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Market Direction Morning Comments for Aug 12 2014 – Weak But Holding The 1930 Level

Aug 12, 2014 | Stock Market Outlook

Stocks this morning are showing a bit of weakness as they struggle to hold the 1930 valuations. Stocks need to hold 1930 and then reclaim 1940 to confirm that the rally on Friday was more than just a deeply oversold bounce. At present the Friday rally is starting to look like it was over-enthusiasm from investors regarding Russia pulling its troops back as well as a deeply oversold environment.

Market Direction SPX Morning Chart

The one minute chart for this morning shows the SPX is struggling to hold 1930. Shortly after 11:00 stock broke 1930 after setting an early morning low of 1932.82. The 1940 level has not been reached this morning. The lack of volume is continuing to hinder the movement higher as well. Only 552 million shares have traded this morning with 51% of that volume to the downside so you can see just how split investors are as to market direction.

SPX morning comment Aug 12 2014

SPX Market Direction Outlook Into The Afternoon

The morning remains definitely mixed with volume split almost 50/50 between up and down. The best an investor can say this morning is that the gains from Friday still have not been returned. There is a lot of strength in the market but when you look at the chart pattern you can see that the present pullback and then subsequent rally do not follow the previous pullbacks for this year. Each of the past pullbacks bounced and then moved straight back to the 50 day simple moving average (SMA) and then resumed the uptrend. The present pullback is moving sideways and not up. Yesterday’s bounce back in the morning which was almost all given back in the afternoon set the market up for the weakness we are seeing today.

SPX intra-morning Aug 12 2014

Over Valuation

One of the biggest problems facing stocks is they are overvalued in general. Back in January when the first pullback of the year ended, stocks were fairly valued. On average most stocks were trading at around the 18.5 times PE which is still somewhat high but based on the forward guidance of most stocks, the PE were reasonable considering expected earnings in the next quarter. With earnings in the next quarter reaching an “okay” level of on average around 8% stocks were already pushing too high a valuation and so were once more overvalued. The rally that followed in May took the S&P close to 2000 which placed stocks heavily overvalued. Earnings this quarter had to come in at 15% if they were to return to around 18 to 19.5 times price to earnings ratios. This is not happening which means that even with the present correction, many stocks are having trouble because in general they are overvalued.

Sideways Markets

While many investors may be reluctant to sell positions at present levels fully expecting stocks to appreciate further, I believe we are probably entering into a more sideways environment for stocks. For the type of trading I do, using options against stocks to earn profits, sideways markets are ideal. They have higher volatility and tend to dip somewhat deeper and can jump stronger and then give back much of the rally confusing analysts and investors. The erratic behavior of stocks in a sideways markets is what helps to keep volatility up and with it option premiums.

Close Positions Early

The best method for handling sideways markets is closing positions early for profits and looking for other opportunities to keep capital working. It is often a poor choice to hold positions into option expiry because sideways markets can whipsaw positions often which for those investors with less experience, can be daunting and at times downright frightening. To control that fear, take on far less positions and take profits as they appear. Stay with stocks that have big institutional followings because these same institutions tend to trade their favorite stocks when they dip a bit too far to average in more shares.

Outlook For The Afternoon

Personally I think stocks are going to try to push back higher but there remains a lot of nervousness among investors. My watch is on the 1930 level. The longer it holds the more chance there is of an upside move. The more often it is tested, broken and recovered, the more chance there is the SPX to move lower.

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