Market Indicators (week of June 24)

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 (6/19/2013)

37.5.0% bullish. 30.0% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (6/19/2013)

46.8% bullish. 21.9% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .82

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: 18.90

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above its 200-day MA, slightly above its 100-day, and below its 50-day MA. S&P slightly below its 20-day MA.

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 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 sentiment indicators are indecisive, and showing complacency (maybe anxiety), but not fear. Financial writers are more positive than the retail investor. The S&P went below its 50-day moving average, a significant short-term sell signal. MACD is also below its signal line, and correctly gave us an early warning signal. That warning remains. Bottom line: Indicators are telling us the short-term pain and volatility could continue.

Opinion: Even after the 500-point drop in the Dow last week, people are not afraid. In fact, some experts see the pullback as a healthy sign, and an opportunity to buy at a lower price. Some investors are feeling more anxious than the pros right now, as they remember the pain they went through in 2008. Here’s the way I see it:

The Good News: Compared to the rest of the world, the US economy is strongest, and the markets will not get hit as hard as everyone else. There are positive signs in housing (in Florida, housing prices are rising so fast people are concerned there might be another bubble), and the US economy appears to be recovering, although slowly. If you are a foreigner looking to invest in stocks, the US is the best place right now. (Another possible scenario is that billions of dollars leaving the bond market could also find its way to the stock market.)

The Bad News:

Last week was just a taste of what is coming. Emerging markets had their worst month in years, and there are no signs the EM destruction is going to stop anytime soon. Interest rates shot up last week (keep your eye on the 10 year Treasury yield), and billions of dollars fled the bond market. When people open their statements at the end of this month and see how much money they lost in bonds, it will not be pretty. Many people incorrectly thought that bonds were risk free, and they are just starting to wake up to reality: bonds are not a safe place to be right now.

Right now, I can confidently say that you do not want to own bonds or emerging markets. The Chinese economy, although growing, appears to slowing down, so don’t be surprised if you wake up to a huge correction (or worse) in Asia. Because it’s hard to know what is really going on in China, that makes it more uncertain.

Warning: Investing in emerging markets and bonds are too dangerous right now.

In the US, the technical indicators have taken a turn for the worse. The S&P went under the 50-day moving average, and MACD is signaling that more pain is coming. If you are an individual investor, you have the flexibility to move in or out of the market. Right now, the stock market is uncertain and dangerous. According to the indicators, we could have a pullback (3 to 9 percent) or a correction (10 to 20 percent). And if that happens, it’s also possible we could bounce right back. What is uncertain is if we will enter a bear market, which would be more painful, and last longer than a correction.

I remember in 2007 when people were anxious but also in denial that the housing market crash would affect our stock market. If anything, back then, experts on TV suggested that you buy stocks (especially those low priced financial stocks) on the dip.

And now, just like in 2008, many people seem unconcerned. Unfortunately, no one knows what will happen to the US stock market if emerging markets continue to implode, and if there is a mad dash out of both emerging market bonds and US bonds. It will not be pretty, and the worse is yet to come.

If you are a beginner investor, you will find that moving to cash is a comfortable place to be. You will not stay in cash for the long term, but only until this financial storm passes. Similar to a hurricane heading your way, you need to protect yourself. I would be very wary about holding individual stocks right now, but that is a decision only you can make. If the storm is not as dangerous as we originally thought, then you only missed out on a few months of potential gains. If the storm is destructive, then you will have protected your portfolio. Some brokers tell you that you can’t time the markets, but I think they are wrong.

If you are an experienced trader, this is an ideal opportunity to make money if you are on the short side. Inverse ETFs and put options are working right now, but this market could reverse direction at anytime, so be careful. Only the most experienced traders should short individual stocks. If you’re a beginner, do not short individual stocks, as the volatility can cause major losses.

Bottom line: A financial storm is brewing and it’s a good time to take cover in cash. More aggressive traders can take advantage of the volatility with bear market strategies.

* 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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