Bullish or Bearish? Week of Sept. 7, 2021

Notice: My publisher, McGraw-Hill, informed me that two of my books, Understanding Options, and Understanding Stocks, have sold more than 100,000 copies each. They are putting a special “sticker” on the cover of each book advertising that fact. (I want to thank my readers for helping to make this happen.) 


This is what the technical indicators are telling us this week: 

One-week trend = Slightly Higher. The bulls kept control during the week, bringing the market to extremely overbought levels. SPX rose from 4509 to 4535, a mild 26-point advance. The indexes remain at all-time highs. Futures are relatively FLAT on Monday night. In the morning, we will have a better idea which way the market winds are blowing during this shortened week.

SPX 20-day moving average (WEEKLY): Uptrend. SPX is above its 20-day moving average and is still in a strong uptrend. To paraphrase what I wrote last week, “The short-term trend looks wonderful. Unfortunately, moving averages don’t predict the future.”

RSI: (S&P 500) @73.53 (WEEKLY) = Extremely Overbought. If you believe in technical analysis and RSI, you may be shocked at these extremely overbought readings. While indexes can stay overbought for long time periods, the potential for a major pullback is high. No one can predict the day or time of the reversal, but it is guaranteed to catch everyone by surprise when it happens.

MACD (WEEKLY) = Neutral. Nothing to see here. The weekly MACD continues to give mixed signals. MACD is above its zero line, which is bullish. The MACD line is even with its 9-day signal line, a neutral reading. Note: MACD does not work well when SPX volatility is low (and the indexes are at all-time highs). However, MACD still works with volatile individual stocks. 

Daily Intraday Volatility (VIX) = 15.68 = How low can the VIX go? Let me count the ways. A super high RSI and a low VIX is a dangerous combination. Unless the algos have negated technical analysis (some traders claim that’s exactly what has happened), then the stock market is in for a world of hurt.

Comment:  I never thought RSI could get this overbought on the weekly SPX, but it’s happening. I feel sorry for anyone shorting the indexes as the pain must be excruciating. I suggest watching The Big Short this week as a reminder of how crazy things can get before it all comes crashing down. While you should not fight the tape, caution is advised.

No one can predict crashes, corrections, or bear markets. All we can predict is that they do occur every few years. Our last bear market was in March 2020, and it lasted less than a month. In theory, this bull market could continue for another year or so. Anything is possible.

Nevertheless, the extreme RSI reading is a huge warning sign that can’t be ignored. As it turns out, many people are ignoring the signs. As we enter the typically rough September-October time period, don’t forget how overbought this market is, and let’s see who wins the month: technical analysis or the algos. (So far, the algos are winning.)

Retail investors are riding the trend higher fueled by low interest rates and a friendly Fed. The scary part for me is how so many investors are oblivious to the risks. It’s as if people are just “throwing caution to the wind” and buying anything that moves higher no matter how overpriced.

Bottom line: The trend says we’re going to the moon, but the overbought-oversold indicators say the party has been going on way too long. Avoid predictions and follow the facts (and not your emotions). As for me, I wouldn’t be betting big on either side.


Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts’ latest newsletter:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

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