Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.
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AAII survey (8/6/2014)
30.9% Bullish. 30.9% Bearish. 38.2% Neutral.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (8/5/2014)
50.5% Bullish. 17.1% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
VIX: 15.77 (on 8/8/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): S&P 500 is below its 50-day moving average, and pointing up. The Dow is below its 50-day and 100-day moving averages and pointing up.
Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.
Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.
MACD (S&P 500): MACD is below its zero line, and 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 (S&P 500): RSI is at 43.04 (on 8/8/2014)
Overbought (i.e. Bearish): When RSI rises to 70 or above.
Oversold (i.e. Bullish): 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 2.42% (on 8/8/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: The S&P 500 was ready to fall below the line-in-the-sand technical level of 1900 when the market was saved by Friday’s monster rally, but on low volume. Nevertheless, the two-week downtrend was temporarily interrupted, and on Monday we’ll see if there will be another rally, or a continued selloff. The downtrend is still intact (according to the moving averages), but that could change in a heartbeat, especially if Janet unexpectedly appears. MACD is still signaling trouble, but like moving averages, it’s a lagging indicator. On the sentiment side, retail investors are feeling less bullish now, but financial writers are still all in (with a few exceptions). Bottom line: Sentiment indicators have fallen a bit after the two-week drubbing, but few investors are excessively bearish. Technical and fundamental indicators are giving confusing signals, so watch the market itself for clues.
Opinion: It was another crazy, volatile week. Because of geopolitical concerns and economic problems we don’t know about, the market continued selling off. And then Friday arrived, and Bam! Out of the blue, the market staged a monster rally on low volume. Commentators spent hours of time trying to determine why the market rallied, and I don’t even remember their reason. (I believe it was because Russia appeared to pull back from Ukraine.)
Friday’s rally proved once again why shorting stocks has been so difficult for the last five years. In fact, many short sellers are sitting on the sidelines, and they won’t return until they are convinced the uptrend is broken. Until then, short-sellers are cautious, as well they should.
I can’t tell from the indicators what will happen this week, but I’m looking to see if the Friday rally continues. Even more important, I am looking for clues the rally rolls over and fails. If this rally (or future rallies) fail, it might be time to think about buying inverse ETFs or puts. Once again, shorting strategies are risky in a volatile environment, which is why playing it safe in cash is the preferred strategy for retail investors.
Nevertheless, the majority of retail investors are not in cash. According to the most recent AAII Allocation Survey, cash levels in July dropped to 15.8%, the lowest level since 1999. Once again, it seems like retail investors are buying stocks at the highs. In fact, the worst mistake investors can make now is chasing after lost opportunities in the late stages of a bull market.
On the other hand, many very smart money managers believe the worst is over and the bull market continues. Many appear on TV with exciting predictions of 2,000 on the S&P and beyond. Perhaps they are right. If we get there quickly, the bull market continues and short sellers must retreat.
As you know, I’m not willing to buy at these elevated price levels (the S&P is still only 4% from its all time high). To me, the 5% potential upside is not worth the 20% potential downside. Nevertheless, that’s a decision only you can make.
Bottom line: Once again, because of volatility, geopolitical events, and confusing technical and fundamental signals, it’s impossible to predict what will happen this week. At this writing, I still believe the probabilities are on the side of the bears, but that can change quickly.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.