Bull or Bear? (Week of December 9)

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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AAII survey (12/4/2013)

42.6% Bullish. 27.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.


Investor’s Intelligence (12/4/2013)

57.1% Bullish. 14.3% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.


CBOE Equity Put/Call Ratio: .53

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: 13.79

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 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 61.55 (on 12/6/2013)

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 2.88% (on 12/6/2013)

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


Analysis: Independent financial writers are more bullish than last week, along with most money managers. Retail investors, however, lost a little of their enthusiasm as the market fell during the week. VIX is still in the complacent zone, and RSI has pulled back to neutral levels. Technical indicators are mixed, with no clear winner. If you follow technical indicators, you are cautiously bullish. On the other hand, Thomas DeMark, creator of a number of superb timing tools, says that his indicators are giving him a major sell signal.

Opinion: Although most pros are all in, and believe there will be a Santa Claus rally, prudent investors are scaling back. The week went south all week until Friday, when the market staged a 1 percent rally, erasing most of the week’s losses.

On the surface, the rally was impressive. Unfortunately, volume on the major indexes was weak, which was not a bullish sign.

The market is giving mixed signals. Many of the top pros in the business are bullish, and even a few long-time bears changed sides (because they gave up fighting the Fed’s easy money policies). The pros have a good point: fighting the Fed can be dangerous to your wealth, as the last five years have shown.

And yet, I’m watching the 10-year Treasury yield creep up towards 3 percent. As you remember, the higher the yield goes, the lower bond prices go. It will be fascinating to watch millions of dollars in bond mutual funds and bond ETF leave the market at once.

Here’s how I see the future: The odds are very good that bond prices will continue to fall. The odds are also good that emerging markets are going to keep struggling. The big unknown is what is going to happen to the U.S. stock market.

If the pros are right, the market will stage a year-end rally that could blow your socks off. Money managers will receive their year-end bonuses, Wall Street will celebrate, and overly cautious investors will miss out on another spectacular year: Right now, the Dow is up over 20 percent, the S&P is up over 25 percent, and Nasdaq is up nearly 35 percent.

And yet, the higher this market goes, the more the risks increase. If the Fed is truly in control, and tapering is off the table, Wall Street may get its wish. On the other hand, the rise in the yield, the overall complacency among investors, and the extreme bullishness among the pros makes me cautious.

Is it time to get completely out of the market? That is a decision only you can make according to your risk tolerance. The trend is still up but there are enough warning signs that should cause prudent investors to increase cash positions.


* 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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