Yesterday the Fed minutes juiced the market higher. Investors reacted favorable to the “answers” on interest rates given by the Fed. With the belief that a rise in interest rates would be a long way away and even when they did rise they would be very low, investors happily moved back into stocks. The Fed definitely seems determined to keep investors in risky assets.
Today though the Weekly Initial Unemployment Insurance Claims came in at the best level since May 2007. This shows the growing strength within the economy and unemployment gains continue to push ahead. Add in some weak forward-looking statements from Bed, Bath and Beyond and you have the making of another push back down wiping out Wednesday’s gain.
It’s a tough market to gauge but it should now be obvious to every analysts that the problem is two-fold. The first and foremost is fear or rising interest rates and the fact that investors are thinking they will rise quicker than anticipated. This could actually be the case because with more people back at work, pressure will build for wage increases which will mean inflation. Japan has been stuck for two plus decades in a deflationary cycle but while there are many causes for that, it is also interesting to note the low to nil wage increases over not just a couple of years but many years. That will not be the case in North America where workers will push for higher wages as more return to work. That means inflation which means rising interest rates.
The second is concern over the market being so highly overvalued. No matter what analysts keep droning on about, stocks in general are overvalued. A normal Shiller Price To Earnings ratio on the S&P sits down around 16.5. The market is at 25.14 this morning. I prefer the Shiller ratios but even if we look at just historic norms, the S&P 500 mean is around 15.51 and stocks are sitting at 18.46. Stocks are in general overvalued.
Market Direction Intraday April 10 2014
There is no need to show the various markets other than the NASDAQ. All the markets are being pummeled again this morning. The S&P easily plunged back through 1870 which has no real support, the 1860 that was just starting to build support and the 1850 which had support. The 1850 has stood up well but it cannot keep withstanding this much selling pressure. The 1840 level is what lies ahead for the S&P and a break of the 1840 will bring in more sellers. At this point the S&P is skirting the 50 day simple moving average (SMA). It is not in correction territory yet but will be soon.
Meanwhile the Dow is holding above the 50 day simple moving average (SMA) but giving up yesterday’s gains. It looks weak here and ready to move lower if investors keep selling.
The NASDAQ though is the more troubling at this moment. The NASDAQ is back below the 100 day exponential moving average (EMA) and today’s open is what is known as a non-confirmation of yesterday’s gains. That means the bounce over the past two days, even with the Fed, is technically just an oversold bounce and the next leg is lower. The next position to watch is the lows from the Jan- Feb correction. If those break the NASDAQ will quickly fall to the 200 day exponential moving average (EMA). If that breaks, the NASDAQ will have given up 371 points for a drop of 8%. While not a bear market, it would be the steepest correction since November 2012.
Momentum which had bounced back after two days of buying, is turning negative again, but the more telling technical indicator is MACD which is continuing to fall more deeply into a sell signal state.
Market Direction Outlook Into The Close For April 10 2014
No one could have gauged today but the reaction of investors tells all of us that the fear factor is alive and well and it is indeed interest rates that are the problem. With the economy growing there is little the Fed can do about keeping interest rates at near zero while watching an economy heat up. That will not play out well. Investors in general see this so while the Weekly Initial Unemployment Insurance Claims are advising that the economy is doing well, for perhaps the first time in history, a growing and improving economy is not what investors want to see.
Into the close markets will stay negative, obviously. I am back trading to the downside. My first trade today was the Spy Put Options which I will write about shortly.
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