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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.