Bull or Bear? (Week of December 16)

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to determine if we are in a bullish, bearish, or sideways market environment. *

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I also write a monthly column for MarketWatch. Here is my latest: http://on.mktw.net/1epjUhL

 

AAII survey (12/11/2013)

41.3% Bullish. 25.0% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (12/11/2013)

58.2% Bullish. 14.3% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

CBOE Equity Put/Call Ratio: .67

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

 

VIX: 15.76

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 (and Dow) is slightly above its 50-day moving average, and also above its 100-day and 200-day MA, and pointing down.

Bearish: Index crosses below 50-, 100-, or 200-day MA.

Bullish: Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is above the zero line, but is 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: RSI is at 45.85 (on 12/13/2013)

Overbought: When RSI rises to 70 or above.

Oversold: 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 2.86% (on 12/13/2013)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Financial newsletter writers and many on Wall Street are still bullish, as reflected in the Investors Intelligence survey results. The numbers would have been more extreme except it was a down week, so other sentiment numbers cooled slightly. Technical indicators took a slight turn for the worse, with MACD turning down. The S&P is barely holding on to its 50-day moving average. Once again, keep your eye on the 10-year yield, as the higher it goes, the lower bonds go. Meanwhile, all eyes are on the Fed, and their talking points will trump all indicators this week.

Opinion: As I warned last week, it was the time to be cautious, and it still is. Although the bears ruled the week, volume was so anemic that you can’t declare victory for either side. It doesn’t really matter because the Fed show is coming to a theatre near you (Wednesday is the big day), and that should take up all of the oxygen.

Judging by the sentiment numbers, most pros believe that the Fed will continue to make excuses why it is not the right time to taper. In fact, that should not come as a surprise. The only surprise would be if the Fed actually tapered, or said they are going to taper. Now that would shock the market, but not in a good way. (Note: I was wrong about that. Market shot up by almost 300 points!)

The odds are extremely high that nothing is going to happen at this meeting. It is unknown how the market will react, but after a down week, perhaps they will find something (anything) positive. With bond prices falling, with emerging markets faltering, with bubbles appearing in different places around the world, the Fed is not going to do anything to tip the market over.

And yet, the Fed has a huge dilemma. For their experimental strategy to work, interest rates must remain low. Unfortunately, bond yields are creeping up, which are a threat to QE. Maybe they can come up with a new program that will keep interest rates low and the stock market up. Any new ideas, anyone?

Watch the market reaction for clues. If the market sells off on the no tapering news, that would be a negative sign for the market. If the market rallies on the no tapering news, then people still believe in the Fed’s power, and the show will go on. On second thought, it’s the day after (Thursday) that will be interesting.

Bottom line: Because of so many cross currents, this should be a volatile week. Year end bonuses are being calculated, money managers are hoping for a Santa Claus rally, and no one wants to lose the gains from another fantastic year. But reality has a funny way of interrupting even the best laid plans. In my opinion, it’s still a dangerous market (even more so). I am keeping my eye on emerging markets (the odds are they will continue to fall), and the bond market (ditto).

Fed or no Fed, each week I see increased risk in the market. Obviously, financial news writers and most pros are reliably bullish, primarily because they know the Fed is watching their back. And this is the way it has been for years. Nevertheless, the clock is ticking. Although the market could still go up by obscene amounts, prudent investors are taking money off the table.

 

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

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