Market Indicators (Week of August 12)

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). Finally, I write a monthly column on long-term trading for MarketWatch.com.

IMPORTANT NOTE: Read my interview with Investor’s Business Daily market expert Amy Smith below.

AAII survey (8/7/2013)

39.5% bullish. 26.6% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (8/7/2013)

51.6% bullish. 18.5% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .58

Sell Signal: Lower than .75 is a sell (more call options are being bought). Less than .50 is a screaming sell.

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

 

VIX: 13.41

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 MA.

 

MACD: MACD is above 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 zero line. MACD line crosses above 9-day signal line.

 

Analysis: Although mixed, indicators are leaning towards the bear side. Sentiment indicators are a bit frothy. S&P is resting on the 20-day moving average and MACD is poised to fall (slightly below the 9-day signal line), thanks to a negative week. We’re getting confused signals because we have a confused market. As the tug-of-war continues, market could go either way.

Opinion: This is still a dangerous market and that should continue for some time. You should not be scared, but prepared. This is time to think clearly and be ready for any possiblity. Even some money managers believe the market could take a 10 to 20 percent hit, and many are looking for a buying opportunity. In fact, if the market plunged, one comment by Bernanke that he will not taper would rally the markets higher. Because this market is so unpredictable with mixed signals, you must be on guard.

For your information, most professional equity strategists are predicting the S&P will be above 1700 by the end of the year (they are now referred to as the “1700 Club”). The most aggressive prediction is 1775 by the JPMorgan equity strategist, Tom Lee. The lone exception is the Wells Fargo Securities strategist, Gina Martin Adams, who is predicting a year-end target of 1440 on the S&P. Therefore, most mainstream strategists believe the market is going higher, and I can’t wait to see if they’re right. 1700 Club – very catchy.

Nevertheless, many people have short memories. They don’t remember 2008, or don’t believe it could happen again. Personally, I want the U.S. economy to improve, unemployment to fall, and our debt to diminish. Even though I want this to happen, I must be realistic. The good news: The U.S. appears to have the strongest economy (although the 17 trillion in debt is a serious problem). The bad news: Emerging markets are still vulnerable, especially India and Brazil, and perhaps Russia. China released extremely positive growth numbers, but behind the curtain there are major concerns.

It’s possible we’re reaching a tipping point. In a worst-case scenario, we could have a perfect storm of problems that will affect not only the stock market but our economy. In the best case, the market could take a quick hit, recover, and then continue on its bullish way.

The challenge, as always, is no one can time a pullback or correction. You can, however, look for clues, such as late day reversals and selloffs. If the volume, and momentum, increases on the downside, that is a clue. At this time, it appears as if the 30-year bull market in bonds is coming to an end. Judging by mutual fund redemptions, many investors are selling bond funds and moving into stock funds. In my opinion, until we get more clarity, cash is still the safest place to be (but only for the short term). Those who have high risk tolerance could slowly scale into inverse ETFs (non-leveraged). The danger of shorting is the markets will reverse if Bernanke makes one positive comment. Even more dangerous, this indecisiveness and volatility could continue for several months.

Bottom line: We’re still in the danger zone. As the bulls and bears play tug-of-war, be defensive. The bulls do not want the party to end and will do anything in their power to keep it going. Even if the U.S. economy continues to improve, there are too many potential land mines that could derail the market. In addition to being cautious, you must also be patient. Let the market reveal its hand before committing too heavily to one side or the other. August is traditionally quiet with low volume, so the real fireworks should occur in the fall. Nevertheless, anything is possible before then.

 

* 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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