Market Direction For The Third Week Of September 2012

Market Direction higher certainly got a lift last week from the Federal Reserve with their announcement of the much-anticipated Quantitative Easing Three. The most prominent comment from the Fed was the announcement of monthly buying of 50 billion of Mortgage Backed Securities to try to keep interest rates low on the short end. There is a lot of controversy over the Fed’s actions for QE3 and a lot of worry about inflation. Personally I think the price of oil could be the next problem for the economies but as I am not an economist but an investor, I prefer to stay with the trend.

The market direction trend is certainly up following the Fed’s action. As well the ECB’s action has pushed down interest rates for Italy, Spain, Portugal and Greece as well as some of the smaller members and suddenly there is little talk about sovereign debt defaults. Sounds almost like everything has been fixed doesn’t it. But then you know it’s never that easy.

The rise in the overall stock market direction has taken the S&P 500 to a new bull market high and it is now just 9% below the all time high made on Oct 09 and 10 2007 of 1565.42. Leaving the S&P 500 aside for the moment, the Russell 2000 which is composed of small cap stocks set an intraday high of $86.96 on Friday. This marks an all-time high for the Russell 2000 index of small cap stocks. Trading symbol is IWM. From the collapse in March 2009 to $34.26, the Russell 2000 has recovered 153.8%

Market Direction and Russell 2000 Index

Russell 2000 Index is now up 153.8% since the bear market bottom in March 2009

Market Direction and The S&P 500

While the S&P 500 has 9% still to go, many sectors of the S&P are already well within their top trading ranges. In particular the Consumer Discretionary, Health Care, and Consumer Staples has now traded to all-time highs this year. Other sectors are not doing as well particularly financials which are down 143.07% from their all time highs. At the same time the Industrials, Utilities, Energy, and Materials Sectors are all still down from 19% to 24% from their all time highs. So with quite a few sectors still trading below their all time highs, many stocks are being watched by investors for opportunities.

Market Direction and Covered Calls

The same can be said about those investors who do covered calls. As some of the remaining sectors take off, staggering covered calls among various strikes and months may be worth considering to realize some gains while at the same time providing a bit of protection as the stock market does appear to be at somewhat loftier levels.

Market Direction and Put Selling

For those of us who enjoy Put Selling, I am continuing with my Put Selling strategy but I am continuing to keep some of my capital back for opportunities should stocks take a dip here or in the next couple of weeks. With over 80% of stocks trading above their 50 day moving average, it is rare when that many stocks are in a “bull run” as it were. This could be a signal of a possible pullback as the market direction up is certainly overheated.

Market Direction and Spy Put Hedge

With the market direction continuing higher I will not be putting in place any kind of SPY PUT hedge. I see no reasons to buy SPY PUT protection in this market. I prefer staying with the trend rather than trying to second guess when a large pullback may occur.

Market Timing Indicators From Friday

The market timing indicators from Friday are interesting to review.

Momentum is continuing to climb and is now up 7 trading sessions in a row.

MACD histogram is also continuing to climb from Thursday.

The Ultimate Oscillator shows the market is overbought but not extremely so.

Rate Of Change is climbing which is expected what with the rallies continuing.

The Slow Stochastic continues to warn that the market is overbought and it is now turning neutral.

The Fast Stochastic continues to also warn that the market is overbought and it firmly neutral.

Market Direction as determined by market timing technical indicators

Market Timing technical indicators from Friday are climbing but show very overbought

Market Direction indications are positive but there are some clear indications that the market direction is overbought and needs to rest. Whether or not investors will let the market consolidate is difficult to predict at this point. Investors are back buying stocks as none of the market timing indicators are warning about any possible sudden drop in stock markets. Consolidation can be handled, and this means many investors will be back buying dips.

Market Direction Outlook For The Third Week of September 2012

Market Direction outlook is up to neutral and there are no signs of a sharp pullback. September is normally the worst of months for stocks, but it would appear that Mr. Bernanke and Mr. Draghi have decided differently for September.

This week September options expire and according to the Traders Almanac Monday of this week has seen the Russell 2000 down 8 of the last 12 years but on the Friday the Dow has been higher on 7 of the last 9 years. Therefore I will be holding onto my in the money Intel Stock naked puts that are close to their put strikes as we enter the final week of September options expiry just in case the market does push a bit higher and then I will be rolling any Intel Stock puts that are left in the money.

If the dip buying starts again on any sign of market direction weakness then I will be back Put Selling on my favorite stocks out to October and November. Stocks like VISA Stock, YUM Stock, Microsoft Stock, Walmart Stock have all pushed higher in the past week. This has left almost all of my naked puts out of the money. After Friday when options expire, the problem will be deciding how much capital to put back to work in this stock market at these levels.

My plan for this week will be:

A) Watch overall market direction for any signs of a market pullback that could be worse than expected. Right now there are no such signs.

B) Concentrate on my favorite stocks and watch for opportunities to do some Put Selling on weakness.

C) Continue with the Cautious Bull Strategy and sell puts in small lots “just in case”.

E) I will not be selling any naked calls including on Intel Stock at this time. The overall market direction remains up and as such selling naked calls is foolhardy in this kind of market environment.

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  • Hi Alexei
    I tend to focus on my strategies. There have been so many death crosses since the year I started in the early 1970’s that were wrong. Probably somewhere around 90%. I still think keep some cash on the sidelines for opportunities, is better than worrying about the next death cross and there will be lots more to come I am sure.