Market Timing / Market Direction Overbought But Higher

Market timing is attempting to predict stock market price movements or market direction by using a variety of technical tools. However market timing can also include fundamental analysis as well as technical.

Fundamental analysis is looking at historical and present data to forecast stock or market valuation and market direction. Many investors feel that fundamental analysis is more important than market timing technical tools. Fundamental analysis looks at stocks by analyzing financial statements, management performance, debt ratios, competitors, the industrial sector the company belongs to. It can then be widened to include interest rates, the economy, unemployment levels, industrial sectors and diversification, overall production levels within nations and even the management of a nation.

I have a few investor friends who believe strongly in fundamental analysis and not technical analysis when it comes to market timing. This week they are all back to 100 percent invested in stocks. Personally I believe they should have been in the market in March 2009.

Fundamental Analysis Is Important

All of these fundamental factors are very important in gaining a strong insight into both stock market direction and naturally the health of the nation’s underlying economy. Lately the health of the nation’s economy appears to be improving. Employment levels are better as businesses appear to be hiring more employees. As well the housing industry appears to possibly be bottoming. The overall national debt is definitely out of control but it would appear that those in power are aware of it. Whether they can do anything about it is another question. Businesses have done well although over the past few years following the stock market crash of 2008 to 2009, many analysts had reduced their expected earnings from companies and in most cases companies easily beat those earnings.

This past quarter was not so rosy as analysts increased their expectations and many companies failed to meet the higher expectations. Nonetheless though it would appear to many investors that fundamentals look better and even the Federal Reserve seems cautiously optimistic which is why my investor friends were buying stocks this week.

So fundamental analysis would seem to indicate that the worst is behind the economy and stocks should be able to move higher from here.

Market Timing Fundamental Analysis VS Market Timing Technical Analysis

The problem with Fundamental Analysis is that overall it cannot judge or predict investor sentiment and capital placed at risk. Market timing technical indicators on the other hand can do just that. For example, investors who follow market timing fundamental analysis would never have put their capital at risk in March 2009 when the bear market bottomed. However market timing technical analysis advised to get my capital into the market because every indicator pointed to a huge bounce in the works.

Again this year in July, August and November, market timing fundamental analysis, told investors to stay out of the stock market in particular due to the Europe Debt Crisis. As well fundamental analysis indicated that overall the economy could be slowing further than expected, but my market timing technical indicators did not agree. Once again the market timing technical indicators told me to buy into the weakness.

Do you recall all the talk about a double dip recession in 2009, and again in 2010? This was market timing fundamental analysis at work and not market timing technical analysis. However by relying on market timing technical analysis in both those years I could see that I should be in the market and not worried about a double dip recession possibility.

I must also point out that fundamental analysis is often used by economists. It is a well-known fact that in general economists have rarely been right when it comes to predicting stock market direction trends.

One last point has to be that many financial planners place their client’s capital at risk when market timing fundamental analysis gives the “all clear” or “safe” signal which is almost always the poorest time to invest. However by using market timing technical analysis I can judge when stocks are cheap, undervalued and under appreciated. That’s the time when stocks are at fire sale prices and I love buying.

So this week all my investor friends who are market timing fundamental analysis investors are back in the market. I hope this is not a bad sign.

Personally I believe it is best to combine the two market timing indicators but put more weight on the technical analysis because it is telling me what the smart money investors are busy doing.

Market Timing / Market Direction Technical Analysis For Friday March 16

Today was options expiration for March and just as the Trader’s Almanac predicted, the Dow closed down. The Trader’s Almanac showed that the Dow has been down 3 of the last 5 years. Now it will be 4 of the last 6 years. See how these statistics get started?

The stock market had a terrific week and the S&P 500 closed up today by 1.57 ending a week of solid gains. Below are my market timing technical indicators at the end of this week.

Market Timing / Market Direction technical indicators for March 16 2012

Market Timing / Market Direction technical indicators for March 16 2012

Market timing technical indicator – Momentum:

Momentum started the week at 100.26 and climbed the entire week, closing today at 102.52. An impressive move higher day after day. According to momentum then, the market direction remains up.

Market timing technical indicator – MACD (Moving Average Convergence / Divergence):

MACD started the week at a negative -1.95 and ended today with a very strong 1.90. You can see in the MACD column that the signal line has been crossed over marking a return to higher prices. Just like the market timing technical tool, momentum, MACD climbed every single day.

Market timing technical indicator – Ultimate Oscillator:

The Ultimate Oscillator started the week in bullish territory with a reading of 52.47. It climbed all week-long and ended today at a very bullish 75.30 which was the highest reading for the week. You can see from the Ultimate Oscillator that the S&P is now firmly in overbought territory. Remember that does not mean the stock market will pull back. The market direction may not change for some time yet as bull markets can easily stay in overbought territory for a while as investors put more and more capital into the markets. However it is important to realize that the stock market is very overbought and could correct, particularly on a string of bad news reports.

Market timing technical indicator – Rate of Change (ROC):

Rate of change also started the week with a negative reading of -0.08 but ended the week at 2.92 another strong reading and the strongest for the week. Market direction should remain up according to the Rate Of Change indicator.

Market timing technical indicator – Slow Stochastic:

The Slow Stochastic was the second indicator to turn quite bullish back on March 9. Like most of the above market timing indicators, the Slow Stochastic Indicator ended this week on a high note with a reading of 94.71% and ended the week flashing an extreme overbought signal.

Market timing technical indicator – Fast Stochastic:

The Fast Stochastic confirmed the Slow Stochastic reading of March 9, one day earlier on March 8 make it the first indicator the confirm the upside momentum. All this week the Fast Stochastic rose firmly into bullish territory. On Tuesday March 13 it gave an extreme overbought reading of 99.68% which is almost cause for some selling. It ended the week at 94.02 which remains very overbought.

Market Timing / Market Direction Conclusion For March 16

With today being triple witching I had hoped for more volatility but the VIX ended the week at 14.47 down another 6% from yesterday. As volatility continues to decrease option premiums also decrease. This means investors interested in selling options should be studying specific stocks or sectors to find areas that have good volatility to assist in pushing up option premiums.

On March 12, the beginning of the week I wrote how there was limited risk in the stock market this week. It was obvious to me watching my market timing technical indicators all week that fresh capital is coming into the market. Investors just starting to put their capital back to work should consider that they could be buying at over-valued levels. But it always seems to be the same case, investors dump their hard-earned money back into stocks after the recovery is well underway when they should have done this months ago.

My market timing technical indicators at the close of the week are stronger than at the beginning. All the indicators are flashing that despite the overbought signals, risk is still limited in the market so unless something unforeseen should happen this weekend or into next week the stock market direction should continue to be up.

To temper the enthusiasm, statistics from the Trader’s Almanac show that historically the Dow has been down 15 of the last 24 years for the week following Friday’s March Triple Witching. However in 2007 the Dow was up 3.1%, 2009 up 6.8%, 2011 up 3.1%. As we enter the final two weeks of March the Trader’s Alamanc also advises that March is historically weaker later in the month of March than near the beginning.

Combine those statistics with the overbought readings from my market timing technical indicators and perhaps the market direction won’t be straight up for next week. That would be welcomed by myself as I like to earn as much as possible from put selling options and any selling will help push volatility up and increase option premiums. However the market timing technical tools show that risk to the downside remains limited so I would expect any weakness next week to be quickly bought, therefore any weakness and I will be put selling.