The market direction always follows the Federal Reserve actions and the Fed Chairman’s comments. The uproar over everything the Fed Chairman proposed and implemented to try to rescue the US economy from the brink of a depression starting in 2008 has dissipated greatly in 2013. A lot of the criticism has declined in large part because rather than collapsing as so many analysts and pundits predicted, the economy has managed to recover somewhat and indeed unemployment is declining, economic numbers keep pointing to further expansion and housing has definitely improved.
But one of the biggest quieting factors has been the sudden rise in stocks starting in the fall of 2012 and continuing today. The push to all time highs in both the Dow and the S&P 500 is truly impressive considering the dire predictions of economic collapse back in 2008 to 2009 as the US and the world seemed to fall apart.
Lack Of Faith In The Fed
Back in 2009 when Chairman Bernanke commenced his liquidity program to try to rescue the economy, many investors fled the equity markets and even bond markets despite the old adage “don’t fight the Fed”. Many preferred to supposed safety of gold. To me it was surprising that so many investors could not see the party the Fed was having and the invitation to join the party was being dismissed by many analysts and investors. I even wrote an article back then entitle Dance Near The Exit, in which I wrote:
“My approach has been to turn down the noise from the media, turn up the music from the Federal Reserve and stay with the trend. I know after 35 years of investing that there is rarely any point in fighting the trend. Right now the Federal Reserve has been pumping liquidity into risky assets and has been since the credit crisis.”
Starting late last year analysts and investors suddenly seemed to realize that the Fed was “serious” about the quantitative easing program and they turned to stocks. Today many seemed dismayed that the Fed may begin to curtail the easing which has been ongoing since 2008 yet most missed one of the greatest rallies in history and now with stock markets just just over 17% this year, many wonder if this is the top.
Bernanke Rattles Market Direction
Today’s fed Chairman Ben Bernanke’s comments rattled the stock markets as he spoke about how to reduce the amount of liquidity in the markets. He did not indicate that this was going to happen any time soon, but stocks, which had been up to 1687.18 on the S&P 500, another brand new high, began an impressive collapse on worries that the end of liquidity means an end to the “stock market game”. Personally I have a lot of doubts about the end to stock market gains but I have no tools to look out months rather than just a few days to determine Stock Market Direction into the summer months.
Today’s Market Direction Collapse
The Collapse in the Stock Market Direction after Bernanke’s testimony was bigger than many investors realize as the drop from the high until the recent low was 2.27% making it the biggest drop in almost a month. But the drop was still small in light of the enormous run-up in stocks. The question now for a lot of investors is whether this is a turning point in stock market direction or just a “bump in the road”.
Market Direction Drop May 22 2013
The economy is showing significant signs that there is growth and economically there are improvements. However there are also many signs that the improvements are not strong and could in fact be temporary thanks in large part to the Fed’s intervention which if removed or scaled back could see the economy slow.
My Outlook On Fed Policy
Personally I think there is plenty of room for the Fed to continue some form of quantitative easing particularly with inflation almost non-existent and housing in large part being improved through ultra-low interest rates. Meanwhile unemployment still has a long way to fall to even come close to 6.5%.
Therefore I am not expecting anything new from the Fed. If there is a reduction in easing I believe it will be gradual and easily stretch into 2014.
Put Selling Against Ben
Despite my personally belief, I cannot invest based on just a “gut feeling”. Instead I have to invest based on market direction and trend. There is no reason to believe that we will experience any kind of stock market collapse such as was saw in 2001 – 2003 and 2008 to 2009 when the news of a slowing or an end to quantitative easing becomes reality. But at the same time there is no reason to believe the markets will continue happily pushing higher either.
This is the kind of environment I love for Put Selling stocks and it is just another indication of why Put Selling is a superior method of investing for income and profit.
Put Selling offers investors the opportunity to continue to stay invested, through selecting big cap stocks and picking strong support levels to sell at or slightly below. Today is a good example. Despite today’s plunge there were many bargains to be had as the pressure on stocks pushed up the volatility levels in many stocks and made put selling out of the money on many stocks very profitable, but at valuations that make more sense than present values.
Put Selling Nucor Stock Example
Take Nucor Stock for example. This steel company recently released earnings that disappointed to the downside. Disappointment would be an understatement. The earnings are going the wrong way considering that the economy is supposed to be getting better. Thanks to analysts who keep lowering their estimates, Nucor stock has beaten those earnings estimates in 4 of the 5 last quarters. But to get a true picture, I like to add in the previous quarters. When we take into account the previous quarters you can see that results are dismal.
Nucor Stock Recent Earnings Announcement
So when Put Selling against Ben, you have to take those periods when the market direction is being hammered such as today and sell puts against a stock like Nucor Stock at realistic valuations. Presently with the stock above $46, it is, in my opinion, overvalued.
The chart below shows that $44 is the first level of support and $42 the second but both of those are weak levels. Strong support is back just below $40. By understanding the support levels in Nucor stock, an investor can sell at the $44 to $42 support levels but realize they may have to roll down to strong support zones should the stock pull back to the higher support levels ($44 to $42).
Nucor Stock one year daily chart
Put Selling gives investors all of this and more. The entire time I am Put Selling stocks I am earning income. When I roll down to stronger support levels I am also earning income. So instead of buying stocks when they are overvalued such as Nucor Stock is at $46 and above, Put Selling allows me to earn income, stay invested and should I be assigned, own shares below overvalued prices which allows for all kinds of other strategies to be implemented to continue to earn income.
Put Selling And Knowing Market Direction
My market direction technical indicators can only look out a few days at best. Longer-term no one knows what the market direction will be as there are many unknown factors that can influence stocks and the stock market direction.
Instead the use of literally dozens of option strategies such as Put Selling helps to level the risk of buying stocks in a market such as the one we are presently in.
While I cannot judge exactly what Ben Bernanke will “spring” on investors in his monthly comments, I do know that through the use of option strategies I can benefit from those periods like today when Fed comments hurt stocks. It is through options strategies that I am better protected against large losses and when assigned shares I end up at realistic levels that can profit my portfolio rather than hurt it.
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