The market direction outlook for Wednesday was for stocks to move lower. In the end it was quite the day. Stocks sold lower from the start hitting a low by 10:30. Then the testimony of Janet Yellen bolstered investor confidence in stocks. In her comments she argued that the Fed is not supporting stocks and she indicated that stocks are trading at “normal historical valuations”. I am not sure where she got her figures from, but as we all know stocks are an emotional investment for the majority of investors, both retail and institutional. The so-called “smart money” investors are just as emotionally tied to their stocks as are small retail investors. Everyone worries the same about losing capital.
Yellen: Things Are Improving
Yellen went on to say that the first quarter was impacted by severe weather but the second quarter will be a lot better. She continued that the long-term unemployed or non-participating are returning to the labor force and basically the economy is improving. So with the first quarterly earnings season winding down, investors were back contemplating if the second quarter would indeed be a lot better. Yesterday the rate of change was the only indicator to show an inflow of capital into the S&P. It was not a large rise but certainly did indicate that some investors were buying stocks. Today’s rate of change at the close was slightly higher again so perhaps Yellen’s comments are boosting investors risk appetite.
Investor Conundrum
The problem for investors is if they sell now and get out, only to find that they did not have to sell, they will end up buying back the same stocks but at higher prices. Instead, investors want to be the ones selling their stocks at higher prices. It is quite the challenge for a lot of investors who at this moment are nervous about the S&P and Dow sitting at all-time highs and yet refusing to move up higher which is where so many investors want to get out of their positions. At the same time the VIX Index shows a lack of fear in general despite the NASDAQ being punished again today. Then on the back of everyone’s mind is the worry that stocks may be topping here and setting up for a plunge shortly and of course let’s not forget we are now entering the worst 6 months of the year.
Yellen: Musical Chairs
So today Yellen has brought back the game of musical chairs as investors jostle to not be the last one standing when stocks finally do turn lower. The hope is under her guidance that stocks will just keep rising. Exactly how this is possible without rising revenue to match is something I have not experienced yet as an investor but then there is still that Yellen phrase to ponder – “normal historical valuations”. I was watching the market when she uttered that phrase and watched as stocks turned higher less than a minute later.
Treasury Offering
On top of the Fed comments there was also a 10 year 20 billion treasury offering which actually went well and the yield fell throughout the day, yes fell. When I last look the yield was down to 2.61%. So obviously the worry about interest rates rising may be just a myth and nothing more. The news that the offering was quickly snatched up with the bulk of it being tucked away by institutional investors like pension funds and such really bolstered investors. After all these are supposed to be the smart money managers. If they are buying a 10 year offering with such low rates investors can surmise that perhaps the worry about rising rates is overblown.
Weekly Initial Unemployment Insurance Claims
The only other event I want to mention is that last week the Weekly Initial Unemployment Insurance Claims climbed to 344,000. Every time the Weekly Initial Unemployment Insurance Claims rise to within range of 350,000 stocks have trouble. I just wanted to put that out there for investors to ponder. Tomorrow we get the Weekly Initial Unemployment Insurance Claims again. Should be interesting to see those numbers.
Market Direction S&P Intraday Chart May 7 2014
It was certainly a wild day. The morning saw a quick jump which was expected and then a sell-off of .86% down to 1859.79. I bought into the downtrend right at the outset of the day based on the technical indicators. I did well with the NASDAQ Ultra-Short ETF but only made a small profit with the Dow Ultra Short.When the market rallied back as Yellen gave her testimony, I bought the downside again which by the close looks like I am on the wrong side of the market and could see some losses tomorrow since I am now holding my market direction positions overnight.
Too bad the technical indicators can’t take the Fed comments into their readings. The close saw the S&P break through the 1876 early morning jump and close above it right at the high for the day. Normally this can be a bullish sign for the next day.
Advance Declines For May 7 2014
Advancing issues actually trounced decliners with 63% of stocks advancing and 34% declining. New highs which were just 108 yesterday rose to 156 but new lows which were 87 yesterday jumped to 125 today.
Momentum while still to the upside continues to not show strength. I have mentioned many times that this year we are not seeing days with 250 plus new highs. Those are the types of new high numbers we need to see to convince investors that stocks can sustain higher valuations.
Market Direction Closings For May 7 2014
The S&P closed at 1878.21 up 10.49 but did not recover all of Tuesday’s loss. The Dow closed at 16,518.54 almost recovering most of Tuesday’s loss. The NASDAQ closed at 4067.67 down 13.09 but off the lows for the day. At 10:30 the NASDAQ was down to 4021.05 and looked set to plunge to 4000 as investors were pummeling Whole Foods Stock down 18.81% at the close and Twitter fell even further today down to $29.51 before closing at $30.66 for another loss of 3.74%.
The Russell 2000 ETF, IWM, fell all the way to $108.43 before recovering and actually close up 7 cents at $110.14.
Market Direction Technical Indicators At The Close of May 7 2014
Let’s review the market direction technical indicators at the close of May 7 2014 on the S&P 500 and view the market direction outlook for May 8 2014.
The 1750 level continues to hold the S&P up since the correction ended in early February. All the levels of any support above 1800 have been broken and will need time to heal and create support again. Any downturn in stocks will quickly see these levels above 1800 break. The only level above 1800 that has any support worth mentioning is the 1840 level. There is still no change to this. I am still expecting that at some point in the spring to summer period stocks will correct down to the 1750 level. The wild ride today on the markets, especially the NASDAQ did not result in much action in the VIX Index and by the end of the day with the Dow up 117 points and the NASDAQ down just 13, the VIX Index was actually lower by almost 3% for the day. This is why we always say stocks are a risky asset because they are an emotional roller coaster much of the time.
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 now back positive after turning slightly negative yesterday. The reading is so close to neutral that it is tough to say which way momentum will turn tomorrow.
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 the readings a further drop but the recovery after Yellen spoke kept MACD from issuing a 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 still positive and pushed back higher today closing at 58.73 after tumbling yesterday to 54.40.
Rate Of Change is set for a 21 period. The rate of change is still positive and is climbing slightly again indicating capital was being risked against some stocks today.
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 for Thursday and into the end of the week. The Slow Stochastic indicates the market is still overbought.
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 has turned back up and is showing a slight bias to the upside for stocks for tomorrow. The signal is not strong enough to indicate a decent up signal but it is though still pointing up.
Market Direction Outlook And Strategy for May 8 2014
I had expected a bounce right at the open and then selling for much of the day. Instead I got a bounce at the open today, a big sell-off and then a turn around day with positive closes on the S&P, the Dow and the Russell 2000. All indexes recovered from the sell-off.
The question now has to be whether the plunge in the NASDAQ down to 4021 was a bit of a washout for stocks. The plunge in valuation of Whole Foods Market Stock was perhaps a bit overdone but it certainly pummeled the NASDAQ. If though this was a washout for tech stocks we could see momentum begin to build once again for another attempt to break through to new highs.
I have to disagree with Janet Yellen. The problem remains valuations. Revenue just is not strong enough to support stocks staying at elevated levels even if they do break out and there may be a good chance they will break out. The VIX Index is certainly a wonder as it rose to just $14.49 before closing at $13.40, lower than yesterday.
The technical indicators are somewhat mixed. Momentum, MACD, Ultimate Oscillator, Fast Stochastic and Rate of change are all positive, but none are strongly positive. MACD is declining and momentum is more neutral than positive. Meanwhile the Slow stochastic is the only indicator that is pointing down.
This is the type of market where we can expect to earn profits by staying nimble and in my opinion, conservative. I am trading only within stocks I would own if they plunged and I was assigned without being able to either roll out positions or apply a rescue strategy fast enough. I am trading with less capital. My overall portfolio is up 14% so I can afford to earn fewer profits and stay more cautious. Remember at the start of the year I indicated that 2014 was probably the year to protect capital first and focus on profits second. I still think that is the case.
Tomorrow I am expected some selling after the big rally back from this morning’s selling, however in general the indicators are still pointing to no big decline ahead but also no big advance either. I am looking for a sideways market for tomorrow.
Market Direction Internal Links
Profiting From Understanding Market Direction (Articles Index)
Understanding Short-Term Signals
Market Direction Portfolio Trades (Members)