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). In addition, 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 the line.
Note: Here is my latest MarketWatch article, this one from the Twilight Zone – http://on.mktw.net/16Cjdxc
AAII survey (8/14/2013)
34.5% Bullish. 37.3 % Neutral. 28.2% Bearish.
Sell signal: Over 60% bullish.
Buy signal: Over 50% bearish.
Investor’s Intelligence (8/14/2013)
47.4 % bullish. 20.8% bearish.
Sell signal: Over 50% bullish.
Buy signal: Over 50% bearish.
CBOE Put/Call Ratio: .60
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)
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 slightly below 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 above the zero line and below 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: Investor sentiment has turned cautious but there is little panic (for now). Financial newsletter writers are still bullish about the long term prospects of the market. The VIX is on the low end and the put/call ratio still shows excessive bullishness. These are all negative signals. In addition, the technical indicators turned negative, and there is more room for the market to fall. If you follow the indicators, you are cautious and prepared for a rough ride. The negative scenario could take some time to play out, so be patient.
Opinion: The market revealed its hand, and it was not pretty (if you are bullish). As I wrote last week, this is a dangerous market. As it turned out, MACD gave us an early warning signal that the market was in trouble. Now, the indicators are firmly bearish. This doesn’t mean the bull market is over, only that a market pullback or correction is highly likely in the next few weeks or months.
Hopefully, you are temporarily in cash or you scaled into inverse, non-leveraged ETFs (Be careful with leveraged ETFs because they are so unpredictable, and can viciously turn against you if you hold more than a few days, or weeks). If you are new to the market, I’d also be cautious about selling short individual stocks, as that takes experience and discipline.
Even many long-time bulls went on TV last week and admitted that a 10 percent correction is likely. They were quick to add they see this as a buying opportunity. The bulls suggest that you don’t panic, that you don’t sell what you own, and that the market will end up higher at the end of the year than now. Only one mainstream equity analyst believes the S&P 500 will end the year below 1700. Everyone else is in the “1700 Club.” They are right about one thing: You should not panic.
The bulls are also confident because they (wink, wink) have insurance. Let me explain. When you trade options, you can buy protective puts, an option strategy that helps protect your stock positions. Instead of protective puts, however, the bulls have something better: the Bernanke put. In other words, if the market starts to plunge, they know that Uncle Ben is going to say two magic words, ”No Tapering,” and everything will be all right. On the day he says these words, the markets will reverse direction and the bull market will continue. At least that is the story many people are telling. After all, when the market plunged by 700 points in June, it bounced back. The theory is that any future pullback will be temporary.
When the selloff does begin, it may start off slow, but could turn fast and furious. To alleviate the damage, in addition to the Bernanke put, the name of the new Fed chairman could be leaked or announced (Janet Yellen is the current favorite). The market will likely approve.
Unfortunately, if there is anything that I learned about the market, it’s that anything is possible. In Florida (where I live), when a hurricane is headed in your direction, you prepare. You protect your house, buy supplies, and if the storm is bad enough, you leave the area. Sometimes the hurricane makes a direct hit, and sometimes it’s a lot less damaging than originally thought. Right now, a financial hurricane is headed our way. It may not be a disaster, but it could be.
Keep in mind that a lot of new money entered the stock market in the last two weeks. Some of that came from bond mutual fund holders who wanted a better return. (Welcome to the stock market, bond holders!) If the market starts to falter, the new buyers will be the first to panic. Right now, there is little fear as people assume there will only be a temporary pullback. But no one can predict if the pullback will be temporary or not. If investors panic, they might flee the stock market in droves. If that happens, the market may not recover immediately.
Bottom line: Keep an open mind. As you know, there are a lot of conflicting and converging developments throughout the world that could create a perfect storm. The technical indicators have turned bearish and a pullback is imminent. No one knows how vicious it will be or how long it will last. This is a difficult market environment, even for the pros, so you must be nimble and observant. For now, take out the popcorn and see if this tired market can rise back above its 50-day moving average (that would be bullish). The market should put up a good fight.
Interview with Amy Smith, Market Expert at Investor’s Business Daily
Amy Smith, author of “How to Make Money in Stocks Success Stories” and a market expert at Investor’s Business Daily, gave her view of the overall market.
How do you see the overall market?
There’s been sideways action in both indexes for awhile, and then the uptrend came under pressure after two Fed officials suggested quantitative easing could start being scaled back this fall. Yet, as we know the Fed’s thinking can sometimes change day to day. Just another reason that in the market you want to remain flexible and nimble, and monitor the market each day. If you see a lot of heavy selling days in a short period of time, that would spell trouble for the market. But if you see heavy volume to the upside and stocks breaking out of price consolidation, then we are in a good market.
The S&P 500 went just above 1,700 last week, and hit an all time high on August 2. That was very positive. There have been a lot of stocks report positive earnings, and that is also positive for the market. But there also have been some high profile earnings misses, so it pays to be cautious and watch the overall market for signs of strength or weakness each day.
How do you look at industry groups?
We look at the New High List in Investors Business Daily© (IBD). It’s a good sign when you see a lot of stocks making new highs. Stocks came from a number of different groups such as medical and retail. One stock from the medical group that reported strong earnings was QuestCore Pharmaceuticals (QCOR). They have a gel that treats multiple sclerosis. Their earnings rose 96 percent and sales were up 64 percent in the most recent quarter. There are also a lot of stocks in retail doing extremely well. For example, Starbucks reported strong earnings and did some cost cutting. That stock has been an institutional favorite.
How can investors take advantage of earnings?
The key is to keep your watch list up to date, look for stocks showing strength, that have good fundamentals, and that are setting up solid bases, also known as price consolidations. That’s the most complete way to analyze a stock’s potential.
LinkedIn was an example of how great earnings can move a stock. Last quarter its earnings were up 138 percent compared to the same quarter a year earlier. Institutions always look for positive earnings.
Why should investors buy stocks high?
First, you don’t buy stocks that are too extended in price past a potential buy point. You want stocks that are showing strength in the market, and when you see stocks hitting new highs, it’s usually because there is good news, and it’s usually because of solid earnings numbers. Stocks with the best potential often report stellar earnings, which captures the attention of institutional investors.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.