Stock Market Analysis

Monday, August 17, 2015

Why Did The Market Turn Positive?

US market reversed early losses due to a much worse than expected Empire State Index to close higher by 67 points today .

The Empire State Index today was surprisingly disappointing. In fact, it is the worst reading since the market crash, resulting in the market opening deep in the red. The Empire State Index is a measurement of manufacturing activity in the New York region which then reflects on the health of the economy in general. However, the reading is too surprisingly bad that it actually looked suspicious. Anything too surprising or overdone in the market tends to mean the opposite. This is perhaps why investors didn't actually follow through with the negativism but actually lifted the market back upwards as the housing market continue to meet expectations.

Housing market continues to be an important driver of the stock market this year and today was no exception. This is perhaps the only good thing in the economy right now, which is why the possibility of a rate hike is so scary for the stock market. A rate hike hits every single aspect of the entire housing market chain; Higher rates makes building new projects harder, which means lesser projects and therefore lesser business for the construction sector, higher rates also mean less buying since loans would be higher, higher rates also hit existing variable rate loans, increasing the possibility of bad accounts which will adversely affect the banking sector. However, a rate hike seems to be definitely on the horizon and can actually be a good thing for the economy in the long run. Yes, anything good for the long run is usually painful in the short run and could even spark that dreaded market crash experts have been talking about for so long.

Internally, today's positive market didn't look so positive... Bond yields were still down and total equities put call ratio was still in that uncertain zone. This means that overall, sophisticated investors aren't showing the kind of bullishness they do in really strong markets. As such, I would be very careful buying into this even though on the technical side, it does look like a very nice reversal off the 30MA with a nice bottom hammer candle marking the pivot. In fact, I would continue to be careful even if the next few days turn out to be positive. As such, this is one such condition in which if you wish to profit to upside, you should already have entered today or enter resolutely tomorrow without waiting for more evidence, because the "evidence" you are looking for might just be the whole move this leg.

All in all, its still an extremely tricky market which is more suited to profit from using my volatile/neutral multidirectional strategy, the Ride The Flow system, which has managed to continue making a nice 7% average monthly return over the past quarter even though the market remains unpredictable.

Market Crash Timer: YELLOW

For now, the market remains in short term and intermediate term neutral trend within a primary bull trend.


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