Market Direction Drifts Waiting For Draghi and Employment Numbers

The present market direction remains drifting for the most part as investors await the ECB Chief Mario Draghi’s comments on Thursday regarding the ECB’s attempts to push down interest rate yields through buying one to three-year bonds from the likes of Greece, Italy and Spain. The present problem facing these principal countries is 10 year rates are not sustainable. However presently none of these countries are issuing 10 year bonds. Whether or not the ECB buying 1 to 3 year bonds can make an impact is questionable. Numerous analysts feel that this effort will have very little impact if any, but for investors it may be enough to push stocks higher, at least for the short-term.

Market Direction Sentiment Poll

The latest market direction sentiment blogger poll shows that there are more bearish bloggers than bullish ones. While this is an informal survey I find it has predictive qualities as my spreadsheet built around this poll shows that when there are more bearish bloggers than bullish ones, the stock market has trouble falling. Instead the stock market direction tends to move sideways with a bias to the upside.

Market Direction poll

This informal weekly market direction poll provides a good idea as to sentiment among financial bloggers.

One of the important aspects to ponder with regards to the stock market since early June has been the constant market direction rise despite all the bearish sentiment among investors. Even with the stock market direction challenging the April highs in August, the selling since then has been muted. Therefore while fear is talked about by investors, the VIX Index which measure volatility in the stock market itself shows low volatility. On one hand then investors are talking fearfully that this could be a top in stock market direction but on the other hand they are not selling into the latest run up in valuations despite their concern. The risk of a strong market direction downturn therefore seems fairly limited.

Market Direction Chart

The past month for the S&P 500 is shown below. Since hitting a top on August 21 of 1426.68, the market direction has been a gradual drift lower. There is no heavy selling here, just investors playing a wait and see approach. The dip buying that was so prominent since the start of June, has for the moment been put on hold by investors.

Market Direction drifting of stocks

Market Direction remains drifting slowly lower while investors in general talk fearfully but do not show any signs of exiting.

Market Timing Technical Indicators

Looking at the market timing technical indicators for September 5 show the drifting pattern in the S&P 500. Momentum continues to decline but it is closer to market direction neutral than actually being down.

MACD continues to drift lower.

The Ultimate Oscillator is also moving lower and staying negative despite the one day rally on August 31.

Rate of Change is also lower and negative.

The Slow Stochastic however is flashing neutral to a slight bias up for two or three days away. The Slow Stochastic could be reflecting the fact that over the past few days the daily intraday low is not falling but advancing. If correct, this move by the intraday low to keep rising could be signaling that the market direction will shortly break to the upside.

The Fast Stochastic remains bearish and is still signaling that the S&P 500 will be lower tomorrow.

Market Timing Indicators for Sept 5

market timing technical indicators for Sept 5 2012

Market Direction Outlook For Thursday

As we head into the final two days of the week, the market direction up and down is being held in check by the ECB comments tomorrow and Friday’s employment numbers out of the US. Investors are hoping that the ECB will provide more liquidity for the market which should push stocks higher. Investors already believe that when Fed Chief Ben Bernanke spoke at Jackson hole last week, that he gave a clear indication that the Fed will be providing more liquidity for the economy which should also push stocks higher.

Therefore investors are holding here and refusing to sell. They see a better chance of more liquidity for stocks than the likelihood of any significant decline in valuations. In my other market direction comments today which you can read here, I indicated that stocks can certainly move higher, but it will take an increase in earnings for the next quarter to sustain any rise in equities from here. Last quarter was poor for company earnings. This quarter needs to be much stronger across the board, otherwise any rise in stocks might last only a few weeks at best.

Presently I have about 50% of my capital committed to naked puts. With the market direction drifting, I see no reason to commit more capital until the stock market gives a clearer direction which way it plans to move. Short-term the blogger poll makes me think that stocks could move higher. The market timing technical indicators though as a consensus are still bearish to neutral. It is the slow stochastic that has me thinking market direction might just break to the upside.

  • Thanks Teddi. Very helpful insights. Wish I hadn’t just jumped in and bought a VXX call a few days ago.

  • It could still work out Paul.

  • Chester the Income Investor

    As always, thank you!