Market Direction today was not very inspiring. Yesterday saw the market direction push up, break through the 14,000 Dow Index Barrier and close on the highs for the day. Yet despite such a terrific day with excellent market breadth, decent volume and strong investor conviction, today started poorly and investors took flight. So what’s up? There are a number of factors that are stalling the market direction up including the fact that the rally has continued to lose steam throughout February. Investors have remaining uncommitted to pushing stocks higher and today the Federal Reserve policy meeting notes suggest that the central bank should consider slowing or halting QE3 before employment improves further. This would be an about-face for Ben Bernanke and it should be pointed out that these are just notes from a policy meeting but as usual, investors hate uncertainty.
Market Direction Weakness Feeds Onto Itself
When the market direction becomes cloudy such as now, investors become increasingly nervous. Fear runs deep among most investors, institutional and retail. Fear drives everything on the stock markets. Fear of missing out on a rally and fear of being caught in a downturn. Therefore when weakness enters a market direction investors look for every opportunity to confirm their worst suspicions to sell out of their stocks. Despite what you may think, buy and hold is not a major part of the stock markets. Instead it is buy and sell. The Fed policy meeting minutes hurt the market direction trend higher, but then investors also turned to poor housing numbers that showed January housing starts were down 8.5%. Most investors ignored the new permits rising 1.8 percent because sometimes new permits do not result in new building.
Investors literally pounded the builders when quarterly earnings and sales from Toll Brothers were lower than expected. They pushed Toll Brothers down 9.1 percent and PulteGroup fell another 6.8 percent adding to yesterday’s decline. This added to the market direction decline.
But many of these home builders are overvalued in my opinion so any amount of negative news will result in selling. Looking at the past 6 months, I had written last September about how Toll Brothers was way overvalued and indeed by mid November 2012 is had finally fallen back to being undervalued as it fell below $30.
Investors always push stocks to extremes both up and down. Fair value of Toll Brothers in my opinion based on their earnings should be around $32 and today’s collapse of the stock has certainly started to bring it back in line.
Market Direction and Gold’s Collapse
Against this backdrop there is also the rising US Dollar which most analyst seem to not be mentioning lately. The lack of any demise of the US Dollar must be annoying by now to the gold investors. The 50 day moving average for Gold today collapsed below the 200 day signaling the bear market in Gold has returned again. Gold is now down to $1578 and in no small part thanks to the US dollar rising.
Market Direction and the Rise of the US Dollar
But while many may be watching gold’s collapse, few seem to recall that a rising US Dollar has not been good for the stock market direction higher since 2006. There has been a direct relation between the rise and fall of the US dollar and stock valuations. Over the past two weeks while the Stock markets seem stuck, the US dollar has been rising. This will negatively impact stocks at some point. How much is anyone’s guess but I doubt the co-relation is broken yet.
Market Direction and Commodities Decline
Commodities tumbled amid speculation that a hedge fund was unwinding positions. Crude oil fell to $94.46 (U.S.) a barrel, down $2.20. Gold fell to $1,578 (U.S.) an ounce, down $26.20. That brings the price of gold to the lowest level since summer 2012.
Office Depot Merger
Office Depot confirmed that it a deal to merge with OfficeMax worth $1.2-billion was in the final stages. OfficeMax fell 7 per cent and Office Depot fell 16.7 per cent reversing the gains from yesterday. As I indicated yesterday, none of the office supply dealers are of interest to me. I believe no amount of mergers will save them from further store closings, job cuts and price cuts.
Market Direction Closings and Apple Stock
The S&P 500 closed at 1511.95, down 18.99 points. This 1.2 percent decline is the one day market direction decline for the S&P since mid-November. The Dow closed at 13,927.54 down 108.13 points or 0.8 percent. This marks the 8th attempt to hold above the 14,000 level. Again the Dow failed. The NASDAQ closed at 3164.41 down 49.19 points. Apple Stock closed down over 11 percent at $448.85. I sold biweekly puts yesterday so obviously I was too early.
Market Direction Technical Indicators At The Close of Feb 20 2013
Let’s take a moment now and review the market direction technical indicators at today’s close on the S&P 500 and view the next trading day’s outlook.
For Momentum I am using the 10 period. Momentum is clinging to stay positive and after yesterday’s jump back, this is a poor sign indeed. It will take a large run up tomorrow to keep momentum from turning negative. I doubt that will occur. Market Direction is down as far as momentum is concerned.
For MACD Histogram I am using the Fast Points set at 13, Slow Points at 26 and Smoothing at 9. MACD (Moving Averages Convergence / Divergence) has signaled market direction down since Feb 4. Today that signal is expanding to the downside. MACD may have called the market direction correction early.
The Ultimate Oscillator settings are Period 1 is 5, Period 2 is 10, Period 3 is 15, Factor 1 is 4, Factor 2 is 2 and Factor 3 is 1. These are not the default settings but are the settings I use with the S&P 500 chart set for 1 to 3 months.
The Ultimate Oscillator is still positive but tumbled today. It won’t take much to turn the Ultimate Oscillator to the downside as it too signals that market direction is now down.
Rate Of Change is set for a 21 period. Rate Of Change is still positive but collapsed today. It too is signaling a change in the market direction up.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is overbought and signaling that the market direction is down. As it looks out more than a day or two, I would expect lower prices by the end of the week.
For the Fast Stochastic I use the K period of 20 and D period of 5. These are not default settings but settings I set for the 1 to 3 month S&P 500 chart when it is set for daily. The Fast Stochastic is no longer overbought. Today’s selling has eroded the overbought signal. The signal now is for a pullback in market direction for tomorrow in stock prices.
Market Direction Outlook And Strategy for Feb 21 2013
February is often the weakest of the best 6 months for the S&P 500. All the indications are for the market direction to move lower. Even if the market rallies tomorrow, all the indicators are that the market direction trend up is broken for now and the S&P 500 will be pulling back to rest. With the possible budget cuts to be put in place starting in March, and the 7.4 percent rally since January 2, it is not surprising that the market will end this latest rally here.
Even if tomorrow the market should turn around and try to climb back I believe the Market Direction technical indicators are correct that the direction is now changed.
In my intraday comments from today I indicated that the Dow Index has flirted with 14000 for the past two weeks and has been unable to break convincingly through. You can read the intraday comments through this link. It is obvious that the path of least resistance presently is lower. Despite the Fed Policy meeting minutes, there is no indication yet from Mr. Bernanke that he will entertain the idea of leaving his unemployment goals at this stage of the recovery. But investors have waited for a reason to sell and with the markets stalled over the past few days, this was the catalyst they needed.
My strategy since the start of February has been to stay cautious and invested but with smaller positions and out of the money. My strategy included buying back early any positions that had decent profits and not holding any until expiry unless necessary. To that end, with the market direction moving lower I will be looking for opportunities to close some of my positions early and to put in place new positions.
I am not expected a plunge here. I disagree with the media analysts who have called for 1000 and 2000 point plunges before the end of February. Instead I look upon this correction as an opportunity for higher put prices and to reposition many trades to take advantage of the increase in option volatility which a market direction correction should bring
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