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.
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AAII survey (4/30/2014)
29.8% Bullish. 29.4% Bearish. 40.8% Neutral.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (4/29/2014)
54.7% Bullish. 20.6% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
CBOE Equity Put/Call Ratio: .66
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: 12.91 (on 5/2/2014)
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 up. Nasdaq below 50- and 100- day moving averages.
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 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 9-day signal line. MACD line crosses above zero line.
RSI (S&P 500): RSI is at 56.14 (on 5/2/2014)
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 2.59% (on 5/2/2014).
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 indicators remain the same with financial writers feeling more bullish while retail investors are unsure (i.e. neutral). Nevertheless, that hasn’t stopped investors from loading up on equity mutual funds. The VIX reflects complacency among option buyers, with no fear in sight. Technical indicators are giving mixed signals. The S&P 500 is still in an uptrend while the Nasdaq is below its 50- and 100-day moving averages. Bonds have rallied recently, confounding conventional wisdom.
Opinion: As I predicted last week, the market rallied before the Fed minutes were released and then meandered around for the rest of the week. There was an early rally on Friday followed by a mild late day selloff. As I expected, the bulls and bears fought it out all week with no clear winner (although technically the bulls won).
It’s easy to get confused by this market. On one hand, you might see a bullish market that is slowly rising thanks to the Fed and improved economic numbers. On the other hand, many high-flying Nasdaq stocks are getting smashed along with less known equities on the S&P 500. In other words, even though the market is going higher, fewer and fewer stocks are participating. That means trouble. In addition, while the Nasdaq tech and biotech stocks started to sell off a few months ago, it is spreading to other sectors. That is also not a good sign.
One thing about bull markets: They often end before most people realize it. The only way to know is through observation, studying the clues and indicators, and probing. Up to now, the put options I bought to test the market have not been profitable. Therefore, it is still too early to short aggressively. As I’ve said repeatedly, the most prudent move is to increase cash positions. Experienced traders can test and probe the indexes or individual stocks.
Each week that goes by gives us more clues. The most revealing indicator in the world is the market itself. To confirm a bear market (or a downtrend), I’m looking for intraday reversals, late day selloffs, and more volatility. If this bull market is truly coming to an end, there will be one of two scenarios: First, there could be a severe market break that will seemingly come out of nowhere. Or second, the market could drift lower and lower like a frog being boiled alive.
What if I’m wrong? According to bullish analysts, the market is consolidating, and will explode higher soon. As for me, I continue to lean bearish. Only time will tell who is right.
Bottom line: The market remains dangerous and caution is advised. It might be too early to short, but it’s also late to go long (in my opinion). The truth is in the tape, so observe it closely. The hardest action to take right now is to sit and wait for the market to reveal its hand, but that is exactly what you need to do. Making impulsive trades in a dangerous environment will cost you money.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.