Market Indicators (Week of May 27)

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).

May 30th PM update: Selloff into the close, another distribution day. This is the time to take defensive action.

May 30th Update: Investor’s Business Daily identified three distribution days (heavy institutional selling), and world markets are selling off. Bond market acting unusual. It is not the time to be afraid, but be defensive in case there is a real storm. Bonds could be more dangerous than stocks at first.

May 29th Breaking Note: Markets sold off for three days.  It is time to take defensive actions, i.e. inverse nonleveraged ETFs, put options, reduce individual stocks. In my opinion, correction more probable than a crash. I hope I’m wrong, but if not, I like having stock insurance. 


AAII survey (5/22/2013)

49.0% bullish. 21.6% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.


Investor’s Intelligence (5/22/2013):

55.2% bullish. 18.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.


CBOE Put/Call Ratio: .73

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: 13.99

Sell signal: Lower than 12.

Buy signal: Over 40.


Moving Averages: S&P 500 above the 50-day, 100-day and 200-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 is above the red 9-day signal line. MACD turned down slightly. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.) 


Sell signal: MACD line (black line) crosses below zero line. MACD line crosses below 9-day (red or gray) signal line.

Buy Signal: MACD line crosses above zero line. MACD line crosses above 9-day signal line.


Analysis: After a volatile week, the bull market continues. Financial newsletter writers remain bullish (II) while retail investors are just starting to believe in this bull market (AAII). Put-Call ratio is a sell but otherwise all indicators are bullish.

Opinion: One of Jesse Livermore’s discoveries was that a strong bull market is unstoppable (it even ignored a world war). In other words, don’t fight the tape. He used to “pyramid,” that is, buy more shares of stock as the price went higher. Most people do the opposite; they buy weak stocks that appear on sale, but are actually damaged goods. But Livermore was also a genius at detecting the end of a bull market, and when it is susceptible to a correction or crash. Livermore famously made over $3 million dollars in one day selling short during the Panic of 1907.

That brings us to our stock market. We’re still in a bull market but you must be on the lookout for any signs it’s over. Japan fell by over 10 percent during the week, but recovered a little. No one knows if what is happening in Japan will spread to the U.S. markets. If the bull is intact, it will ignore the bad news and continue higher. But you must remain on guard and defensive, especially if you are trading individual stocks.

According to the AAII survey, the retail investor is more optimistic about the market, but not at euphoric levels. Some have called this four-year bull run the “most hated bull market in history.” It sure seems that way. How long can this bull market continue? No one knows, although every week there is another crash prediction. It is nearly impossible to try and time the top (or the bottom). Once again, follow the indicators and ignore opinions, predictions, and tips. If you can do that, you will not only save money, but you will learn how to read the market yourself without relying on authors, columnists, and TV commentators.

* 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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