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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AAII survey (10/22/2014)
49.7% Bullish. 22.5% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (10/22/2014)
35.3% Bullish. 18.2% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
VIX: 16.11 (on 10/24/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): The S&P is slightly above its 100-day moving average and slightly below its 50-day moving average and pointing up. It bounced back above its 200-day MA.
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 below its zero line, but slightly 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.
RSI (S&P 500): RSI is at 55.88 (on 10/24/2014)
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.
Bonds: U.S. 10-year yield is at 2.27% (on 10/24/2014)
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 Fed stopped the carnage and led the market higher last week. In fact, the S&P 500 was up 5.5 percent for the week, its best weekly gain in nearly two years. The markets needed to repair the technical damage from two weeks ago and it did. The moving averages are now pointing up along with MACD. Retail investors threw caution to the wind and are back to feeling bullish. Surprisingly, financial pros and writers are feeling a little less exuberant. Bottom line: As we enter the coming week, there is a bullish bias thanks to the Fed’s words and anticipated actions.
Opinion: I didn’t think it was possible but the bullish party continued last week with only a one-day hiccup. With the Fed ready to take center stage this week (the FOMC minutes will be released Wednesday and Janet makes a speech on Thursday), anything is possible. Judging by past Fed actions, the Dow will be knocking on 17,000’s door soon. The Fed “might” end QE but will be quick to mention they have other programs in place. (If the market takes another dive, however, watch how fast they bring back QE. On second thought, they may not really end QE at all.)
The Fed is playing with fire but they can’t help themselves. They do not want the market to plunge. They use words and actions to reverse any downward momentum, and they’ll continue to do so. In the future, if the market falls by an extreme amount (to the Fed, 7 percent is extreme), they will bring out the cavalry. I’m impressed because so far the strategy has worked, but it’s a dangerous game.
Not surprisingly, the masses believe the Fed can do no wrong. If the Fed is right, the economy will improve enough to bring real buyers into the market. But if the Fed is wrong, this thing could unravel quickly, and create problems in unanticipated places (it already has).
With debt levels so high, with the Fed actively participating in the market, commodities getting smashed, bond yields plunging, and the market at all-time highs, it’s an unpredictable market. And yet, the Fed could continue QE for months or years.
Right now, I cannot predict what the market will do this week. 17,000 is a real possibility. On the other hand, if outside events take a turn for the worse, even the Fed can’t stop the stampede out the door.
Bottom line: The Fed has the tools and the will to take the market higher, but eventually the scheme must end. All we can do is wait and watch.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.