User Rating: 0 / 5

Star InactiveStar InactiveStar InactiveStar InactiveStar Inactive

I enjoy roller coasters. It’s a thrill. Somehow, it isn’t quite as thrilling to have my money taking that wild ride. That phenomenon has become very common in recent markets. After hitting a high of 2952 on May 1st, the S&P 500 index dropped 7% in 23 trading sessions. But then the market turned and recovered all of those losses in only 13 trading sessions. This is typical of the modern “V” shaped correction: a rapid, scary ride down followed by an incredibly rapid recovery in short order.

We witnessed part of that pattern again over the past two weeks. The Standard and Poors 500 Index (SPX) closed at 3026 on July 26th and then proceeded to lose 6% through the close on August 5th. Thursday’s close recovered half of that loss in only three days. SPX closed yesterday at 2919, down 19 on the day.

Trading volume has run below average since the July 4th holiday, but that changed with this correction. Trading volume in the S&P 500 companies spiked on July 31st and only dropped back close to the 50-day moving average (dma) yesterday. It is significant that the only increases in trading volume are coming with market declines, not bullish runs higher. Money remains on the sideline as the market rises, but traders take profits quickly at the least sign of trouble.

The volatility index for the S&P 500 options, VIX, spiked as high as 25% on the worst day of the correction and has declined since then, closing yesterday at 18%. That remains a relatively high level of volatility. All is not yet calm.

The Russell 2000 Index (RUT) continues to lag behind SPX and NASDAQ. Russell began the correction at 1587 on 7/31 and closed down 6.3% at 1487 on 8/5. By Thursday, Russell had recovered almost half of that loss, but it gave much of it back yesterday, closing at 1513, down 19 points. Russell never fully recovered from the December correction lows last year. Before this most recent correction, RUT had not yet even regained its high from early May of this year. Yesterday’s close remains over 15% below RUT’s 
all-time high. This chart’s bearish nature is a significant caution sign for the bulls.

The NASDAQ Composite index set a new all-time high of 8330 on July 26th, but lost over 7.3% in this recent correction. NASDAQ recovered some of that loss this week, closing Friday at 7959, down 80 points.
NASDAQ’s trading volume has trended even weaker than that of the S&P 500 index since the July 4th holiday, but volume rose above the 50 dma during this correction and has remained above average throughout this week.

Traders were buoyed by the prospects of a rate cut coming out of last week’s FOMC meeting and were somewhat disappointed by the quarter point cut, but the markets remained positive. Then the China trade negotiations took center stage once again with President Trump’s tweet last Thursday. The markets have recovered somewhat since then, but remain very fragile.

My suggestion to my most conservative clients is to remain largely on the sidelines. Focus on conservative blue chips. Selling ITM calls is a good strategy for income and providing 3-4% percent of protection.

I have worked through a large number of stock charts this week, focusing on stocks that have not broken their 50 dma during this correction. A finer screen would be those stocks that were trading sideways or higher yesterday. The following stocks met both criteria, remaining above the 50 dma during the correction and trading higher on Friday: CMG, EW, HSY, and SBUX.

Be extremely diligent. Watch your positions carefully. In all cases, trip your stops aggressively. Don’t wait and hope in this market.

User Rating: 0 / 5

Star InactiveStar InactiveStar InactiveStar InactiveStar Inactive

The Standard and Poors 500 Index (SPX) opened slightly higher this morning, but began a steady climb late morning that continued until only a few minutes before the close. SPX closed at 3026, up 22 points on the day and setting a new all-time high in the process. SPX opened the week at 2982 and tacked on 1.5% for the week.

Trading volume in the S&P 500 companies continues to run lower than average. It managed to break the 50-day moving average (dma) yesterday, but only came in at 1.7 billion shares today, under the 50 dma at 1.9 billion shares. The markets are setting new highs, but these are fragile highs. Lower trading volume on these new highs suggests a lot of money is on the sidelines. Traders are waiting on the resolution of some key issues: China trade and the Fed’s decision on interest rates.

The Russell 2000 Index (RUT) continues to lag behind SPX and NASDAQ. Russell opened the week at 1550 and closed at 1579, gaining 1.9% this week for a strong showing. RUT took quite a tumble on Thursday, but regained all of that today. Russell never fully recovered from the December correction lows last year. RUT’s all-time high was set at 1741 in late August, 2018. Russell remains over 10% below that all time high. The recent high was set in early May at 1615, about 2% above today’s close. Russell’s bearish inclination is a significant hindrance for a strong bull market. Until these high beta stocks start to accelerate, the bulls are clearly not on a strong “risk on” path.

The NASDAQ Composite index broke its May 3rd high of 8164 on July 10th, but broke down below that support level last Friday. NASDAQ opened above that level on Monday and traded up 1.9% to close today at 8330. Today’s new all-time high for the NASDAQ Composite broke the previous high from this past Wednesday, which, in turn, had broken the high from July 15th. NASDAQ’s price chart pattern is much stronger than Russell’s and even slightly stronger than SPX.
 NASDAQ’s trading volume is low, even weaker than that of the S&P 500 index, having remained below its 50 dma since the July 4th holiday. It is hard to get too excited about strong market days like today when trading volume is downright dismal.

The prospects of a rate cut coming out of next week’s FOMC meeting appears to be the primary bullish motivation for this market. Public interviews by Powell and other FOMC members a couple of weeks ago had convinced many market analysts that a rate cut was on the table for next week’s meeting. That pushed the indices higher. The discussions documented in the last Fed meeting’s minutes (last week’s Beige book) seemed to throw doubt on that prospect and that weakened the market last week. Did today’s GDP number of +2.1% encourage the bulls that a rate cut might be probable after all? Is that what drove today’s bullish run?

The bulls are still driving this market, but anticipation of the restart of the China trade negotiations on Tuesday and the Fed announcement on Wednesday is on everyone’s minds. Therefore, my outlook remains unchanged. Trade with expectations of a sideways to slightly bullish market, but be prepared to hit the stops earlier rather than later. More conservative traders would be well advised to wait until after the Fed announcement on Wednesday before moving additional capital into the market.

User Rating: 0 / 5

Star InactiveStar InactiveStar InactiveStar InactiveStar Inactive

The Standard and Poors 500 Index (SPX) traded steadily higher this week, closing Friday at 3014, up 1.1% for the week. Friday’s trading seemed a little subdued in the morning, but rallied late in the day to push to a new all-time high at 3014. But new all-time highs must be tempered by the weak trading volume. Trading volume in the S&P 500 companies started July almost precisely at the fifty-day moving average (dma) of 2 billion shares. But that was the high for the month thus far. The low trading volume after the holiday last week was to be expected, but trading volume has continued to meander along at low levels this week. This isn’t the sign of a confident bull market.

VIX hit an intraday high on Tuesday at 14.7%, but steadily declined the balance of the week, closing the week at 12.3%. VIX is often called the fear indicator and the market is not panicked by any measure, but it isn’t perfectly calm either. This is a bullish, but nervous, market.

Market analysts watch the small cap stocks carefully as a measure of the market’s comfort with taking on more risk. The Russell 2000 Index (RUT) is composed of small to mid-capitalization domestic companies. Russell closed the week essentially unchanged at 1570 after opening the week at 1574. In fact, without Friday’s strong intraday move of eleven points, RUT would have posted a very negative week. This stands in contrast to the steady gains of the S&P 500 stocks. Russell’s price chart is another indicator of a nervous market.

The NASDAQ Composite index paralleled trading in the S&P 500 this week, setting a new all-time high on Friday at 8244. The pattern in trading volume was also similar to SPX, coming in below the 50 dma since the first of July, and even declining the last three days of this week. NASDAQ set a new all-time high, but without much conviction.

The broad market indices are being cautiously held up by reasonably positive reports concerning the trade negotiations with China, but that could change at any moment with the next news story or rumors from either side of the table.

The prospects of a decrease in the federal discount rate at the upcoming FOMC meeting on July 30-31 is encouraging a bullish mood for the markets, but I think that prospect is unlikely. Interest rates are historically low, and lowering rates is one of the most powerful tools available to the Fed. Basic economic data would have to send up some alarms before the Fed pulls that lever. And economic data is positive on virtually all fronts.

That leaves the China trade negotiations as our principal concern. Given the fact that it could rain on that parade at any moment, the nervousness of this market is not surprising. We see the signs in three principal areas:


•    Consistently low trading volumes
•    Modestly higher volatility
•    Sideways trading in the small caps, as represented by the Russell 2000

Therefore, my outlook remains unchanged. Trade with expectations of a sideways to slightly bullish market, but be prepared to hit the stops earlier rather than later.

User Rating: 0 / 5

Star InactiveStar InactiveStar InactiveStar InactiveStar Inactive

The Standard and Poors 500 Index (SPX) gave back most of last week’s gains this week. SPX closed Friday at 2977, down 19 points on the day, and down 1.4% for the week. The support level to watch is from the early May high around 2950. A secondary support level would be the 50-day moving average (dma) at 2900.

Trading volume in the S&P 500 companies hit a low after the July fourth holiday and has steadily risen for the past two weeks, but remains below the 50 dma. This reinforces the lack of conviction among the bulls. They may not be selling off strongly, but they certainly aren’t buying aggressively either. The Fed meeting next week will eliminate some of the uncertainty holding this market in check. As long as the uncertainty of the China trade negotiations remains, the bulls will remain largely on the sidelines.

VIX spiked up to 14% on Wednesday after opening at 12.6% that morning. Friday afternoon’s sell-off spiked VIX up to 14.5%. I regard volatility levels below 15% to be relatively benign, but this increased level of VIX confirms a moderate level of concern on the part of traders.

Small to mid-capitalization stocks, as represented in the Russell 2000 Index (RUT), may be regarded as the proverbial canary in the coal mine. These are high beta stocks, meaning they will rise faster than the S&P 500 in a bull market and lose value faster in a bear market. Russell stocks are the classic “risk on” and “risk off” stocks, leading bull markets higher and bear markets lower. Russell closed the week at 1548 after opening the week at 1571, down 1.5%, a touch more than SPX’s decline for the week. RUT has been in a steady decline since the beginning of July. SPX and NASDAQ eclipsed their May highs during July, but RUT has yet to recover even its February highs.

After breaking its May highs last week, the NASDAQ Composite index broke that support level on Friday, closing down 61 points to 8147. The pattern in trading volume is similar to the S&P 500, running steadily below the 50 dma since the July fourth holiday. NASDAQ was down 1.4% for the week.

The broad market indices were being cautiously held up by the prospects of a rate cut coming out of next week’s FOMC meeting. The FOMC discussions documented in the last meeting’s minutes were released this week, and it appears that the committee sees the economy as moderately strong, so a rate cut is unlikely. Basic economic data would have to cause the Fed some concern, and the data are pretty solid.

I see three evidences of a nervous market:


•    Consistently below average trading volumes


•    Modestly higher volatility


•    Sideways to lower trending in the small caps, as represented by the Russell 2000

Therefore, my outlook remains unchanged. Trade with expectations of a sideways to slightly bullish market, but be prepared to hit the stops earlier rather than later. More conservative traders would be well advised to wait until after the Fed announcement on Wednesday before moving additional capital into the market.

User Rating: 0 / 5

Star InactiveStar InactiveStar InactiveStar InactiveStar Inactive

The Standard and Poors 500 Index (SPX) declined over the first three days this week, but recovered most of those losses by the end of the week, closing at 2942 today, essentially flat for the week (actually down nine points or 0.3%). The recovery over the past two days seems to suggest that traders are expecting a resolution to the trade negotiations this weekend.
Trading volume ran below average all week, until today when volume spiked to 2.7 billion shares, well above the 50-day moving average (dma) at 2.0 billion shares. I find it curious that we have seen trading volume spikes for the past two Fridays, but below average volumes in between those spikes. Is this the result of bullish expectations for trade news over the weekends?

The volatility index for the S&P 500 options, VIX, was running above 16% earlier this week, but declined to close at 15.1% today. That puts volatility right on the edge. Values below 15% are reasonably complacent, but higher values start to get my attention. The markets are bullish, but not relaxed and confident either.

The Russell 2000 Index (RUT) gapped open higher this morning, closing up twenty points at 1567. In two trading sessions, Russell wiped out four days of losses. This is the most bullish signal we have observed in the small cap index in some time. This is very encouraging because the small caps normally lead bull markets higher. But we need to get a trade deal done with China before we jump on the bulls’ bandwagon.

The NASDAQ Composite index gapped open higher this morning and closed at 8006, up 38 points. NASDAQ outperformed SPX in trading volume with a huge spike up to 4.1 billion shares, well above the 50 dma at 2.1 billion shares. The China trade negotiations continue to be the principal dark cloud hanging over this market. The prospect of an agreement this weekend encouraged traders, resulting in today’s spike in the markets on increased volume.

But that bullish attitude may be premature. Until we see a definitive resolution of the China trade negotiations, this market will be volatile. And that may be especially true this coming week. Even if we have a confirmed trade agreement on Monday, it isn't clear which way this market will move. I remain very cautious.