In my market direction outlook for Friday I mentioned that investors were showing resilience but there were many warnings signs that the rally may be starting to come undone. The rally has moved stocks higher for 5 months without much if any correction. I do believe though we could finally be in for a correction as we move into the summer months starting with June. The plunge of stocks into the close on Friday certainly was not encouraging to start off this week.
Dividend Stocks Are Under Pressure
I mentioned this last week and Friday showed more selling pressure as obviously a lot of investors feel that the move toward dividend stocks is coming to an end. Friday saw many of the big cap dividend paying stocks pull back 2% in many cases, but still a lot of these big cap dividend stocks are overvalued in my estimate.
For example, Coca Cola Stock closed at $39.99 but fair value based on their PE and cash flow is down at $38, which on Friday saw the $38 puts being sold for .20 cents for June 22 expiry.
Johnson and Johnson fell back to $84.18 but fair value in my opinion is down around $81.50.
The list is endless of dividend stocks getting hammered as the big institutional investors are obviously moving out of these types of stocks.
PepsiCo Stock was down only .55% to $80.77 but fair value in my opinion is at $75.00. Another stock being pressured is AT&T Stock which closed at $34.99. I announced on Friday that I rolled my $36 puts lower and added more naked puts but fair value is down to $34, still another $1.00 lower.
Treasuries Could Be A Gamble
Treasuries moved up on Friday and I received a lot of emails from investors wondering what I thought about TLT for going “short”. TLT is a 20 year bond ETF and personally I think the better move will come in shorter-term bonds particularly the 5 year if interest rates start to move higher. I have never been a gambler when it comes to investing and shorting TLT I think could be a losing trade for some time yet.
S&P 500 3 Month Daily
Looking at the 3 month S&P 500 chart below you can see that the correction in mid April was more severe than what we are presently seeing. That said, Friday’s action pushed the S&P 500 to close below the 20 period exponential moving average (EMA). The next test will come with the 50 period EMA. In the April pull back the 50 period held up quite well as you can see in the chart below. It will be interesting to see how well it performs next week.
Market Direction Closing For May 31 2013
The S&P 500 closed at 1,630.74 down 23.67 points. The Dow closed at 15,115.57 down 208.96 points. The NASDAQ closed at 3,455.91 down 35.38 points.
Market Direction Technical Indicators At The Close of May 31 2013
Let’s take a moment now and review the market direction technical indicators at the close of May 31 2013 on the S&P 500 and view the market direction outlook for June 3 2013.
For Momentum I am using the 10 period. Momentum has now been negative for 3 trading sessions and is continuing to fall further into negative readings.
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) issued a sell signal on May 24. The sell signal is still valid and readings indicate lower prices lie ahead of us.
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 negative reflecting the late day selling on Friday.
Rate Of Change is set for a 21 period. The rate of change is positive but continues to move lower.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling that the market direction is lower.
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 signaling the market direction is lower.
Market Direction Outlook And Strategy for June 3 2013
The market direction outlook for Tuesday is more downside. While Tuesday could see a bounce against the backdrop of Friday’s drop in valuations, the outlook is still negative even against such a rally.
My strategy is to stay cautious with my Put Selling and take only small positions until I see clear indications of the market direction. I will be aggressive however with my Spy Put Options and with the Trading For Pennies Strategy.
The Friday Spy Put Options trade returned 52% for only a few hours of work. I am expecting more of these types of returns in the coming days as I do believe the market direction has shifted to negative for the immediate future. For Tuesday then, I won’t be surprised to see a rally back but it has to be suspect. The market direction internals are weakening and big traders want out of many stocks. I think any market direction move up is bound to end in failure at this point in time and June, I think, could turn in the first negative month for 2013. It should be an interesting month.
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