Bullish or Bearish? Week of August 30, 2021

Notice: My publisher, McGraw-Hill, informed me that two of my books, Understanding Options, and Understanding Stocks, have sold more than 100,000 copies each. They are putting a special “sticker” on the cover of each book advertising that fact. (I want to thank my readers for helping to make this happen.)


This is what the technical indicators are telling us this week: 

One-week trend = Higher. The bulls took control during the week and ran with the ball. SPX rose from 4441 to 4509, a strong 68-point advance. Exuberance has gone through the roof as indexes flirt with all-time highs. Futures are FLAT on Sunday night.

SPX 20-day moving average (WEEKLY): Uptrend. SPX is above its 20-day moving average in a strong uptrend. Everything looks wonderful in the short term but moving averages don’t predict the future.

RSI: (S&P 500) @72.50 (WEEKLY) = Extremely Overbought. The skunk at the bull party is RSI, reflecting extremely overbought readings on SPX. While indexes can stay overbought for long time periods, the potential for a severe pullback is high. No one can say when, unfortunately, but we are looking for signs.

MACD (WEEKLY) = Neutral. Nothing to see here. The weekly MACD is still giving mixed signals. MACD is above the zero line, which is bullish. The MACD line is even with its 9-day signal line, a neutral reading. Note: MACD does not work well if SPX volatility is low but MACD does work with volatile individual stocks.

Daily Intraday Volatility (VIX) = 16.39 = It’s a mad, mad, mad world. The VIX fell a few points as fear went back on holiday. One of these days, volatility will return with a vengeance, but until then, enjoy the ride higher, but please put on your seatbelt.

Comment:  The over-confident bulls took the market into the stratosphere. As long as you’re not selling short, it’s easy to make money in the market. Not only has fear been on holiday but so has risk. Buy and hold the indexes or any old stock and you can’t lose. If I sound sarcastic, it’s because I am.

An entire generation of investors believe that it’s EASY to make money in the market. That is a scary thought. I never could have predicted that the market would rise for 13 years straight with only a few weeks pullback along the way.

The overbought reading from RSI is a red flag that should not be ignored. While it’s common for some stocks to remain overbought for long time periods, rarely have I seen the indexes remain this overbought for very long. I would not be surprised to see a major pullback, but no one can say when. My advice is to look for clues because they will appear one day.

As the market moves higher and VIX moves lower, the market gets more and more overbought. At these statistically stupid price levels, it wouldn’t take much to pop the bubble and bring us back to reality. No, it doesn’t mean to sell everything and move to cash. It does mean to evaluate what you own, the risks you are taking, and what would happen to your portfolio in a worst-case scenario.

Bottom line: We are in untested waters so anything is possible. Hint: Keep your eyes on the Fed.


Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts’ latest newsletter:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

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