Market Indicators (week of July 15)

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 (7/10/2013)

48.9% bullish. 18.3% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (7/10/2013)

46.9% bullish. 22.9% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .67

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: 13.84

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: The technical indicators (MACD and moving averages) are clearly saying the trend is up and the bull market continues (jump-started by Ben Bernanke). The sentiment indicators, although not screaming sell signals, are telling us the crowd is feeling a bit too confident about the market. Individual investors are even more bullish than the financial writers. The trend is up, the bull market continues, but if the sentiment gets too exuberant, that would be a signal the good times are going to end. We’re not there yet, however.

Opinion: The bulls put on an spectacular performance during the week thanks to dovish comments by Ben Bernanke. Similar to the “Greenspan put,” the Bernanke put has you covered. Three weeks ago (it seems like an eternity), Bernanke had spoken a bit too clearly about removing stimulus, and the market protested strongly: “Don’t take away our QE!”

Now, the word is out: The Fed will protect you. Therefore, in the short term, the market is destined to go up. In addition, the Wall Street minions have concluded that bond buyers are going to flock to the stock market, where the grass is greener. Also, those who invested in emerging markets are also supposed to move their money to the U.S. stock market. The theory is this: When you look around the world, the U.S. is the safest country for investments. It’s a good theory and it is true right now. Therefore, you are supposed to believe that nothing will stop this bull market from going higher. In addition to Bernanke, positive earnings will also drive this stock market higher, no matter how bad it is in the rest of the world. As long term traders, we follow the trend until it ends, and the trend is up.

However…there are enough warning signs to make astute traders cautious. Eventually, the world’s financial problems (and the problems seem to be getting worse) will affect us. Oil has spiked because of the unrest in the Middle East. Europe is still in a recession but appears to be recovering, although it’s too early to know for sure.

In my opinion, I would not be surprised to see the U.S. take a 7 to 10 percent hit sooner rather than later. (It would be cruel if bond investors, who by nature are a conservative lot, entered the stock market only to get slammed.) I’m in the minority, however, as everyone else is looking at 15,800 on the Dow and beyond. The poor short sellers had only a few really good days in the last four years, the best reason why you follow the trend no matter what you think “should” happen.

If you’re a long term trader, you are long the U.S. stock market (but avoid EM and bonds) but you’re also cautious (in case I am right about the 10 percent hit). For now, look for signs of a selloff at the end of the day. Also, look for a gap up in the morning followed by a quick selloff. Some major institutions or high frequency traders seem to be selling into the rallies. Although my gut tells me this market can’t go up much longer, the market indicators tell me differently. But now that the investing crowd is finally starting to believe in this market, that is also a sign the fun is going to end one of these days.

Whether you are long or short, follow these three rules. They could save your assets: Rule 1: If you have a 5% loss on any position, that is a warning sign: Be prepared to sell. At 6 or 7 percent, sell without looking back. Rule 2: Don’t ever add to a losing position, but you can add to a winning position. Rule 3: Never buy a security on the way down. In my opinion, that is a dumb idea (although many people disagree).

Bottom line: Everyone wants the market to go up so the market is going up even though there are huge storm clouds across the world. I know that we aren’t isolated from the world’s problems, so be prepared to change strategies at anytime. When the sentiment changes from bullish to bearish, it won’t be pretty. Unfortunately, no one can predict when that will happen. All we can do is look for 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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