting forces looming no one can say with certainty what will happen this week. Bottom line: It’s an unpredictable, dangerous market with extreme amounts of complacency (i.e. VIX at all-time lows again).
Opinion: As expected, Janet removed the word, “patient,” but was so dovish in her press conference that the market got another buy signal. With millions of dollars trading hands, some people made a ton of money buying on the dip. As I wrote last week, based on previous Fed meetings, the market rallies because the Fed almost never disappoints. (The last time the market was surprised was when Bernanke hinted at tapering QE in May 2013; the market plunged. Bernanke backtracked for a week until he lit the market on fire again.)
While the U.S. and many world markets are making all-time highs, there are many danger signs. In fact, if you are reading this, you should be alarmed. This is the time to take money off the table. If the Dow climbs to 19,000, at worst you missed out on some upside. If I’m right, the money you moved to cash will be like an insurance policy.
Based on my analysis and opinion of the market, it’s rare that the market moves up this fast and this high based on nothingness. 1999 comes to mind, and 2007. This week is important because we’re going to see if the market can keep climbing without the Fed’s help. I am looking for earnings reports, and more importantly, the housing numbers. If this market is the real deal, then it better be going higher based on reality, and not on what the Fed does or does not do.
We’re not at the scary zone yet but we’re getting closer. My theory is that the market is topping out (and that can take time). When you add in the extreme complacency, world turmoil, a bubbly bond market, plunging commodities, you have got to be careful.
Bottom line: If you are all in the market and still buying, you are in danger of being greedy. Unless the Fed has changed reality (and many would argue they have), then this is forming a bubble of huge proportions. No one can say when it will pop, because it can go on for weeks or months, but the prudent choice is moving to the sidelines.