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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This is my latest MarketWatch article (Oct. 13): http://goo.gl/8pEsCL
AAII survey (10/15/2014)
42.7% Bullish. 33.7% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (10/14/2014)
37.8% Bullish. 17.3% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
VIX: 21.99 (on 10/17/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): All the indexes are below their 50-, 100-, and 200-day moving averages, and pointing up. Note: The Russell 2000 is in a correction.
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, and below its red 9-day signal line and pointing down. (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 37.19 (on 10/17/2014)
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 2.19% (on 10/17/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: It was another wild week. Sentiment retreated along with the stock market, especially among pros and financial writers. Nevertheless, most are still hopeful we’ll have a year-end rally. Retail investor sentiment took a dive during the week, although I’m sure they were cheered by Friday’s bounce. The VIX also spiked as volatility returned to the market. After a 1000-point drop in the Dow in two weeks, some investors were caught off guard. Even with Friday’s Fed-inspired rally, technical damage has been done to the indexes. It seemed impossible two weeks ago but all the indexes are below their 200-day moving averages.
Opinion: Last week was profitable for the bears. Nevertheless, the market was headed even lower when Fed member James Bullard single-handily reversed the market’s plunge (down 460 on Thursday at the low before reversing), which also helped to move the market higher on Friday. The market was saved by the Fed, who always seems to appear at just the right time.
This week will be very important. It will take a lot of smooth talking by the Fed (and Wall Street) to win back those 1000 lost points. As you know, the Fed has done it before: Remember QE2 (Nov. 2010), Operation Twist (Sept. 2011), and QE3 (Sept. 2012). There is little doubt in my mind that if the market keeps plunging, the Fed will initiate a new program.
If you are new to the stock market, you might think that the Fed has always interfered in the market. In reality, before Fed chairman Greenspan, the Fed generally took a hands-off attitude towards the markets. The interference of the Fed into the markets is unprecedented. One thing is certain: If the Fed tries to talk up the stock market or create a new program, and the market keeps falling, all hell will break loose. Put another way, investors believe the Fed and their programs. If the Fed ever loses credibility, the markets will plunge. There is an old Wall Street adage: “No one is bigger than the market.” We will put this proverb to the test this week.
As I’ve warned for weeks and months, this is still a dangerous market. In fact, I stand by my last MarketWatch column (http://goo.gl/oC9rEJ). If you are shorting with inverse ETFs or put options, be prepared for dramatic Friday-type spikes. If you are long, however, your main hope is that the Fed and positive earnings will save the day.
At the moment, it’s too early to say we’re in a bear market, but signs are pointing in that direction. In a bear market, those amazing one-day rallies are common, but they don’t last long. If the market fails to make back those lost points and the rally fails, the odds are good the bear has arrived.
However, most investors believe the correction is over and it’s a buying opportunity. If they’re wrong (and I believe they are), the market will keep falling. On the other hand, if I’m wrong, those 1000 points will be made up lickety-split (i.e. quickly). I can’t wait to see who is right.
Bottom line: It’s not nice to fool with Mr. Market. There could be unexpected and dangerous consequences. For now, be on the lookout for failed rallies. If investors get their wish this week, the market will calm down and volatility will decrease. It’s possible they will get their wish — for now.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.