Market Indicators (Week of Sept. 16)

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).

 

FRIDAY ALERT: Late-day selloff, not a good sign. Be careful if you’re long.

 

AAII survey (9/11/2013)

45.5% Bullish. 24.6% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/11/2013)

37.1 % Bullish. 22.7% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .60

Sell Signal: Less than or near .50 is a sell (more call options are being bought).

Buy signal: Higher than or near 1.0 is a buy (more put options are being bought)

 

VIX: 14.16

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 50-day, 100-day, and 200-day MA.

 

MACD: MACD is at 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 9-day signal line. MACD line crosses above zero line.

 

Analysis: We went from bearish to bullish in one week. Individual investors are feeling a bit more bullish while financial writers lost some of their enthusiasm. (Another survey says that a majority of money managers are expecting a correction.) Technical indicators made a dramatic turnaround, and this week we’ll see if it’s for real. Unfortunately, the Fed meeting and other news will trump the indicators. Because we’re still in a sideways market, the market can go in either direction. Once again, look for late day selloffs on high volume. A head and shoulders pattern is starting to develop on the S&P 500, which is very negative (thanks to trader Toni Turner for pointing this out).

Opinion: Last week was an important lesson about market indicators. At the start of the week, most of the indicators were pointing down, and it seemed like a slam-dunk to sell the market short. And then, unexpectedly, there was the Syria relief rally, and the bulls had the best week in months. Most important, at the end of each day, the market did not sell off like it had in the past. It was a glorious day if you were long the market, and we’ll soon see if it can last.

The lesson of the week is that you can never make a trade based only on indicators. Although market indicators help put the odds on your side, they can’t predict the future. Last week, unexpected good news trumped the indicators and everything else. It was a breathtaking turnaround for the bulls. It also goes to show that anything is possible in the stock market, which is why protective call or put options make sense when the market is moving sideways.

This week will be exciting. The FOMC meeting begins on Tuesday, Sept. 17, and it’s sure to increase market volatility before and after the meeting (especially after). Here are three possible scenarios ofwhat could happen:

1. Action: Ben and the Fed announce that they are not going to taper now but at the next meeting (after Ben has said his goodbyes).

Possible Result: Market goes wild, rises by 2 or 3 percent. S&P is firmly in the 1700 Club. Gold explodes higher. Emerging markets also go higher and Ben is a hero on Wall Street. Short sellers get crushed.

Concern: If the Fed delays tapering, it must mean there are more problems with the economy than the Fed is letting on. By delaying, it will only make things worse when they taper in the future.

My opinion: This is a possible scenario, which is why it’s dangerous to short without call option protection. Nevertheless, the market would be pleasantly surprised if they delayed tapering. I would also be surprised if they delayed tapering.

 

2. Action: Ben and the Fed announce that QE is going to end by more than the market expected.

Possible Result: Market sells off by more than 3 percent, gold gets crushed, and emerging markets have the worst week in years.

Concern: Ending liquidity this abruptly would upset the markets.

My opinion: There is a .00001 percent chance that the Fed will end QE abruptly.

 

3. Action: The Fed tapers a little (the mini-taper), no more than 5 to 10 billion dollars a month.

Possible Result: Market will be volatile.

Concern: The markets will see this as the end of QE in the future and won’t like it one bit.

My opinion: This is the most likely scenario. The Fed will taper a little and hope the market will accept it. In fact, articles are already appearing that the market “priced in” mild tapering and won’t be surprised. If markets start to sell off, perhaps there will be an announcement that Janet Yellen will be the new Fed chairman, a decision Wall Street will like (this is pure speculation on my part). That will reduce the tapering pain.

With one wave of his magic Fed wand, Ben can crush the markets or let the party go on a bit longer. Either of the two extremes (no tapering or a lot of tapering) will cause big reactions, and I don’t think the Fed wants that. By tapering a tiny little bit, they are hoping they can slowly wean the markets off of the QE liquidity trap. No one can predict how the market will react, but there will be a reaction, even though it might be delayed.

Once again, the safest bet is to move to the sidelines until the market calms down, which could take a while. There are other events (such as the debt ceiling talks) that have taken a back seat to Syria, but these events could emerge once again.

I still like using call or put options to protect long or short positions (as I described last week). Nevertheless, the market will be volatile so managing stock and option positions will be a challenge. I can honestly say that the market indicators, although leaning bullish at the moment, could reverse again this week (and intraday). Once again, you must be prepared for anything since it’s in the Fed’s hands at the moment.

And as I’ve repeatedly said, this market is dangerous, and more so this week. Traders will be looking to make money off of the volatility. Investors, however, are hoping that Ben can maneuver the market into calmer waters before he sails off into the sunset.

Bottom line: It’s time for the Fed to fish or cut bait. This is their moment, and they are either going to pump up the market higher or taper a little and hope for the best. I wouldn’t be surprised to see their public relations team spread the word that mini-tapering is a good thing for the market. The Fed will probably want to telegraph their intentions early so the market doesn’t throw a temper tantrum. Be cautious no matter what side of the market you are on.

Additional: With the futures up over 1% on the Summers’ news, and the S&P in the 1700 Club for the moment, the market will have to hold its gains through the week or look out below. Look for a selloff into the close. If there is a late day selloff and the S&P can’t hold its gains, it would be very bearish. We’ll know this week if this bull market has legs or is in trouble.

 

* 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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