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Let’s begin our analysis of the patient with a review of his recent history. The Standard and Poors 500 Index (SPX) closed at 2581 on February 8th, down 10% from the high on January 26th. The rest of February and early March were textbook post correction trading: a recovery followed by a test of the correction lows. Then it appeared we were out of the woods. But SPX closed on March 23rd at 2588, which was not only coincident with the February 8th low, but also the 200-day moving average at 2585. The market thrashed about last week and began this week with another retest of the February 8th correction low. Monday’s close was 2582, only one dollar off of the close on February 8th.

Then the patient recovered and the gap open yesterday morning appeared to be what we were expecting: the correction low has been tested and we are on our way to a full recovery and can put the correction behind us. But our patient had a relapse today, losing 58 points, or 2.2%, to close at 2604, just above the 200 dma at 2594.

The market’s fall in early February was triggered by fears of a trade war after President Trump announced he was considering 25% tariffs on imported steel and aluminum. The EU, Britain, and Canada all complained and threatened retaliation. Then back room negotiations exempted those countries from any new tariffs. Then a deal was announced with South Korea with concessions on both sides. That left China, the principal supporter of North Korea. Perhaps more than tariffs are on the table.

Let’s return to the SPX price chart. The February 8th correction was accompanied by extreme trade volume spikes. Last week’s market weakness resulted in trading volumes that barely reached the 50 dma. This week’s trading volume was even more benign, starting at the 50 dma and declining all week. How is that possible with these extreme market swings?

Given the wild swings and reversals in SPX this week, volatility has been surprisingly steady and mild. VIX closed at its high for the week on Monday at 23.5% and hit its low yesterday at 19%. But today’s reversal didn’t seem to panic traders, with VIX closing at 21.5%.

There is a dichotomy in this market analysis. If I just focus on the extreme price swings and price reversals day after day, I am ready to panic and look for psychiatric help.  But low trading volumes and relatively low volatility are sending us a very different message. An additional fact from the SPX price chart isn’t consistent with the “sky is falling” conclusion: the combination of the lows from the February correction and the 200 dma are holding very well as support. That level has been tested five times over the past two weeks of trading, and it has held. That is powerful support.

What is my diagnosis for the patient, Mr. Market? He is nervous, afraid of every shadow, and dives under the table after every tweet from President Trump. But he has not yet fallen out of bed. The 200 dma is holding.

I am slowly and selectively picking my spots, e.g., the Apple diagonal spread I opened this week. Apple is drowning in cash as a result of the tax reform bill. Strong stock buy-back programs and increasing shareholder dividends are most likely on the drawing board for the earnings announcement on May 1st. Analysts are already increasing their price targets.

Keep your powder dry.