Market Direction today has continued the push into new territory for the Dow Index and a slight rise for the S&P 500. Before I look at the market direction technical indicators and what the action was all about for today, I want to conclude my article on Understanding what is meant by the term Cautious Investing.
The first part of the article can be read here. To continue with the questions from the FullyInformed forum member:
Question: Speaking for myself, I am running Strangles and doing so in legs. I am already short SPX puts at the 1465 level (40 contracts) and I am going to sell calls shortly (later today or tomorrow) at strikes above a particular “target level” based on my own setups (targets are profit taking points and I have been studying the S&P for over 10 years now). This is a great time to be “trading” but I am not sure it is a great time to “invest.” I actually do not “invest” my money in stocks any longer but instead I “rent them.” I am completely out right now and have spent some time looking at the credit markets and studying some options there. Anyway, how do we actually “trade this?”
Answer: First perhaps it is important to remember that even doing strangles is investing. Any time you place capital at risk no matter what the strategy being used, you are investing. Trading is no different from investing. The whole purpose of investing is to grow wealth.The concept of investing versus trading comes down to risk versus reward and in both cases they are exactly the same. You are risking capital against potential return which is investing.
But understanding market direction is what assists in telling you how to invest. For example you are presently buying SPX puts now. By buying SPX puts now you are “gambling” on the market direction going lower. Yet I can get excellent returns by simply waiting for the market direction to give clear signals that the trend is down and then buying the Spy Put Options on that signal and the chance that I am buying when the trend is in my favor is definitely higher. So while you gamble with your investment, I prefer to stack the odds of success in my favor, so I wait for the signals to be clearer.
here are two articles discussing never betting against the trend. Spy Put and Never Betting Against The Trend – August 15 2012 and Market Direction Bet – Lessons Learned From Bear ETFs – September 16 2012.
If you review my Spy Put Options Trades here since the start of the year you can see that I have only bought SPY ETF puts when the market direction trend was down which was in my favor. I don’t like to second guess the market direction but prefer to let the technical tools advise me what the direction is and buy puts accordingly.
The Myth Of Market Direction Being Too High
A lot of people believe that the market direction once it recovers is “too high” and will pull back. Others believe that the markets will crash “again”. But since the start of 2009 companies in general have witnessed their best earning since the early 1990’s. They have thrived in a low inflation, low-interest, under employed market place. Basically earnings have astounded. In 2010 the average for the S&P 500 companies was a full 25% improvement in earnings.
Market Direction Over The Past 20 Years
Over the past 20 years I have marked on the S&P 500 chart below periods when the general media and analysts called the market direction “too high” and called for “crashes” or severe pullbacks. Note how this was not the case in the market tops of 2000 and in 2007.
market direction chart of the S&P 500 over the past 20 years
No one can predict a “too high” scenario where stocks will pull back or collapse. The belief that stocks are “too high” is I believe pointless as we have seen above over the past 20 years how many times stocks have been too high.
Focus On Market Direction Technical Indicators
Instead I think investors should focus more on when technical indicators advise that more caution should be exercised. This cautious outlook can happen at any time during a market either bull or bear.
For example February 2013 has seen a strong sideways market direction within the S&P 500. This sideways action as it continued to develop turned the market direction technical indicators from bullish into a neutral stance. In Feb the S&P was up just 0.57%.
This movement higher has created a situation where the market direction technical indicators while still somewhat bullish are warning that the outlook has become more neutral. This means that a neutral stance should be taken. A neutral stance means that investors should pull back on capital in use, take smaller positions and look for opportunities as they develop.
If the market direction should continue higher I will at some point see the market direction technical indicators turn back to bullish and then the strategy will change depending on that outlook. The same should the market direction turn bearish.
Protect and Compound Capital
I cannot stress enough that investing is not about always having to be “doing something”. There are two key aspects to investing. The first is protection of capital and the second is compounding the capital through investing. They work hand in hand. I do not believe in simply investing without a plan or making decisions based on “hunches”. In my opinion this cannot grow wealth that lasts. Instead by investing prudently through a strategy of understanding when to commit more capital and when to commit less, investors are protecting their capital while still growing it. These two key aspects work together. I may not grow my capital as quickly during cautious periods but my capital is not losing any value either should the market direction change suddenly and pull back. Therefore many times it is not the return that is the focus but the protection of capital in hand. Other times the strategy changes from cautious to fully invested and then the focus changes to return with less emphasis on protection of existing capital.
Worry Over A Possible Market Top
Right now a lot of investors are becoming “anxious” as they worry about the market direction as we are now entering March and they feel that they must be “doing something”. At the same time they worry they might be entering at a market top. The truth is no one knows if this is a market top. This same fear has been around numerous times over the past 5 years ever since the market crash. Each time the market has clawed its way higher the fear of being caught in a downturn has returned to investors. Now because we are breaking into all-time market highs investors Are “even more” concerned and believe the recovery of the 2007 high means there is even a greater chance of a collapse. Instead these investors need to understand that they can invest in any market condition if they have a clear understanding of what market direction is and what the technical indicators are advising.
Right now the technical indicators tell us that there is bullishness still within the market direction but that bullishness is not strong enough to show a strong uptrend such as back in early January. Instead the technical analysis tells us that the market direction is more sideways than higher. These are the same type of readings we have seen many times over the past 5 years throughout the market recovery from the last bear market. The present market direction technical readings are not unique or new but just as in the past, they tell investors to be careful and to risk less capital until the market direction is clear. So the mantra is “stay cautious but stay invested”. That will eventually change but for now there are strategies you can be doing including Put Selling. But by following the market direction technical indicators which advise that by keeping capital back, should the market direction turn and pull back, you have capital available to rescue present positions that could end up in the money on a pull back as well as capital available to put in place new trades to take advantage of lower valuations. This could also include taking advantage of a downturn to trade within market direction assets such as my Spy Put Options or Ultra Short ETFs.
This is what investing is all about. Being aware of market direction and knowing when to commit capital and when to pull back on committed capital and wait. Right now then, it is time to pull back on committed capital which means invest less and wait for a clearer signal.
And now let’s look at today’s market direction action!
Market Direction Action For Today
The markets continued their Market Direction push higher supported by an upbeat private-sector report that shows employers adding 198,000 positions in February. tomorrow we get the Weekly Initial Unemployment Insurance Claims which should be interesting. Meanwhile January’s private-sector reports was revised up to 215,000. As well the Commerce Department indicated that factory orders fell 2 percent in January which was better than the 2.2 percent expected drop. In the afternoon the markets were buoyed by the Federal Reserve Beige Book which showed a modest to moderate economic recovery was still ongoing with real estate a bright spot but the labor market still slow and with slowing retail sales in some districts.
Market Direction Closings
The S&P 500 closed at 1541.46, up 1.67 points and the Dow closed at 14,296.24, up 42.47 points. The NASDAQ closed at 3222.36 down 1.77 impacted by a big drop in Microsoft Stock caused by a fine from the Eurozone over browser issues once again.
Market Direction Technical Indicators At The Close of Mar 06 2013
Let’s take a moment now and review the market direction technical indicators at today’s close on the S&P 500 and view the next trading day’s outlook.
For Momentum I am using the 10 period. Momentum is positive and back climbing which is a good sign for market direction moving higher.
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) today turned positive issuing a buy signal at the close. We will need to see this buy signal tested either by a pullback in the market which is not reflected in MACD or by MACD continuing to move higher.
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 and pulling back a small amount. The pulling back is to be expected but the overbought signal is not as strong as previously, particularly in mid-January. It would be nice to see a stronger overbought reading from the Ultimate Oscillator.
Rate Of Change is set for a 21 period. Rate Of Change is still positive but today pulled back from yesterday’s reading.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is now extremely overbought but is still signaling that market direction will be higher in two or three days out. In other words, market direction will be higher later this week.
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 also extremely overbought and it too signals that market direction will move higher tomorrow.
Market Direction Outlook And Strategy for Mar 07 2013
The market direction outlook for the next trading day is to see if the buy signal on MACD can be confirmed. As well the extreme overbought signals from the slow stochastic, fast stochastic and Ultimate Oscillator should be watched as normally this indicates a temporary top can be in and stocks tend to sell lower after such extreme readings. Despite this the signals remain upbeat among the Market Direction technical tools but there are various warning signs still which indicates an overbought state exists and investors should remains cautious. So as I have said in many articles, the strategy remains the same. Stay cautious and stay invested which means I am take smaller positions, keeping less capital invested, looking for dips in my favorite stocks for Put Selling opportunities and remaining aware of the state of the market direction.
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Profiting From Understanding Market Direction (Articles Index)
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