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).
Note: Here is my latest article from MarketWatch on surviving market crashes: http://on.mktw.net/10YNz5S
AAII survey (6/5/2013)
29.5% bullish. 38.6% bearish.
Sell signal: Over 60% bullish.
Buy signal: Over 50% bearish.
Investor’s Intelligence (6/5/2013)
45.8% bullish. 20.8% 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)
Sell signal: Lower than 12.
Buy signal: Over 40.
Moving Averages (daily): S&P 500 above the 100-day and 200-day MA. S&P below 20-day, 40-day MA, and slightly above 50-day.
Sell signal: Index crosses below 50-, 100-, or 200-day MA.
Buy signal: Index crosses over MA.
MACD: MACD is still above the zero line but is firmly 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: Signals are mixed. Retail investors and financial journalists got spooked by last week’s market (AAII and II). As a contrarian indicator, that is a good sign. On the other hand, their confidence may have been restored on Friday (survey comes out on Thursday). MACD and Moving Averages are telling us the trend is in trouble. Also, volume on Friday told us the institutions weren’t participating 100 percent, another negative sign. Bottom line: Mixed signals.
Opinion: If you read the clues from the major indicators last week, the short-term pullback was not surprising (as I warned early last week). First, there were several distribution days, i.e. institutions sold off at the end of the day. Second, the market had sliced through its 20-day and 40-day moving averages, and on Thursday morning temporarily dropped below its 50-day moving average.
We’ll never know if the 50-day was a signal to buy or if the positive payroll number report was leaked, but on Thursday afternoon, the market made a bullish reversal, which continued into Friday (although on lighter volume). The S&P 500 is now slightly above its 50-day moving average thanks to Friday’s rally.
For the fourth time this year, the S&P 500 fell below its 50-day moving average and bounced back. It will be interesting to see if the bulls can keep the party going a little longer. In fact, if the market follows the same scenario as before, it will have a short-term run this week. But because of what is happening in the bond market here and overseas (the bond bull market is ending), this is a volatile market. In addition, emerging markets are still in turmoil, and an Asian selloff could affect our market.
Near the end of a bull market, the bulls will fight ferociously to keep the uptrend in place. There is a war going on between the bulls and bears, and it’s too early to say who will win. In my opinion, the bears have an edge.
Although the market could continue to rally, the indicators tell me that the market is indecisive. As I suggested last week, it makes sense to reduce individual stocks, especially any losers; and perhaps hedge with inverse ETFs (non-leveraged only). If you’re not comfortable hedging, then don’t do it. Suddenly, having cash on the side feels comfortable for the moment.
The best advice I can give is let the market (and the indicators) tell us where it will go, and not let opinions influence you. My other advice is not to make a huge bet on either direction.
Bottom Line: Stock market will continue to be indecisive so remain cautious. The winner of this battle will be known eventually.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.