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 how stock bubbles burst: http://goo.gl/alw6R1
AAII survey (5/6/2015)
27.1% Bullish. 46.1% Neutral. 26.8% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (5/5/2015)
52.5% Bullish. 13.9% 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: 12.86 (on 5/8/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 55.92 (on 5/8/2015)
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 pointing up.
Bearish (Short-term Downtrend): Index 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 and 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 2.15% (on 5/8/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: It’s déjà vu all over again. Last week, the market sold off until the jobs number were released (or perhaps it was the British election), but the market gained back all of its losses. This is the second week in a row when the market was saved by a Friday rally. In fact, the indicators haven’t moved much in two weeks. Retail investors are getting more cautious while many in the financial media believe in miracles. Most technical indicators are not giving strong signals so once again, we could go in either direction. The market appears to be topping out but the proof is in the market. The indexes must surpass their all-time highs on strong volume if the bull market is for real. Up to now, we haven’t seen that.
Opinion: Tom McClellan, editor of the popular McClellan Market Report and a market timer, gave out a sell signal from his timing models and seasonal patterns. He believes the selloff will occur from May 19 to May 22. In a week, we’ll know if he’s right.
This market is playing mind games with the bears or anyone who believes we’re in a bubble. It’s easy to get frustrated with the market, especially if you believe a correction or crash is imminent. It’s very tempting to do something instead of just sitting and waiting. But to paraphrase Jesse Livermore before the 1929 crash: “It’s the sitting and waiting that makes the money.”
Unfortunately, it’s not easy to sit and wait while it appears that other people are making money. Most bears have thrown in the towel or in some cases, went long. I’ve also observed that most investors believe they can get out in time before the next correction. (Good luck with that strategy.)
I believe the market is at a dangerous crossroads. Thanks to the policies of the Fed (QE 1, 2, and 3 and low interest rates), the market has gone up fast and high. Even now, most investors believe the Fed will keep the party going indefinitely. It is hard to sit on the sidelines and refuse to participate. Although the pressure to beat the indexes is intense, the only sane action to take in this environment is to take money off the table. Unfortunately, sanity left this market a long time ago. One day we may look back at these days and shake our heads in disbelief. (Sometimes I feel like I’m in the Matrix.)
Bottom line: Let’s see what the market has in store for us this week. We surpassed Dow 18,000, S&P 2,100, and Nasdaq 5000 thanks to the Friday rally. I will watch closely to see if there is strong support at these price levels. If we break below these levels, it will be another wild week.