Market Direction indicators are hanging on today and the Fast Stochastic signals are certainly paying off. Meanwhile this morning I watched with great interest one of my favorite market analysts, Laszlo Birinyi, President of Birinyi Associates. As regular readers know I have followed Birinyi for decades. I loved watching him on the Louis Rukeyser Wall Street Week PBS series. What a great show that was. I was so disappointed when Rukeyser passed away in 2006. I recall vividly his telecast after the 1987 market plunge. You can view some of that episode through this market direction link to the Big Picture blog. Anyway back to Birinyi.
Market Direction Up
Birinyi is one of the few who called a market direction up in early March 2009. Over the decades of my following his calls he has been very good at market direction timing. He is patient and acknowledges when he is wrong. On CNBC this morning Laszlo Birinyi commented that this rally is not just short covering or high frequency trading but real people buying real stocks. Birinyi comments on how volume cannot predict a market movement but it can tell you where people have bought and sold, which comes back to my strategy of resistance and support levels through volume monitoring. Meanwhile Birinyi advised that investors should look for more gains in market direction and keep their options open.
Market Direction Parallel to 1982
Birinyi sees a lot of parallels between this market and 1982 when the market direction took off and moved the stock market 22% higher over the course of 12 months. He isn’t calling for this type of gain but does feel that the S&P 500 could easily reach 1600 this year although obviously as he put it, through an “irregular pattern”. In other words, not straight up. Birinyi works off a sentiment strategy as he believes that sentiment is what drives most of the market direction and individual stocks. He developed years ago his own sentiment indicators which he uses in managing client’s capital through his Birinyi Associates financial investment company.
Market Direction and Sentiment
One of the interesting aspects of the talk this morning were his comments regarding investor sentiment and how common the mood of investors is swayed by misinformation. He pointed out the recent comments of analysts in the media who discussed the market putting in a top here and then entering a pattern similar to the “massacre of 1994”, where they indicated stocks collapsed quickly by 9%. Instead Birinyi pointed out stocks only fell 3.3%. The amount of misinformation he explained is amazing and it hurts investors. Many sell when in fact they should be buying more.
Still though CNBC is excellent for watching for sentiment and mood as just late last week they were marching out the parade of bears again as the stock markets sold off and this week it is back to the bull parade.
Market Direction and The Sectors To Buy
Birinyi discussed the sectors he likes which are the bottom up industries which include, utilities, manufacturers and industrials. He believes the economy is performing better than most analysts and investors are believing and he feels it will get better.
Market Direction and Dow Theory
Just a few short weeks ago the Dow Theory has issued a sell signal on the markets and now theorists claim a buy signal has been generated. This is why I cannot follow these types of indicators. Instead I think the Dow Transports hitting another new all time high are better indicators that the market direction will continue to push higher. Certainly not straight up but definitely with the bias to up.
Market Direction and Put Selling For Income
This means that the best environment for Put Selling for income is upon investors. If indeed there is limited downside the chance of the market direction rushing headlong higher is nil. But with the bias to the upside the general trend higher will mean dips and pullbacks in different stocks (think Target Stock from yesterday) to allow for Put Selling opportunities. Make a watch list and monitor those stocks for Put Selling chances on dips. I have discussed this strategy many times in a variety of articles. Once sold, look for the opportunities to buy to close naked put positions for 20% or less of what was originally sold. This means if you sold a put for just 25 cents buy it back if there are several weeks to options expiry and you can close for 5 cents.
You want to keep your capital bringing in a constant stream of income now as long as the trend can remain with a bias to the upside. Put Selling within the put options of your favorite stocks does not mean having to keep your capital tied until options expiry. Instead watch for opportunities. Basically if you have capital tied to Stock A and an opportunity comes along on Stock B which is excellent and there is a profit in Stock A, close even some of the naked puts in Stock A to sell puts in Stock B. If Birinyi is right and the market direction can chug higher, this is a terrific time for Put Selling profits. Pick the strong large cap dividend paying stocks as they will also have the best chance of recovering from any sell-off. Again this fits right in with my Caterpillar Stock Put Selling trade and my Target Stock trade yesterday.
Market Direction Action For Today
Today’s pattern is what you want to keep watching for during the day to confirm the strength is with the rally.
A) The market opened and fell slightly but immediately recovered and moved higher and then pulled back. It then retested the morning open to see if sellers would emerge. They didn’t.
B) So the market direction pushed higher and then broke through the early morning high marked by C.
C) It is important that the market does not establish patterns of lower lows. If it does intraday, hold capital back as that should provide a bit more volatility and some selling which could push down some of the stocks on your watch list for Put Selling opportunities.
When the market direction continues to climb check your naked puts values and close them when you see another opportunity beginning to develop in another stock. Keep rotating your capital from one Put Selling trade to the next. Realize that holding for that last 5 or 10 cents when there is a 25 cent or 50 cent trade developing is not worthwhile. When the market direction is climbing you want to play the dips in your favorite stocks and keep your Put Selling income flowing in. Holding for 5 or 10 cent gains for two weeks up to options expiry is a waste of capital that can be earning better returns on other stocks in your watch list.
Keep your capital working and remember, the doomsayers have been wrong since the bear market ended in 2009. One day they will be right, but it is not today and that’s all that matters as you grow your portfolio.
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