The Weekly Trader

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to determine if we are in a bullish, bearish, or sideways market environment. *

JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk

My book, Predict the Next Bull or Bear Market and Win (Adams Media), comes out in May.

 

AAII survey (2/12/2014)

40.1% Bullish. 27.3% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (2/11/2014)

41.8% Bullish. 17.4% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .57

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

 

VIX: 13.57

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 is above its 50-day moving average, its 100-day, and 200-day MA, and pointing up.

Bearish (Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is even with zero line, above its red 9-day signal line, and pointing up. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

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

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 60.18 (on 2/14/2014)

Overbought: When RSI rises to 70 or above.

Oversold: When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Bonds: U.S. 10-year yield is at 2.74% (on 2/14/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Last week, the uptrend continued until Friday, as reflected in the sentiment numbers (i.e. bearish sentiment decreased while bullish sentiment increased). The VIX moved back to thecomplacent zone along with the put-call ratio. Technical indicators made a remarkable recovery, and as we start the week, the uptrend is intact. That’s the good news. The bad news: Keep reading.

Opinion: Following the market trend would have produced excellent returns over the last five years if you had bought and held the major market indexes. In a bull market, that was the right move. Unfortunately, bull markets don’t last forever (although many investors think they do). In fact, one of the most important jobs you have is to determine when one trend ends and another begins. In my opinion, we are getting very close to a trend change.

As the market has changed, I have changed strategies. I used to sit back and take advantage of long-term trends (especially bullish ones). Recently, the uptrends and downtrends are not long term, but short term. As a result, I’ve had to switch to short-term trading strategies. Put another way, in this dangerous market environment, uptrends and downtrends don’t last long: days or weeks, and sometimes months.

Because the market has become more challenging, astute traders will take profits quickly, look for intraday reversals and other evidence that the trend is changing. I can’t stress enough how treacherous this market is. If you’re caught on the wrong side of a trade, you could lose a lot of money. (One method I use to protect profits or minimize losses is using call and put options with short expiration dates. Although not for everyone, I’ll discuss this strategy in a future column.)

Many retail investors who made easy money last year without too much effort may think this year will be the same. Perhaps they are buying on the dip, assuming the market will run up indefinitely. Few are aware that underlying market conditions are changing. Therefore, the higher the market goes, the more dangerous it becomes. Although novice investors believe the sky is blue, there are storm clouds brewing.

In the near future, we’re going to have short-term uptrends followed by short-term downtrends. But one of these days, a winner will be declared, bull or bear. Right now, this market is difficult to predict, which is why I follow trends. Unfortunately, when the trend changes every few days or weeks, it’s not easy to get it right.

As I’ve repeatedly said, one of the biggest known (and unknown) dangers are in emerging markets. Millions of dollars have been pulled from emerging markets over the last few months, which is probably why the CEOs of several brokerage firms as well as some money managers said that emerging markets are a long term buying opportunity (“be long, not short,” one CEO suggested). I hope you don’t listen to them. In my opinion, the pain from EM will get much worse before it gets better. Buying EM now is too risky. Over the next three to six months, I will remember those who urged investors to buy emerging markets on the dip. It will be interesting to see if they were right.

Bottom line: Be ready to take profits quickly in this volatile market. Buyers ran the Dow past 16,000, which I said was possible. But lurking in the shadows are unknown pitfalls. This is the time to be cautious and alert. According to the indicators, we are going higher, but it’s not a slam-dunk. As for me, I am on the lookout for failed rallies and other evidence this bull market is coming to an end.

 

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

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is todetermine if we are in a bullish, bearish, or sideways market environment. *

JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk

My book, Predict the Next Bull or Bear Market and Win (Adams Media), comes out in May.

 

AAII survey (2/4/2014)

27.9% Bullish. 36.4% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (2/4/2014)

45.9% Bullish. 17.4% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .68

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

 

VIX: 15.29

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 dropped below its 50-day moving average (but above its 100-day and 200-day MA), and pointing up.

Bearish (Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is below zero line and below its red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

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

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 49.69 (on 2/7/2014)

Overbought: When RSI rises to 70 or above.

Oversold: When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Bonds: U.S. 10-year yield is at 2.67% (on 2/7/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: After a rough start (at one point, the Dow was down over 400 points over two days), the market recovered all of its losses. Sentiment indicators fell during the week as nervous retail investors fled to bonds for safety. The S&P is still below its 50-day moving average but pointing straight up. MACD still giving a negative signal. With Janet Yellen testifying before Congress on Tuesday morning, it could be a market-moving event. Based on the last two days, the uptrend continues as we start the week. That could change on a dime.

Opinion: What a week! Just when the Dow seemed doomed, and broke below its 100-day (and 50-day) moving averages, it made a dramatic turnaround. That was an important signal, one that can’t be ignored.

What we have right now is a short-term uptrend in a dangerous market. If you get whiplash this week, it’s understandable. This is a trader’s market, which means you better take any profits fast or they could disappear.

It’s possible the uptrend will continue for a while (similar to what happened in June). On the other hand, because it’s a dangerous market, bad breaking news could send the market lower. In other words, this week is a coin flip.

If the short-term uptrend continues (with the assistance of a dovish Janet), let it ride. However, if this uptrend stalls and reverses, then the chances of a downtrend (or worse) increases. The bulls have an advantage based on Thursday and Friday’s action, so all we can do is wait and see. Anything is possible, which means the market could run back above 16,000 (if you’re short, be prepared). A failed rally, however, will not be pretty for the bulls (if you’re long, be prepared).

Keep in mind that retail investors lost some faith in the market over the last month. It would be some achievement to run the market past 16,000, but anything is possible in an unpredictable market. If you’re a short-term trader, you can take advantage of the volatility and trade with the trend (but be ready to take profits or cut losses quickly). If you have a longer term perspective, being on the sidelines is a comfortable place to be.

Because the market is so unpredictable, thousands of articles and commentary will appear on “why” the market is going up or down. Focus on “what” is happening rather than why. The why won’t be known until later. (Note: I discuss this thoroughly in my upcoming book, Predict the Next Bull or Bear Market and Win (Adams Media).

Bottom line: This is a dangerous market.  Based on the indicators, this market could go in either direction. That 300-point drop in the Dow along with a bearish month cannot be forgotten. Therefore, it will take more than a two-day rally to convince me that the worst is over. However, I also know that the short-term uptrend could continue for a while. Patience is needed until we find out what is really going on with this market.

 

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

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is to determine if we are in a bullish, bearish, or sideways market environment. *

JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk

Here is my latest column for MarketWatch: http://on.mktw.net/1bUWY3w

My book, Predict the Next Bull or Bear Market and Win (Adams Media), comes out in May.

 

AAII survey (1/29/2014)

32.2% Bullish. 32.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (1/29/2014)

53.1% Bullish. 15.3% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .54

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

 

VIX: 18.41

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 dropped below its 50-day moving average (but above its 100-day and 200-day MA), and pointing down.

Bearish (Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is slightly above the zero line, and below its red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

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

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 39.82 (on 1/31/2014)

Overbought: When RSI rises to 70 or above.

Oversold: When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Bonds: U.S. 10-year yield is at 2.66% (on 1/31/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: The technical indicators took a turn for the worse during the week, ending on a sour note late Friday. The S&P and other indexes are firmly below their 50-day moving averages and close to slicing through the 100 MA. Although not a disaster (yet), this could be the start of a longer-term downtrend. Sentiment indicators are giving mixed signals: Financial writers and many Wall Street pros remain bullish while individual investors are feeling anxious.

Opinion: As I warned for several months, emerging markets are in serious trouble and the problems are not going away. Central bankers may work together to try and alleviate the problems, and if unsuccessful, it could get ugly. Be prepared for more volatility, churning, and indecisiveness. If EM does get out of control, it will cause havoc across all markets.

I’m not trying to scare you but prepare you. Most investors believe that the 5 percent pullback isonly temporary, and are taking a wait and see attitude. After all, the market has always come back before. Unfortunately, the world has changed, and not in a good way right now. Of course you want to be positive but you must also be realistic or you will lose money.

If you follow the indicators and look only at the evidence, then it’s essential you protect your portfolio or increase cash. Best case: The current pullback could be temporary. Worse case: The downtrend will continue and we’ll enter a bear market. In my opinion, the downtrend will continue although it’s too early to proclaim a bear market.

The indicators are telling us this market is dangerous. Although there will still be short-term rallies, it’s unlikely they will last for long. This week will give us a much better idea how bad things could get. If the market rallies during the week, then the bull market continues. If the market struggles and heads lower, continue to protect your portfolio. You don’t want to get trapped if there is a mad exit out of emerging markets, which could spread across the world.

Last week I spoke about testing the market to determine where is the line of least resistance. Right now, the line of least resistance is down, and until that changes, I continue to lean bearish. Your first goal in this market environment is to protect profits and limit losses. Your second goal is to find profitable opportunities.

Bottom line: This is a dangerous market so be careful out there. This is the time to focus on the market and not get distracted by misleading information and hype (positive or negative). As I said last week, investors will have to work hard for their money this year.

 

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

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is todetermine if we are in a bullish, bearish, or sideways market environment. *

JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk

 

AAII survey (1/22/2014)

38.1% Bullish. 23.8% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (1/22/2014)

57.6% Bullish. 15.1% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .65

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

 

VIX: 18.14

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 dropped below its 50-day moving average (but above its 100-day and 200-day MA), and pointing down.

Bearish (Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is above the zero line, and below its red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

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

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 36.82 (on 1/24/2014)

Overbought: When RSI rises to 70 or above.

Oversold: When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Bonds: U.S. 10-year yield is at 2.73% (on 1/24/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: The selloff knocked some of the frothiness out of the market, but it’s still there. Sentiment readings (which were released before the recent pullback) were on the high side. Although the VIX spiked, it’s still in the complacent zone. More important, the selloff caused technical damage to the market as the S&P (and other indexes) fell below its 50-day moving average. Next stop: the 100-day moving average. First, we’ll see this week if the damage can be repaired. For now, the markets are starting the week with a bearish bias thanks to emerging markets. (Can Janet save the day? We shall see.)

Opinion: Little did I know how right I was when I wrote last week that emerging markets were going to crumble, and it would spread to the U.S. Although the indicators and clues were showing this would occur, I did not know when. I was surprised when the wheels starting coming off a few days after my post.

One important lesson: It doesn’t matter until it matters. In other words, although emerging markets were in trouble for a year, no one cared until the market started to sell off. Now you will read a thousand articles on why the market sold off. Guess what? It’s not important “why” the market sold off as that it did sell off. The selloff is an important signal.

As you know, Janet Yellen takes over this week at the Fed. It is going to be fascinating to see what the Fed will do. If they continue to taper, it will pressure emerging markets. If they stop tapering, there will be a short-lived rally (short-lived because it means the Fed has lost credibility). Personally, I don’t see how the Fed and other governments around the world are going to turn the markets around. Perhaps someone will pull a new program out of their bag of tricks and delay the inevitable.

Most investors are hopeful that the Fed will save them, but hope is dangerous for investors. In fact, hope can help damage your account if you let it. Instead of hope, be prepared for the possibility of a correction or bear market, but only if there is evidence.

To prepare (which I write about in my upcoming book, Predict the Next Bull or Bear Market and Win), consider scaling out of positions into cash. If you have losing positions, this is a good time to trim them or dump them if the losses are severe. If you have profitable positions, watch them carefully. Do not allow winning positions to turn into losers. This is also a time to consider buying protective put options if you believe the market is headed down (but this strategy is only for those who fully understand how to use puts). Aggressive traders can consider non-leveraged inverse ETFs (if there is evidence of a bear market).

Personally, I wouldn’t be buying on the dip in this market. The risk is too high. For now, it’s permissible to wait and see how this week develops. It’s possible that all the governments of the world will work in unison to support the market and the economy. If that happens, the market will rally. The real key is whether the rally (if one occurs this week) holds.

A popular theory by many money managers is that as emerging markets fall, investors will eventually find their way to the U.S. stock market. It’s a good theory, but if the market really unravels, my guess is investors will first move to the safety of Treasuries and gold (as they did on Thursday and Friday).

This is also not the time to panic. Only you can decide how much pain you can take if this selloff is significant. Because of the last selloff in June, many investors believe the market will quickly bounce back. In my opinion, the problems in emerging markets are deeper than anyone thinks right now. When this becomes evident, hope will turn to fear, and it could get ugly fast. A correction or pullback may or may not happen this week, but the odds are that it will happen in the near future.

Bottom line: Right now, there is a war between the bulls and the bears. As I said last week, I am leaning to the bear side, and until I see evidence of a significant reversal, I am sticking to that position.

 

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

Each weekend, I analyze market conditions using sentiment and technical indicators. The goal is todetermine if we are in a bullish, bearish, or sideways market environment. *

JUST RELEASED: Understanding Options (McGraw-Hill, 2E) and Understanding Stocks (McGraw-Hill, 2E): http://bit.ly/1bl0ZNk

 

AAII survey (1/15/2014)

39.0% Bullish. 21.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (1/15/2014)

56.1% Bullish. 15.3% Bearish.

Bearish: If sentiment is over 60% bullish.

Bullish: If sentiment is over 60% bearish.

 

CBOE Equity Put/Call Ratio: .53

Bearish: Less than or near .50 is bearish (more call options are being bought).

Bullish: Higher than or near 1.0 is bullish (more put options are being bought)

 

VIX: 12.44

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

Moving Averages (daily): S&P 500 is above its 50-day moving average, its 100-day and 200-day MA, and pointing down slightly.

Bearish (Downtrend): Index crosses below 50-, 100-, or 200-day MA.

Bullish (Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD: MACD is above the zero line, and slightly lower than its red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

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

Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

RSI: RSI is at 56.49 (on 1/17/2014)

Overbought: When RSI rises to 70 or above.

Oversold: When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Bonds: U.S. 10-year yield is at 2.83% (on 1/17/2014)

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: The rollercoaster week reduced some of the bullish market sentiment, but it’s still on the frothy side. Even more interesting, few investors are expecting a bear market. In fact, there is a level of complacency in the market (look at the low VIX for evidence) that is remarkable. On the technical side, the S&P stalled last week, as reflected in moving averages and MACD. Once again, we enter the week with mixed signals.

Opinion: One of the most important tasks of a trader is to identify when one trend ends and another begins. After a lengthy bull market (five years and counting), it’s essential to look for signs that the bull market might be in trouble. Failing to do so can cost you money.

Rather than trying to predict what the market will do next, it’s more important to observe the market, and look for danger signs.

One way of determining whether the market is about to roll over is by testing your positions. Rather than stepping into a confused market with a handful of buy (or sell) orders, start by probing the market to see which way the financial winds are blowing. For example, you could buy 100 shares or more of a stock or index (or sell short 100 shares or more depending on the size of your account). If you are right, then you will own a profitable position. If wrong, cut your losses at 7 or 8 percent. Rule: Add to profitable positions but never add to unprofitable positions.

I believe that the market is struggling and is about to turn over. In my opinion, the first hit will come from emerging markets (EEM, the emerging market index, recently fell below its 200-day MA), which will spread to the U.S. I have no idea when this may occur or how long it will last. I also don’t know if I’m right. To test my opinion, I will probe the market (something I learned from Jesse Livermore).

Obviously, if the market does take a hit, the Fed may come to the rescue by announcing that they have stopped tapering until further notice. The markets will rally on that news. Because of the Fed, the market has become much more unpredictable. It’s essential, however, that you not get trapped on one side or the other, and remain objective. (I’m leaning bearish but I’ll change my mind if the market proves me wrong.)

Bottom line: I believe that investors will have to work for their money this year, unlike in 2013, which was a cakewalk. Astute investors must be alert, and in my opinion, be properly diversified or on the sidelines ready to pounce.

 

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