Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to use clues and indicators to determine if we are in a bullish, bearish, or sideways market environment.*
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AAII survey (3/26/2014)
31.2% Bullish. 28.6% Bearish.wait
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investor’s Intelligence (3/25/2014)
54.7% Bullish. 17.5% Bearish.
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .64
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: 14.41 (on 3/28/2014)
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, but pointing down. Nasdaq is below its 50-day moving average and 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 below 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 51.86 (on 3/28/2014)
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 2.71% (on 3/28/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Once again, the sentiment indicators are not giving strong signals, although the difference in sentiment between financial writers and retail investors is remarkable. The financial writers are still extremely bullish while retail investors have lost some of their enthusiasm (although some sentiment indicators show higher retail enthusiasm) . On the technical side, the Nasdaq fell below its 50-day moving average thanks primarily to biotech. In fact, Nasdaq’s weekly loss was the worst since October 2012. In addition, the technical indicators from other indexes are pointing down (but haven’t broken through their 50-day moving averages). We will have to be patient to see if this is the beginning of a trend change or a temporary pullback.
Opinion: What a week! As I warned last week (and the week before), the market is in the danger zone. The intraday market reversals and late day selloffs were significant, especially as volume increased at the end of the day. All week, the market attempted to rally intraday, which was constantly met by stronger selling pressure. We will have to see if the other indexes follow theNasdaq, or if the Nasdaq recovers.
Hopefully, if you owned any of the highfliers like Tesla, Netlfix, and others, you have been scaling out. Take the profits if you have any in these overbought stocks. Many of these stocks have obscene valuations (over 150 P/E in some cases), and they are too risky to hold for much longer (in my opinion). The risk-reward isn’t favorable.
The only bright spot last week was emerging markets, which had its best one-week rally in many months. With all of the economic and political problems in the world, the market still rallied. Once again, we have to observe if the one-week rally is a true bottom or a bear market rally.
One of the most difficult jobs of a trader is to be patient. At this point, wise traders are on the sidelines with cash ready to pounce. My view is that after five years, the short side will be lucrative, but it’s still too early to commit completely. I have been testing and probing the short side (something I learned from reading Jesse Livermore) with small share sizes and options. Although some Nasdaq stocks are getting slammed, the S&P has not cracked yet.
Bottom line: According to the signals and clues, this market could go in either direction. Nevertheless, the high margin debt, the unwillingness by many to even imagine a bear market, the one-week breakdown in the Nasdaq, and those late day selloffs confirm the market is vulnerable right now. In addition, the accusation by author Michael Lewis that the stock market is rigged by high frequency traders is a development that must be watched. Perhaps one day the SEC will crack down on the unfair practices (but that could take years). And yet, although it’s tempting to commit to one side of the market or the other, it’s essential that you let the market be your guide (one of the reasons I am testing the market).
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.