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.
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 (6/17/2015)
25.4% Bullish. 40.3% Neutral. 34.3% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (6/16/2015)
45.5% 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: 13.96 (on 6/19/2015)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
RSI (S&P 500): RSI is at 52.23 (on 6/19/2015)
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 slightly above its 50-day moving average, 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 slightly above its zero line and even with 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 2.27% (on 6/19/2015).
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders). Note: Bonds had a significant rally last week.
Analysis: According to the indicators and clues (and common sense), the market will be unpredictable this week. Unfortunately, the indicators can’t tell us how volatile it will get. Trumping the indicators is the Greek drama, and judging by the S&P futures (Sunday night), investors believe there will be a final agreement. As I mentioned last week, observe how the bulls and bears fight for Dow 18,000 and S&P 2100. By the end of the week, we should know who won.
Opinion: Last week, the bears had the upper hand, and then Janet Yellen appeared, and said nothing surprising, but the indexes skyrocketed higher. And here we are at Dow 18000 and S&P 2100. Once again, the short-term trend is sideways.
As mentioned above, the highlight of the week will be Greece, and the outcome is unknown. Will the ECB and Greece kick the can down the road, or attempt to solve Greek’s debt problem? No one knows the answer although there are “hopeful signs.” Most important is the market’s reaction. The probabilities are good that it will be a volatile week.
The longer the Fed plays “hot potato” with Mr. Market, the longer they keep interest rates low, the higher the debt goes, the more dangerous the market becomes. How will the Fed respond to a 10 or 15 percent correction? You know the answer: they will buy even more bonds. Yes, it gets curiouser and curiouser.
It’s not easy to stay sane in a mixed-up world. It might be weeks, months, or longer than you ever imagined, but this party will end. Few appear to be prepared for interest rates going higher and a market going lower, but that day is coming. Wise investors are preparing for the inevitable smash, although it might occur in waves rather than at one time.
I’ll leave you with a Jesse Livermore quote, a saying true now as it was 100 years ago: He wrote: “Stocks are manipulated to the highest point possible and then sold to the public on the way down.”
Bottom line: Don’t forget that human nature never changes. By the way, this should be an interesting week.