Stock Market Indicators (Week of October 21)

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).

Note: Here is my latest MarketWatch article: http://on.mktw.net/18DmLPk

Stocks

AAII survey (10/16/2013)

46.3% Bullish. 24.9% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (10/16/2013)

42.3% Bullish. 21.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .46

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)

 

VIX: 13.04

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 its 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.

 

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 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.

 

Bonds: U.S. 10-year yield is at 2.58% (on 10/18/2013)

Note: 3% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Sentiment indicators are on the high side but not extreme except for the put/call ratio. For the first time in months, the retail investor is more bullish than financial writers. Technical indicators are clearly on the bullish side, so according to MACD and MA, we’re going higher in the short term. The September jobs report is on Tuesday, which could be a market moving event.

Opinion: Now that the shutdown and debt crisis are over, buyers stepped in from the sidelines. Volume slowly increased throughout the week on increased demand, a bullish signal. With Yellen about to take over the ship, QE will continue indefinitely, no matter how often they threaten the markets with tapering. No time is a good time to taper as it will cause a major market dislocation, and the Fed doesn’t want that. Therefore, in the short term, the bulls are in control.

As I mentioned above, there is a jobs report on Tuesday, so any surprises could light up the market, or cause a one-day pullback. Judging by the bullish sentiment, the odds are we’re going higher. Also, it’s earnings season, but negative releases (such as IBM’s)  will be ignored if the market is bullish.

What could derail the bull party? Although in the short-term everything looks peachy, there are many danger signs. First, we’re watching the 10-year yield every week. The higher it goes, the lower bond prices go, which could also disrupt the stock market. When the yield hits 3 percent (and it will one day), it will be a battle between the Fed and the bond market.

The higher the market goes while backed by the Fed’s easy money policies, the greater the chance a bubble is forming. I write about this possibility in my latest MarketWatch article, which should be published this week. If the sentiment readings go through the roof, and RSI (an indicator I’ve added to the list) surpasses 70, the market will be overbought and in the danger zone. Also, the recent parabolic chart pattern on the S&P can’t go on indefinitely.

In my opinion, although we appear to be going higher in the immediate future, there are many risks: Emerging markets, the bond market, increased investor enthusiasm, and the Fed overplaying its QE hand. You put it all together and I don’t see blue sky forever.

Bottom line: If you’re a short-term trader, you can play upside momentum, but use stop losses andtake profits quickly. Investors can hold long positions as this market could rally higher than anyone believes, and yet, you must be on guard. Hopefully, you are diversified with a healthy amount of cash. This is not the kind of market where you want to be 100 percent invested (my opinion only). In the future (it could be months), it would not be surprising to wake up one morning to see themarkets plunging. Everyone believes they can get out in time if the markets reverse, but that door will close fast.

Finally, although the markets are destined to go higher this week, if there is a mid-week selloff, that would be a significant bear signal.

 

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

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