The Weekly Trader

This is what the technical indicators are telling us this week: 

One-month trend = Bullish. Last week, SPX drifted through the four-day New Year’s holiday on low volume and momentum. The indexes drifted slightly higher during the week. SPX closed at 3756 on Thursday night (higher by 50 points from a week before). On Sunday night, the futures are flat, but that could change in the morning. 

Mid-term (50- and 100-day MA) = Bullish. The S&P 500 is well above its 50- and 100-day MA. 

RSI: (S&P 500) @ 67.28 (Daily) = Overbought. RSI is getting close to the danger zone, i.e. 70 RSI.

MACD = Neutral. MACD is above its zero line but is even with its 9-day Signal Line

Daily Intraday Volatility (VIX): 22.75 = VIX is still saying there is no fear. 

Comment: The bulls are dreaming of a Santa Claus rally, which includes the first week of January. In addition, the so-called January effect suggests that how the market performs in early January determines the rest of the year. Sometimes the January effect works, sometimes not.

Nevertheless, the market is overbought, the virus is exploding, and the economy is mixed. It’s amazing to many that the stock market has done this well, all things considered.

However, if there is anything I learned about the stock market, it’s that what most people “think” will happen doesn’t usually happen. When it comes to the stock market, forget common sense, as the market follows its own path. That is why I follow the market rather trying to outwit it.

The market is overbought according to most technical indicators, but that won’t prevent it from becoming more overbought,. However, once RSI rises about 70 on SPX, be on guard. Trade or invest with caution if and when RSI rises above 70.

Whether you are trading or investing, be sure you are properly diversified in case the market goes in the “wrong” direction. Always prepare for worst case scenarios and look for opportunities to buy winning stocks at competitive prices. Right now, unfortunately, most of the most popular stocks are at or near all time highs.

Bottom line: Stand by and see which side wins. It could be a tricky road over the next two weeks.

Bitcoin news: If you haven’t looked, bitcoin, which rose to $20,000 a coin a few years ago before plunging to $6,000, has made a remarkable recovery recently. If you haven’t looked recently, it spiked from $20,000 to $33,000 per coin. It either means that bitcoin is ridiculously overbought, or a solid long-term investment. I have no idea which, but similar to Tesla, short sellers got smashed.

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For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

This is what the technical indicators are telling us this week: 

One-month trend = Flat to Bullish. Last week, the SPX drifted through the four-day holiday week on low volume and momentum. Neither the bulls or bears won decisively last week. SPX closed at 3703 on Friday night. On Sunday, the futures are relatively flat to slightly higher, but that could change in the morning. It’s another four-day week.

Mid-term (50- and 100-day MA) = Bullish. The S&P 500 is well above its 50- and 100-day MA. 

RSI: (S&P 500) @ 61.28 (Daily) = Neutral to slightly overbought. RSI is in the neutral zone as we start the shortened week. 

MACD = Neutral. MACD is above its zero line but is slightly below its 9-day Signal Line

Daily Intraday Volatility (VIX): 21.53 = VIX is still saying there is no fear. 

Comment: Last week was not very exciting as neither side made it to the Winner’s Circle. In fact, last week is a duplicate of two weeks ago. We have another four-day week but this week, news events could impact the market.

Breaking News: The president tweeted that he plans to sign the Covid Relief Bill, and he just did. It’s hard to predict how the market will react, but it leans towards bullish.

The overall market is still overbought, there is still a lot of anxiety in the country, and the virus appears out of control. And yet, we are near our all time highs.

Only you can decide what to do but playing it safe is not an unreasonable decision. Since the market is an auction, I’d rather wait and buy at more competitive prices than is being offered now. Obviously, astute investors and traders can find stocks with reasonable valuations, but you have to do your homework (i.e. search for good candidates).

Bottom line: Wait and see what happens this week. We could go in either direction. Have a great holiday and New Year! And please stay safe.

Note: I don’t usually promote myself but Forbes Magazine gave two of my books, Understanding Options 2E, and Understanding Stocks 2E, an excellent review. The link is here (I’m #5 on the list): https://bit.ly/34PCmi5

Lance Roberts (realinvestmentadvice.com) wrote another excellent piece on how the market may rally in the first week of January but then watch out below: https://bit.ly/3pthMfb

This is what the technical indicators are telling us this week: 

One-month trend = Flat to Bullish. SPX drifted through the week, ending almost where it started. Neither the bulls or bears won decisively last week. SPX closed at 3709 on Friday night. On Sunday, the futures are relatively flat.

Mid-term (50- and 100-day MA) = Bullish. The S&P 500 is well above its 50- and 100-day MA. 

RSI: (S&P 500) @ 63.53 (Daily) = Neutral to slightly overbought. RSI is in the neutral zone as we start the shortened week.

MACD = Neutral. MACD is above its zero line but is slightly below its 9-day Signal Line

Daily Intraday Volatility (VIX): 21.57 = VIX is saying there is no fear.

Comment: It’s a four-day week because of the Christmas holiday. Often, there is a “Santa Claus rally” before the holidays, and with the stimulus, along with the vaccine, there is reason to be optimistic. In fact, a lot of investors are extremely optimistic.

I don’t want to sound like a party pooper but as I said last week, when nearly “everyone” is bullish, I get cautious. And judging by my analysis of both professionals and retail investors, it appears as if the majority are extremely bullish. The low VIX confirms the lack of fear.

No one can predict with certainty what is going to happen this week or next, but we can read the clues. After studying the indicators, however, neither side is dominant yet. We could go in either direction.

The market is only sightly overbought but the VIX is on the low side. Although there is reason to be bullish, there is still a lot of financial uncertainty and pain, along with the deadly virus that seems to get worse each week.

These two competing forces have given us the market you see before you: A battle between the bulls and bears. So far, the bulls have a slight edge as every selloff is met with buying. 4000 on the S&P 500 is the goal of the bulls by the end of the year.

Bottom line: More time is needed before making a huge commitment to either side. Keep in mind that the majority of traders and investors are bullish. They could be right, but I’d still be on guard.

The following is an excellent piece by Lance Roberts (realinvestmentadvice.com) on the overly bullish environment, which confirms what I am also seeing: https://bit.ly/3peRKwf

This is what the technical indicators are telling us this week: 

One-month trend = Flat to Bullish. As expected, (due to overbought signals from RSI), SPX drifted lower last week, closing at 3633 on Friday. Now: Futures are substantially higher on Sunday night, but as always, wait until the morning for confirmation. 

Mid-term (50- and 100-day MA) = Bullish. The S&P 500 is well above its 50- and 100-day MA. 

RSI: (S&P 500) @ 60.22 (Daily) = Neutral to slightly overbought. RSI warned us last week that the market was getting “too big for its britches” (i.e. overbought), and sure enough, RSI dropped from near 70 to 60. Now you know that RSI often gives reliable warning signals as it creeps closer to 70 (visa versa on 30).

MACD = Neutral. MACD is above its zero line but crossed below its 9-day Signal LineMACD reversed direction with the market and signaled there could be trouble, and there was.

Daily Intraday Volatility (VIX): 23.31 = VIX is still telling me that investors have little or no fear. 

Comment: Last week, the market got too overbought, as reflected in the RSI readings (near 70). Sure enough, the market was unable to move higher, which was not a surprise, and then fell almost all week. Volume and momentum were absent.

On Sunday night (as I’m writing this), the positive vaccine news and a Fed meeting are leading to a positive futures market. RSI has moved to neutral (a little overbought at 60) but VIX is signaling extreme complacency. With the holidays approaching, and investors dreaming of a Christmas rally, caution is still advised.

It always makes me cautious when “everyone” is on the same side. It’s true that the market often rallies during Fed meetings, and perhaps the optimism over the vaccine will take the market into the stratosphere. That is quite possible.

On the other hand, I have seen this scenario before. In 1999, the market was going to the moon (thanks to bullishness over dot.com), and with the Fed’s help over the Y2k fears, the market went even higher in January 2000. The market seemed unstoppable. By March, however, the party ended as the market began a long descent into the abyss. It was not a pretty picture as many investors and traders lost everything.

I’m not saying this will end the same way. What I do know is that all bull markets, and bubbles, end. No one can say when, or what the catalyst will be, but one day this bull market ends. Right now, the biggest worry for me is the low VIX and that so few traders and investors think anything is wrong. Every decade or so the market teaches these people painful lessons.

I’m not saying to sell everything and move to cash, but it wouldn’t be a bad idea to evaluate how much risk you are taking with stocks, and to reduce risk if necessary. It’s a decision only you can make.

Meanwhile, with the vaccine on its way, the Fed meeting, and a recent pullback, the market appears ready to rock and roll. Let’s see how high it can go, and most importantly, if any rallies fail. As I’ve said in the past, watch the rallies for clues. A failed rally would be a warning signal.

This is what the technical indicators are telling us this week: 

One-month trend = Bullish. SPX drifted higher during the week. Volume and momentum was on the light side all week. Futures are flat to lower on Sunday night, but once again, wait until the morning for confirmation. 

Mid-term (50- and 100-day MA) = Bullish. The S&P 500 is well above its 50- and 100-day MA. 

RSI: (S&P 500) @ 67.96 (Daily) = Overbought. As SPX creeps higher, so does RSI. It’s near the 70 RSI overbought level, so be on guard. I would not be surprised to see a severe reversal based on RSI alone, but no one can predict when.

MACD = Bullish. MACD is above its zero line and above its 9-day Signal Line. MACD is signally that the uptrend will continue. Look for any signs of a reversal.  

Daily Intraday Volatility (VIX): 20.79 = How low can we go? VIX tells me that bullish investors have little or no fear.

Comment: The overbought market has become more overbought. Throw the fundamentals out the window because no one seems to cares. Just like in 1999, and 2008, all that matters is that the market is going higher.

Wise traders, however, know that extreme overbought markets can reverse on a dime, and at anytime. I can’t predict when that will happen, but I am certain it will happen. There is a point when there just aren’t enough buyers to keep lifting the market higher.

Trying to time a reversal is difficult for most traders. That is why it’s a good idea to trade less often and with smaller positions as the market gets more overbought. If the RSI of SPX rises above 70, that is a flashing warning signal.

Most investors are waiting for a Christmas rally, fueled by the positive vaccine news. And yet, the jobs number was disappointing, and there are other signs of economic problems.

Bottom line: It’s unknown which direction the market will go this week, but the overbought signals should not be ignored. Markets can reverse without warning before investors have a chance to react. Watch the rallies closely for clues of a struggle to move higher.

Here is the latest from Lance Roberts (realinvestmentadvice.com), who notes that investors are ignoring the rising risks: https://bit.ly/3osdAvI

Sven Henrich (Northman Trader) observes how momentum is weakening while the market moves ever higher: https://bit.ly/39K4Vkh