MARKET DIRECTION CALL
June 1 2011 -
Tread Carefully - Market Remains Overvalued
As I mentioned in yesterday's
market direction call any negative news will pull
the market down. The housing news alone is enough to
bother the market but the rise in the US Dollar also
hurt equities today, let alone unemployment news and
The economic news today was enough to pull the market
back. The see sawing back and forth is bringing
volatility higher which is a great thing for those of us
who do options, but it can be a little unnerving for
those who are buy and hold stock investors or dividend
investors watching their stocks thrash about.
Yesterday the US dollar moved lower and equities moved
higher. Today exactly the reverse has happened and
equities have sold off. Today the news of only 38,000
workers being hired for the month of May (which still
has to be verified by the way) worried the market.
Honestly though let's stop for just a moment and think
about it. Apple is selling their ipads like crazy yet
they are made in China. Iphone - China. Most auto parts
- China. The US really needs a bit of a wakeup call.
Then auto sells from Ford and GM came out weaker than
expected, well no kidding. How many people need to keep
buying new cars every year? People need to be working to
spend and right now many who are working are trying to
pay down debt.
Then the drop of the US Manufacturing sector to 53.5%
which is the biggest drop in month month since 1984,
shows just how precarious the economy is. How many
economists said the Japanese Earthquake-Tsunami wouldn't
have any impact? Most. Wrong again. We are just now
seeing that impact.
Now all we need is for Greece to announce, "OK, we are
going to restructure our debt" - meaning default time.
Now that will really bring the stock market down.
The economic problems are not going to go away for years
if not decades. Those who want a market that just keeps
climbing are living in a dream. There are going to be
tough days ahead both up and down. This is why I believe
in options over buy and hold or even dividend investing.
Remember, many stocks in this market are over valued by
every stretch. As I said in my article on
the cautious bull, the easy profits in this bull
market have been made. Keep some cash around. The market
also is watching the ending of QE2 to see what effect
that may have or whether QE3 is announced. Stay tuned
Don't forget that the Federal Reserve through its very
actions is kicking the problems down the road. The hope
is to buy some time for the economy to recover and for
bankers and politicians to get their act together. But
with 2012 an election year in the US, the chance of any
real change is limited at best.
The chart below shows today's action up to 1:30 PM.
Yesterday a nice rally, lower US dollar, today a nice
selloff, higher US dollar. Noise is driving the market.
Remember that fear and fear alone drives equities. Fear
of missing a rally and fear of being caught in a
downturn. This is the same fear that as an option seller
I am trading against. This bull market is not over yet
but nothing goes up in a straight line. It never is a
comfortable ride after the easy money is made in a stock
market recovery. Below is the chart for today June 1.
The story from yesterday
was that I should have listened to MACD that indicated
at -0.93 that yesterday's rally was suspect and not
confirmed. Meanwhile even with the selling today, the
Ultimate Oscillator at 1:30 PM is still neutral with a
slight bearish bias whereas yesterday is was neutral
with what I took to be a slight bullish bias, which in
hindsight was not the case as it was not above 50.0.
Keep some cash ready and remember that this market is
over valued and so are many of the stocks in it,
particularly defensive stocks. I sell put options so I
can pick strike prices that I think stocks are fairly
valued at. I am not seeing any market crash at this
stage, but I remain picking naked puts to sell at prices
where I will hold stocks. Tread carefully - this market