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 (7/1/2015)
22.6% Bullish. 42.83% Neutral. 35.1% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (6/30/2015)
49.5% Bullish. 15.4% 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: 16.79 (on 7/3/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 42.96 (on 7/3/2015)
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 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 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 2.39% (on 7/3/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Retail investors lost some of their bullish enthusiasm last week but financial writers and most on Wall Street were overwhelmingly bullish. It will be interesting to see if this week dampens their bullish bias. On the technical side, sell signals were triggered as the indexes fell below technical levels. We will need to see if the indexes remain below their moving averages. It’s still too early to say for sure, but the odds are good the sideways trend is ending (which may lead to a downtrend). Bottom line: You know this is going to be a wild week, which I will discuss below.
Opinion: Get ready for a roller coaster ride. There are two main stories that are converging on Sunday night. First, we have the Greek drama that will play out for weeks or longer. Investors hate the unknown, which is why Greece will cause them heartburn. Also, the central banks aren’t sure how to react, or how bad it could get. All anyone can do is sit back and observe. Many investors are fleeing to bonds for safety, and at the moment, the Euro is getting crushed. Day traders may have fun this week but everyone else will get whiplash.
The second big story is China’s stock market, which lost 30 percent in two weeks (after a 120 percent rise in one year). The Chinese government has taken a number of unprecedented steps to contain the damage, including suspending short selling, encouraging or demanding that brokerage firms buy stocks, loosening margin, discouraging selling, and cutting interest rates. As Jim Rogers told me, bubbles are deliciously fun on the way up, but awful when they pop.
On Sunday night, the Chinese market opened up 8.5 percent higher, but then was up only 3 percent within minutes. As investors will learn the hard way, no one, not even central bankers, are bigger than the market. Once fear takes hold of investors, they will panic sell. One Chinese investor said that all he wants “is to get back to even.” Don’t we all! It’s possible that the Chinese stock market will be a bigger story than Greece in the coming days.
At this time, it’s unknown how China and Greece will affect the U.S. market. The talking heads will come out and say it will have little or no effect on the U.S. market (however, the Dow futures are down about 200 points, but that is meaningless until the market opens). I do know from experience that China and Greece are red flags that must be heeded.
The world’s central banks are likely putting together new rescue packages in case world markets plunge in unison. Perhaps they can keep investors calm with words only. Last week I told you that Wall Street needs a calm market with an upward bias. Right now, they have a volatile market with a downward bias. If things get out of control, the Fed will step in with a new program. That is why it is impossible to predict which way the markets will end this week.
In my opinion, and based on the indicators, the probabilities strongly favor the bear side. However, because of the influence of the central banks, it’s still too early to go heavily short. As I’ve repeatedly warned, this is the kind of environment when cash is your friend (along with put options for protection or speculation).
Bottom line: This could be the start of a number of unpredictable, volatile, and wild days. Complacent investors are opening their eyes for the first time in years.