Bull or Bear? (Week of November 18)

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).

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 (11/13/2013)

39.2% Bullish. 27.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish:  If sentiment is over 50% bearish.


Investor’s Intelligence (11/13/2013)

52.6% Bullish. 15.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish:  If sentiment is over 50% bearish.


CBOE Equity Put/Call Ratio: .55

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: 12.19

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, and crossed over 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 68.14 (on 11/15/2013)

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 2.71% (on 11/15/2013)

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 is still on the high side, but individual investors lost some of their enthusiasm. VIX remains in the complacent zone, and RSI is overbought. Add it up and you get a mixed message: Sentiment is frothy but not extreme, while indicators are leaning bullish (thanks to Janet Yellen). Bottom time: Investors believe the market will go up and the indicators reflect that enthusiasm. Market will go up until investor mindset changes.

Opinion: When the week began, everything was going according to plan. The 10-year yield was rising, bonds were getting hammered, and emerging markets were sinking. Then Janet Yellen stepped up to the plate. She was cool, calm, and forthright, and very impressive. She hit it out of the park at the hearings.

Janet said that QE will continue, there are no equity bubbles, and she reserves the right to taper in the future. As long as the economy is still struggling, she said, there will be no changes. Wal-Mart disappoints: Yeah, no tapering! Cisco’s earnings are terrible: Yeah! No tapering. Earnings are weak!: Yeah! QE will continue as far as the eye can see until it doesn’t.

After her testimony, emerging markets rallied, bonds rallied, and the U.S. market went up respectively. In the old days (three weeks ago), her testimony would have lit the market on fire. Maybe it’s because all of the buyers are already in the market. Some value investors are complaining they can’t find any bargains (I’d recommend going to Wal-Mart if you want bargains. Doors will be opening on Thanksgiving night).

As I said last week, only you can decide if the potential 5 percent rally is worth the downside risk. If you’re a money manager needing to lock in a year end bonus, you must be all-in for the rest of the year. If you’re a retail investor, you have a choice.

With indexes at all time highs, enthusiasm growing (mostly by the pros who really need this market to go up), and a belief that the Fed has your back, caution is advised. Even with the positive reaction to Janet’s testimony, the odds are still good that the yield will go up, and that emerging markets will go down along with bonds.

If you are compelled to put on your party hats and go after that last 5 percent, be careful. The good news is the Fed has your back. The bad news is everything else.

Bottom line: Although the technical indicators say the market is going higher, there are more than enough warning signs. With an overbought market, a feeling by many investors there is little risk (because of the Fed), and a sense the market wants to go up, it’s time to let up on the gas, in my opinion. If things don’t go perfectly, that last 5 percent could be the hardest you ever made.


* 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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