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.
RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk
AAII survey (9/10/2014)
40.4% Bullish. 26.6% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (9/9/2014)
57.6% Bullish. 14.1% Bearish (Note: This is one of the lowest bearish reading since 1987, i.e. it’s a bearish signal).
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
VIX: 13.31 (on 9/12/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 and Dow are above their 50-, 100-, and 200-day moving averages, and pointing down.
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 below 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 50.75 (on 9/12/2014)
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 2.61% (on 9/12/2014)
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 is still on the high side, especially the VIX, which reflects the lack of volatility and complacency in the market. Last week, each morning the market sold off but recovered somewhat, making multiple “V” patterns each day. Nevertheless, the market seemed heavy and sluggish, and Friday it just didn’t have the energy to turn positive. (The S&P ended the week lower by 1.1%.) The next two weeks should give us many clues as to market direction. Keep your eye on the bond market, as yields rose and bond prices fell. The Fed meets Tuesday and Wednesday, with Janet giving a press conference on Wednesday after the release of the FOMC policy statement. Inquiring minds want to know: After eight years, will the Fed hint that they may raise interest rates? (Answer: I doubt it.)
Opinion: Market watchers such as myself are seeing a number of strange events. Even with the geopolitical problems, oil is going down along with gold. Bond prices fell last week as yields spiked. The stock market seems unnaturally sluggish as if the path of least resistance is down. The Fed says there is no inflation but shoppers believe otherwise. The Fed is supposed to stop tapering next month, and as you read above, they are having their FOMC meeting. If they even hint at raising interest rates, bonds and stocks may react negatively. That is why I personally doubt Janet will say anything that upsets anyone.
The next two weeks are very important, and we’ll soon learn who is in control of this market. If the Fed can convince everyone that rising interest rates are good for the market, or if they can continue to suppress rates, then the bull market may continue. But if there is a Black Swan event, or if the Fed spooks investors, the much anticipated correction may finally arrive.
One of the downsides of keeping interest rates ridiculously low for so many years is that bubbles form. Although it will be argued in the history books for decades, when you look at the stock market on a chart, it appears to be in a bubble. Then again, many will argue that the Fed has the tools and power to keep the market from crashing or correcting (2000 and 2008 didn’t work out so well, but the optimists believe the Fed will get it right this time).
Unfortunately, bubbles cannot be controlled. The Fed will learn one day that keeping interest rates artificially low is the easy part. The hard part is exiting. Once again, if the Fed even hints at raising interest rates, many savvy market players will take that as a sell signal. As for me, I just can’t wait to hear what Janet has to say on Wednesday, along with the FOMC minutes. If you go by history, the Fed will let the game go on as long as possible.
Bottom line: The smart money is betting that the Fed will do nothing.
Here’s a great interview with Art Cashin, one of the most experienced floor traders on the NYSE. Here’s the entire interview:
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.