The market direction outlook for Thursday was for stocks to turn sideways with a slight bias down. The slight bias down though, ended up quickly becoming a panic and a sell-off. Let’s take a look.
Weekly Initial Unemployment Insurance Claims
Three things rattles investors on Thursday. The Weekly Initial Unemployment Insurance Claims came in at a surprising 297,000 stunning investors and economists alike. This was the best reading since May 2007 before the credit crisis was underway. Despite an upward revision for two weeks earlier, investors focused on the number below 300,000. As you may recall I have mentioned in many articles that the number 250,000 is what really tells investors the economy is humming. This exceptional number scared investors with the prospects of the Fed commencing raising interest rate and/or increasing the rate of tapering.
Inflation Numbers
Next up were the consumer price index numbers which showed that inflation had grown to 0.3% in April bringing the inflation rate to 2% for the past year. This is a major goal of the Federal Reserve monetary policy and with the number this high investors were jolted into realization the Fed could raise rates sooner rather than later.
Walmart Stock Decline WMT
Walmart stock closed down 2.43% at $76.83 after earnings fell to $3.59 billion from $3.78 billion in the same quarter last year and they gave forward guidance that was below estimates. The stock plunge was pronounced but it also hurt the overall market. This is a giant of a stock and concern about possible decline in revenue and earnings growth will impact all investors. As it is widely held by institutional investors the negative outlook surprised a lot of investors. There is support for the stock down around $74. In the correction back in late January early February, the stock got down to $72.50 so even with today’s sell-off down to a low of $76.25, there is a lot more room for the stock to pull back. I am interested in Put Selling against this stock but not at $75.00 which for June 21 was trading as high as .57 cents. I would prefer to selling the $72.50 put strike but I want at least 50 to 70 cents. I will be watching the stock to see what happens next but the strength of the stock cannot be underestimated. The stock could easily rebound and then move sideways from here. Meanwhile momentum is now pointing down. Today was one of the heavier days for investors dumping Walmart stock. 13 million shares traded hands, double the daily average.
Market Direction S&P Intraday Chart May 15 2014
The 1 minute chart for today shows what happened when all three of the above events hit investors. Within minutes investors were panicked and dumping shares. The market collapsed the entire morning into the noon hour. You can see in the morning there was some pushing and shoving around the 1870 level before the market then moved lower. As the lunch hour ended some investors picked through the carnage to find some bargains and they market moved back to close at the 1870 support level. Even at 1870 though most stocks are still overvalued. Fair value in stocks usually finds the S&P normally around 16 times price to earnings. Right now the S&P is trading above 22.5 times PE and today’s sell-off still keeps the S&P within just 20 points of the 1900 level.
Yesterday I showed this chart which shows how often the S&P this year has sold off after reaching a high. We could be looking at a similar situation although the S&P during the lunch hour did break through the 50 day simple moving average (SMA).
Advance Declines For May 15 2014
Advancing issues were hammered today with just 28% advancing while 68% were declining. For just the second time in the past few weeks, new lows were above new highs, with 101 new lows and 64 new highs.
Market Direction Closings For May 15 2014
The S&P closed at 1870.85 down 17.68. The Dow closed at 16,446.81 down 167.16. The NASDAQ closed at 4069.29 down 31.33
At one point in the day the Russell 2000 IWM ETF was down to 107.44. By the close of the day the IWM ETF was down 74 cents to 108.88. The IWM ETF is back down below the 200 day EMA.
Market Direction Technical Indicators At The Close of May 15 2014
Let’s review the market direction technical indicators at the close of May 15 2014 on the S&P 500 and view the market direction outlook for May 16 2014.
The 1750 level continues to hold the S&P up since the correction ended in early February. Levels above 1800 have regained support with two levels now in play. The first is back at 1840 where once again there is enough strength at that level to hold stocks probably for 2 to 3 days of selling. The next level is at 1870 which is lighter support but probably enough for the S&P to break through 1900 which occurred intraday on Tuesday before investors sold the S&P back down. Today the S&P was pushed lower but remains within easy striking distance of a new high.
Meanwhile I am still expecting that at some point in the spring to summer period stocks will correct down to the 1750 level or close to that level. 1750 would mark a decline of 7.8% which is well within the confines of a normal market correction. I do not think today is the start of that correction, but I do think it is setting stocks up for further declines.
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 is slightly negative at the close today.
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 buy signal on April 22. Today MACD issued a weak sell signal. We will need a follow through tomorrow to confirm this sell signal.
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 continuing positive but is lower again today.
Rate Of Change is set for a 21 period. The rate of change is still positive but ready to turn neutral.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling market direction is down which means for the start of next week we could see lower prices.
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 the market direction for Friday is considerably lower with a very strong down signal.
Market Direction Outlook And Strategy for May 16 2014
While the there are catalysts that move markets one way or the other, there are also catalysts that simply are the instigators of what is already in play. The market direction higher has been incredibly poor and for many investors very frustrating to watch.
The market direction technical indicators yesterday were more mixed. Today they are strongly biased to the downside. With the quarterly earnings drawing to a close investors have not seen the rise in stock valuations many believed would happen. A lot of retail investors have pumped in money into stocks this year as many analysts keep telling investors that “stocks are the only game in town.” In fact they are not. Bonds have had a good year to date and even today the iShares 20+ Year Treasury Bond ETF rose .80 percent.
I have mentioned before that it is impossible for stocks in the S&P and Dow to continue rallying higher with the small caps and tech stocks falling lower. This cannot happen. It has never happened in the past although many analysts seem somewhat unaware of that fact. It is true that for short periods the Dow and S&P have broken with the other two market sectors but in the end one or the other catches up. Right now it looks like the Dow and S&P are going to be catching up.
I have only small positions in play now and continue to close positions quickly when the opportunity presents itself. In this way I can keep cash available for the next downturn in stocks. While I do not believe today’s downturn is the start of a major correction I do think it is warning investors that weakness is building every day and has been for weeks now. Today’s downturn and the market breadth to the downside are signals of what I think will be coming this summer if not sooner.
For Friday stocks may attempt to rally in the morning but the market direction down is still intact following the past two days. Friday should see a lower close.
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