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
AAII survey (7/29/2015)
21.1% Bullish. 38.2% Neutral. 40.7% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (7/28/2015)
43.3% Bullish. 17.5% 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: 12.12 (on 7/31/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 51.78 (on 7/31/2015)
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 above its 50-, 100-, and 200-day moving averages, and pointing down.
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 even with its zero line and even with its red 9-day signal line and flat. (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 2.21% (on 7/31/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Last week, the Fed stuck to the script, saying nothing, but the market rallied (as we expected). The indexes managed to climb above their moving averages but not by much. Unfortunately, the technical indicators are not telling us much, which means the market could go in either direction this week. Sentiment isn’t extreme, but the VIX is at 12 again, reflecting extreme complacency. It appears as if many market participants believe we’ll have a low volatile but rising market (of course). If you look deeper, however, the warning signs are increasing. For example, only a handful of stocks are keeping the indexes afloat. Also, the New High-New Low indicator is flashing red (18 new highs vs 480 new lows on July 29). Finally, China must be watched for signs of a slowdown, and commodity prices are plunging. Bottom line: The market appears suspiciously quiet and guarded going into this week. Observe whether the Dow can retake 18,000 or if the S&P 500 can hold 2,100.
Opinion: As I mentioned last week, the market needed to rally during the Fed two-day meeting, and it did. Unfortunately, the rally was rather tepid, and worse, the Dow remained below 18,000, a key psychological level.
One thing I’ve learned about the market: It can go higher than anyone ever imagined, but it can also go lower than anyone believes. That is why it’s so essential to be prepared for either scenario. Based on the clues and indicators so far, the evidence is leaning towards a pullback, but that is not guaranteed. That is why you must protect your positions using hedge strategies or raising more cash.
If this were a strong bull market, the indexes would have risen a lot farther and faster by now. Instead, the market appears to be weakening. It’s still too early to aggressively short, but it might be time to draw a list of potential candidates.
And yet, never forget that a sideways market such as this is the most treacherous of all. Amateurs are going to get whipsawed as the market goes in both directions, sometimes within a day. Yes, it’s possible the market will climb higher this week (because anything is possible). However, it’s also possible there will be more deterioration. I am watching the market leaders. When the leaders start to crack (and some already are), the market will be even more vulnerable.