Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment and trend, it may help you to create profitable trading strategies.
RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk
My latest MarketWatch column (Aug 14): http://goo.gl/Axc5Pi
AAII survey (8/12/2015)
30% Bullish. 33.4% Neutral. 36.1% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (8/11/2015)
40.2% Bullish. 18.6% Bearish.
Bearish: If sentiment is over 60% bullish. (Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low.)
Bullish: If sentiment is over 60% bearish.
VIX: 12.83 (on 8/14/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 49.16 (on 8/14/2015)
Overbought (i.e. Bearish): When RSI rises to 70 or above.
Oversold (i.e. Bullish): When RSI falls to 30 or below.
Note: RSI can remain overbought or oversold for extended time periods.
Moving Averages (daily): The S&P 500 is below its 50- and 100-day moving average, and slightly above its 200-day moving average, and pointing up.
Bearish (Short-term Downtrend): Index crosses under 50-day, 100-day, or 200-day MA.
Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.
MACD (S&P 500): MACD is below its zero line and below its red 9-day signal line and pointing sideways. (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 zero line. MACD line crosses above 9-day signal line.
Bonds: U.S. 10-year yield is at 2.20% (on 8/14/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Retail investors are becoming increasingly bearish but not at extreme levels. It’s primarily at extremes that the sentiment indicators are most useful. However, financial writers and most pros are still overwhelmingly bullish with very few bears in sight. Therefore, it’s a draw. On the technical side, although the indexes are below their 50- and 100-day moving averages, they are above the all-mighty 200-day and pointing up, thanks to a remarkable intraday reversal on Tuesday. Bottom line: Because of the intraday reversal (and low interest rates), the bulls have the advantage this week.
Opinion: Not surprisingly, the first couple days of last week were volatile. As expected, on Monday the indexes bounced strongly, and it looked like it was going to be a great week for the bulls (after a miserable month). On Tuesday, China shocked the financial world by devaluing their currency, sending the futures straight south. In the morning, the indexes plunged, and the bears were in control. Around mid-morning, after hours of panic selling, an influx of buy orders from computer algorithms and stock buybacks halted the plunge, and the panic subsided. The market drifted upward the rest of the week.
As I’ve mentioned before, computer algos (and Wall Street) needs a low-volatile, slightly bullish market, and they got their wish. A complacent market (with the VIX near 12) keeps clients calm. As we enter this week, all seems well with the world once again.
At the moment, conventional wisdom is that interest rates will remain low (and that the Fed will not raise interest rates in September), that there will be no more surprises from China, and bonds will keep rallying. Sounds perfect (as long as you are not long commodities or emerging markets). Based on previous index reversals and conventional wisdom, the market “should” shrug off bad news and climb higher this week. Wall Street needs the Dow to return to 18,000; the sooner the better.
Putting it all together, I would be surprised if the indexes did not climb higher this week. Although moving averages are negative, the intraday reversal was powerful. In fact, if the indexes do not move higher this week, then the previous pattern will have changed, and that will be significant (it will be very negative).
Bottom line: This is the time to be patient and watch. The bulls should win the week, and if they do not, then the financial problems are more severe than anyone realizes. The market is still dangerous, so do not let down your guard. Problems can appear from places no one can anticipate.