Market Indicators (week of August 26)

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 the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

AAII survey (8/21/2013)

29.0% Bullish. 42.9% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (8/21/2013)

43.3 % Bullish. 21.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity 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)

 

VIX: 13.98

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 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 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: Once again, we’re getting mixed signals. If you don’t include anxious retail investors, sentiment is generally bullish (which is a bearish signal). In addition, the VIX and put/call ratio are still showing complacency. On the technical side, the S&P was able to climb slightly above its 50-day moving average. This week, we’ll learn if that can last. On the other hand, the Dow is still below its 50-day moving average. MACD is below its signal line (bearish) and pointing down (also bearish). In summary, the market is not out of the woods yet, but it’s less dire than last week.

Opinion: As we anticipated, the market put on a good show. The week began with the bears in control. The S&P (and Dow) started to sell off according to script, that is, until mid-week, when the Nasdaq stopped trading for three hours due to a technical glitch. Instead of a sell-off, however, the market reversed direction, and went higher. Usually, the market doesn’t like technical problems so the positive reaction was surprising.

To be honest, right now this market is hard to predict. A lot depends on whether Bernanke cuts back (i.e. tapers) on QE, or whether he delays it. If institutional investors perceive that Bernanke will delay tapering, the market will climb, and quickly. This is a real possibility. In that case, the market will rise well above its 50-day moving average, and retail investors, who became increasingly bearish last week, will join the party. In addition, mainstream analysts who predicted a rally (i.e. the 1700 Club) will be right. And short sellers, who had waited four years for a market correction, will have to wait a bit longer to be rewarded.

On the other hand, if interest rates continue to rise, if the market perceives that Bernanke will taper more than expected, if emerging markets continue to implode, then the pullback we have anticipated will occur. The consensus, however, is that Bernanke will taper only a little off the top so as not to upset the market.

No matter what Bernanke does, this market is dangerous. Right now, you need to be observant andflexible. If you are a rookie (and even if you’re not), being in cash is a comfortable place to be. Another idea is to hedge your positions with call or put options. The market is volatile, and this will continue. As we move into the fall (put September 17th on your calendar, the day of the next FOMC meeting), the volatility will increase.

Experienced traders can do well in this environment (playing both sides), but investors are going to get whipsawed. If the market starts to sell off, the buy-on-the-dip crowd will jump in. At the moment, there is some anxiety about the market, but little fear. It will take a dramatic (and unexpected) event to change complacency into fear. It might be too soon now, but we’re getting closer.

Bottom line: This is a complicated and risky market environment. The market could go in either direction so be prepared for anything. The market is vulnerable so it wouldn’t take much for a severe pullback. However, most institutional investors believe in Bernanke and are certain he will not do anything to upset the market. Who is right, the bulls or the bears? We may not know for a while, but this week should give us important clues.

 

* 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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