The Weekly Trader

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).

UPDATE: Here is my latest column for MarketWatch — http://on.mktw.net/13SBlLY

 

AAII survey (7/17/2013)

47.7% bullish. 21.3% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (7/17/2013)

52.1% bullish. 19.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .54

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: 12.54

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 MA.

 

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

 

Analysis: It’s a tale of two indicators. The technical indicators are saying the bull market will continue while the sentiment indicators are warning that it’s getting frothy. Individual investors are hopeful, but they still don’t believe in this market 100%. Once they do, however, it will be a huge warning sign.

Opinion: This time it’s different, or so many people believe. Because Ben Bernanke has us covered, many believe there is little risk in investing in the market. I notice the change in sentiment: It’s been a long time, but in the last week I got two stock tips, one from a customer at the bookstore and another from a bagger at the supermarket.

Early in the week, Bernanke went to Congress and answered questions, calmly reassuring investors that no matter what happened to the economy (or the market), the Fed would use their tools to keep things stable. The market liked what it heard, and it sailed through a difficult week.

In fact, the news was not good. Google and Microsoft missed earnings estimates. Oil prices rose to over $108 per barrel, and Detroit declared bankruptcy. When the market opened on Friday morning, there was a big yawn (except for Microsoft, which got hit by 10 percent). The Dow ended down by only 4 points. In the old days, the market would have plunged on bad earnings by market leaders and a bankrupt city. There is little doubt about it: This market is ignoring reality. (To be fair, however, U.S. economic indicators have been generally positive.)

Here’s the important point: You can complain about the unfairness of the market, and how it “should” react, but opinions don’t matter. No matter what you think should happen, the market is going up. And yet, the sentiment indicators are flashing danger signals, although not at extreme levels (for the moment). Who are you going to believe? Unfortunately, sentiment indicators should not be used to time the market because sentiment can remain extreme for long time periods. But it does tell us that many investors do not see (or care about) the warning signs.

If you believe in the power of the Fed, you won’t care about the slowdown in China, the turmoil in emerging markets (remember?), high oil prices, risky bond funds (at least they were two weeks ago), and the earnings miss by two major technology companies. Retail investors are getting lulled into thinking this bull market is unstoppable, and for the moment they are right. But only for now.

There is no doubt that a pullback or correction is coming, but it is impossible to time. And don’t forget: If there is a pullback, the Fed will step in. With the Fed making people believe that investing is risk-free, it would not be surprising to see this market keep climbing. In reality, investing is not risk-free. Getting off the quantitative medicine is not going to be easy. In fact, just the mention that the medicine might stop is enough to send the market into a tizzy.

In my opinion, it is a dangerous market simply because most people are unaware it’s so dangerous. I am not writing this to scare you, but to prepare you. This market cannot keep going up forever. When the market plunges one day, I am hoping that you will be ready. Unfortunately, we cannot predict when that day will occur. But we can look for clues (including using market indicators).

If you are long (or short) the stock market, use strict money management techniques (see a list at the end of the article) to minimize losses. This is not the time to make huge bets on either side of the market. The safest place to be right now is in cash, but that is a decision only you can make (since it’s quite possible you will miss out on the next 500 points). In my opinion, it’s a trader’s market. There is still enough bad news in the world (and even in the US) to give any realistic investor heartburn.

Bottom line: Because of Bernanke’s soothing words, the market keeps going up, ignoring bad news. It may not be fair, but you can’t fight the tape. One day this bull market will end, perhaps sooner rather than later. Be ready with a trading plan and be nimble if there are signs of an imminent pullback or correction. Aggressive traders can hedge with inverse ETFs while cautious investors can increase cash positions.

 

Four Money Management Rules that Can Save Your Assets

Note: These are not hard and fast rules, but guidelines. Adjust the rules to fit your risk tolerance.

  1. If you lose more than 5 percent on a position, that is a warning sign, so be prepared to sell. At 6 or 7 percent, sell.
  2. Don’t buy any stock or index on the way down.
  3. Never add to a losing position (but it’s okay to add to winning positions).
  4. If you have a gain, and the stock or index pulls back 3 to 5 percent, sell to lock in that gain.

 

* 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 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).

 

AAII survey (7/10/2013)

48.9% bullish. 18.3% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (7/10/2013)

46.9% bullish. 22.9% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .67

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: 13.84

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 MA.

 

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

 

Analysis: The technical indicators (MACD and moving averages) are clearly saying the trend is up and the bull market continues (jump-started by Ben Bernanke). The sentiment indicators, although not screaming sell signals, are telling us the crowd is feeling a bit too confident about the market. Individual investors are even more bullish than the financial writers. The trend is up, the bull market continues, but if the sentiment gets too exuberant, that would be a signal the good times are going to end. We’re not there yet, however.

Opinion: The bulls put on an spectacular performance during the week thanks to dovish comments by Ben Bernanke. Similar to the “Greenspan put,” the Bernanke put has you covered. Three weeks ago (it seems like an eternity), Bernanke had spoken a bit too clearly about removing stimulus, and the market protested strongly: “Don’t take away our QE!”

Now, the word is out: The Fed will protect you. Therefore, in the short term, the market is destined to go up. In addition, the Wall Street minions have concluded that bond buyers are going to flock to the stock market, where the grass is greener. Also, those who invested in emerging markets are also supposed to move their money to the U.S. stock market. The theory is this: When you look around the world, the U.S. is the safest country for investments. It’s a good theory and it is true right now. Therefore, you are supposed to believe that nothing will stop this bull market from going higher. In addition to Bernanke, positive earnings will also drive this stock market higher, no matter how bad it is in the rest of the world. As long term traders, we follow the trend until it ends, and the trend is up.

However…there are enough warning signs to make astute traders cautious. Eventually, the world’s financial problems (and the problems seem to be getting worse) will affect us. Oil has spiked because of the unrest in the Middle East. Europe is still in a recession but appears to be recovering, although it’s too early to know for sure.

In my opinion, I would not be surprised to see the U.S. take a 7 to 10 percent hit sooner rather than later. (It would be cruel if bond investors, who by nature are a conservative lot, entered the stock market only to get slammed.) I’m in the minority, however, as everyone else is looking at 15,800 on the Dow and beyond. The poor short sellers had only a few really good days in the last four years, the best reason why you follow the trend no matter what you think “should” happen.

If you’re a long term trader, you are long the U.S. stock market (but avoid EM and bonds) but you’re also cautious (in case I am right about the 10 percent hit). For now, look for signs of a selloff at the end of the day. Also, look for a gap up in the morning followed by a quick selloff. Some major institutions or high frequency traders seem to be selling into the rallies. Although my gut tells me this market can’t go up much longer, the market indicators tell me differently. But now that the investing crowd is finally starting to believe in this market, that is also a sign the fun is going to end one of these days.

Whether you are long or short, follow these three rules. They could save your assets: Rule 1: If you have a 5% loss on any position, that is a warning sign: Be prepared to sell. At 6 or 7 percent, sell without looking back. Rule 2: Don’t ever add to a losing position, but you can add to a winning position. Rule 3: Never buy a security on the way down. In my opinion, that is a dumb idea (although many people disagree).

Bottom line: Everyone wants the market to go up so the market is going up even though there are huge storm clouds across the world. I know that we aren’t isolated from the world’s problems, so be prepared to change strategies at anytime. When the sentiment changes from bullish to bearish, it won’t be pretty. Unfortunately, no one can predict when that will happen. All we can do is look for clues.

 

* 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 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).

 

AAII survey (7/3/2013)

42.0% bullish. 23.8% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (7/3/2013)

43.8% bullish. 20.8% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .60

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: 14.89

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 slightly above its 50-day MA.

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over MA.

 

MACD: MACD is on the zero line and firmly 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 S&P rose slightly above its 50-day moving average, but is firmly above the 100-day moving average (in fact, the 100-day acted as support). Sentiment readings are increasingly bullish, but not extreme. It was a good week for the bulls, but we’re still at a crossroads. The sentiment is bullish but the technical indicators, although improved, are still not giving an “all clear.” For that to happen, it will have to be another good week for the bulls, which is what the crowd is expecting to happen.

Opinion: In only a week, it seems as if the technical and fundamental analysts agree that the market is going up. Retail investors and financial investors are bullish again, the S&P crawled over its 50-day moving average, and the Dow is above 15,000. Economic indicators are positive, jobs are improving, and it seems like happy days are here again. People a lot smarter than me says we’re going a lot higher. Forgive me for being a party pooper because I’m still cautious.

The biggest party pooper is emerging markets, which is still in a bear market (over the weekend I heard one commentator recommend buying EM because it is so cheap. In my opinion, buying EM (or gold) on its way down is a sure way of losing all your money.) Bonds are also getting hurt and this could be the beginning. It seems that many investors didn’t realize you could actually lose money buying bonds. Surprise! When interest rate go up, and they are going up, bond prices go down, and some bonds go down faster than others.

Why buy anything that is falling? No one knows how low gold, bonds, or emerging markets can go. I’d rather buy gold (and anything else) on the way up, not on the way down. Trying to time the bottom is for gamblers only.

That brings us to the U.S market. When I look at the indicators, the market isn’t out of the woods yet. It’s struggling to stay above its 50-day moving average. I also have to wonder that if emerging markets and bonds continue to plunge, won’t that affect stocks? The bullish case is that everyone will run to our stock market because it’s the safest place to be. The bearish case is that our market cannot escape the turmoil in other countries, or in bonds.

So what is a long term trader supposed to do? As for me, I am watching to see if the S&P can decisively rise above its moving averages, and not sell off at the end of the day. Therefore, I’m taking a wait and see attitude on the US market. Perhaps the pros are right and the market is on its way upward and skyward, ignoring the world’s problems. The market could be consolidating for a few weeks before it heads higher. Or, this could be a bull trap.

Truthfully, I do not know. Perhaps this week will give us clues. If this is a continuation of the bull market, then the Dow will be well above 15,000 by the end of the week (or month). If this is the beginning of a correction or pullback, the market will continue to struggle, and be volatile.

The indicators will eventually declare a winner. For now, it’s a tie. The bull was knocked off its pedestal a few weeks ago, and it came back strong on low volume. Betting against emerging markets with an inverse ETF such as EUM has worked in the past, although there are no guarantees it will work in the future. Compare the chart of EUM (inverse emerging markets) with EEM (emerging markets).

Bottom line: It will be a fascinating week. The bulls want to believe the U.S. market is ready to take off, but it’s hard to ignore all of the looming problems in the world. I know this for sure: Anything is possible so be prepared. Once again, traders should enjoy the volatility while investors should remain cautious.

 

* 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 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).

 

AAII survey (6/26/2013)

30.3% bullish. 35.2% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (6/26/2013)

41.7% bullish. 25% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .66

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: 16.86

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 slightly below its 50-day MA.

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over MA.

 

MACD: MACD is on the zero line and firmly below the red 9-day signal line and pointing down. (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 S&P was unable to rise above its 50-day moving average, and barely above the 100-day MA. MACD is still flashing a sell signal and is on the verge of dropping below the zero line (a negative sign). Because of the rally last week, option buyers bought more calls (not surprising), a negative sign. Bottom line: The market is once again at a crossroads. The indicators are telling us to sell. If that is going to change, it will have to be a very good week for the bulls.

Opinion: This is a trader’s week as the Chinese purchasing manager’s index (PMI) (released on Sunday night) and the U.S. monthly jobs report (Friday) could be market-moving events. Anything below 50 for the Chinese PMI indicates contraction. FYI: The market is closed on Thursday, July 4, and will reopen on Friday to a lower-volume (but perhaps more volatile) day.

As expected, last week was also volatile, but the bulls took control for a rousing performance. Those multiple 100-point days erased the pain from the week before, although the gains were on lighter volume.

Once again, when compared to the rest of the world, the U.S. economy appears strongest. The big unknown is how the problems in other countries will affect ours. Emerging markets are in a bear market and are continuing to fall (although they did have one excellent day). Bond prices appear to be going in the wrong direction as interest rates creep up, and not that slowly at times. (Perhaps the worst investment right now is bonds in emerging markets.) China is still the big unknown, but Sunday night we will get a glimpse when the manufacturing numbers are released. (Breaking news: PMI was 50.1, in line with estimates)

The unpredictable piece of the puzzle is the U.S. market. On the bull side, we are still above the 200-day moving average. Also, the economy is showing some strength along with more jobs (on Friday we’ll get the jobs numbers). In the topsy-turvy world of Wall Street, a stronger economy means the Fed will reduce the stimulus, which could cause the market to fall. A weaker economy could cause the market to rise, and for bonds to recover. Can anyone predict how the market will react to the jobs numbers? No, except there will be a reaction.

The bear side is still stronger, at least in the short term. The S&P is below its 50-day moving average (and above the 100-day), and MACD is a flashing a sell signal. If the bulls can manage another up week on strong volume, those technical indicators will change for the better.

Not surprisingly, the average retail investor is feeling suspicious of this market, and who can blame them? The bear sentiment is slowly creeping up, but not at extreme levels. It will take a few more plunges for retail investors to fear this market. We’re not there yet.

Here’s the way I see it: Emerging markets (EEM) are in a bear market according to the charts. The bond market is in turmoil and prices will continue to fall. I believe we are not immune to the economic problems spreading throughout the world, and our market could take a short-term hit. However, I think we would also be the first to recover.

If you are a trader, this will be a wonderful week as the volatility will continue. If you’re an investor, you can step to the side in cash or be willing to ride out the storm, knowing that in the long term our market will go up. In an interview that I did with author and economist Bernard Baumohl, he is estimating that the Dow will end this year around 15,500. In the past, he has been uncanningly accurate with his estimates. Nevertheless, there are potential pitfalls that concern him (the full interview will be published on MarketWatch in a week).

Bottom line: This will be another tumultuous week so be alert, especially on Friday (July 5th) when most market participants are on vacation. If the bull market is not over, then the bulls must prove it. As always, the tape doesn’t lie.

 

* 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 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).

 

AAII survey (6/19/2013)

37.5.0% bullish. 30.0% bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (6/19/2013)

46.8% bullish. 21.9% bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Put/Call Ratio: .82

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: 18.90

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 above its 200-day MA, slightly above 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 MA.

 

MACD: MACD is still above the zero line but is firmly below the red 9-day signal line and pointing down. (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 sentiment indicators are indecisive, and showing complacency (maybe anxiety), but not fear. Financial writers are more positive than the retail investor. The S&P went below its 50-day moving average, a significant short-term sell signal. MACD is also below its signal line, and correctly gave us an early warning signal. That warning remains. Bottom line: Indicators are telling us the short-term pain and volatility will continue.

Opinion: Even after the 500-point drop in the Dow last week, people are not afraid. In fact, some experts see the pullback as a healthy sign, and an opportunity to buy at a lower price. Some investors are feeling more anxious than the pros right now, as they remember the pain they went through in 2008. Here’s the way I see it:

The Good News: Compared to the rest of the world, the US economy is strongest, and the markets may not get hit as hard as everyone else. There are positive signs in housing (in Florida, housing prices are rising so fast people are concerned there might be another bubble), and the US economy appears to be recovering, although slowly. If you are a foreigner looking to invest in stocks, the US is the best place right now. (Another possible scenario is that billions of dollars leaving the bond market could also find its way to the stock market.)

The Bad News: Last week was just a taste of what is coming. Emerging markets had their worst month in years, and there are no signs the EM destruction is going to stop anytime soon. Interest rates shot up last week (keep your eye on the 10 year Treasury yield), and billions of dollars fled the bond market. When people open their statements at the end of this month and see how much money they lost in bond funds, it will not be pretty. Many people incorrectly thought that bond mutual funds and ETFs were risk free, and they are just starting to wake up to reality: bond funds are not a safe place to be right now.

Right now, I can confidently say that you do not want to own bond funds or emerging markets. The Chinese economy, although growing, appears to be slowing down, so don’t be surprised if you wake up to a huge correction (or worse) in Asia. Because it’s hard to know what is really going on in China, that makes it more uncertain.

In the US, the technical indicators have taken a turn for the worse. The S&P went under its 50-day moving average, and MACD is flashing a danger signal. If you are an individual investor, you have the flexibility to move in or out of the market. Right now, the stock market is uncertain and dangerous. We could have a pullback (3 to 9 percent) or a correction (10 to 20 percent). And if that happens, it’s also possible we could bounce right back. What is uncertain is if we will enter a bear market, which would be more painful, and last longer than a correction.

I remember in 2007 when people were anxious but also in denial that the housing market crash would affect our stock market. If anything, back then, TV commentators suggested that you buy stocks (especially those low priced financial stocks such as Lehman and Bear Sterns) on the dip.

And now, just like in 2007, many people seem unconcerned. Unfortunately, no one knows what will happen to the US stock market if emerging markets continue to implode, and if there is a mad dash out of both emerging market bonds and US bonds. It will not be pretty, and the worse is yet to come.

If you are a beginner investor, you will find that moving to cash is a comfortable place to be. You will not stay in cash for the long term, but only until this financial storm passes. Similar to a hurricane heading your way, you need to protect yourself. I would be very wary about holding individual stocks right now, but that is a decision only you can make. If the storm is not as dangerous as we originally thought, then you only missed out on a few months of potential gains. If the storm is destructive, then you will have protected your portfolio. Some brokers tell you that you can’t time the markets, but I think they are wrong.

If you are an experienced trader, this is an ideal opportunity to make money if you are on the short side. Inverse ETFs and put options are working right now, but this market could reverse direction at anytime, so be careful. Only the most experienced traders should short individual stocks. If you’re a beginner, do not short individual stocks, as the volatility can cause major losses.

Bottom line: A financial storm is brewing and it’s a good time to take cover in cash. More aggressive traders can take advantage of the volatility with bear market strategies.

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