Bullish or Bearish? Week of December 14, 2020

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

One-month trend = Flat to Bullish. As expected, (due to overbought signals from RSI), SPX drifted lower last week, closing at 3633 on Friday. Now: Futures are substantially higher on Sunday night, but as always, wait until the morning for confirmation. 

Mid-term (50- and 100-day MA) = Bullish. The S&P 500 is well above its 50- and 100-day MA. 

RSI: (S&P 500) @ 60.22 (Daily) = Neutral to slightly overbought. RSI warned us last week that the market was getting “too big for its britches” (i.e. overbought), and sure enough, RSI dropped from near 70 to 60. Now you know that RSI often gives reliable warning signals as it creeps closer to 70 (visa versa on 30).

MACD = Neutral. MACD is above its zero line but crossed below its 9-day Signal LineMACD reversed direction with the market and signaled there could be trouble, and there was.

Daily Intraday Volatility (VIX): 23.31 = VIX is still telling me that investors have little or no fear. 

Comment: Last week, the market got too overbought, as reflected in the RSI readings (near 70). Sure enough, the market was unable to move higher, which was not a surprise, and then fell almost all week. Volume and momentum were absent.

On Sunday night (as I’m writing this), the positive vaccine news and a Fed meeting are leading to a positive futures market. RSI has moved to neutral (a little overbought at 60) but VIX is signaling extreme complacency. With the holidays approaching, and investors dreaming of a Christmas rally, caution is still advised.

It always makes me cautious when “everyone” is on the same side. It’s true that the market often rallies during Fed meetings, and perhaps the optimism over the vaccine will take the market into the stratosphere. That is quite possible.

On the other hand, I have seen this scenario before. In 1999, the market was going to the moon (thanks to bullishness over dot.com), and with the Fed’s help over the Y2k fears, the market went even higher in January 2000. The market seemed unstoppable. By March, however, the party ended as the market began a long descent into the abyss. It was not a pretty picture as many investors and traders lost everything.

I’m not saying this will end the same way. What I do know is that all bull markets, and bubbles, end. No one can say when, or what the catalyst will be, but one day this bull market ends. Right now, the biggest worry for me is the low VIX and that so few traders and investors think anything is wrong. Every decade or so the market teaches these people painful lessons.

I’m not saying to sell everything and move to cash, but it wouldn’t be a bad idea to evaluate how much risk you are taking with stocks, and to reduce risk if necessary. It’s a decision only you can make.

Meanwhile, with the vaccine on its way, the Fed meeting, and a recent pullback, the market appears ready to rock and roll. Let’s see how high it can go, and most importantly, if any rallies fail. As I’ve said in the past, watch the rallies for clues. A failed rally would be a warning signal.

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