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. *
Breaking News: The 2nd edition of my bestselling book, Understanding Options (McGraw-Hill, 2E), and Understanding Stocks (McGraw-Hill, 2E), will be released in January. They have been completely rewritten. I believe you will be pleased with the new editions. Here are the links:
Understanding Options: http://amzn.to/I7bDjF
Understanding Stocks: http://amzn.to/1aXat0Z
Also, here’s a link to my latest MarketWatch column on how we can get to Dow 20,000. Hint: It’s satire: http://on.mktw.net/1e9lOip
AAII survey (11/27/2013)
47.3% Bullish. 28.3% Bearish.
Bearish: If sentiment is over 50% bullish. (Note: Bullish sentiment rose by 12% in last week, so it’s bearish)
Bullish: If sentiment is over 50% bearish.
Investor’s Intelligence (11/27/2013)
55.7% Bullish. 14.4% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
CBOE Equity Put/Call Ratio: .48
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)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 (and Dow) is above its 50-day moving average, and above its 100-day and 200-day MA, and pointing up.
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 level with 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 65.86 (on 11/29/2013)
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 2.75% (on 11/29/2013)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Sentiment indicators are showing increased bullishness. Even retail investors, after a week of caution, have joined the bull party. Inflows into stock mutual funds have increased (along with margin debt levels), and many believe there will be a Santa Claus rally. VIX is still in the complacent zone, and the put/call ratio reached extreme levels. As you know, when sentiment is this high, it’s a bearish signal. Conversely, technical indicators are still bullish (although MACD leveled off a bit). If you only follow technical indicators, you are long the stock market. Bottom line: Although being long the market has been a winning strategy, caution is advised.
Opinion: I wrote a satirical column for MarketWatch (link to article is in second paragraph from the top) on how we are going to Dow 20,000. Because many people only read the title, I received a lot of angry comments and emails on why my prediction was wrong. If people read the entire column, they’d realize I was not predicting Dow 20,000. I just pointed out that although the market has gone up a lot this year, it’s still not a traditional bubble. For that to happen, we need more irrational behavior from investors. We’re not there yet.
Nevertheless, we can have a bubble without having a mania. It is still unknown whether this market is in bubble territory. I do know, however, that many who are sitting on the sidelines are angry and in disbelief that the market goes higher (the emails I received was evidence of that anger). The Russell 2000 has been the most impressive this year (a 36 percent YTD rise is more than impressive, but it’s also accompanied with a P/E of 75).
As I’ve written before, although this market can still go higher, and probably will, the risks are growing. The most dangerous clue is that the market has appeared to separate itself from the real economy and has rocketed higher on its own. This is exactly what happened in 1929, although at much more extreme levels.
On the other hand, many professional money managers who have billions under management believe this market still has more room to grow. When you look at the financial problems in the rest of the world, the U.S. economy appears strongest. In addition, as interest rates rise, savvy bond investors are fleeing bond mutual funds. They can either put their money in cash or in the stock market. At the moment, they have chosen stocks.
Bottom line: As a prudent investor, although it’s tempting to capture an additional 5 percent or more upside, be defensive. Be sure you are diversified, and that you do not own volatile stocks, or stocks that have reached unsustainable price levels. As I’ve said before, the market is priced for perfection, and that can’t continue indefinitely.
Note: This is one of those times I wish I had a crystal ball.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.