My Market Direction outlook for today was for some weakness but overall the market direction wants to keep pushing higher. Eventually there will be a correction but how steep a correction in market direction is unpredictable at this point.
This morning I watched with great interest as the media paraded a string of analysts who called this a “broken market”. They pointed to the industrial output numbers which show industrial production declined in April by the most in 8 months. The downward revision for March also dampened analysts’ outlook who felt that these declining numbers reflect an ongoing weakness in the US economy. Worldwide, they pointed out, is no better.
Intraday Market Direction Chart
You can see the market direction action for this morning in the chart below.
A. The market direction opened lower with the news of the industrial output numbers.
B. Morning low in market direction was made within about 15 minutes and held.
C. The market direction waffled slightly but no new low was made. Selling did not erupt on the news. Instead by 10:45 the story was already in Bloomberg that inflation was so low that surely the central banks around the world will keep the liquid party alive for still months to come. That ended any further pullback and the market direction moved up. The little bit of Put Selling I could do was already over.
D. With no selling, the market direction up resumed taking the poor industrial output numbers in stride.
Market Direction intraday May 15 2013 on S&P 500
Broken Market? – No – Just A Bull
So is this a broken market that refuses to acknowledge that the economy is worse than realized? Is the market out of touch with reality? Absolutely because this is a bull market that loves to climb the “wall of worry” and leave investors fuming at the ridiculous nature of a stock market that will not accept the true picture of a slowing economy. But then is the economy actually slowing down that much? Remember that the industrial output numbers have been poor for months. Actually they have been poor for years now. This morning’s numbers were 8 month lows. In other words they are the worst numbers in 8 months. We have had a lot worse numbers over the past 5 years.
The Reality Is…
The reality is that a lot of institutional investors got out of the market in 2009 and instead moved into bonds where they attempted to earn a return. Truthfully when you look at the mutual funds and pension funds, few made much in bonds after mid-2010 despite the big rally in bonds. Making money in bonds is not as easy as people think. For one thing a lot of pension funds can only trade within high rated bonds and government bonds at that. But the bleeding of losses from stocks did stop once these big players left stocks and they earned decent returns in bonds until late in 2010. Since 2011 the returns have fallen off and now there is so little left in bonds that squeezing out any kind of return is next to impossible on high rated bonds.
For many of the big pension funds and institutions, many of their bonds have expired or been sold and they obviously see no reason to be adding the “usual” numbers of 5 to 10 year bonds at this stage of the recovery. As the present economic climate offers little in the way of reward for continuing to buy bonds, many large institutional investors and pension funds started to move into stocks in a major way in the fall of 2012.
The big players are still buying the dips and trading stocks as they attempt to get returns to keep clients content. They now believe firmly that the Fed will not leave this market and that the direction is up and stocks are undervalued in general. Personally I don’t see this undervalued outlook for stocks. I believe most stocks are fairly valued and many are overvalued but then that is also why I prefer Put Selling to owning stocks.
While 90% of stocks have reported earnings and the majority beat those earnings, revenue was very short and the revenue picture is more important in my mind than earnings. But investors like to hang their fortunes on any positive aspect and earnings still look decent in the most recent quarter. I am more a realist perhaps and I think revenue looked “bad” for most companies, reflecting a worldwide slowdown.
Put Selling The Bull
My market direction outlook yesterday said it all. The trend remains up for now and this is the point to be Put Selling strong large cap stocks that are moving in the right direction along with market direction. Be careful around stocks that are not following the market direction because when there is a correction, many of these companies that are already falling will have a lot further to fall.
When the market direction is up and the weak stocks are still falling, these types of stocks will take a large tumble when the market direction corrects down. Take smaller positions in those stocks if you have a need to be Put Selling against them.
Own It In A Heartbeat
For me I prefer Put Selling the stocks that I would own in a heartbeat. That way I can hang tough when there is a correction, decide what stocks I will move my naked puts lower on, which ones to accept shares on and which ones to sell covered calls against. I have a boatload of strategies to apply to all my positions so I sleep well at nights, but let’s be honest with ourselves – eventually the market direction will correct and the higher the market direction up has taken us, the more severe the decline will be. Remember too that it is a rare year when stock markets do not have at least a 10% correction in market direction and we are now into the weakest 6 months of the year.
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