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
My latest MarketWatch column (on using options to limit losses): http://goo.gl/BNuZRJ
AAII survey (3/4/2015)
39.8% Bullish. 23.4% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (3/3/2015)
58.7% 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: 15.20 (on 3/6/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 45.66 (on 3/6/2015)
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-, 100, and 200-day moving averages and is pointing down.
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 slightly 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 zero line. MACD line crosses above 9-day signal line.
Bonds: U.S. 10-year yield is at 2.24% (on 3/6/2015)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Last week, sentiment surveys show that investors, especially many pros, believe the bull market will continue. The stronger the sentiment, the more bearish the result. (Although sentiment is high, it’s still not as extreme as 1999.) When we started the week, the market could have gone in either direction. However, by Friday, the market trend had ended (at least in the short term). In fact, the indexes broke below a number of key technical levels, which caught the interest of technicians. This week we will see if the uptrend has ended or if we witnessed another false reversal. The odds favor the bears this week but that could change in an instant if investors believe all is well.
Opinion: It was a fascinating week, and this week should be just as interesting. The market was at a crossroads, seesawing in both directions until Friday. That is when the indexes broke below key technical levels and headed straight down. Nevertheless, the market is above its 50-day moving average and holding on for dear life.
We’ve seen this story before. Just when the market is about to fall into the abyss, someone from the Fed or elsewhere makes an encouraging comment and the market reverses direction. It could happen again, which is why it’s best to take a wait and see approach. A few bears (those who are left) are dipping their toe in the water with certain overvalued stocks, but in general many traders are waiting to see if this is another head fake or the real deal. We should know fairly soon if this pullback has legs.
No matter what the market does, since it’s at all-time highs, wise investors are taking this opportunity to take money off the table. In my opinion, there is nothing wrong with holding cash in a dangerous market. Although I can’t predict what the market will do in the future, I can tell you this is one of the most dangerous markets I’ve seen in years.
Many blindly bullish investors don’t recognize the warning signs and are all in. After all, the bulls have had their way for years, so it’s understandable they believe this is just another minor pullback on the way to Dow 20,000. I’m not convinced, which is why I remain cautious. I’ve experienced several corrections and they happen quickly and usually without warning. The odds are good another one is coming.