The market direction outlook for Wednesday was weighted heavily to the downside. Instead stocks shot up and closed considerably higher. More and more traders are complaining about the erratic behavior of stocks, but over the 4 decades I have spent investing, I have seen many erratic markets. This really is nothing new. What is difficult for many investors is trading against this type of market. That’s where Put Selling shines. Two things are needed. The first is confidence that the trade placed can be rescued or repaired to keep it profitable and capital protected from loss. The second is support levels to work from. Over the past several days I have commented on the 1870 level for the S&P and its importance for investing. As long as this level holds I can continue Put Selling against large cap stocks. There are clear steps any investor can take in markets such as this one. The most important is to stay clear of speculative trades and the second is to risk less capital. This way an investor can still earn income and have capital available in case the market direction turns the wrong way. The problem for a lot of investors is they want to invest all their capital in an effort to generate the largest returns possible. That, I believe is a mistake.
Before the markets opened Wednesday morning European stocks were lower following on the heels of the decline in the US markets. The Bank of Japan meanwhile had suggested that further stimulus was not needed for the Japanese economy and this pushed the Yen lower. With retail stocks hammered on Tuesday, suddenly earnings numbers came in that surprised to the upside from Tiffany, Lowes and even Target managed to meet expected revenue although their forward guidance was weak. Added to the mix was the release of the Fed minutes which showed no intention to raise interest rates any time soon. Instead the minutes showed that the Fed still considers unemployment too high and will remains “flexible”. Investors took this to mean the party is not yet over and jumped back in to buy stocks.
Are Stocks Suddenly Cheap?
So does today’s action mean stocks are suddenly cheap or was it really more an oversold market and no real catalyst to the downside that kept stocks from falling further. In general stocks are not cheap and the majority of big cap stocks that have pulled back, have only pulled back slightly. So the answer is in general stocks are exactly where they have been for the past 30 days. On the S&P you can see that stocks are treading here at 1880 but the general mood is still one of optimism that stocks have more upside than downside at present. But once again I have to mention revenue and earnings did not come in higher for the quarter and in general only 2% of companies in the S&P managed to show revenue that was above forecasts. Still with the second quarter to begin July 8 when Alcoa reports its quarterly result and unofficially kicks off the second quarter earnings, many investors remain convinced that stocks will be higher by then and can still tack on even higher valuations once the second quarterly results pour in. Again, I have a lot of doubt the revenue picture will improve next quarter. That does not however mean stocks cannot move higher. Many can simply on investor enthusiasm that revenue and earnings will be better in the second quarter.
Market Direction S&P Intraday Chart May 21 2014
The 1 minute chart for Wednesday shows how consistent the rally higher was today. The open saw an immediate bounce and then the market moved sideways. By 2:00 PM the market rallied into the close to end the day at the high which is usually bullish for the following day.
Advance Declines For May 21 2014
New highs on Wednesday came in at 110 and new lows were almost unchanged from Tuesday at 80. 63% of stocks were advancing while 34% were declining. This is almost the identical opposite from yesterday when Fed comments sunk stocks. While yesterday volume to the downside was 2.4 billion shares, today up volume came in at 1.9 billion and down volume was at 756 million. Volume was lower today that Monday or Tuesday despite the big push higher.
Market Direction Closings For May 21 2014
The S&P closed at 1888.03 up 15.20. The Dow closed at 16,533.06 up 158.75. The NASDAQ closed at 4,131.54 up 34.65.
The IWM Russell small cap ETF had just an okay day. At one point around the noon hour it was negative on the day but still closed higher at $109.62 for a gain of 56 cents. The IWM ETF is still below the 200 day EMA but continues to trend more sideways than lower. Still though this is a concern and without the small caps any sustained move higher in the S&P and Dow remains very suspect.
Market Direction Technical Indicators At The Close of May 21 2014
Let’s review the market direction technical indicators at the close of May 212014 on the S&P 500 and view the market direction outlook for May 22 2014.
There have been two key support levels in the market following the sell-off which ended in early February. They are the 1750 level and the 1775 level. If 1750 were to break, stocks would move considerably lower as a lot of investors would bail out at 1750. There are though two key higher levels that have now gained prominence. The first is 1840. In the last small pullback in mid April, 1840 was the level that held the market in check. Since then support has also been building at 1870. 1870 is important support for a move above 1900. For 1900 to be held, there must be a support base. 1870 is that base and 1840 is the second base which 1870 has built upon. The bounce back in stocks today continues to show further support for 1870. Yesterday I wrote how the 1870 level was continually being tested and how this testing cannot last much longer without a break one way or the other. Today investors decided to move the market higher which builds even more support for 1870.
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 back positive.
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 weak sell signal on May 15. Today MACD is continuing to point to further weakness but the sell signal is weakening which is opposite to what happened yesterday.
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 and moved slightly higher today.
Rate Of Change is set for a 21 period. The rate of change turned back slightly positive today but certainly does not indicate that investors are placing new capital to work.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling market direction is up.
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 is up.
Market Direction Outlook And Strategy for May 22 2014
The market direction move back up today may be a slight over-reaction to the Fed minutes but nonetheless it certainly confounds those who are looking for a big correction sooner rather than later. This must be frustrating to the bears as each time there is a dip, investors step back in and push stocks back up. Today was a perfect example. Once stocks started to gain momentum to the upside, more investors jumped in determined to catch this next bounce back. This pattern has been the mainstay for most investors since January and it has paid off.
For Thursday, stocks are set to turn sideways and move higher. Stocks have not had a lot of follow through following big up days which is indicative of an overvalued market as investors don’t want to be the “last investor standing” as it were. Thursday does not look better. The technical indicators are still somewhat mixed but in general there is more strength for a continuation of a move higher, than a move lower.
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