Bull or Bear? (Week of November 25)

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. In my opinion, 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 (11/20/2013)

34.4% Bullish. 29.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish:  If sentiment is over 50% bearish.

 

Investor’s Intelligence (11/20/2013)

53.6% Bullish. 15.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish:  If sentiment is over 50% bearish.

 

CBOE Equity Put/Call Ratio: .60

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: 12.26

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 66.53 (on 11/22/2013)

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 11/22/2013)

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

 

Analysis: Investor sentiment has decreased while financial writers enthusiasm has increased. One group will be right, and so far it is the financial writers and money managers. VIX remains in the complacent zone, which reflects the bullish bias, as well as an attitude the Fed won’t be tapering anytime soon. The most bullish indicator is moving averages, and the market trend is clearly in an uptrend. The most significant development this week is the spike in the 10-year yield, which is pressuring bonds.

Opinion: This will be a shortened week because of the holiday, so trading should be light. As we enter the holiday season, it appears as if the market will give us that Christmas rally. The trend is up, the Fed is being cooperative, and sentiment is generally subdued.

For your information, retailers are giving out fantastic deals before and during Black Friday, including 50% and 60% discounts. Perhaps it’s because of the shortened shopping days (compared to last year), or that retailers are desperate. It’s too early to say for sure, but I’m stunned at some of the deals (especially in clothing).

There are also a few lumps of coal looming in the background. First, as the yield on the 10-year rises, bond prices go down. In a week or so, bond mutual fund investors will open their statements and see losses. As the yield climbs to 3 percent, those losses will increase. In fact, 3 percent will be a significant turning point in the bond market, and the media will announce it all day.

When the yield does hit 3 percent in the future, and bond losses increase, bond investors have choices: Stay put, move to cash, or move to the stock market. Many believe bondholders will move to the stock market to chase after higher returns. Others think they will move to cash. I have no idea what bondholders will do, but I know this: The 30-year bull market for bonds is coming to an end, and the financial world will change.

Another distressing development is emerging markets. The Chinese say they are on the right track, and investors believe them. As a result, the Chinese stock market is in bubble territory (up 20 percent in four months), and bubbles never end well.

Meanwhile, other emerging market countries are in deep economic trouble (Brazil is the latest). Even some European countries are showing more signs of trouble (i.e. France). I’m not sure how this will play out, but if there is going to be a market correction, the catalyst will likely come from emerging markets or bonds. The clock is ticking for both, and it will not be pretty.

How will this affect the U.S. stock market? The positive view is that the U.S., although not out of the woods, is stronger than everyone else. In addition, you can’t fight the trend, and the trend is up. The negative view is the world’s problems, as well as a bond dislocation, will negatively affect our stock market. Seems obvious, right? Except that our stock market has so far been bullet proof. It’s possible that as the world’s problems increase, investors will flock to the U.S. for safety.

The world is a dangerous place, and an unknown catalyst can cause a correction or major pullback. With the holidays approaching, the bulls have the edge, but it may not last long.

Bottom line: The market moves higher, ignoring all of the bad news. This is a classic bull market. Nevertheless, as bond prices fall, as emerging markets struggle, and as the Fed tries to figure out what to do next, caution is advised. The advice from Bernard Baruch is still brilliant: When asked how he made so much money in the stock market, he replied, “Because I sell too soon.”

Have a great Thanksgiving!

 

* 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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