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 (3/19/2014)
36.8% Bullish. 26.1% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investor’s Intelligence 3/18/2014)
52.0% Bullish. 17.4% Bearish.
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .55
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: 15.03 (on 3/21/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 is above its 50-day moving average, its 100-day, and 200-day MA, but pointing down.
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, but even with 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: RSI is at 55.87 (on 3/21/2014)
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 2.75% (on 3/21/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Just like last week, many of the technical indicators and sentiment indicators are not giving strong signals. In fact, if you study the indicators, they are saying the market could go in either direction. Nevertheless, if you dig a little deeper, you will detect ominous signs. Commodities have been hit hard (copper is the latest), biotechs were taken to the woodshed on Friday and smashed, and the market made a dramatic intraday reversal (the Dow was up 130 but ended down 28). That intraday reversal was an interesting clue, although it’s too early to say if it’s significant (perhaps traders didn’t want to hold over the weekend and sold). Other worrisome clues are the large number of IPOs set to go public and the high margin debt (at an all-time historic high). In summary, the market is still in the danger zone.
Opinion: In my upcoming book, Predict the Next Bull or Bear Market and Win (Adams Media), I discuss that detecting a trend change is essential for traders and investors. I discuss the clues and indicators that help you to identify those changes. Last week, the market acted irrationally. The market appeared to rally early in the week based on a chance that Janet was going to be more dovish than Ben. After Janet spoke, the market sold off, recovered, and sold off again. These are all red flags. In my opinion, this topsy-turvy, unpredictable market is a clue that something big is headed our way, but I don’t know what. As a market observer, it confirms the market is getting more dangerous every day.
I have spoken to a number of professional traders who are sitting this market out. Many short-sellers are patiently waiting for a better opportunity to short. And those who want to go long are also waiting for better opportunities. In other words, there is nothing wrong with sitting on the sidelines in cash, waiting for the market to reveal its hand.
There are those who disagree with sitting on the sidelines. In their opinion, you should always be 100 percent invested in the market at all times. I disagree. There are times when the most prudent choice is to sit and patiently wait for an opportunity to pounce. I believe this is one of those times. To be patient while waiting for the right opportunity is difficult for most people. During those times, Jesse Livermore used to go fishing until he was certain he was right. At the moment, nothing is clear, although many people are sure they know what the market will do next. No one knows!
If you are heavily invested in the stock market, I’m not suggesting that you sell everything and move to cash. I am saying, however, that it’s a good time to review what you own, discuss it with your brokerage firm or money manager, and be sure you are protected in case the market does fall in the future (one day it will). Only you can decide how much risk you are willing to take. (Warning: If you own any of the high-fliers such as Tesla or Priceline, you’re at risk. You’re also at risk if you are buying stocks on margin.)
Over the next few weeks, we should have a better idea where this market is headed. It’s possible it will rise well above its all time highs (maybe even go parabolic). Money managers a lot smarter than me believe that is exactly what is going to happen, and it could. On the other hand, if more red flags appear (intraday reversals to the downside, continued selloff in commodities, a failure for market to rise above its previous high, and market leaders selling off), then I will be more confident this current uptrend is ending.
Bottom line: Long or short, this market is unpredictable right now. Be on the lookout for danger signs and red flags. (I’m watching emerging markets and the bond market (i.e. interest rates) for clues).
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.