The market direction outlook for Monday was mixed but the bias was to the upside. As I explained in the market direction outlook on the weekend, “The outlook for Monday is mixed but with momentum back positive, stocks may push higher.” Momentum has been a leading indicator, replacing MACD late last year as the better indicator to put more weight against. No indicator will lead forever. Throughout the year different indicators will pick up the lead and become sharper at picking changes and swings in the market direction. In 2013 it was primarily MACD (Moving Average Convergence / Divergence) but then 2013 was a much easier year to predict, as it was basically up. This year there are more twists and turns to the direction and Momentum has been the better indicator. Momentum as a technical indicator is not really based on buy and sell signals but more on changes in overall market direction based on the strength of the market movement itself.
The rally today had a number of factors in play.
Europe Deflation Fears
The fear in Europe over a slow drift toward what economists fear is deflation has the ECB contemplating a stimulus measure duplicating Quantitative Easing. The fear of too much debt seems to have been replaced with the fear of deflation. Perhaps many European nations are so debt laden that at this point more debt really does not matter. As an investor I have no idea what is the best course for Europe and my opinion does not really make any difference. Instead I prefer to simply follow the trend in the market direction and stay aware that nothing lasts forever including Quantitative Easing. At some point I have always felt that “the chickens will come home to roost”. I just know when or if that happens I will be trading to the downside and using different strategies. Investors though love the thought of more liquidity and ultra low-interest rates. It makes stocks the best “game in town”.
Higher Interest Rates? Not So Fast!
Also a catalyst to help stocks higher today was Fed Chair Janet Yellen who indicated that while the economy is recovering, for many Americans it still feels like a recession. No kidding. With the highest number of people not even participating in looking for employment since the 1930’s, this tells all of us just how tough it still is 6 years after the financial collapse of 2008. Yellen then went on to say that the struggling job market will need the help of low-interest rates for “some time”, but exactly what “some time” means was of course not clear. Still this added fuel to today’s rally. After all as long as most investors believe they can get out “before everyone else”, when the party finally ends, they will most likely stay at the party longer which means pushing stocks higher.
Alcoa Stock
Alcoa is considered by most as the first stock to start each quarterly earnings season and a lot of analysts still believe that Alcoa gives a good overall indication as to what to expect in the way of revenue numbers for the quarter from most stocks. Analysts though have downgraded the outlook so low for Alcoa that if they cannot beat the average of just 5 cents for this quarter, then stocks could be in trouble. Last year for the same quarter Alcoa earned 11 cents. With a reduction of more than 50% analysts must be convinced that Alcoa will beat their greatly reduced expectations. If they don’t this is indeed sad. If they do by even a penny you can be sure that analysts will be announcing that the upcoming quarter will show “wondrous growth” so be prepared for a jump in valuations of the market as a whole if Alcoa beats estimates. Alcoa stock was up 3.13% on investor enthusiasm. If the earnings beat estimates watch for the stock to finally break out and challenge the highs of 2011 when the stock actually made it to just above $19.00. I doubt it can make it that high but stranger things have certainly happened. Alcoa Stock is not a stock I trade in.
Revenue Matters
The real story lies in revenue. Revenue numbers are a lot harder to manipulate so this is what I watch more than earnings. Amazon is a good indicator of the power of revenue. They have decent revenue and because they pumped their revenue back into their business they have not real earnings. This shows where the story really is for investors. I am not saying that earnings do not matter, far from it. Earnings matter a lot and they are what pays my dividends. However earnings numbers can be manipulated whereas revenue growth really tells investors how the economy is doing and how well a company is doing. To support higher stock valuations that will hold in coming months, companies need more growth. It really is that simple.
S&P Market Direction Intraday for March 31 2014
The opening of the markets today started with a jump in all the major indexes and the Russell 2000. The short burst higher was followed by a slight bout of weakness which set up an opening morning low. A second rally into a higher level challenging 1874 was met with some selling when eventually pushed the S&P to an intraday low of just below 1867.50. But there was not a lot of selling which meant that the market could move higher into the lunch hour.
This was the concern I expressed yesterday about doing the Spy Put Options into the afternoon. This is why in the market direction outlook for today I had written “We could see another attempt to rebound in the morning. I have used the morning pop to pick up Spy Put Options for trading to the downside after about 11:00 AM. I may not do this on Monday as the market may fool investors with a smaller rally in the morning and then more buying in the early afternoon. The indicators are not nearly as negative as they have been.”
I received a number of emails from investors who by 1:00 with the market just above 1874 were staring at some big losses because they had jumped into the Spy Put Options and were expected the afternoon to be weak. Instead of selling out after the intraday morning low around 11:30, these investors did not use a stop-loss but held on. They figured the push lower at 11:30 was just the start of a bigger move lower. The key though should have been seen. The move back up around 12:00 PM to above the morning open low was a signal that the direction was still up. I worked with these investors and they got out with very small losses at 2:00 PM. None wanted to stay longer to see what Tuesday might bring.
The afternoon push back above the morning opening low kept investors buying all the way up to just above 1874 and for a brief moment the market moved above 1875. As FullyInformed Members know, this is the top of the range the S&P has been trading in. This could signal a final break free and a chance to move higher. It all comes down to earnings and investor enthusiasm. Meanwhile the close saw the S&P hold much of the day’s gains but still off the highs.
Advance Declines For March 31 2014
Advancing issues pulled ahead of declining issues again today. 74% of stocks were advancing and 23% were declining. New highs are finally picking up with 151 new highs and just 65 new lows. This is a better picture but for a strong rally we need new highs way above 250. Recalling the new highs from last year many days saw more than 460 new highs. Now that’s a true rally and one where investors can buy the UDOW and sit back and watch the profits roll in. Today’s numbers reflect a start to momentum beginning to push back to the upside.
Market Direction Closings For March 31 2014
The S&P closed at 1872.34 up 14.72. The Dow closed at 16,3457.66 up 134.60 The NASDAQ closed at 4198.99 with an excellent gain of 43.23 which wipes out a lot of the weakness tech stocks have seen lately and was the best gain of the three major indexes.
The Russell 2000 ETF IWM rose $2.05 to $116.34 for a gain of 1.79% bringing some life back to the small cap stocks. All the three major indexes (not IWM) confirmed the rally attempt of Friday with today’s move and this marks the first actual follow through for a rally in weeks for all the indexes.
Market Direction Technical Indicators At The Close of March 31 2014
Let’s review the market direction technical indicators at the close of March 31 2014 on the S&P 500 and view the market direction outlook for April 1 2014.
The 1750 level has been holding the S&P up since the correction ended in early February. The 1840 level is now the second line of support and 1850 is the first line of support. The retesting of the 1850 level last week and the one day of a close just below 1850 has continued to build some support at 1850 making it strong enough to hold up against a downturn for probably 2 or 3 days. Today also marked the first day where we are beginning to see momentum move back to the upside in stocks.
For Momentum I am using the 10 period. Momentum has been the best indicator over the past four months, replacing MACD as the most accurate indicator. Momentum has not supported the present rally to a new all-time high but on Friday for the first time of the present rally, it turned positive. Today it continued to stay positive but it did not climb as much as might be expected. Still staying positive is a good sign for the present rally.
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) issued a sell signal on Feb 13. MACD continues to stay negative. The sell signal is still present and valid but it continued to weaken today and the MACD Histogram, which is the gray chart behind the signal lines, is rising rapidly now.
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 negative and has been since last Tuesday but today it moved higher again nearing the point of returning to positive readings. One more up day and the Ultimate Oscillator should support the rally attempt.
Rate Of Change is set for a 21 period. The rate of change is positive today and turned considerably higher reflecting investor buying interest is returning to a degree to stocks.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling that the market direction is up. This negates the down signal from Friday’s close.
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 signaling that Tuesday the market direction will be higher.
Market Direction Outlook And Strategy for April 1 2014
Historically the first day of April has seen the Dow up 15 of the last 19 years. April is also the best month for the Dow with an average 2% gain since 1950. In April 1999 the Dow gained 1000 points and in 2011 it rose 856 points before the bear market got underway in 2002 when it fell 458 points. In 2003 the Dow gained 488 points. But of perhaps more interest is the historic statistic that shows aside from a handful of years, even the poor April periods were not big down years. In other words, April is a great month to be invested and as I do primarily Put Selling I have a big advantage in that I am selling at strikes that are for the most part already out of the money which provides me some protection if the markets pull back a bit this April.
The market direction technical indicators are changing. 4 are now positive, Momentum, the Rate Of Change and the Fast Stochastic and Slow Stochastic. Only two are now negative and both are rising with each day their negative readings are continuing to reflect a change back to the upside.
For Tuesday I am looking for stocks to continue to advance. It may not be a big advance following today’s move as the market may try to consolidate, but I am expecting investors will push stocks to the upside as the week progresses and we will see new highs on the S&P. Any dips in stocks and I will be looking for more Put Selling opportunities. I will have strategy investing notes before the markets open for tomorrow up early tomorrow morning. I believe it may take a day or two but stocks will break the market direction sideways action as we enter April.
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