Market Indicators (Week of July 1)

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).

 

AAII survey (6/26/2013)

30.3% bullish. 35.2% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (6/26/2013)

41.7% bullish. 25% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .66

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: 16.86

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 MA.

 

MACD: MACD is on the zero line and firmly below the red 9-day signal line and pointing down. (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: The S&P was unable to rise above its 50-day moving average, and barely above the 100-day MA. MACD is still flashing a sell signal and is on the verge of dropping below the zero line (a negative sign). Because of the rally last week, option buyers bought more calls (not surprising), a negative sign. Bottom line: The market is once again at a crossroads. The indicators are telling us to sell. If that is going to change, it will have to be a very good week for the bulls.

Opinion: This is a trader’s week as the Chinese purchasing manager’s index (PMI) (released on Sunday night) and the U.S. monthly jobs report (Friday) could be market-moving events. Anything below 50 for the Chinese PMI indicates contraction. FYI: The market is closed on Thursday, July 4, and will reopen on Friday to a lower-volume (but perhaps more volatile) day.

As expected, last week was also volatile, but the bulls took control for a rousing performance. Those multiple 100-point days erased the pain from the week before, although the gains were on lighter volume.

Once again, when compared to the rest of the world, the U.S. economy appears strongest. The big unknown is how the problems in other countries will affect ours. Emerging markets are in a bear market and are continuing to fall (although they did have one excellent day). Bond prices appear to be going in the wrong direction as interest rates creep up, and not that slowly at times. (Perhaps the worst investment right now is bonds in emerging markets.) China is still the big unknown, but Sunday night we will get a glimpse when the manufacturing numbers are released. (Breaking news: PMI was 50.1, in line with estimates)

The unpredictable piece of the puzzle is the U.S. market. On the bull side, we are still above the 200-day moving average. Also, the economy is showing some strength along with more jobs (on Friday we’ll get the jobs numbers). In the topsy-turvy world of Wall Street, a stronger economy means the Fed will reduce the stimulus, which could cause the market to fall. A weaker economy could cause the market to rise, and for bonds to recover. Can anyone predict how the market will react to the jobs numbers? No, except there will be a reaction.

The bear side is still stronger, at least in the short term. The S&P is below its 50-day moving average (and above the 100-day), and MACD is a flashing a sell signal. If the bulls can manage another up week on strong volume, those technical indicators will change for the better.

Not surprisingly, the average retail investor is feeling suspicious of this market, and who can blame them? The bear sentiment is slowly creeping up, but not at extreme levels. It will take a few more plunges for retail investors to fear this market. We’re not there yet.

Here’s the way I see it: Emerging markets (EEM) are in a bear market according to the charts. The bond market is in turmoil and prices will continue to fall. I believe we are not immune to the economic problems spreading throughout the world, and our market could take a short-term hit. However, I think we would also be the first to recover.

If you are a trader, this will be a wonderful week as the volatility will continue. If you’re an investor, you can step to the side in cash or be willing to ride out the storm, knowing that in the long term our market will go up. In an interview that I did with author and economist Bernard Baumohl, he is estimating that the Dow will end this year around 15,500. In the past, he has been uncanningly accurate with his estimates. Nevertheless, there are potential pitfalls that concern him (the full interview will be published on MarketWatch in a week).

Bottom line: This will be another tumultuous week so be alert, especially on Friday (July 5th) when most market participants are on vacation. If the bull market is not over, then the bulls must prove it. As always, the tape doesn’t lie.

 

* 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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