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
Note: My latest MarketWatch column: http://goo.gl/tAmvkg
AAII survey (7/22/2015)
32.5% Bullish. 41.9% Neutral. 25.6% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (7/21/2015)
49.0% 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: 13.74 (on 7/24/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 43.62 (on 7/24/2015)
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-day and 100-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 below its zero line and even with its red 9-day signal line and pointing down. (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 2.27% (on 7/24/2015).
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 Dow fell by 600 points from its highs, the worst week for the Dow since January. In fact, the Dow fell below its 50-, 100-, and 200-day moving averages. Although many technical indicators reflect a short-term downtrend, there is an FOMC meeting this week. In the past, during the meeting, the market has rallied. Therefore, the odds are good that Janet Yellen and the Fed will give buyers a reason to buy on the dip (at least for two days). As noted last week, the VIX made ridiculous lows last week, reflecting overwhelming complacency. Although a little uncertainty creeped back to the market, sentiment indicators tell us that most market participants still believe it’s going to be a pleasant, low-volatile summer.
Opinion: What a difference a week makes. As you remember, permanently bullish professor Jeremy Seigel predicted Dow 20,000 by the end of the year (anything is possible), and Dennis Gartman said on CNBC that you’d have to be an “idiot” to short (oops). And don’t forget all the pundits, including Jim Cramer, who loved Biogen, that is, until it fell by 22% on Friday. Ouch. (Now the pundits hate the stock.)
It was a brutal week for the bulls, but the lesson is clear: Don’t make or listen to market predictions. When pundits predict, they are guessing. No one knows where the indexes will be next year, next month, or tomorrow. Listening to predictions is similar to playing a parlor game. It’s amusing, but it’s unlikely to make you money.
When last week started, everything looked rosy. Greece was “solved,” the Chinese stock market was under control, and most on Wall Street saw only blue skies. Then out of the blue, the market sold off for five days straight.
But that was last week. As mentioned above, based on probabilities, there should be a short-lived rally during Janet’s speech and question and answer period (note: no Q&A this meeting). If the market doesn’t rally, and sells off, that would be unusual. What is she going to say? Not much, I assume. Instead, pay attention to the market’s reaction. Wall Street really wants the Dow to hit 18,000 again.
Right now, it’s important to keep an open mind. The market could go in either direction so control risk. If you’re comfortable with options, consider using them as an insurance policy to hedge positions. Using options for risk management is a very powerful and effective tool. Unfortunately, the majority do not believe the market is at risk, and are certain that the Fed will save them once again. We will see.
Bottom line: Based on past history, the market should attempt to rally this week, especially while Janet is speaking (this is not a market prediction, only an observation). After the meeting, however, anything is possible. Keep your eye on the market leaders (see * below). Apple was tarnished last week but the others are going strong. If the leaders start to falter over the next few weeks or months, it will not be a fun summer for the bulls.
* From Reuters: “Data from S&P Dow Jones Indices shows that the gains in Amazon (AMZN.O), Facebook (FB.O), Google (GOOGL.O) and Netflix (NFLX.O) account for more than 50 percent of the broad S&P 500’s rise of just over 1 percent so far in 2015. Add in Apple (AAPL.O), and those five companies account for nearly 60 percent of the year’s gains, according to S&P index analyst Howard Silverblatt.”