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 (7/15/2015)
30.8% Bullish. 45.9% Neutral. 23.2% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (7/14/2015)
43.7% 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: 11.95 (on 7/17/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 60 (on 7/17/2015)
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 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 but above its red 9-day signal line and pointing up. (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 2.35% (on 7/17/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Complacency rules on Wall Street as the VIX fell below 12, a flashing red warning sign, while bearish sentiment is at historic lows. It’s hard to find many investors who believe the market is in danger. Last week the indexes rose back above their moving averages, so all appears well with the world. As we enter this week, we’re in a short-term uptrend. Bottom line: The odds favor a low-volatile, sideways market. However, as China learned the hard way, that could change in an instant.
Opinion: Now that Greece is out of the front pages (for the moment) and China managed to keep its market from plunging more than 30 percent (in fact, they had a 20 percent rally last week), volatility has been crushed. Janet Yellen agreed that all is well, at least I think that’s what she said. More importantly, buyers rushed in at the 200-day moving average and stopped the market from falling further. So here we are again: Dow 18,000 and 2,100 on the S&P. In other words, we’ve gone nowhere in six months. It feels like the movie, “Groundhog Day.” That’s what sideways markets are like.
At the moment, many bullish investors feel invincible. Professor Jeremy Siegel appeared on CNBC again to repeat his Dow 20,000 prediction. Also, Dennis Gartman said you’d have to be a “fool” to short this market. If you look at the market, you see a blue sky as far as the eye can see with no rain in sight.
However, here are the facts: Margin is at all-time highs along with complacency; the problems in Greece have not been solved; China’s market is still flashing warning signs; nearly half the stocks in the S&P 500 are underperforming the index (source: Zacks); in the last three days ten stocks attracted most of the money (GOOG, AAPL, FB, BAC, M, NFLX, MSFT, CELG, GE, and DAL). (Source: effectivevolume.com). Note: Watch the market leaders closely. When they start to fall, head for the exits.
As for me, I have not changed my longer-term view of the market. In my opinion, continue to be cautious and manage risk. The market is designed to fool the most people most of the time. When I see that the majority on Wall Street has the same view, my internal antenna goes up. I know from experience this is the kind of behavior we see at market tops.
Not to pick on permanently bullish Professor Siegel but I must leave you with a quote from Jesse Livermore, who reacted to the prediction by Professor Irving Fisher, who said that “stock prices have reached what looks like a permanently high plateau.” Unfortunately, Fisher said that a few months before the 1929 stock market crash.
Here is the Livermore quote: “What can a professor know about speculation or stock markets? Did he ever trade on margin? Does he have a single cent in any of these bubbles he talks are cheap? Beware of inside information, all inside information. How can the public possibly rely on information coming from a classroom? I tell you the market never stands still. It acts like the ocean. There are waves of accumulation and distribution. The market always tells you when you are wrong. So let’s leave it to the market to tell its own story with or without the help from college professors.”