Bull or Bear? (Week of November 11)

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. *

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).


AAII survey (11/8/2013)

45.5% Bullish. 21.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.


Investor’s Intelligence (11/8/2013)

55.2% Bullish. 15.6% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.


CBOE Equity Put/Call Ratio: .51

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: 12.90

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.

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, 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: RSI is at 61.36 (on 11/08/2013)

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 2.74% (on 11/08/2013)

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 among retail investors and financial writers is bullish, especially for those in the financial press (which is a negative sign). Other sentiment readings are also reflecting complacency among investors, and a belief that there is little risk in the financial markets. That is about to change soon, in my opinion. MACD turned down a little as did moving averages. The big news this week was the 5% spike in the yield on the 10-year Treasury on Friday. Oh boy.

Opinion: That spike in the 10-year was very significant, and the financial world is going to change soon as the yield climbs towards 3%. When that happens (not if), bonds are going to get crushed, and there will be blood in the streets for investors holding bond mutual funds. The market always gives you one opportunity to get out of dangerous positions, and that opportunity is closing fast.

When (not if) bonds get smashed, it’s anyone’s guess what will happen to the equity markets. There are two theories: The first is that after opening their monthly statements, bondholders will run to the relative safety of stocks. The second theory is that stocks will plunge along with bonds. I’m not smart enough to tell you which scenario will occur, but it is going to be very interesting. Hint: I believe that emerging markets will also plunge along with bonds.

Investors believe the Fed has them covered and that there is little risk in stocks right now. In fact, it’s as if the market is giving away free money. To paraphrase G.M. Loeb in his classic 1935 book on investments: When Wall Street is giving away free money, it’s time to sell and move to cash.

That also reminds me of what Jesse Livermore said. To paraphrase: When the market is not acting like it should, change your strategy immediately. In my opinion, something very strange is happening in the market, and I can’t quite figure it out. I’m not sure what is going to happen, perhaps we’ll get to 1800 on the S&P in no time, but for the moment, I’m sitting this one out until things are a bit clearer.
Bottom line: Just when it seemed like the market isn’t dangerous, it is getting dangerous, but only a few see it right now. As for me, I question whether that 5 percent potential upside is worth the risk. I’m in the minority, however, as almost everyone else has their party hats on.


* 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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