Each weekend, I study market behavior 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.
JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk
My latest book, Predict the Next Bull or Bear Market and Win (Adams Media), is available at any Barnes & Noble store, and on Amazon right now. Here is a link to the book and sample pages: http://amzn.to/1h1rZZu
My latest MarketWatch article: http://on.mktw.net/1pbAqU7
AAII survey (5/14/2014)
33.1% Bullish. 22.6% Bearish. 44.3% Neutral.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (5/13/2014)
55.1% Bullish. 19.4% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .69
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: 12.44 (on 5/16/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 is slightly above its 50-day moving average, and pointing down. Nasdaq below 50- and 100- day moving averages and pointing down.
Bearish (Short-term Downtrend): Index crosses below 50-, 100-, 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 zero line, and 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 (S&P 500): RSI is at 51.42 (on 5/16/2014)
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 2.52% (on 5/16/2014). (Note: Bonds are rallying.)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Investor sentiment hasn’t changed much from last week. Investors say they are neutral but margin rates are at all-time highs, which is a negative signal. Financial writers and a majority ofmoney managers are still extremely bullish, so it will take a correction to change their minds. VIX is still showing that option speculators are complacent, not fearful. Technical indicators are giving mixed signals, although the Nasdaq and Russell 2000 are in a downtrend. Bullish investors are hoping the Dow and S&P will lift these indexes rather than visa versa. Only time will tell who is right. The most interesting development lately is the rally in bonds, which has surprised nearly everyone. Keep your eye on the 10-year yield. Any extreme moves in bonds could disrupt the stock market.
Opinion: Last week, I wrote a controversial column for MarketWatch (http://on.mktw.net/1kg4b5p). In the column, I wrote there are signs a bear market is approaching, although no one can say when. I also don’t know the catalyst that will cause the current bull market to end, but I’m looking for clues. More than likely, I wrote, it will be a geopolitical crisis, an economic disruption, or a spike in interest rates.
After the column was published, I received an onslaught of negative comments and tons of emails. A few fund managers wrote to thank me for confirming what they believe, but the majority of investors attacked me for being “stupid,” “wrong,” and “insincere.” I am especially sympathetic to fund managers who are willing to be independent (those who are probably getting heat from their clients). Being a money manager in this current environment is extremely difficult. Right now, clients are pressuring managers to outperform the indexes, and will punish those who dare to move to the sidelines in cash. That in itself is a red flag.
I will never forgot what happened to Robert Rodriguez, an extremely successful fund manager who I interviewed for one of my books. In 2007, he correctly forecast the global meltdown, so he increased the cash position of his fund to 12 times that of the industry. His reward: An onslaught of redemptions and angry clients who questioned his decision. As it turned out, he was 100 percent right, but he went through hell before he was vindicated. It’s not easy being a money manager, especially when clients are getting greedy.
I was recently interviewed by MarketWatch columnist Chuck Jaffe, who said that he sometimes hears from investors who say (paraphrased): “I am willing to take risks in the stock market. I just don’t want to lose money.” Unfortunately, investors can’t have it both ways. They want their money managers to make them rich without any risk of losing money. Good luck with that!
Right now, I want to be protected from a bear market. I have no problem waiting for its arrival even if it is several months. As Jesse Livermore said, it’s rare for traders (or investors) to sit and wait for underlying market conditions to change. Eventually there is a pivot or inflection point that will signal the beginning of a bear market. That inflection point is coming, and I’m patiently waiting while looking for clues.
I thought a lot about the emails and comments I received. Some accused me of being a “permabear,” but that is not true. I am looking forward to the day when a stronger and healthier bull market emerges. The main point is you should not be a permabear or a permabull. Either is dangerous to your financial health. To succeed in the market, it’s essential you remain objective. Those who refuse to acknowledge that a bear market is even possible are just as mistaken as those who are permanently bearish.
I don’t like to see other people lose money, especially retail investors who have no clue they are at risk. Some get angry for suggesting that investors move to the sidelines in cash. It’s up to each individual to determine how much risk they are willing to take. As for me, I believe it’s prudent to have cash in a dangerous market. I’d rather miss the 5 percent (or less) upside than get hit with a 10 or 15 percent correction. That’s my opinion.
I also know that after a major correction or crash, there will be an excellent opportunity to buy stocks that have been smashed. Many will disagree with me, but I believe the market is at risk. I’m keeping my eyes on the S&P 500. When that starts to crack, then things could get ugly fast.
This is important: Knowing when to stay out of a dangerous market is only one part of the equation. Equally important are using clues, indicators and observations to know when to get back in. As you may know, after the 2008 crash, many retail investors were too afraid to step back into the market, and in fact, many are just now entering the market (one of the reasons that margin rates are so high). Therefore, although having cash is an excellent way to avoid a bear market, you don’t want to be in cash indefinitely.
Bottom line: The market has the final word, and everything else is just opinion. And that is why you and only you must decide how to handle this market. Some will buy and hold through a correction or bear market, while others will move to the sidelines. A majority, however, don’t even think there will be a bear market at all. I can’t wait to find out who’s right!
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.