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
AAII survey (5/20/2015)
25.2% Bullish. 49.8% Neutral. 25.0% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (5/19/2015)
50.6% 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: 12.13 (on 5/22/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 54.89 (on 5/22/2015)
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 down.
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 above 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 2.22% (on 5/22/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Once again, the indicators are giving us mixed signals. As you can see from the AAII survey above, retail investors are overwhelmingly neutral (by the way, that is the highest neutral signal in a dozen years). On the other hand, financial professionals are overwhelmingly bullish. Few pros seem to believe the market will go down, and they are putting their client’s money where their mouths are. Fortunately for the pros, the short-term trend is still up although the market is in a sideways pattern. With a sideways market, it could break out higher or plunge lower, and no one can predict which way. Based on the indicators, it is suggested you protect asserts and reduce risk (always good advice but especially now).
Opinion: As mentioned above, the market is going sideways. Although the market is in a short-term uptrend, looks can be deceiving. For example, a number of world events could threaten the markets. Take your pick, starting with Greece. Also, Janet is hoping the economic data improves so she can justify raising rates. She may not get her wish. Most pros are all in while cautious retail investors are sitting still. Unlike in past markets, there isn’t a lot of enthusiasm for this market, especially as it climbs higher.
This is a confused sideways market that could go in either direction. The Fed is ready to prevent a bloodbath with words or delaying tactics. If the market breaks out higher, the bull market continues until it exhausts itself. If the market breaks lower, however, nervous investors might hit the sell button.
Bottom line: Bad breaking news could send this market lower so be alert. One of these days the market will take a strong stand in either direction. Meanwhile, be patient.