My last market direction outlook was for the see-saw action to continue the market. The market direction intraday continues to point to this type of market action. This week though is somewhat special. We have GDP numbers, unemployment numbers, Fed interest rate decisions. I don’t think any of these will be too far off their mark. Even the Fed interest rate decision should be close to a non-event, but it could be the tiny print that raises a few brows among investors as they try to gauge any possible easing of the present Quantitative Easing programs.
Detroit Bankruptcy
The Detroit bankruptcy will most likely push the Fed decision to scale back Quantitative Easing out a little further. Whether analysts like to admit it or not, the bankruptcy of a major city, even one that may have been badly mismanaged, sets a dangerous tone for other municipalities. Recalling that the bond market is huge in relation to stocks, no Fed governor will want to see more cash starved municipalities go Detroit’s route. A debt of 20 billion dollars is small in relation to all the debt instruments held from all the municipalities, but it is the symbol that is important. If the bankruptcy proceeds, bond holders will be wiped out and bonds are supposedly far more secure than stocks especially when it comes to debt instruments like municipalities. Many of my own municipal bonds pulled back dramatically on the news of Detroit’s decision to declare bankruptcy and are only just now starting to creep back to where they were trading. Bonds are different from stocks and if a lack of confidence should enter the municipal bond market, this would be damaging to the overall health of the ongoing recovery.
Market Direction Action 6 Month Daily
Looking at the 6 month chart gives us very clear indications as to what investors should be watching for. It also explains my present stance of continuing to look for Put Selling opportunities.
In late May the S&P market direction pushed to around 1670 and then backed off. It then recovered to the 1650 level around June 18 and then Bernanke made his statements regarding scaling back Quantitative Easing and the market direction fell back. I have marked this period as point A on the chart. You can see why, in my opinion, Bernanke stepped back from his comments. Stocks took a strong tumble and were at risk of breaking the uptrend following his statements..
Bernanke then did an about-face announcing that Quantitative Easing would be needed for some time yet and the market direction resumed the uptrend. It then broke through 1650 around July 10 and then pushed back to the all-time high of 1670 the following day. The breakout was both technical and fundamental. The confirmation by investors that the Fed would not be entering a scale back of Quantitative Easing anytime soon, stopped the selling pressure and turned market direction back up. When the previous high of 1650, the point where the Fed had pushed the market direction down, was broken, technically this marked a breakout. I have marked the break out point as B in the chart below.
S&P 500 Market Direction 3 Month Daily Chart
The three-month daily market direction chart gives us an even clearer picture. Once stocks recovered from Bernanke’s comments, they pushed back above 1650 and then pushed beyond 1670, the previous all-time high. There was a retest shortly after and then another new high as the S&P flirted with 1700 before settling into the sideways pattern that I have spoken of in the past few market direction comments due to the market direction being so heavily overbought during this last run-up.
Market Direction Action To Watch For
Sometimes it is easy to trade and right now is one of those times. Investors want to push the market direction higher but the market is overbought and revenue is once more beginning to impact the quarterly results. While analysts can manipulate revenue and earnings figures all they want, the larger investors simply look at total revenue and see if it is higher than the same period last year. It really is that simple. As long as revenues hold up the market direction can hang on and eventually push higher. But revenues are so far disappointing and while certainly not dismal, they are not strong enough in general to get the market direction a lot higher.
The first line of defence to be watching for is the 1670 level. If the market direction breaks back through I will be purchasing Spy Put Options, which is my usual course of action. As well, because I am not handling the market direction portfolio following the passing of my good friend Doug Harris, I will also be buying UltraShort ETFs.
However until that happens the strategy remains looking for my favorite stocks that have dipped and selling puts against them. Over the past couple of weeks those stocks have included, Microsoft Stock, Intel Stock, Kimberly-Clark Stock, Visa Stock, Coca Cola Stock and several others.
Present Market Direction Outlook
I have no concerns at present as the market direction continues to stall here as it tries to work out the overbought condition and continues to look for a catalyst to push stocks higher. Some excellent revenue numbers on a handful of Dow 30 stocks would assist but in all likelihood the markets may only be able to push about 5% higher from here. August should be interesting and I will be watching the market direction daily for any signals that the trend up is over. Until then I am happy to be taking advantage of dips in my favorite stocks and continue with my Put Selling trades.
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