Market Indicators (week of July 29)

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 (7/24/2013)

45.1% bullish. 22.6% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (7/24/2013)

51.5% bullish. 19.6% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .64

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: 12.72

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 indicators are almost identical to last week. The technical indicators are bullish while the sentiment indicators reflect optimism, but not at extreme levels. However, looks can be deceiving.

Opinion: If you had only looked at last week’s closing prices, you wouldn’t have known the market plunged on two days, including a 150-point drop on Friday before coming back to even. The bulls came out in full force to make sure the market squeaked out a small gain. It was a very impressive performance.

And yet, it’s hard to ignore what is going on in the rest of the world. First, Chinese President Xi Jinping has made an aggressive effort to cut down on government debt, reduce corruption, lower growth expectations, and get control of shadow lending practices. We won’t know for a while whether he succeeds, but we do know the problems in China are deeper than many people realized.

While the U.S. bull market continues, there are other problems around the world. Europe is struggling to get out of a deep recession, many emerging market countries are in serious financial trouble, and the Mideast is still in turmoil. Eventually, these problems will affect the U.S., but no one knows when. In a bull market, bad news is often ignored until it can’t be ignored any longer.

Back in the States, it will be a busy week. Many companies are releasing earnings, the FOMC (Federal Open Market Committee) is meeting for two days, the GDP report will be released on Wednesday morning, and the July employment report will be released on Friday. There should be plenty of fireworks as market participants digest the news, or lack of news.

On the positive side, the U.S. economy seems to be improving but at a lackluster pace. More important, if the Fed lets the market believe that QE will go on and on, we should go nowhere but up (in the short term). On the negative side, the Fed will eventually have to taper QE, or at least remind the market of that fact.

Bottom line: Because of all these cross currents, this is a dangerous market. Although the market might end the year up by an additional 5%, as many people predict, the odds have increased that it will be an extremely bumpy ride. While retail investors are starting to believe in this market again, it might be at the exact wrong time. In my opinion, this four-year bull market is showing signs of wear and tear. Even though the technical indicators are pointing up, the clues point to problems ahead. As for me, I am going to look for those end-of-day reversals. Take out the popcorn, the market is going to put on a very good show this week.

 

* 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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