Market Indicators (week of July 22)

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).

UPDATE: Here is my latest column for MarketWatch — http://on.mktw.net/13SBlLY

 

AAII survey (7/17/2013)

47.7% bullish. 21.3% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (7/17/2013)

52.1% bullish. 19.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .54

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: 12.54

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: It’s a tale of two indicators. The technical indicators are saying the bull market will continue while the sentiment indicators are warning that it’s getting frothy. Individual investors are hopeful, but they still don’t believe in this market 100%. Once they do, however, it will be a huge warning sign.

Opinion: This time it’s different, or so many people believe. Because Ben Bernanke has us covered, many believe there is little risk in investing in the market. I notice the change in sentiment: It’s been a long time, but in the last week I got two stock tips, one from a customer at the bookstore and another from a bagger at the supermarket.

Early in the week, Bernanke went to Congress and answered questions, calmly reassuring investors that no matter what happened to the economy (or the market), the Fed would use their tools to keep things stable. The market liked what it heard, and it sailed through a difficult week.

In fact, the news was not good. Google and Microsoft missed earnings estimates. Oil prices rose to over $108 per barrel, and Detroit declared bankruptcy. When the market opened on Friday morning, there was a big yawn (except for Microsoft, which got hit by 10 percent). The Dow ended down by only 4 points. In the old days, the market would have plunged on bad earnings by market leaders and a bankrupt city. There is little doubt about it: This market is ignoring reality. (To be fair, however, U.S. economic indicators have been generally positive.)

Here’s the important point: You can complain about the unfairness of the market, and how it “should” react, but opinions don’t matter. No matter what you think should happen, the market is going up. And yet, the sentiment indicators are flashing danger signals, although not at extreme levels (for the moment). Who are you going to believe? Unfortunately, sentiment indicators should not be used to time the market because sentiment can remain extreme for long time periods. But it does tell us that many investors do not see (or care about) the warning signs.

If you believe in the power of the Fed, you won’t care about the slowdown in China, the turmoil in emerging markets (remember?), high oil prices, risky bond funds (at least they were two weeks ago), and the earnings miss by two major technology companies. Retail investors are getting lulled into thinking this bull market is unstoppable, and for the moment they are right. But only for now.

There is no doubt that a pullback or correction is coming, but it is impossible to time. And don’t forget: If there is a pullback, the Fed will step in. With the Fed making people believe that investing is risk-free, it would not be surprising to see this market keep climbing. In reality, investing is not risk-free. Getting off the quantitative medicine is not going to be easy. In fact, just the mention that the medicine might stop is enough to send the market into a tizzy.

In my opinion, it is a dangerous market simply because most people are unaware it’s so dangerous. I am not writing this to scare you, but to prepare you. This market cannot keep going up forever. When the market plunges one day, I am hoping that you will be ready. Unfortunately, we cannot predict when that day will occur. But we can look for clues (including using market indicators).

If you are long (or short) the stock market, use strict money management techniques (see a list at the end of the article) to minimize losses. This is not the time to make huge bets on either side of the market. The safest place to be right now is in cash, but that is a decision only you can make (since it’s quite possible you will miss out on the next 500 points). In my opinion, it’s a trader’s market. There is still enough bad news in the world (and even in the US) to give any realistic investor heartburn.

Bottom line: Because of Bernanke’s soothing words, the market keeps going up, ignoring bad news. It may not be fair, but you can’t fight the tape. One day this bull market will end, perhaps sooner rather than later. Be ready with a trading plan and be nimble if there are signs of an imminent pullback or correction. Aggressive traders can hedge with inverse ETFs while cautious investors can increase cash positions.

 

Four Money Management Rules that Can Save Your Assets

Note: These are not hard and fast rules, but guidelines. Adjust the rules to fit your risk tolerance.

  1. If you lose more than 5 percent on a position, that is a warning sign, so be prepared to sell. At 6 or 7 percent, sell.
  2. Don’t buy any stock or index on the way down.
  3. Never add to a losing position (but it’s okay to add to winning positions).
  4. If you have a gain, and the stock or index pulls back 3 to 5 percent, sell to lock in that gain.

 

* 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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