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. *

I have two new (updated) books that are available now on Amazon and Barnes and Noble: Understanding Options (McGraw-Hill, 2nd Edition): and Understanding Stocks (McGraw-Hill, 2nd Edition). Click here for the links: http://bit.ly/1bl0ZNk

I also write a monthly column for MarketWatch. Here is my latest: http://on.mktw.net/1epjUhL

 

AAII survey (12/11/2013)

41.3% Bullish. 25.0% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (12/11/2013)

58.2% Bullish. 14.3% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

CBOE Equity Put/Call Ratio: .67

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: 15.76

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

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

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

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

 

MACD: MACD is above the zero line, but is 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 45.85 (on 12/13/2013)

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 2.86% (on 12/13/2013)

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

 

Analysis: Financial newsletter writers and many on Wall Street are still bullish, as reflected in the Investors Intelligence survey results. The numbers would have been more extreme except it was a down week, so other sentiment numbers cooled slightly. Technical indicators took a slight turn for the worse, with MACD turning down. The S&P is barely holding on to its 50-day moving average. Once again, keep your eye on the 10-year yield, as the higher it goes, the lower bonds go. Meanwhile, all eyes are on the Fed, and their talking points will trump all indicators this week.

Opinion: As I warned last week, it was the time to be cautious, and it still is. Although the bears ruled the week, volume was so anemic that you can’t declare victory for either side. It doesn’t really matter because the Fed show is coming to a theatre near you (Wednesday is the big day), and that should take up all of the oxygen.

Judging by the sentiment numbers, most pros believe that the Fed will continue to make excuses why it is not the right time to taper. In fact, that should not come as a surprise. The only surprise would be if the Fed actually tapered, or said they are going to taper. Now that would shock the market, but not in a good way. (Note: I was wrong about that. Market shot up by almost 300 points!)

The odds are extremely high that nothing is going to happen at this meeting. It is unknown how the market will react, but after a down week, perhaps they will find something (anything) positive. With bond prices falling, with emerging markets faltering, with bubbles appearing in different places around the world, the Fed is not going to do anything to tip the market over.

And yet, the Fed has a huge dilemma. For their experimental strategy to work, interest rates must remain low. Unfortunately, bond yields are creeping up, which are a threat to QE. Maybe they can come up with a new program that will keep interest rates low and the stock market up. Any new ideas, anyone?

Watch the market reaction for clues. If the market sells off on the no tapering news, that would be a negative sign for the market. If the market rallies on the no tapering news, then people still believe in the Fed’s power, and the show will go on. On second thought, it’s the day after (Thursday) that will be interesting.

Bottom line: Because of so many cross currents, this should be a volatile week. Year end bonuses are being calculated, money managers are hoping for a Santa Claus rally, and no one wants to lose the gains from another fantastic year. But reality has a funny way of interrupting even the best laid plans. In my opinion, it’s still a dangerous market (even more so). I am keeping my eye on emerging markets (the odds are they will continue to fall), and the bond market (ditto).

Fed or no Fed, each week I see increased risk in the market. Obviously, financial news writers and most pros are reliably bullish, primarily because they know the Fed is watching their back. And this is the way it has been for years. Nevertheless, the clock is ticking. Although the market could still go up by obscene amounts, prudent investors are taking money off the table.

 

* 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. *

Breaking News: The 2nd edition of my bestselling book, Understanding Options (McGraw-Hill, 2nd Edition), and Understanding Stocks (McGraw-Hill, 2nd Edition), will be released in January. They have been completely rewritten. I believe you will be pleased with the new editions. Here are the links:

Understanding Options: http://amzn.to/I7bDjF

Understanding Stocks: http://amzn.to/1aXat0Z

 

AAII survey (12/4/2013)

42.6% Bullish. 27.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investor’s Intelligence (12/4/2013)

57.1% Bullish. 14.3% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% 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: 13.79

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

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

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

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

 

MACD: MACD is above the zero line, but is 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 61.55 (on 12/6/2013)

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 2.88% (on 12/6/2013)

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

 

Analysis: Independent financial writers are more bullish than last week, along with most money managers. Retail investors, however, lost a little of their enthusiasm as the market fell during the week. VIX is still in the complacent zone, and RSI has pulled back to neutral levels. Technical indicators are mixed, with no clear winner. If you follow technical indicators, you are cautiously bullish. On the other hand, Thomas DeMark, creator of a number of superb timing tools, says that his indicators are giving him a major sell signal.

Opinion: Although most pros are all in, and believe there will be a Santa Claus rally, prudent investors are scaling back. The week went south all week until Friday, when the market staged a 1 percent rally, erasing most of the week’s losses.

On the surface, the rally was impressive. Unfortunately, volume on the major indexes was weak, which was not a bullish sign.

The market is giving mixed signals. Many of the top pros in the business are bullish, and even a few long-time bears changed sides (because they gave up fighting the Fed’s easy money policies). The pros have a good point: fighting the Fed can be dangerous to your wealth, as the last five years have shown.

And yet, I’m watching the 10-year Treasury yield creep up towards 3 percent. As you remember, the higher the yield goes, the lower bond prices go. It will be fascinating to watch millions of dollars in bond mutual funds and bond ETF leave the market at once.

Here’s how I see the future: The odds are very good that bond prices will continue to fall. The odds are also good that emerging markets are going to keep struggling. The big unknown is what is going to happen to the U.S. stock market.

If the pros are right, the market will stage a year-end rally that could blow your socks off. Money managers will receive their year-end bonuses, Wall Street will celebrate, and overly cautious investors will miss out on another spectacular year: Right now, the Dow is up over 20 percent, the S&P is up over 25 percent, and Nasdaq is up nearly 35 percent.

And yet, the higher this market goes, the more the risks increase. If the Fed is truly in control, and tapering is off the table, Wall Street may get its wish. On the other hand, the rise in the yield, the overall complacency among investors, and the extreme bullishness among the pros makes me cautious.

Is it time to get completely out of the market? That is a decision only you can make according to your risk tolerance. The trend is still up but there are enough warning signs that should cause prudent investors to increase cash positions.

 

* 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. *

Breaking News: The 2nd edition of my bestselling book, Understanding Options (McGraw-Hill, 2E), and Understanding Stocks (McGraw-Hill, 2E), will be released in January. They have been completely rewritten. I believe you will be pleased with the new editions. Here are the links:

Understanding Options: http://amzn.to/I7bDjF

Understanding Stocks: http://amzn.to/1aXat0Z

Also, here’s  a link to my latest MarketWatch column on how we can get to Dow 20,000. Hint: It’s satire: http://on.mktw.net/1e9lOip

 

AAII survey (11/27/2013)

47.3% Bullish. 28.3% Bearish.

Bearish: If sentiment is over 50% bullish. (Note: Bullish sentiment rose by 12% in last week, so it’s bearish)

Bullish:  If sentiment is over 50% bearish.

 

Investor’s Intelligence (11/27/2013)

55.7% Bullish. 14.4% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

CBOE Equity Put/Call Ratio: .48

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: 13.70

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

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

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

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

 

MACD: MACD is above the zero line, but is level with 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 65.86 (on 11/29/2013)

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 2.75% (on 11/29/2013)

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

 

Analysis: Sentiment indicators are showing increased bullishness. Even retail investors, after a week of caution, have joined the bull party. Inflows into stock mutual funds have increased (along with margin debt levels), and many believe there will be a Santa Claus rally. VIX is still in the complacent zone, and the put/call ratio reached extreme levels. As you know, when sentiment is this high, it’s a bearish signal. Conversely, technical indicators are still bullish (although MACD leveled off a bit). If you only follow technical indicators, you are long the stock market. Bottom line: Although being long the market has been a winning strategy, caution is advised.

Opinion: I wrote a satirical column for MarketWatch (link to article is in second paragraph from the top) on how we are going to Dow 20,000. Because many people only read the title, I received a lot of angry comments and emails on why my prediction was wrong. If people read the entire column, they’d realize I was not predicting Dow 20,000. I just pointed out that although the market has gone up a lot this year, it’s still not a traditional bubble. For that to happen, we need more irrational behavior from investors. We’re not there yet.

Nevertheless, we can have a bubble without having a mania. It is still unknown whether this market is in bubble territory. I do know, however, that many who are sitting on the sidelines are angry and in disbelief that the market goes higher (the emails I received was evidence of that anger). The Russell 2000 has been the most impressive this year (a 36 percent YTD rise is more than impressive, but it’s also accompanied with a P/E of 75).

As I’ve written before, although this market can still go higher, and probably will, the risks are growing. The most dangerous clue is that the market has appeared to separate itself from the real economy and has rocketed higher on its own. This is exactly what happened in 1929, although at much more extreme levels.

On the other hand, many professional money managers who have billions under management believe this market still has more room to grow. When you look at the financial problems in the rest of the world, the U.S. economy appears strongest. In addition, as interest rates rise, savvy bond investors are fleeing bond mutual funds. They can either put their money in cash or in the stock market. At the moment, they have chosen stocks.

Bottom line: As a prudent investor, although it’s tempting to capture an additional 5 percent or more upside, be defensive. Be sure you are diversified, and that you do not own volatile stocks, or stocks that have reached unsustainable price levels. As I’ve said before, the market is priced for perfection, and that can’t continue indefinitely.

Note: This is one of those times I wish I had a crystal ball.

 

* 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. *

Breaking News: The 2nd edition of my bestselling book, Understanding Options (McGraw-Hill, 2E), and Understanding Stocks (McGraw-Hill, 2E), will be released in January. They have been completely rewritten. In my opinion, you will be pleased with the new editions. Here are the links:

Understanding Options: http://amzn.to/I7bDjF

Understanding Stocks: http://amzn.to/1aXat0Z

Also, here’s  a link to my latest MarketWatch column on how we can get to Dow 20,000. Hint: It’s satire: http://on.mktw.net/1e9lOip

 

AAII survey (11/20/2013)

34.4% Bullish. 29.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish:  If sentiment is over 50% bearish.

 

Investor’s Intelligence (11/20/2013)

53.6% Bullish. 15.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish:  If sentiment is over 50% bearish.

 

CBOE Equity Put/Call Ratio: .60

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: 12.26

Bearish: Less than or near 12.

Bullish:  Greater than or near 40.

 

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

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

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

 

MACD: MACD is above the zero line, but is level with 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 66.53 (on 11/22/2013)

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 2.75% (on 11/22/2013)

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

 

Analysis: Investor sentiment has decreased while financial writers enthusiasm has increased. One group will be right, and so far it is the financial writers and money managers. VIX remains in the complacent zone, which reflects the bullish bias, as well as an attitude the Fed won’t be tapering anytime soon. The most bullish indicator is moving averages, and the market trend is clearly in an uptrend. The most significant development this week is the spike in the 10-year yield, which is pressuring bonds.

Opinion: This will be a shortened week because of the holiday, so trading should be light. As we enter the holiday season, it appears as if the market will give us that Christmas rally. The trend is up, the Fed is being cooperative, and sentiment is generally subdued.

For your information, retailers are giving out fantastic deals before and during Black Friday, including 50% and 60% discounts. Perhaps it’s because of the shortened shopping days (compared to last year), or that retailers are desperate. It’s too early to say for sure, but I’m stunned at some of the deals (especially in clothing).

There are also a few lumps of coal looming in the background. First, as the yield on the 10-year rises, bond prices go down. In a week or so, bond mutual fund investors will open their statements and see losses. As the yield climbs to 3 percent, those losses will increase. In fact, 3 percent will be a significant turning point in the bond market, and the media will announce it all day.

When the yield does hit 3 percent in the future, and bond losses increase, bond investors have choices: Stay put, move to cash, or move to the stock market. Many believe bondholders will move to the stock market to chase after higher returns. Others think they will move to cash. I have no idea what bondholders will do, but I know this: The 30-year bull market for bonds is coming to an end, and the financial world will change.

Another distressing development is emerging markets. The Chinese say they are on the right track, and investors believe them. As a result, the Chinese stock market is in bubble territory (up 20 percent in four months), and bubbles never end well.

Meanwhile, other emerging market countries are in deep economic trouble (Brazil is the latest). Even some European countries are showing more signs of trouble (i.e. France). I’m not sure how this will play out, but if there is going to be a market correction, the catalyst will likely come from emerging markets or bonds. The clock is ticking for both, and it will not be pretty.

How will this affect the U.S. stock market? The positive view is that the U.S., although not out of the woods, is stronger than everyone else. In addition, you can’t fight the trend, and the trend is up. The negative view is the world’s problems, as well as a bond dislocation, will negatively affect our stock market. Seems obvious, right? Except that our stock market has so far been bullet proof. It’s possible that as the world’s problems increase, investors will flock to the U.S. for safety.

The world is a dangerous place, and an unknown catalyst can cause a correction or major pullback. With the holidays approaching, the bulls have the edge, but it may not last long.

Bottom line: The market moves higher, ignoring all of the bad news. This is a classic bull market. Nevertheless, as bond prices fall, as emerging markets struggle, and as the Fed tries to figure out what to do next, caution is advised. The advice from Bernard Baruch is still brilliant: When asked how he made so much money in the stock market, he replied, “Because I sell too soon.”

Have a great Thanksgiving!

 

* 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. *

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).

Here’s a link to my latest MarketWatch column on how we can get to Dow 20,000. Hint: It’s satire: http://on.mktw.net/1e9lOip

 

AAII survey (11/13/2013)

39.2% Bullish. 27.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish:  If sentiment is over 50% bearish.

 

Investor’s Intelligence (11/13/2013)

52.6% Bullish. 15.5% Bearish.

Bearish: If sentiment is over 50% bullish.

Bullish:  If sentiment is over 50% bearish.

 

CBOE Equity Put/Call Ratio: .55

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: 12.19

Bearish: Less than or near 12.

Bullish:  Greater than or near 40.

 

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

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

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

 

MACD: MACD is above the zero line, and crossed over 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 68.14 (on 11/15/2013)

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 2.71% (on 11/15/2013)

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

 

Analysis: Sentiment is still on the high side, but individual investors lost some of their enthusiasm. VIX remains in the complacent zone, and RSI is overbought. Add it up and you get a mixed message: Sentiment is frothy but not extreme, while indicators are leaning bullish (thanks to Janet Yellen). Bottom time: Investors believe the market will go up and the indicators reflect that enthusiasm. Market will go up until investor mindset changes.

Opinion: When the week began, everything was going according to plan. The 10-year yield was rising, bonds were getting hammered, and emerging markets were sinking. Then Janet Yellen stepped up to the plate. She was cool, calm, and forthright, and very impressive. She hit it out of the park at the hearings.

Janet said that QE will continue, there are no equity bubbles, and she reserves the right to taper in the future. As long as the economy is still struggling, she said, there will be no changes. Wal-Mart disappoints: Yeah, no tapering! Cisco’s earnings are terrible: Yeah! No tapering. Earnings are weak!: Yeah! QE will continue as far as the eye can see until it doesn’t.

After her testimony, emerging markets rallied, bonds rallied, and the U.S. market went up respectively. In the old days (three weeks ago), her testimony would have lit the market on fire. Maybe it’s because all of the buyers are already in the market. Some value investors are complaining they can’t find any bargains (I’d recommend going to Wal-Mart if you want bargains. Doors will be opening on Thanksgiving night).

As I said last week, only you can decide if the potential 5 percent rally is worth the downside risk. If you’re a money manager needing to lock in a year end bonus, you must be all-in for the rest of the year. If you’re a retail investor, you have a choice.

With indexes at all time highs, enthusiasm growing (mostly by the pros who really need this market to go up), and a belief that the Fed has your back, caution is advised. Even with the positive reaction to Janet’s testimony, the odds are still good that the yield will go up, and that emerging markets will go down along with bonds.

If you are compelled to put on your party hats and go after that last 5 percent, be careful. The good news is the Fed has your back. The bad news is everything else.

Bottom line: Although the technical indicators say the market is going higher, there are more than enough warning signs. With an overbought market, a feeling by many investors there is little risk (because of the Fed), and a sense the market wants to go up, it’s time to let up on the gas, in my opinion. If things don’t go perfectly, that last 5 percent could be the hardest you ever made.

 

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