The market direction outlook for Tuesday was for some selling pressure to exert itself. Icahn’s comments late Monday spooked investors primarily because he touched on a topic that most investors are concerned about but “hope” just won’t happen. Then today the Organization for Economic Co-operation and Development cut its 2014 forecast for global growth from 4% to 3.6 %. Among the items mentioned by the OECD was their concern if the Fed begins tapering in early 2014. It is without doubt a tough call for investors and obviously also for the Federal reserve. In early October when the Fed announced they would not be commencing any scaling back of their Quantitative Easing programs just yet, the market took off and has moved up substantially. What is interesting is how many interest rate sensitive financial stocks, particularly insurance companies pulled back on that news. This is because they make a lot of their income from interest rate sensitive securities. Low-interest rates have been tough on many insurers. When it was believed that the Fed would begin tapering their Quantitative Easing in 2013, many insurers moved higher as investors felt that interest rates would rise soon after any tapering ended. Now once again over the past several days many insurers are back rising once more as many investors believe the Fed must begin tapering soon and this will lead to higher interest rates which can only help out insurers.
S&P 500 at 1800
The other issue facing the market direction is the rally itself. Stocks are most likely ahead of themselves at the moment. So much money has literally poured into stocks this year that many stocks are sitting at PE multiples that just do not make sense when revenue in particular, is taken into account.
Earnings and Revenue
As I have mentioned before, earnings can be manipulated far more than revenue. The past quarterly results have shown that over 60% of companies met or exceeded their earnings projections but only 50% met revenue projections. So while analysts kept adjusting earnings projections lower, it was much harder to manipulate revenue projections simply because revenue projections were higher for this quarter than the same quarter last year. But only 50% of companies managed to reach the revenue projections. Very few companies exceeded revenue projections.
Valuations Are Still Reasonable
Many analysts are still indicating that valuations are reasonable for S&P 500 companies but they are basing their valuations on earnings and not revenue. In any coming correction I will be looking for Put Selling opportunities on large cap stocks, but I will not be thinking that stocks are undervalued. At present I believe many stocks are pushing into overvaluations while others are fully valued.
Home Depot Revenue and Earnings
One company that posted strong revenue growth was Home Depot. With revenue up 7% to $19.47 billion versus 18.13 billion for the same quarter last year, this is the type of revenue growth companies must produce to keep valuations at present levels and move market direction higher.
Market Direction S&P 500 Intraday For Nov 19 2013
The 1 minute market direction chart for the S&P 500 below shows how the day progressed. The morning saw a quick sell-off and then a bounce back. But when the S&P ran out of steam at 1795, it began to stumble. It then developed a string of lower highs unable to recapture the 1795 level. In the mid-afternoon it put in place a lower low and finally a rally off the lower low pushed the market direction back to what ended up being another lower high. This led to more selling and the S&P 500 closed below 1788.
Advance Declines For Nov 19 2013
Tuesday was a copy of Monday. Declining issues outpacing advancing issues with 66% of all stocks declining versus 30% advancing. New highs were only at 98 and new lows at 102. With the new highs and new lows running parallel, we could be about to see further weakness tomorrow in the market direction.
Market Direction Closing For Nov 19 2013
The S&P 500 closed at 1,787.87 down 3.66. The Dow closed at 15,967.03 down 8.99. The NASDAQ closed at 3,931.55 down 17.51. The NASDAQ has tried repeatedly to break the 4000 barrier over the past several weeks and has been unable to do so. It is showing more signs that it needs to regroup at lower levels and then push again to break through.
The IWM ETF closed at $109.37 down 0.68.
Market Direction Technical Indicators At The Close of Nov 19 2013
Let’s review the market direction technical indicators at the close of Nov 19 2013 on the S&P 500 and view the market direction outlook for Nov 20 2013.
The most important support line in the S&P 500 at this time in the ongoing rally remains 1750. That support line is holding the market direction up at present. This though is the second down day for the S&P 500. The S&P 500 has not had two consecutive down days in 11 trading days or just over two weeks.
For Momentum I am using the 10 period. Momentum is positive today and slightly higher but only slightly. Still the most important aspect is that it remains 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 sell signal on Nov 7 which was not confirmed. The signal of Nov 14 was market up and it was confirmed on Nov 15. While the confirmed direction may be up, MACD has been eroding steadily every day since Nov 15. Today it stands with a divergence reading of just 0.36 and ready to turn negative again if tomorrow is another down day.
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 positive but falling from its overbought level.
Rate Of Change is set for a 21 period. The Rate Of Change is falling again today and is lower than yesterday.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling that the market direction is down and it is 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 is signaling that the market direction is down and it is also overbought.
Market Direction Outlook And Strategy for Nov 20 2013
The S&P 500 market direction has not had two consecutive down days in 11 trading sessions. Tomorrow the market direction needs to turn back up otherwise there is a strong possibility that the market will correct here.
The market direction was unable to come close to the 1800 level today and indeed all day it exhibited an unwillingness from investors to buy stocks at higher valuations. The advance decline ratio is particularly concerning as for the first time the number of new highs and new lows for the past 52 weeks was almost identical indicating that the selling pressure on stocks may be about to climb.
Meanwhile the market direction technical indicators are also split. MACD is about ready to turn back negative. Momentum is actually looking good still, but the rate of change is falling as is the Ultimate Oscillator. Meanwhile though both stochastic indicators are signaling market direction is down for tomorrow and the Slow Stochastic is signaling market direction will be lower towards the end of the week.
Technically then, 2 indicators are pointing to market down, two are falling lower, one is on the verge of turning negative again and only one, momentum is steady. The technical indicators then are equally split but the stochastics are clear that tomorrow will see a stronger downward pressure on stocks.
For Wednesday then, the S&P 500 must turn back up to not end the past record of two days down and then a return back to up. Technically there is more strength to the downside than upside for tomorrow. The outlook then has to be for a move lower for tomorrow. Watch during the day for signs that the market direction will stabilize and try to turn higher. We need to see some higher highs intraday and we need a strong close to confirm that there is no correction at hand.
My instincts tell me that the market direction wants to bottom here and push higher, but the technicals are indicating that the market direction is lower. This is why I love Put Selling. For those days when the market direction is murky, I can still be bringing in more profits while the market direction tries to figure out whether it wants to move higher or lower.
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