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.
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AAII survey (5/13/2015)
26.7% Bullish. 46.9% Neutral. 26.4% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (5/12/2015)
47.5% Bullish. 15.8% 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: 12.35 (on 5/15/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 57.42 (on 5/15/2015)
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 nearly 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 zero line. MACD line crosses above 9-day signal line.
Bonds: U.S. 10-year yield is at 2.14% (on 5/15/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Sentiment retreated last week after the indexes had three straight days of losses. Even some pros felt less enthusiastic. On Thursday, however, the Dow climbed by 192 points, bringing us above 18,000 on the Dow, 2,100 on the S&P 500, and 5,000 on the Nasdaq. Major support is at these price levels. If the indexes drop below these levels this week, it is a danger sign. If the indexes can hold those levels, it’s bullish in the short term. For the third week in a row, technical indicators are not giving clear signals, and in fact, many indicators are not working at all. Bottom line: It is impossible to predict which direction the indexes will go this week based on technical and sentiment indicators. However, danger signs still exist, including economic and geopolitical turmoil. More alarming is overwhelming complacency. Most investors do not believe there is any danger, and that is a dangerous sign.
Opinion: Once again, the market was saved by a miraculous one-day rally, this time on Thursday, not Friday. It appears as if a major buy program was initiated on Thursday, and off to the races we went, although the market internals were weak. It’s surprising to watch the market climb higher on mediocre earnings and dangerous world conditions. Nevertheless, this is the market we have, so be patient.
More knowledgeable professionals are warning of a major correction or crash. As you remember, respected market timer Tom McClellan gave out a sell signal for this week. We’ve gone a long time without a major correction, which defies logic. And although some people believe “it’s different this time,” it never is. The market cannot stay levitated indefinitely, although it seems that way sometimes. It is guaranteed there will be a major pullback, but I certainly can’t predict when it will occur. It could be this week, or next, or longer, but it will occur. More financial professionals are warning that it’s time to be cautious.
We’re at an all-time high on the major indexes. If this is a true bull market, we should move higher on stronger volume. However, I suspect we will have another failed rally soon. That is when the fireworks will begin. Meanwhile, sometimes I think we are in the Twilight Zone. By the way, gold is getting interesting again, so keep your eye on that commodity. Bonds got crushed all week until a sudden Friday rally. Strange things are happening to various markets, and that cannot be a good sign.
Bottom line: The market has gone nearly sideways for three weeks. It’s only a matter of time before we find out what it’s really made of.