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The Standard and Poors 500 Index (SPX) opened the week at 3144 and plunged nearly one percent to close at 3114 on Monday. But the worst was yet to come. Tuesday’s open was again nearly one percent down, but after trading as low as 3070, SPX recovered to close at 3093. Then Wednesday brought a gap opening higher and the Standard and Poors 500 Index closed today at 3146, almost a perfect round trip from Monday’s open. The bulls are in charge, but they are very nervous. Be careful you aren’t trampled in the stampedes.
Just as we have seen in recent weeks, this week’s market schizophrenia was triggered by comments about the trade negotiations with China. An off-handed comment from President Trump while he was in Europe triggered this sell off, but many times it starts with only a rumored comment from an unnamed insider. Trading volume for the S&P 500 companies continues to run below average, only breaking the 50-day moving average (dma) on Tuesday’s scary gap downward.

The volatility index for the S&P 500 options, VIX, opened the week at 12.7% and closed on Monday at 14.9%. But the severe drop on Tuesday pushed the intraday VIX to 18% before settling back and declining the rest of the week, closing today at 13.6%.

IWM, the ETF based on the Russell 2000 group of companies, has traded much more weakly than the S&P 500 companies all year. That correlation shifted this week. IWM matched SPX’s price action almost exactly, breaking support on Tuesday, but then recovering strongly to close today at 163, slightly higher than Monday’s open. This price action is bullish. Bull markets are typically led by these small to mid-cap stocks. Many analysts call these stocks the “risk off” stocks as traders swing for the fences in a strong bull market. I can’t be that bullish as long as the China trade cloud hangs over the market. But it is a bullish indicator.

The NASDAQ Composite index opened the week at 8673, and closed the week at 8657, up 86 points today – almost a round trip from Monday’s open. NASDAQ trading volume has been consistently running above the 50 dma far more often than the S&P 500 index. NASDAQ’s trading volume this week was at or above the 50 dma every day. That is probably driven by the so-called FANG stocks, FB, AMZN, NFLX and GOOGL. I would add AAPL to this list. The large high-tech stocks have been driving this bull market.

This week’s roller coaster ride was a little scary. That gap down in price on the S&P 500 Tuesday morning was alarming. But then we end the week where we started? This week’s trading is the best evidence yet of the nervous nature of this market. The large institutional traders have their fingers poised over the sell buttons (actually they have programmed their computers, but the poised finger delivers a more powerful image).

On the positive side, the price action of IWM was very bullish. IWM matched SPX toe to toe this week and even closed the week higher than it started. IWM has traded much weaker than the broad market blue chips most of this year.

I am putting more of my cash to work, but this week was unnerving. I still have a significant amount of cash on the sidelines. I won’t be strongly bullish until we settle the trade dispute with China. But it is anyone’s guess when that might happen. Be cautious.