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 (7/8/2015)
27.9% Bullish. 42.9% Neutral. 29.2% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (7/7/2015)
44.8% Bullish. 15.6% 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: 16.83 (on 7/10/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 46.97 (on 7/10/2015)
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 averages, 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. (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 2.42% (on 7/10/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: As expected, volatility returned to the market last week but we ended Friday with a strong rally. Sentiment remained nearly the same: Retail investors are neutral while most financial professionals and writers are bullish. On the technical side, the S&P 500 and other indexes are below their 50- and 100-day moving averages. It was even below its 200-day for two days last week. MACD also triggered a sell signal, one of the first in years. These signals should not be ignored. It tells us that the market has gotten even more dangerous.
Opinion: As noted above, the market has taken a turn for the worse according to the indicators. We were in a sideways market for over six months, and now the market is leaning downward. Yes, news events could send the indexes above their moving averages again, but perhaps only temporarily.
I read the bull case over the weekend (i.e. zacks.com), which is that although the market has gone up 200 percent since 2009, it is still a bull market because a.) There is no evidence of a recession, and b.) the bubble hasn’t popped yet. The problem with this view is that by the time the bubble has popped, you may have already lost 20 percent or more. Same with a recession: By the time it’s obvious to everyone, stocks have already taken a huge hit.
Nevertheless, one of the most important attributes of a successful investor or trader is patience. Because the market is taking its time to pivot, many investors are losing patience. Most bears have lost their confidence after getting steamrolled by a bull market and an accommodative Fed. Until very recently, there were almost no bears to be found.
The bulls, on the other had, still feel invincible. Many believe that the central banks will minimize any potential damage. Unfortunately for the bulls, the charts of a number of leading stocks are breaking down. Look at the chart for Intel, for example. Awful. While most people are distracted by the strength of the Dow, beneath the surface dozens of stocks are falling apart. The last to fall are the market leaders such as Apple, Goldman Sachs, Tesla, to name a few. When the leaders start to fall, then it will be hard for even the Fed to put the market back together again.
What happened in China was fascinating. As the market crashed, the Chinese central bank did everything possible to prevent further selling, including going after short-sellers, loosening margin requirements, and suspending trading on 50 percent of the stocks in the index for six months. The actions appeared to work, at least temporarily. It goes to show that when investors start to panic, even the central bank can’t stop it (unless you suspend trading or make short selling illegal).
In the short-term, the market appears to be reacting to news from Greece and China. But if you keep your eye on the bigger picture, the market seems to be breaking down. It has happened so subtly that few see it, or want to see it. This is another important week as we’ll see if the market can make another attempt to rally.
Although shellshocked bears have disappeared in recent years, it might be time to wake up from a deep slumber. Although it’s too early to say this is a bear market, the odds are good that one is developing. It’s true that a majority of investors do not believe the bull market is over, which will provide many profitable opportunities for short-sellers in the future.
Bottom line: This is the time to observe whether the uptrend is ending. Although I am leaning more towards the bear side than before, I will let the market have the final word. If this market is in trouble, there will be noticeable signals and signs in the coming weeks and months. Be ready: This could be another volatile week.