The Market Direction outlook on Thursday called for Friday to be lower. Friday though was an intriguing day. The market direction dumped right out of the open with the Dow down to 14,434.40 by 10:00 AM. The S&P 500 was down to 1539.50 by 10:00 AM. But that was it. That was the low point and from there the market direction clawed its way back. In the last half hour all the indexes moved higher in market direction and while they did close lower than Thursday’s close, the recovery was strong.
It was the US payroll number on Friday that hit the markets like a rock. No one expected such poor numbers with the payrolls show only 88,000 jobs added in March. In Canada there were job losses of 54,500. The consensus had been for at least 190,000 jobs but the Weekly Initial Unemployment Insurance Claims had risen during the past couple of weeks which was a warning. No one though expected the worst employment numbers in 4 years. The news too that the unemployment rate fell also hurt the markets as this means more people are no longer even looking for work. This makes investors question the whole idea that the economy is improving.
Market Direction Action On April 5 2013
The 5 minute chart below shows the market action. The morning saw the big sell-off but by 10:05 it was finished and the S&P 500 market direction changed back to up. Some of the recovery was technical in nature but investors were busy buying in some of the sectors which they felt were too beaten up like financials, insurers, miners, oil. Meanwhile a handful of stocks actually did well including Facebook Stock and McDonalds Stock set a brand new all-time high. I suppose investors feel the unemployed will be eating out a lot more.
Market Direction Closing For Apr 5 2013
The S&P 500 closed at 1553.28 down 6.70 points and the Dow closed at 14565.25, down 40.86 points. The NASDAQ closed at 3203.86 down 21.12 points.
Market Direction Technical Indicators At The Close of Apr 05 2013
Let’s take a moment now and review the market direction technical indicators at Friday’s close on the S&P 500 and view the outlook for Monday.
For Momentum I am using the 10 period. Momentum is rising and while not overly bullish, momentum did not turn negative at all in the past few days, which in itself, is a bullish sign for the market direction.
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) is still moving lower and increasing the strength of the sell signal. MACD is a very accurate indicator. Today’s climb back by the markets did not change the signal from the MACD indicator.
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 still positive but essentially flat. It pushed up slightly with today’s push back by the market direction but overall the Ultimate Oscillator is in trouble and could easily slip into negative readings.
Rate Of Change is set for a 21 period. Rate Of Change is still positive but Friday’s selling has pressured the rate of change and it is sliding quickly and ready to turn negative.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is still signaling market direction down.
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 signaling that the market direction is down for Monday..
Market Direction Outlook And Strategy for Apr 08 2013
The stunning employment number shocked investors. The belief that the economy was improving has been shaken. Analysts everywhere were quick to point out that one month employment numbers does not make a trend and while true, this numbers were terrible. What was even worse are the number of Americans no longer looking for work and no numbers are kept for those statistics, only estimates. While I expect the March numbers to be revised in April, I do think the unemployment numbers are a serious warning. Here are some of the concerns I have going forward.
1) S&P 500 market high. The push by the S&P 500 this past week to reach a new all-time high was followed by serious selling. This is not typical of bullish sentiment. If the market direction pushes back and the market establishes a new high or a slightly lower high and then falls again, I believe that will signal a top. Whether a short-term top or long-term I have no way of telling but certainly a market top of some sort. So watch for the market direction to push back and try to set a new high. Then watch for any kind of serious follow through.
2) On Thursday the Weekly Initial Unemployment Insurance Claims are released. If they show another rise in numbers I believe the markets will sell lower.
3) Earnings for this quarter starts this week. Any signs of trouble and I think selling will erupt.
4) The dividend yield of the S&P 500 is now 2.13% which is below the historic average of 3.11%. Dividends have become low and instead of increasing dividends and engaging in share buy backs, companies are not hiring but hoarding their cash. If businesses do not show confidence this will bleed into other sectors of the economy including consumer confidence.
5) Quality companies are not cheap. Doug Harris mentioned this in his market direction portfolio article today. FullyInformed Members can log in through this link to read his comments. If you look at the Shiller P/E ratio which adjusts for inflation the S&P 500 is sitting at 23.47 or about 4 times higher than the average which is about 19.7 times earnings.
6) The Russell 2000 ETF, IWM, is continuing to show significant signs of weakness and as it represents 2000 small to mid-size companies the concern is that these companies are not going to meet earnings expectations.
On the plus side the Dow Transports turned around on Friday and roared back to a new high. But back to the negative, Utility stocks touched a four and a half year high as investors are struggling for dividend returns. Last, on Friday the VIX Index reached a 1 month high. I have continued with the VIX Index Stock Market trading Strategy but on Friday I sold all my positions out.
Outlook In A Nutshell
The market direction outlook for Monday is for weakness. Some of the best and strongest market direction technical indicators, namely MACD, Fast Stochastic and Slow Stochastic are negative and signaling lower prices are ahead. Momentum is poor and the rate of change shows that the volume of selling pressure is outstripping buy pressure. At best we could see some sideways action until earnings are presented by some of the bigger companies. If the earnings surprise to the upside I can see the market direction resuming its climb, but earnings have to support normal price to earnings ratios and when they don’t eventually the market direction changes until it does.
My Put Selling has been producing excellent returns but the volume of puts I am selling remains small and out of the money. While I believe there is resilience to the market direction up, I also realize that the headwinds faced by the market direction higher can take some time to have their full impact felt and when it does the market direction may shift to lower for some time to come. Staying cautious is definitely warranted but market direction is not advising me to leave the markets all together. Instead the proper stance is to stay cautious but remain invested.
So while Monday could see a continuation of the bounce back in market direction I will not be surprised if any market direction move higher is short-lived.
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