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, it may help you to create profitable trading strategies.
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AAII survey (6/10/2015)
20.0% Bullish. 47.4% Neutral. 32.6% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (6/9/2015)
47.4% Bullish. 16.5% 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: 13.78 (on 6/12/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 46.16 (on 6/12/2015)
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 is below its 50-day moving average (but above its 100- and 200-day MA), 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 above its zero line but below 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 2.38% (on 6/12/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: The indicators are nearly identical to last week. AAII investors are still overwhelmingly neutral, a very unusual reading. In addition, investors appear more bearish (perhaps because they are reading the news). Nevertheless, financial writers and most pros are still overwhelmingly bullish, so sentiment hasn’t changed. On the technical side, the indexes are below their 50-day week moving averages. In fact, the bulls and bears are fighting for Dow 18,000 and S&P 2,100. At this writing, the bears are temporarily winning, but that could change in a heartbeat.
Opinion: It was quite a roller coaster ride last week, but in slow motion. The bears were in firm control most of the week until there were “hopeful signs” the Greek drama was going to end; the Dow skyrocked up 250 points on the rumor. Kapow! The next day the Dow fell by 140 points as it was another false alarm. As of Sunday night, things look bleak. The drama will play out all week so anything is possible.
In addition, Janet Yellen is speaking this week so we will hear a half-dozen reasons why the Fed wants to raise interest rates but won’t at this time. I’d be surprised if they raised rates this year. Even the managing director of the IMF, Christine Lagarde, told Janet not to raise rates, so there is political cover.
And yet, bond yields are rising in spite of the Fed. When you look at the bigger picture, there is debt as far as the eye can see. If you are a saver, you’ve been punished for years while debtors are rewarded. In the future, expect higher interest rates. It’s true the Fed will do everything in their power to keep interest rates low “for a considerable time” but that can only work for so long (ten years seems to be long enough!). Eventually, the world’s central banks and financial markets will have to face reality, and it won’t be pretty.
Although no one can time the next correction or crash, or even predict when interest rates will rise or how high they will go, one thing is certain: the current economic situation cannot continue indefinitely.
As for me, I am focused on the clues and indicators. Fact: The indexes were unable to stay above their moving averages last week, which is a warning sign. The odds are good that a severe disruption is coming, but ignore the talking heads and focus on what the market tells you. Watch the market leaders to see if they start to falter. I detect a bit of nervousness creeping into the markets but most believe in the power of the central banks to keep the market levitated.
Bottom line: This is a very, very dangerous market. Anything is possible this week. Expect volatility as confused investors search for sunshine while thunderstorms lurk in the background.