Mixed signals are flooding investors. Yesterday we have revised GDP 2.5% and decent Weekly Initial Unemployment Insurance Claims that continue to point to recovery. Today we have and last week high consumer confidence numbers not seen since 2008 before the crash.
Consumer Spending Cautious
Meanwhile consumer spending in July slowed considerable with a very modest 0.1% in July from June which was a very strong 0.6%.
Personal Income Weak
At the same time personal income grew the same amount just 0.1%. This is the weakest gain since April. Economists had predicted 0.3%. Both spending and income are essential to the economy. Without payroll increases it is impossible for consumers to increase spending which means anemic growth which is basically what we have seen since the financial crisis. This meanwhile seems to contradict the recent consumer confidence numbers that were among the highest since 2008. This is always the problem with statistics which in themselves are questionable.
No Inflation
On top of the this came inflation numbers that basically show little risk of inflation growth which is something the Fed is trying to stoke.
Market Direction and Investor Concern
Meanwhile Britain voted against any military action against Syria and in the US, Kerry continues to make a case for a strike against Syria. As well the unemployment news out of Europe presents a very troubling picture of north versus south with unemployment rates in countries like Spain running above 20%. All in all investors are stuck with so many mixed signals they are unsure which direction to take the market in. Investors hate uncertainty which is why I prefer my strategies of combining stocks with options to continue to grow my portfolios no matter what market direction investors want to take stocks.
Market Direction Intraday for Aug 30 2013
The final day of August finds the S&P 500 drifting lower. Around 1:00 PM the market made a drop low of 1628 before quickly recovering back to 1636. There are a lot of investors who remain convinced the market direction will reverse back to up. This could indeed be the case as the market direction is trying to hold the 1620 area. But there are growing pressures to the downside. The technical damage that has been done this week will need at least a few days to recovery to repair the damage and recover the 50 day simple moving average (SMA) which is the first step.
The next step to a recovery is moving back above 1650 and then 1670 and 1680. At present the market direction is being held below the 100 day exponential moving average (EMA). It can stay here for a short period but if it cannot recover the above the 100 day exponential moving average (EMA) it will fall lower and challenge 1620 and then 1600.
Market Direction Portfolio
This is why at present I have a small position of DXD ETF shares in the market direction portfolio while waiting for the market direction to sort itself out. If the Syrian issue is resolved quickly the market could use that as a catalyst to push the market direction back up. However to stay up it must recover 1680 as the final level of resistance. That could be a tall order at present.
I am keeping a tight stop on the market direction portfolio and I am continuing to monitor my outstanding naked puts which for the most part still have not had a need to be rolled lower.
Market Direction False Recovery 2007
It is important to understand that no one can predict what will happen to the market direction over a longer period of time. This is part of the reason I have stayed with using options strategies when trading within stocks. 2007 makes a very good example to recall. Let’s review the fall 2007 period through the weekly chart below.
A. At point A in October the stock market made a new high. The market then sold off and fell below the 100 day exponential moving average (EMA). A lower high was made a few weeks later in mid November which I have marked as Point B.
Following that the market direction pushed toward the 200 day exponential moving average (EMA) which many analysts discussed as the market mainly consolidating before pushing higher. By the end of November at point C the market made a high which matched point B. the market direction then pushed back up in early December and analysts immediately jumped on the move higher as a signal that the correction was over.
But this was a false recovery and at point D the market direction made a lower high. From there we all know what happened.
What is important is to watch the highs being made. In 2007 I followed the market direction just as I do today. Through watching the market highs. At present the market has to recover to the 1680 level to prove that the bull market rally is still intact. At present the market direction is sitting in sort of a “limbo stage” as investors mull over all the data and all the issues facing the market direction.
Outlook At Present
There are lots of analysts on both sides of the market direction, those who think we are in a short rest before moving higher and those who think we are getting ready to pull back further and possibly harder. No one knows and all is simply conjecture. However there are some clues including the Weekly Initial Unemployment Insurance Claims. It is beyond rare when the market direction has collapsed when the Weekly Initial Unemployment Insurance Claims continued to decline. At present the Weekly Initial Unemployment Insurance Claims are still strong enough. Normally they need to reverse and move back above 350,000 for the market direction to begin to enter periods of strong weakness. If the Weekly Initial Unemployment Insurance Claims continue to stay above 350,000 and climb from there, look for the market direction to move a lot lower.
The second clue is the amount of bullish sentiment. When the bullish sentiment moves over 60% it is rare when the market direction can continue higher for very long. Finally the third clue is the new highs and new lows. As more and more new lows are put in it is a warning to investors that the market direction is having trouble staying aloft. It is already then pulling back when more and more new lows are put in. In my recent market direction outlooks I have mentioned the advance declines and new lows and new highs because the number of new lows continues to climb.
Staying The Course
Trading safely in the present environment is not as difficult as many investors think. I went over quite a few simple steps in a recent market direction intraday comment but I will include it here again:
Trading Market Direction To The Downside
It is important to trade what is before us. At this point the S&P 500 is back below the 50 day simple moving average (SMA) which will cause concern among investors. More selling will ensue especially if the Syria issue is not quickly resolved. I will be trading primarily to the downside. If any of my naked puts get in the money I will either roll them sideways if I like the put strikes I have sold, or down if I wish to be in the stock lower. I will be committing further capital once I see what support levels are reached and which ones are broken.
Naked Calls In Present Market
Naked calls are definitely an area I may consider but I would most like do call credit spreads as this market direction could quickly turn back up if there is a quick resolution. The call credit spread can help protect against losses and certainly would limit losses.
Naked Puts Turned to Put Credit Spreads
For other stocks, investors may want to consider put credit spreads to support naked put positions. For example this morning Johnson and Johnson Stock is continuing lower and for investors not interested in owning shares who have sold the $87.50 naked put (which I did), they may want to roll lower and add in some purchased puts to protect against any further downside action. This is not what I will be doing but for nervous investors it is always a choice to consider as a put credit spread will buy some protection against further downside movement.
Covered Calls – In The Money
One of the better ways to protect stock positions is the selling of in the money covered calls. Depending on your outlook for the stock and your degree of comfort investors normally decide how deep in the money to sell calls at. It has to be remembered that in the money covered calls opens up an investor to the possibility of assignment especially if there is a rapid and swift jump back in the stock or market direction. But by selling in the money covered calls an investor can earn some income, protect against additional downside action and buy back the in the money covered calls as a stock moves lower, which then locks in the profit from the in the money covered calls and frees the stock from any possible assignment.
Finally, I had included these links in a recent article and here they are again. These are all FullyInformed members articles:
Adjusting Strategies Depending On S&P 500 Valuations
5 Steps To Building Confidence to Trade Market Downturns Using Spy Put Options
8 Simple Strategies To Profit From Bear Markets and Corrections
Market Direction – How I Handle A Correction
Summary of Intraday Comments For August 30 2013
Do not think that I am indicating that a big move down is coming. Quite the contrary. I have no idea what is coming. My market direction technical indicators look out only a day or two at best. No one can tell what lies ahead for the markets with any degree of certainty. Instead these periods should be looked at as opportunities to grow portfolios in ways that a bull market never can. I believe it is important for investors to understand how to invest in every climate to continue to prosper and grow portfolios while always being aware of the risk to their invested capital.
Market Direction Internal Links
Profiting From Understanding Market Direction (Articles Index)
Understanding Short-Term Signals
Market Direction Portfolio Trades (Members)
Market Direction External Links
Market Direction IWM ETF Russell 2000 Fund Info
Market Direction SPY ETF 500 Fund Info