Market Indicators (Week of June 3)

Each weekend, I will list signals from 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 article from MarketWatch on surviving market crashes: http://on.mktw.net/10YNz5S

AAII survey (5/29/2013)

36.0% bullish. 29.6% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (5/29/2013)

52.1% bullish. 19.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .66

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: 16.30

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages: S&P 500 above the 50-day, 100-day and 200-day MA, but signal line pointing down. S&P below 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 dropped 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: The bull market stalled last week. Financial newsletter writers remain bullish while retail investors’ confidence in the market fell. Retail investors never trusted this bull market after getting burned twice in the last ten years. The Put-Call ratio is a sell, the S&P fell below its 20-day MA (short-term sell signal), and MACD crossed below the signal line. Indicators are signaling caution.

Opinion: In the last week, the mood of the market changed dramatically along with the indicators. The most distressing development for the bulls was institutional selling at the end of each day (i.e. distribution), with Friday being the strongest. That is not a good sign.

To correctly read the market, you need to look not only at indicators but at outside events. During a bull market, even negative news is ignored, until it is no longer ignored. Here are other events that’s affecting our stock market:

  1. Last week, Japan’s market fell by 7 percent in a day, attempted to make a comeback, and ended down over 15 percent at one point.
  2. There was an uptick in yields in the U.S. bond market, a signal that bond investors could get hurt, especially as the Fed slows down its bond buying program (i.e. stimulus). Bill Gross, bond guru at Pimco, warned that the bond rally is over.
  3. Emerging market currencies are getting crushed (South Africa, Thailand, Turkey, Peru) and bond yields have spiked (Turkey, South Africa, Mexico, Hungary, Poland). The governments in these countries could react by raising interest rates.

Right now, many investors are hopeful that world events won’t affect our stock market. In fact, the positive view is that investors will flock to our markets for safety. That is possible, and if true, our bull market would continue.

For four years, people warned of a stock market crash, and for four years, they were wrong. Fortunately, we follow market indicators rather than predictions. Although a crash is always possible, a market correction of 10 to 15 percent (similar to Japan) is more probable. But be forewarned: If there is a correction, it might not last long if the Fed steps in along with other world governments.

As I wrote all week in my blog, now is the time to take defensive action. It doesn’t mean to panic, but hedge until the storm clouds dissipate. Defensive action includes cutting back on individual stocks, buying inverse (but not leveraged) ETFs in market indexes, buying protective put options, or moving to cash. These are not recommendations but something to consider. If you are properlydiversified, you should be protected from a correction (but in a severe correction, nearly all asset classes go down).

The mood of the market turned from bullish to cautious. It is too early to say if the bull market has ended or if the market is simply taking a breather. I can say with certainty that emerging market currencies and bonds are in turmoil. If and when that affects our stock market is anyone’s guess, but we should have a better idea during the week.

Bottom line: The probability of a U.S. stock market pullback (3% to 9%) or correction (10% to 20%) has increased.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

I will notify you of my posts via twitter@michaelsincere

Understanding OptionsUnderstanding StocksStart Day Trading NowAll About Market Indicators