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
Here is my latest MarketWatch column. I was being sarcastic 🙂 http://goo.gl/90Fhgs
Backstory: I got a lot of flack for my tongue-in-cheek column for MarketWatch: “What-Me Worry? Why the Stock Market Will Never Go Down.” My editor left out the “What-Me Worry?” Nevertheless, many bearish traders at Zero Hedge assailed me for writing the article, using colorful language, but I assume most did not read the entire article. I thought the guy who said I should be forced to wear a tattoo of my article on my face was clever.
Bottom line: Anyone who has been following my blog and columns know what I think of this market. But I did learn a valuable lesson: Many people just scan the headlines.
AAII survey (9/3/2014)
44.7% Bullish. 24.0% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (9/2/2014)
56.1% Bullish. 13.3% Bearish (Note: This is the lowest bearish reading since 1987, which is extremely bearish).
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
VIX: 12.09 (on 9/5/2014)
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 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. (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 66.37 (on 9/5/2014)
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 2.46% (on 8/29/2014)
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 number of bears from the Investors Intelligence survey is at a 1987 low. Last week they sent an alert to their subscribers warning of an imminent correction. Retail investors are not quite as enthusiastic, but are still participating. The VIX and other sentiment indicators are at all-time lows, which are bearish signals. On the other hand, the trend is still up. This market has been resilient in the face of geopolitical concerns, a slowdown in hiring, sky-high P/Es on many popular stocks, and low volume. If you follow the trend, you are still long but cautious. If you follow sentiment, you’re on the sidelines making zero. The next two months should give us some clues if and when the uptrend ends.
Opinion: There aren’t many bears left, and short-sellers have had a difficult year. Even with all of the problems mentioned above, the only game in town is the stock market. If you’re not in, you may miss out on another 5 percent end-of-year rally. If you’re on the sidelines, you’re protected but not making any money. Right now, very few investors believe this market will ever go down.
This story is similar to 1987 and 1999. I know there will be a correction or crash, but no one can say when. All we can do is look for clues. When the S&P fell by nearly 100 points last month, it was significant. If it had fallen below S&P 1900, that could have been the start of a major correction. But at 1908, the market held, and it made back its 100 points in no time. Therefore, the bull market continues.
Unless there is a major Black Swan event, the only thing that can stop this market is the Fed. If the Fed raises interest rates (or even seriously mentions a date), there will be a selloff. However, it is extremely unlikely the Fed is going to raise interest rates anytime soon. In fact, they will try and keep interest rates as low as possible as long as possible. I can’t prove this but I bet they are terrified of what could happen if they raised interest rates. That would stop this faux bull market in its tracks.
Until then, however, the market climbs higher, and no one knows when it will come back to earth. Many of the indicators and oscillators that worked in the past have been flashing red alert signals for many months. But the market keeps going higher.
Of course it’s going to end badly one day. Meanwhile, it’s annoying to know you are missing out on opportunities. As for me, I remember what trader Livermore said. To paraphrase, most people do not have the patience to sit and wait for the right opportunity. It’s the sitting and waiting that is so difficult.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.