I discussed a few things about the market direction in my Intraday comments for today. What a lot of analysts still cannot quite grasp is that the stock market is basically sitting at such elevated levels. Analysts are confused about this and for this reason they continue to warn investors about coming calamities. At one point they will be right of course, but I cannot invest based on the possibilities of coming calamities. I can invest knowing how to deal with calamities when they happen and they will happen. Bear markets are a part of the stock markets. This is why it is important to know how to deal with a bear market.
Bear Market Article
The article I wrote yesterday about spotting a market top is among the best advice that I can give. It is also the advice that I follow. I have used it since 1973. It’s impossible to pick a time and say “here’s when the market will top out”. Stock markets just do not work that way. For one thing volatility must be higher and investors must be worried. When investors worry volatility rises. As investors worry more they sell. As they sell more investors join them. Volatility continues to climb and then there is a panic.
Back To The Future – 1979 VS 2012
In 1974 stocks lost 50% of their value in a severe bear market. Investors were shocked. By 1979 these losses had been recovered. Yet analysts everywhere continued to warn that this recovery was fake and manipulated. They warned that the rise in valuations was a mirage. They almost seemed angry. Investors shunned stocks from 1974 to 1979. In 1979 stock liquidity was literally drying up. Gasoline prices had gone through the roof and were unpredictable. Companies pulled IPOs out of the market. In 1979 investors were still fleeing to bonds despite the bond market rates falling as more and more investors piled into bonds. In August 1979 Business Week ran a cover story labeled the “Death Of Equities”. Everywhere the media was filled with concern and worry over the US economy. I have dozens of articles in my collection from the 1970’s. The world wondered if the US dollar was on the verge of collapse and if the national debt would crush America.
Sounds like 2012 all over again doesn’t it. Today all those concerns and more ripple daily throughout the world. As small investors there is not a lot we can do about the state of the world or the US economy. But we do have control over our own investments and finances. Today there are a multitude of products available to investors to assist them in protecting themselves from losses as well as enjoying gains when the next bear market arrives.
My plan has not changed from any of the prior bear markets except that I will have more tools available this time to benefit from a market pullback and to protect from serious losses. When the next bear market arrives I will be busy posting my trades, strategies and positions to show what I am doing to profit and protect at that time.
50 Day Moving Average
So the first step as small investors is to keep watch on the 50 day moving average. As explained in both my article on the market top and my Intraday comments today, the 50 day simple moving average is sort of like the first line of defense. Until that line of defense is broken, we should be investing and looking for opportunities for additional profits. But when the 50 day breaks, we as investors need to become more concerned and make decisions on how much protection and what kind of protection to put in place.
Market Direction Until Then
Until then the best way to continue investing and knowing what specific strategies to apply, is to have some idea as what the short-term market direction may be. Each night I review my short-term market timing indicators. Tonight for example a lot of the indicators are showing a but more strength. For example Momentum while still negative is climbing and should turn positive if the stock market rises even slightly tomorrow.
MACD however is still negative, but it is off its lows and continuing to climb.
The Ultimate Oscillator is back positive and continuing to climb.
Rate of Change remains negative but another positive day and it too will be positive.
The slow stochastic and fast stochastic which have been slightly bullish for a couple of trading days are still slightly bullish today.
The consensus then, is that the market is continuing to show strength. Both the slow stochastic and fast stochastic are indicating that while there are no big up moves coming this week, there should be some more days like today with small gains. But even a gain of just a quarter of a percent a day means more than 1% by the end of a week.
Market timing indicators from the close of Oct 3 2012.
Market Direction Outlook Summary
The market direction until the 50 day moving average breaks remains solidly bullish. Short-term the direction still looks neutral to up with a choppiness that is either the market trying to consolidate the recent big jump to all new highs or the lack of conviction on the part of investors to place new money at risk. Without new money it is difficult for stocks to move higher and without confidence investors a going to remain overly cautious. This see-saw of the stock indexes can continue for a longer period of time than many investors realize.
So the market direction outlook is sideways to up. This see-saw of the market direction also means that Put Selling of big cap stocks does not have high premiums levels which means watching for dips in stocks and taking advantage of those dips for profit and income. That remains my strategy at this stage and until market direction turns solidly up or down, the dip buying remains probably the best opportunity for continuing decent profits.