Fundamentals

The DIA (SPDR Dow Jones Industrial Average ETF), which currently trades a 12 times earnings is historically low for the average. The weak dollar could push earnings higher as most of these companies are growing their international earnings faster than U.S. earnings. This could cause the earning to mislead investors into thinking that earnings are growing when in fact the dollar is just cheaper allowing international companies to boost profits without boosting sales.

Technicals

Looking at the chart above, you can see the current trend is almost identical to the trend that crossed 11,000 in April. The current trend has yet to pull back or have a correction and stochastics trading at 93, the market looks to be overbought. Be aware: stochastics can be oversold or overbought for long periods of time. If you believe the Dow is going higher watch around the 11,200 level. If you believe the Dow is going lower watch the 10,700 level.

Other Factors

Jobs, jobs, jobs! If the job recovery doesn’t pick up, the market will stall out. Main street is still hurting no matter what the market is doing. Retail investors don’t want to be in stocks but rather in bonds. The so called “Currency War” that some are referring could really come back to hurt Americans and the U.S. Dollar. The dropping U.S. Dollar will make import prices higher, along with higher gas prices. Remember when looking at stocks or ETFs to look at more than just stocks, take a look at what else that could affect the potential stock or ETF.

Is Now The Time For Stocks

Stock Mutual fund inflows since May have been net negative, but could that be part of the “Sell in May, and go away” theory? The S&P that currently trades at 13X trailing twelve months (ttm) earnings might seem cheap to some, while others may say the earnings of the past twelve months are artificially inflated by government intervention. If you are in the bullish camp, look at individual stocks and make them give you a reason for buying them. The S&P 500 is still unable to stay above 1150 and until then the market looks range-bound.

Are You Afraid Of Stocks?

If you are afraid of stocks, the game is not over; you can still buy many different types of bonds. Although the returns are meager on bonds, they can and sometime will beat the overall stock market. Just remember as with stocks, the riskier the bond is, the more of a chance you have at losing money. Bonds are a great way to add income to your portfolio but some stocks and/or ETFs yield more than bonds.

Whichever way you decide to go whether long/short stocks or bonds, keep your portfolio diversified and have cash ready to make your next move.

Many stocks are trading at single digit P/E ratios and valuations that make the market look cheap. Although I am not too much into fundamental investing, I have to consider fundamentals when trading. Value investors are working overtime right now trying to distinguish whether these valuations are of actual value or whether they are pointing to a weaker earnings outlook.

What Am I Doing?

Sitting it out for now. If I am not in the market, I can’t lose money. I see companies hoarding cash, retailers reporting mixed numbers, employment not improving, and terrible housing data. The technicals of the markets say there is more room to the downside but with any earnings season around the corner, volatility is the only certain thing in the markets. Some stocks will win and others will lose, I will sit on the sidelines and wait.

Fundamental Meaning

In a simple explanation, the market has just got more expensive. The Dow closing above 11,000 means nothing fundamentally. Don’t shy away the markets because they just got more expensive as the first company, Alcoa (AA), reported its quarterly earnings after the market close today. If earnings come in strong, then the market could be undervalued and send the market higher.

Technical Meaning

For technical traders, the Dow closing above 11,000 means almost nothing. So, what does it mean? Technical traders like round numbers. Other than that, the trend is still moving higher.

Psychological Meaning

This is probably the biggest meaning of the Dow crossing 11,000. It’s nothing more than a psychological number. With every movement higher, retail investors start feeling more and more confident about dipping into the market. Keep in mind: An inflow of retail investment usually indicates a top, whether long-term or short-term as retail investors are always the last into the market.

By no means am I calling a top in the market. Just remember that 10,000 was only about 8 weeks ago, which represents a 10% move in a short period.

The Technical Side

Looking at the chart below, you can see the trend is still intact but momentum seems to be running out. The trend is your friend and you should trade it as so. What do you do when the trend looks like it is about the break or reverse? Buy protection in the form of puts, shorting against long positions, or just go flat (no positions) until you have evidence the trend is still intact and continues to move higher or lower, whichever, the direction.

The 10 DMA on the SPX held today but looks like it might roll over. It looks like sellers want to short this market as the recent volume has been on down days.

Economic Data

Jobs, jobs, jobs. This week’s jobs number may be crucial to market direction. It will be interesting to see how traders will react to the reports. The Census jobs will skew the employment reports. If they come in worse than expected, even with the Census numbers, the market is likely to sell off. Jobs are a lagging indicator but with almost 10% of workers unemployed, it has the power to move markets. The ADP numbers that disappointed traders could give a sign as of what to expect from the payroll and unemployment numbers.

Now, might be a good time to take some profits off the table or to buy some protection.

The Psychological Effect

The psychological effect of the unemployment number crossing 10 percent could have a significant impact on trading tomorrow. If the number comes in higher than expected, the market will probably sell-off. A correction would not necessarily be a bad thing now, as the markets have come a long way since the March bottoms.

Market Looking For Direction

Recently, the market volatility has increased along with the market swings. The Dow 10,000 looks toppy and if the number comes in worse than expected, expect a quick loss in the markets. If the number comes out better than expected, the market will probably continue higher. Those who are short the markets get out of the way until the next source of bad news or lose big.

Be Prepared To Jump In Or Out

You can make a lot of money trading economic new but prepare yourself to get out quickly if the trade does not go your way. If you are trading the employment numbers, please remember your stop orders. The unemployment numbers will move the markets tomorrow. I do not recommend trading economic numbers. If you do so, play it safe and take profits or stop losses.

The Decade That Flat-lined

To me, the DOW crossing 10,000 means nothing fundamentally and technically it is another whole number to trade off. The DOW crossing 10,000 did not create any new jobs, nor did it help the declining dollar. As I mentioned earlier, the DOW crossed the 10,000 milestone 10 years ago. If you had put your money into an index fund 10 years ago, it has done nothing…not counting dividends. Dividends that, if reinvested, have lost value and taxes you paid on them probably wipes out anything you might have gained.

Dow 10,000 – The Second Time Around

With a decade of no performance, where do we really stand? Well, 10,000 today is not the same 10,000 as it were 10 years ago. Thanks to inflation, your investment in an index fund that tracks the DOW might have returned you the same dollar amount as you invested but it gave you a dollar with a significantly weaker buying power. Want to know more about the loss in your buying power? Head over to ZeroHedge.com and read an article called “DOW 10,000!!!! OhWait, Make That 7,537.”

Investing In Index Funds

If you are investing in index funds think about this post. Ten years of no gains and loss of buying power will make anyone poorer than they were 10 years ago. Do not get me wrong, I am not saying that index funds are a terrible investment. I am saying that the buy and hold theory should be history. A decade of losing 25% of your buying power and no investment gains is an obstacle you do not want in a retirement account.

I traded the failed head and shoulders pattern in July, but quickly reversed the trade after breaking up through and holding the neckline. Too many people were shorting the head and shoulders pattern in July and when a few people stepped in to buy; those who were shorting got stopped out. With September around the corner, is it time to sell?

As the market seems to keep going higher, some stocks are getting ahead of the underlying fundamentals. So, why have we not seen a pullback? Whenever the market looks like it wants to pull back, fund managers, retail investors, and others are piling in with hopes of catching up to the indexes. Afraid they will miss the next move higher. The current market just doesn’t want to sell.

Looking at the chart below, the S&P 500 volume is thinning out while making new highs. Recent volume has been concentrated in just a few companies.

Although the S&P 500 is in a nice upward trend, many others and I think there will be a correction. The $64,000 question is when and how much? One thing I learned quickly in trading is that if most investors and traders suspect it, then most likely it will fail. How many times did investors and traders call a bottom on the way down to the March lows? I think the head and shoulders pattern failed because it was a one sided trade…everyone was short, including myself.

While I think a pullback is near, I remain bearishly long. My trading portfolio is currently flat while my income portfolio is loaded with preferred stocks and junk bonds. However, as the markets continue to rise, so do my stop loss orders. Maybe, September will show us what is next to come.

Head And Shoulders Pattern

A head and shoulders pattern is one type of reversal pattern that indicates an end to an uptrend and a beginning to a new downtrend. Look at the picture below (current S&P 500 chart with a head and shoulders pattern) before I explain a head and shoulders pattern and how to calculate where, based on the pattern, the market, stock, or futures, etc. is going.

Head And Shoulders Pattern Explained

The left shoulders forms in a natural uptrend as the stock makes new highs then falls back (or corrects to what will be called the neckline, this will be the first point of the neckline) before pushing higher to make new highs (head).

After making new highs, the security then falls back from the head to previous lows where it finds resistance. This resistance is from the prior pull back.

The security will start to push higher, and will be unable to make new highs. It is as this time you will notice the formation coming into play. This upward push is the beginning of the right should and is unable to get through the highs created in the left shoulder. It is at this time that you need to connect the two pullback points to create the neckline.

Confirmation of the pattern comes when the security passes through and holds the neckline. Traders will start getting into short positions at this time. As you can see from the chart above, the S&P 500 has not yet broke the neckline. The upcoming week will be an important week as to whether the uptrend is over.

How To Calculate The Potential Move

In an equation, it looks like the follow:

Neckline – (High Point in Head – Neckline) = Price Target

Using the image below (DOW Head and Shoulders Patter), take the high point of the head which is roughly 8,800 and the neckline which is about 8,200. In short, you can expect to see a 600-point move to the downside.

8,200 – (8,800 – 8,200) = Price Target

This gives a price target of 7,600 on the DOW. I recommend that you get out before taking out the target unless the markets or a security (whichever you are trading) is falling apart.

Things To Keep In Mind

• The volume is normally highest in the left shoulder. As the stock reaches new highs (in the head), it is usually not supported by volume.
• The neckline does not have to be perfectly horizontal, it can slightly move up or down.
• Shoulders should peak around the same price.
• You do not have to get short positions but should at least lighten up your holding(s) and buy them at cheaper levels.
• Head and shoulders patterns can be used with all types of securities, whether an individual stock or index futures.

Looking at the chart below you can see five technical indicators that may signal the market is heading lower. Here is a list of the five indicators and why they might be saying to get out of long positions as the markets heads toward a possible correction.

1. Stochastics – looking at the daily chart below, you can see the stochastics have turned over. I like the slow stochastics but needs confirmation from other indicators.
2. Resistance – the S&P 500 is stuck around 950 for about 2 weeks now and is unable to close above 950. The market is currently in a range with 950 as the upper number. No a reason to go short but a good reason to sell long positions and look for a better entry level.
3. Volume – has slowly decreased as the market headed higher. As the market reached the 950 level (resistance mentioned above), volume is declining which is an indication that traders do not want to buy at these levels.
4. Trend Line Broken – the current uptrend line dating back to March is broken.
5. 200 Day Moving Average – this is probably one of the most important indicators on a daily chart. Although the S&P 500 has yet to break down through the 200 DMA, it may be coming. The S&P 500 just broke through the 200 DMA to the upside about 2 weeks ago and maybe in a retest of the 200 DMA; which is one reason not to get short, right yet. If the S&P 500 breaks through the 200 DMA, you may want to start hedging or placing shorts.

Is The Market Headed Lower?

DISCLAIMER: Please use your own research. This post is for informational use only and not a recommendation to buy/sell any securities.