Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.
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Remember: The stock market is closed on Thanksgiving (November 27).
AAII survey (11/19/2014)
49.1% Bullish. 23.8% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (11/18/2014)
56.4% Bullish. 14.9% Bearish
Bearish: If sentiment is over 60% bullish. ( Note: Percent of bears is at historic lows. 13.3 % is the 1987 low)
Bullish: If sentiment is over 60% bearish.
VIX: 12.90 (on 11/21/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 73.23 (on 11/21/2014)
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-day, 100-day, and 200-day moving averages and pointing up.
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 its zero line, and above its red 9-day signal line and pointing up. (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.
Bonds: U.S. 10-year yield is at 2.31% (on 11/21/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: The sentiment indicators are at historic levels, including the AAII and II surveys, RSI, and VIX. As you can see above, there are very few bears left, a very negative sign. In the past, at market tops such as 1987, 2000, and 2007, these are the kind of sentiment numbers you will see. This doesn’t mean there will be an immediate correction because sentiment can get even more extreme. However, it does mean that this a glaring red flag. On the technical side, the market was flat all week until China announced they were lowering interest rates, and the Dow zoomed higher by 170 points. It lost almost half of its gains by the end of the day. Bottom line: The market keeps climbing higher but gets more dangerous each day.
Opinion: Since I’ve been doing this blog, I have never seen the sentiment indicators turn so bullish, which is a huge warning. When too many people believe the market will never go down, when most bears have disappeared, when bullish investors feel invincible, you have the makings of a market top.
In addition, the New-Highs New-Lows are reflecting weak market breadth along with the NYSE Tick. When you put it all together, you see a market going higher on fumes. Yes, the market could go even higher, especially if central banks around the world keep announcing programs to lower interest rates or increase QE. We are really in uncharted territory here, so no one can predict how this will end. My opinion: It will not end well, but the timing is impossible to predict.
One day we might look back and say it was so obvious that the market was topping out. After all, China is slowing down, Japan is in a deflationary nightmare, and Europe is teetering into a recession. The U.S. is hanging in there although it’s unknown how long it can last when the rest of the world is struggling. We’ll know more as Christmas approaches. Judging by the sentiment surveys, most investors believe there will be a massive rally at the end of the year.
If you are long this market and have profits, this is the time to take something off the table. If you agree this market is in the stratosphere, it is very tempting to go short. My advice: In my most recent MarketWatch column coming out this week, I recommend being patient.
If you are shaking your head in disbelief how fast and furious this market zoomed, sit back and watch what happens. It could be this week or next, or perhaps early next year, but parabolic markets get exhausted and reverse. Ever since the “Bullard Bounce,” the market went straight up without stopping. That cannot last.
If you are one of the few bears still standing and you’re wondering what has happened to the market, this is how I felt in 1999 and in 2007. For now, I am waiting for the “shot across the bow,” or a 50 to 75-point drop in the S&P 500. That would be a significant clue the rally is in trouble.
Finally, this is a holiday week so volume should be light. It’s possible that nothing significant will occur this week, but watch closely. Have a great Thanksgiving and I’ll be back next week.