The market direction outlook for the final day of 2013 was for stocks to end the day positive. I expected some weakness but a positive higher close. Stocks performed as expected although the afternoon sell-off certainly caught a lot of investors by surprise including a number of analysts. Still though investors pushed back hard and rushed to finish the year on a high. Let’s take a look at Tuesday’s action.
Market Direction S&P 500 Intraday For Dec 31 2013
The morning open saw some weakness and then a quick rally back to support around 10:00 AM. That gave investors confidence to push the market to a new high around 11:00 AM. The market then drifted sideways and late afternoon selling entered which caught a lot of investors by surprise. A new low for the day was put in at 1842.41 but the low held. This kept the S&P above 1840 for the day. Investors stepped in quickly and bought this afternoon dip and pushed the S&P to a new intraday high within a short 30 minutes.From there the market zig-zagged into the close but still closed at a new high. The Dow and Nasdaq followed the S&P and the Dow closed at another new all-time high.
The afternoon selling was of some concern and showed the overbought nature of the market, but it also was most likely related to final tax selling. Investors then rushed to get set for what is perceived to be an excellent run-up in January. Whether that will be the case really needs us to view the technical indicators later in this post.
Advance Declines For Dec 31 2013
For the final day 63% of stocks advanced while 34% declined. The new highs came in at 264 versus 78 new lows. Once again the market direction remains strongly bullish.
Market Direction Closings For Dec 31 2013
The S&P closed at 1848.36 up 7.29. The Dow closed at 16,576.66 up 72.37. The NASDAQ closed at 4176.59 up 22.39.
The IWM ETF closed at 115.36 up 27 cents and was flirting with the all-time high of 115.97.
Market Direction Technical Indicators At The Close of Dec 31 2013
Let’s review the market direction technical indicators at the close of Dec 31 2013 on the S&P 500 and view the market direction outlook for Jan 2 2014.
The most important support line in the S&P 500 is still at 1750. That support line is holding the market direction up at present and that has not changed. The second support level of 1780 is very light support followed by another band of light support at 1800. We can now see that the 100 day is pushing up to the 50 day and closing the gap between these two moving averages. The 100 day is now pulling away from the 200 day moving average. The 200 day and 100 day are widening which shows the strength of the rally has continued and is strong. Shortly the 200 day will move higher if the rally continues during the first full week of January.
For Momentum I am using the 10 period. Momentum has been the best indicator over the past two months, replacing MACD as the most accurate indicator. Momentum is positive and almost unchanged from Monday.
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 Dec 23. That buy signal was strong and has been confirmed. Today MACD remained almost unchanged from Monday.
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 overbought for the eighth trading day.
Rate Of Change is set for a 21 period. The Rate Of Change is positive for the eighth day and is now rising showing investors are back buying. If it rises further we will get a signal advising a change of trend may be about to occur, but we are still a ways away from that type of signal.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is now signaling the market direction is neutral. The Slow Stochastic is extremely overbought but the indicator is signaling that the direction could turn sideways.
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 signals for Jan 2 is signaling that the market could turn higher but it too is so overbought that the signal is now actually neutral rather than up or down.
Market Direction Outlook And Strategy for Jan 2 2014
As we have seen since the market collapse in 2008, December ended strongly and that has set up the start of January to have to deal with a very overbought market. That does not mean stocks cannot move higher. The perception among most investors is that January will see a possible explosive rally. I am not so sure. I prefer to follow the technical indicators and right now they are predicting higher prices but lots of sideways action as well.
Momentum is down just a bit from Monday but it could be another signal that the market is heavily overbought. Other than the rate of change, all the technical indicators are signaling overbought conditions. This has been common for the start of January in each year since January 2010. Each January then we have seen a rise in prices but in some of the Januarys we have also seen some selling.
Happy Days
Over the holidays I heard a lot of investors talking about how terrific the market has been and how excellent the returns. It’s important to understand that in 2013 most investments aside from precious metals and some commodities, should have ended on a positive note. This is not typical of most years and it is important to not believe every trade will always end perfectly. Instead remember that most years bull markets travel through several corrections and many can be quite severe. As long as you realize that 2013 is unusual for stocks, then you should be well prepared for a probable return to a more normal market environment in 2014.
I also read many articles over the holidays that were predicting that the USA could be on the verge of an incredible period of growth fueled by the low-interest rates and stabilized housing market. Many of these analysts are picking past decades as examples to prove their points.
However I lived through most of the decades they discussed and I do not believe for example, that the 1950’s are returning. Plus the 1950’s was not quite the bonanza that many of these analysts think. So I think investors should stay happy, but the lack of bears is worrisome and something to be aware of.
Stay Invested
For now though I think staying invested is the best course to be taking. For those investors who are members, I will be monitoring market conditions as we enter 2014 and I will be posting my views for any possible correction and how I will be handling it as we move through 2014.
No Corrections
2013 was a year without any serious correction to contend with. That is indeed a rare period. 2013 was an incredible year, but I believe strongly that the investors who are moving further away from big cap stocks and selecting junior stocks are a signal that 2014 is not going to replicate 2013. My experience has been that when investors start to chase returns without worrying about stock selection, this has always been a signal that the market direction up will correct. That does not mean a collapse and I see no signs of such an event, but it does mean a possible severe correction that can shake investor confidence and lead to selling.
Put Selling As A Principal Investment Method
Put Selling is my principal investment method. This means I am sitting “short” many stocks. I have no interest in being short more than one speculative trade at a time and I note from emails I received in November and December that many investors are widening their stock selection to include more junior names. I believe this is a mistake. I believe I can earn enough selling puts against a large cap stock that moving to juniors is unnecessary. When stocks correct I prefer a stock that I know will recover. Junior stocks that have risen 10 or 20% in a short period will easily give it all back if investors panic.
Stay Cautious But Invested
Therefore, to start off the year I believe staying invested is the best choice but staying cautious is an absolute necessity. Remember to set the goal of your trade and the rescue or repair strategy you will use in the event that the trade fails, before even placing the trade.
Outlook For Jan 2 2014
For the first trading day of 2014 I am expecting investors to push stocks higher. The technical indicators are pointing to sideways action with a bias to the upside, but I believe investors will be buying on Thursday to start the year off with a bit of a bang. Investors tend to be optimistic people and a new year almost always witnesses enthusiastic investors buying stocks as they believe by the end of the year, these same stocks will be a lot higher. Look for a possible jump to start the morning and then we will see how well stocks can hold a morning rally.
My best wishes to all for a healthy and prosperous 2014!
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