Market Indicators (as of Sept. 23)

Each weekend, I will list signals from some of the most useful market indicators.*

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

Note: Here is a link to my latest column on MarketWatch: http://on.mktw.net/19CIYLo

 

AAII survey (9/18/2013)

45.1% Bullish. 29.7% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/18/2013)

42.3 % Bullish. 21.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .60

Sell Signal: Less than or near .50 is a sell (more call options are being bought).

Buy signal: Higher than or near 1.0 is a buy (more put options are being bought)

 

VIX: 13.12

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above its 200-day MA, above its 100-day, and above its 50-day MA.

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is at the zero line and above the red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Sell signal: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Buy Signal:  MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

Analysis: As expected, it was a volatile week. Although most market indicators are still pointing up, looming outside events may trump the signals. Sentiment is still more bullish than bearish but not at extreme levels. VIX continues to show complacency (not a good sign). I also looked at the indicator, RSI, which shows the market as overbought. if you look at the bigger picture, we’re getting mixed signals. Technically, we’re still in a bull market, according to the charts, but there is evidence we could go sideways or down.

Opinion: I promised you a volatile market, and that’s what you got, thanks to Ben and the Fed. Ben pulled a fast one and surprised nearly everyone. What was he thinking? Or should I ask, what is he seeing that we don’t see?

Looking back, if Ben had cut QE by even a smidgen, the market would have had a gigantic temper tantrum, which would have ruined his legacy. Because the Fed decided to delay tapering, the market rallied by 1 percent, gold rallied, emerging markets rallied, and bonds rallied. Ben is a hero! Warren Buffett said in a CNBC interview that Ben Bernanke is the best Fed chairman we ever had, and he should stay on for another term. Thanks to Ben, happy days are here again.

For a day.

On Friday, the market gave back all of the gains that it had made during the week. Basically, the market ended nearly flat. And that is the definition of a dangerous sideways market. The bulls do not want the party to end, and the bears, who have had few opportunities in the last four years, are slowly waking up from a deep slumber.

Some blamed the Friday selloff on St. Louis Federal Reserve President James Bullard, who said that they might taper in October. This time, they really, really mean it (fool me once, shame on you, fool me twice…). If the Fed really did taper in October, they’d have to pull a rabbit out of a hat to stop the market from plunging. Wait, I think I see Janet Yellen getting ready to take center stage. Maybe she will save the day by continuing quantitative easing. After all, the show must go on.

Right now, there are so many sideshows it’s hard to know what will move the markets. For starters, we have the debt debacle, the threat of a government shutdown, and a dysfunctional Congress. As we enter this week, any “crisis du jour” could turn into a huge headache.

If I were a doctor, I’d say the market was addicted to QE. And like any addict, getting off of that sweet liquidity will be hard. Even talking about cutting back on QE upsets the market. The Fed has really gotten itself in a pickle this time, and there is no easy way out. The longer they wait, the worse it’s going to be when it happens. (If I was the Fed, I’d wait for a huge rally and then make thetaper announcement.)

Meanwhile, Ben is going to sail off into the sunset soon, having saved the market from 2008. Bernanke has always been fascinated by the 1929 crash, and studied how the Fed mishandled it, which helped to create the Great Depression. That was one of the reasons that Ben injected the market with so much liquidity. He didn’t want a 1929 style bubble to happen on his watch. It’s ironic, but there is a downside to adding so much liquidity: bubbles.

At the moment, the Fed doesn’t see a bubble, but they are looking everywhere. In reality, asset bubbles are an interesting phenomenon. During the Dutch tulip bubble, the housing bubble, and the 1929 stock bubble, you don’t realize you’re in one until it pops. No one knows if the current bull market is a bubble, but this I can say for sure: if the Fed doesn’t start to cut back on the liquidity soon, there will be no doubt.

Bottom line: In my opinion, the markets will feel some short-term pain, and soon. The next week will be volatile once again with a number of rallies and reversals (if not this week, then next week). Those late-day selloffs are very bearish, and that could continue. Investors are hoping that any selloff will be followed by a huge rally. It’s possible because there is a lot of cash on the side itching to get into this market at a lower price. This market remains dangerous, and more so in the next two weeks. If the market can come out unscathed through October, I’d be surprised. Nevertheless, sometimes the worse market events occur when people least expect them. You already know that I like using options for protection whether you’re bullish or bearish. This is the time to be disciplined and flexible, so be on your toes, and good luck. We could be in for a rough ride over the next few weeks and months.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

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