Market Direction – Should Investors Worry?

Is the market direction simply consolidating here, or is there a bigger problem developing? Since last week’s big jump in the stock market following the Fed’s announcement of QE3 it is beginning to look like investors may be having some doubts. But while fundamentally it may appear that the market direction is stalling, technically there are no warning signals of a change in market direction, yet.

FedEx (stock symbol FDX) warning of a decline in earnings because of a decline in global shipping spooked investors. Then UPS followed FedEx with warnings of their own. Following them was the news out of Japan that the government there has decided to commence their own version of quantitative easing which many analysts said would extend the rally caused by the Fed’s announcement of the start of QE3. What was strange about the Japanese announcement though which many analysts seemed to have forgotten is that Japan has done quantitative easing at numerous times over the past 10 years as their economy has been in what is definitely the longest recession anyone can remember.

Then Bed Bath and Beyond (stock symbol BBBY) announced next quarter earnings will be lower than anticipated. The stock fell in the after hours and today closed down almost 10%.  Add to that Norfolk Southern (stock symbol NSC) which warned that third-quarter earnings will miss analysts estimates which promptly dropped the shares 5.8% and then watched them close down another 9% today.

Adobe stock (symbol ADBE) fell on the news but recovered today to close up 4.26%  after it adjusted its fourth-quarter outlook to .53 to .58 cents a share compared to analysts average estimates of .67 cents.

Market Direction and More Bad News

Today the news continued to get worse. In China, an initial reading of manufacturing activity showed another contraction in September marking almost 10 months in a row of contraction. In Europe business activity contracted at the sharpest pace since June 2009 and in the US, initial jobless claims for the period ended last week fell by just 3000 from the previous week.

The Conference Board reported leading economic index fell 0.1% in August but manufacturing in Philadelphia improved slightly in September. Overall the indicators everywhere are pointing to anemic growth and probably unemployment rates that remain unacceptably high. Today in New York for every stock that advanced two stocks fell. So what is going on with the rally?

Market Direction and Consolidation

While analysts are becoming increasingly worried, the chart for the S&P 500 does not look bad. In fact it looks pretty common. The market has done the same style of consolidation twice before as you can see in the 3 month chart below. Unless there is a stronger pullback, the continuing pattern of higher highs and higher lows is still in effect.

market direction consolidation

The S&P 500 is exhibiting signs of consolidation

Therefore while everything might appear worrisome, in fact the market is showing no signs of trouble, simply a typical consolidation pattern. Whether or not this third consolidation in the S&P 500 will result in another climb in the markets depends on the market getting some good news. It will not take much to push this market higher. Despite all the bad news the market continues to hold onto its gains pretty well. These are all good signs for a market direction move higher. The question is, will it occur this time again?

Market Timing Technical Indicators

Tomorrow is options expiry for September and historically it has been an up day for the stock markets. It has also been one of the more turbulent days of September. The market timing indicators for today are showing that in general there is slight pressure on the market direction to decline.

Momentum is positive but pulling back. MACD is still quite positive but it too is down from yesterday. The Ultimate Oscillator is no longer overbought. Rate of change is still positive but lower than Wednesday. The Slow Stochastic and Fast Stochastic are both showing that the overbought condition still exists but not to the degree it was earlier in the week. Both stochastic indicators are advising that the market direction is under pressure to pullback slightly from here.

Market Timing Indicators for September 20

Market Direction is under some pressure as shown by the market timing technical indicators.

Market Direction Outlook For Options Expiry Friday

The outlook for Friday is for a possible down day. But the indicators are still positive as they are reflecting the possibility of pressure on market direction to pull back slightly. Aside from this the market direction still remains intact and shows not clear signal of anything major in either direction.

Almost all my naked puts will expire out of the money tomorrow. Following tomorrow I will reassess and begin to commit capital to Put Selling again. While there is a lot of concern on the part of analysts and investors, I plan to continue Put Selling until some clear indications are seen that point to the market direction definitely moving quite a bit lower. Right now technically there are no such signals and unlike a lot of investors, at present I am not worried about market direction.