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).
Bonds: U.S. 10-year yield is at 2.58% (on 10/17/2013)
Note: 3% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
AAII survey (10/9/2013)
41.3% Bullish. 33.6% Bearish.
Sell signal: Over 60% bullish.
Buy signal: Over 50% bearish.
Investor’s Intelligence (10/9/2013)
45.4 % Bullish. 20.6% Bearish.
Sell signal: Over 50% bullish.
Buy signal: Over 50% bearish.
CBOE Equity Put/Call Ratio: .60
Sell signal: Less than or near .50 is a sell (more call options are being bought).
Buy signal: Higher than or near 1.0 is a buy (more put options are being bought)
Sell signal: Lower than 12.
Buy signal: Over 40.
Moving Averages (daily): S&P 500 (and Dow) is above its 50-day moving average, and above the 100-day and 200-day MA.
Sell signal: Index crosses below 50-, 100-, or 200-day MA.
Buy signal: Index crosses over 50-day, 100-day, and 200-day MA.
Note: S&P and Dow still not out of the danger zone because of outside political events.
MACD: MACD is on the zero line, is below the red 9-day signal line, but pointing up. (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 9-day signal line. MACD line crosses above zero line.
RSI: RSI is currently at 65.89.
Overbought signal: When RSI rises to 70 or above, it is possible S&P will reverse direction and fall.
Oversold signal: When RSI falls to 30 or below, it is possible S&P will reverse direction and rise.
Note: RSI can remain overbought or oversold for extended time periods.
Analysis: Early in the week, the market was below its moving averages and headed lower, the VIX (fear index) shot up to 20, and MACD gave a sell signal. Everything changed on Thursday and Friday when the market reversed direction. Because of the political games, the indicators are not as useful, which is where we’re at now. What happens in Washington will trump the indicators. Caution advised.
Opinion: The market did not disappoint last week. It was leaning bearish for the first three days and then, POW! It lit up like a Christmas tree, aggressively taking back 15,000. And here we go again: We’re leaning bearish. In fact, it feels like deja vu all over again. Judging by the market’s behavior, there will not be a government default. If the market thought so, we would be down 10 or 15 percent, not 1 percent.
Nevertheless, this is still a dangerous sideways market, and anything is possible. Even with a bearish open, logic suggests there should be another relief rally (after they really, really avoid a default).
Here’s what I think: I have no idea what is going to happen. The indicators are slightly bullish thanks to the monster rally. But the feuding politicans could change that scenario. I also remember an old Wall Street saying, “Buy on the rumor, sell on the news.” When the games are over, I wonder how the market will react. In a sideways market, it could go either way.
Savvy market participants aren’t making any dramatic moves, which is reflected in the low volume. Even on Thursday and Friday, volume was quite low on the major market indexes.
Although it’s possible to make money in this market, it is difficult. Long-term investors have closed their eyes, thrilled that the Dow went back above 15,000 again. Traders are looking for short-term opportunities, and they’re still looking.
In a market like this, your number one goal is not to lose money (actually, that’s always your goal). This is the time to evaluate your positions, consider taking small losses now, use hedging strategies, and above all: Don’t make any impulsive trades. Since no one can predict the market’s next move, ignore the noise, and there’s a lot of it.
Sit and Wait: Short or Long
There is so much conflicting advice it’s too early to say who will win the week. If you’re long this market, use stop losses to protect your downside.
If you’re short this market, you have to be even more careful. Jim Chanos, a top professional short seller, says that this has been the toughest market environment for shorting in 29 years. As you learned on Thursday, he’s right. You can try and short this market, but in the future, there will be better opportunities. Unless you’re experienced at shorting, you might want to wait a little longer.
The hardest thing to do right now is to sit and wait, but that is exactly what you should do. It’s easy to find yourself on the wrong side of a trade in this environment. When the games are over in Washington (or delayed), perhaps the volatility will decrease. Meanwhile, let’s be careful out there.
Note: The bond market is closed on Monday. Keep your eye on the 10-year yield, which is climbing out of the basement. Bonds rallied after Ben made his no tapering announcement. But lately, bonds are selling off again. When the yield hits 3 percent one day, there will be ramifications for the bond and stock market (unknown at this time, but it won’t be pretty).
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.