Market Indicators (Week of Sept 2)

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 the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).


AAII survey (8/28/2013)

33.5% Bullish. 35.7% Neutral. 30.7% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.


Investor’s Intelligence (8/28/2013)

38.1 % Bullish. 23.8% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.


CBOE Equity Put/Call Ratio: .67

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

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

Note: I adjusted the sell signal of the put/call ratio to .50. (More on the reason for this change below.)


VIX: 17.01

Sell signal: Lower than 12.

Buy signal: Over 40.


Moving Averages (daily): S&P 500 above its 200-day MA, below its 100-day, and below 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 below the zero line and 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 market indicators took a turn for the worse last week. Sentiment is moderately bullish (which is bearish), and the put/call ratio plunged during the week before recovering. The VIX is still in the complacent zone although anxiety is creeping back (just turn on the news to find out why). The most dramatic change was in MACD, which fell below its zero line, a negative signal. The S&P and Dow are below its 50-day and 100-day moving averages (Dow is weaker), and pointing down. According to the indicators, expect more volatility and negativity. The bears won August, but it’s too early to say who will win September. As of Tuesday morning, the futures are pointing higher so the bulls should put up an aggressive fight.

Opinion: Last week, the bears won decisively. This week, the tug-of-war continues as the bulls try and regain control. They are off to a good start as the market may open 100 points higher according to the futures. As you already know, Syria will be a market-moving event, so volatility will continue. In addition, a number of economic reports will be released this week.

This is an important week for the bulls. If they can gain back control now and move the market higher, they will be in a good position before the FOMC meeting on September 17th. On Friday, the U.S. jobs report numbers will be released. In the topsy-turvy world of Wall Street, a good report could send the market down because the Fed might reduce QE. A bad employment report could send the market higher as tapering may be delayed.

As traders, we are looking for late-day selloffs on higher volume (a bearish signal). On the other hand, if the market moves higher on higher volume during the week, the bulls will take back control. No matter what happens, you must be defensive. As I warned last week (and the week before), this is a dangerous, volatile market. The uncertainty over Syria, the Fed, and emerging markets aren’t going away. If you follow the indicators, you are extremely cautious.

I am speculating, but if the bulls do not win the week and the market starts to plunge after theemployment report and geopolitical concerns, I believe that Bernanke will announce he will delay tapering. In my opinion, I don’t think he wants to leave the chairmanship while the market is falling (let the next person deal with it). If there is a correction, I’d be surprised if he went ahead and cut QE. No matter what happens to the market, Bernanke is the bull’s ace in-the-hole.

And yet, although the indicators are bearish and the market is vulnerable, the bulls do not want this party to end. They will do anything possible to move this market higher. Even if the market falls, the buy-on-the-dippers will step in to buy their favorite stocks at bargain prices. That is why you should expect multiple market reversals (i.e. volatility) for the next two weeks (or longer).

Bottom line: The market remains dangerous and unpredictable. According to the indicators, the bears are firmly in control but a sustained rally is possible. Once again, the safest strategy is to move to the sidelines. Aggressive traders can buy inverse ETFs (on market selloffs) or ETFs such as SPY on market rallies. Emerging markets are still vulnerable even though China had positive PMI numbers. The S&P is also vulnerable, but so is the entire world. Therefore, let’s be careful out there.

If you’re unsure how to manage this market, you’re not alone. Read the following two paragraphs from my favorite financial book, Reminiscences of a Stock Operator. This is how trader Jesse Livermore sized up market conditions in the early 1900s. His advice is as valuable now as then:

“Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks: get out for keeps! Wait until you see, or if you prefer, until you think you see, the turn of the market; the beginning of the reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear.”

Later in his life (and in the book), Livermore discovered the importance of taking a position and waiting:

“After spending many years on Wall Street and after making and losing millions of dollars, I want to tell you this: It was never my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve know many {traders} who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which would show the greatest profit. And their experience invariably matched mine — that is, they made no real money out of it. {Traders} who can be both right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.”

Finally, on a side note, I received an email from a reader who wondered why the put-call ratio has ranged between .72 and .78 for almost two years. In other words, if you followed the put-call signal, you’d have been bearish for the last two years. First, the put-call ratio does change over time, so the reader is correct, which is why I changed the signal to .50, an extreme level. With the put-call ratio and other sentiment indicators, there is no magic number, only guidelines. Second, you must never rely on one indicator to determine whether to buy or sell. Sentiment indicators in particular should not be used to time the market, but only to give you a view of what the crowd thinks (so you can do the opposite). I’d much rather rely on technical indicators for a more accurate view of current market conditions. That being said, if crowd sentiment is extremely bullish or extremely bearish, that is a sign the market is too frothy, or fearful. Use other indicators, and research, to confirm. Finally, no one indicator is the holy grail, a point made by those who created the indicators (I interviewed the indicator creators in my book, All About Market Indicators). Analyzing the market using indicators is an art, not a science. Thanks to the reader, JH, for writing me and letting me know that the put/call ratio needed to be updated.


* 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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