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The Standard and Poors 500 Index (SPX) opened the week at 2675 and trended down all week, losing almost 2% at yesterday’s close. However, today’s market was a different animal, with SPX trading higher by 34 points, or 1.3%, to close at 2663. But before we break out the champagne, it is worth noting that SPX remains down nearly one percent for the year.

2018 has been a rough ride. The February correction took us down by 10.2% and then the April retest of the correction was severe on its own at -7.5%.

Trading volume in the S&P 500 companies has remained relatively low since the February correction, rarely bouncing above the 50-day moving average (dma). Today’s strong move higher was not as positive as it might have been since it occurred on volume of 1.9 billion shares, well below the 50 dma at 2.3 billion shares.

The positive news for this market has occurred over the past two weeks of trading. SPX has traded down close to the 200 dma on four occasions, including today, but has managed to bounce higher each time. My rose-colored glasses were smashed earlier this year, so I don’t think I am imagining this positive signal. The 200 dma is acting as a solid line of support. That is a strong rebuttal to all of the doom and gloom voices that are all too common these days. In fact, I have to wonder if we aren’t talking ourselves into a bearish view of the markets. This market’s squeamish behavior is inconsistent with the economic data.

The analysts at FactSet published a report this week on the occasion of 50% of the S&P 500 companies having now reported earnings for the first quarter. 74% of those companies beat the revenue estimates of the analysts and 79% beat the earnings estimates. This is the best rate of earnings “beats” since FactSet started tracking these numbers in the third quarter of 2003. Today’s jobs report included a new low in the unemployment rate, down to 3.9%, the lowest since the year 2000. The unemployment rate among blacks is the lowest ever recorded. Doesn’t that make you wonder what’s going on with this market? Have we just fallen victim to the negativity that seems so common?

The Russell 2000 Index (RUT) consists of largely domestic companies that are much smaller in capitalization than the blue chips of the S&P 500. These are the so called “risk on” stocks. Thus, it is ironic that this index has performed better than SPX all year. The February and April corrections broke the 200 dma on SPX and SPX has been bouncing off its 200 dma for the past couple of weeks, but trading in RUT this week has been around the 50 dma, not flirting with the 200 dma. RUT closed today at 1566, up 19 points or 1.2%.

The NASDAQ Composite closed at 7210 today, up 121 points or 1.7%. Much of that spurt was fueled by Apple and that price spurt was fueled by Buffett’s investment in Apple. NASDAQ broke through its 50 dma today, but the trading volume remained below the 50 dma.

Early in my market training, I was frequently told that the market is essentially a present value calculation, so it is always looking forward and attempting to price assets on the basis of their future prospects. On that basis, it is hard to rationalize this market. We continue to see economic data and corporate earnings setting records, but it seems as though the market is preoccupied with prospects of doom and gloom at every turn.

I also learned long ago not to trade my carefully analyzed predictions in the face of a market going the other way. I may see many reasons why this market’s nervous oscillations shouldn’t be happening, but they are. It is what it is.

I have pared back on my positions. In my Conservative Income service, I have a preponderance of covered call positions on industry sector ETFs to minimize single stock risk during this earnings season. That probably explains why we are up 8% this year while the S&P 500 is down almost 1%. I am now looking for stocks that are boringly trading sideways during this market’s whipsaws. Calendar spreads placed after earnings announcements on those boring stocks are relatively safe trades, but also with relatively low returns. Iron condors on the large market indices are also becoming more attractive.

Above all, manage your risk.

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It is often humbling to write about the market and speculate on the future trends. I was amused as I thought about some positive advice I gave some clients last week. We ended this week feeling anything but happy. The Standard and Poors 500 Index (SPX) opened the week at 2670 and closed today at 2670 – no need to calculate that percent change. On Thursday, I found reassurance in SPX finding support at the 50-day moving average (dma), but that was short lived as SPX sliced through that support level this morning.

Trading volume steadily increased all week, but only reached its 50 dma today. Trading volume in the S&P 500 companies has remained below the 50 dma all month. The decline in trading volume last week as the market traded higher was disappointing. That suggested the large institutional traders were not entering the market aggressively, even though the indices were rising. Rising trading volume this week, as the market weakened, is a cautionary signal.

The Russell 2000 Index (RUT) mimicked the larger indices this week, trading higher through mid-week, but then pulling back over the last two days. The big difference is the location of RUT’s 50 dma. RUT’s 50 dma is 1543, so while RUT closed down 10 points today to close at 1564, it remains well above the 50 dma.

The NASDAQ Composite broke its 50 dma this morning, finally closing at 7146, down 92 points. NASDAQ’s trading volume has been flatter this week and remains well below its 50 dma. It may seem bizarre to say this, but I find lower trading volume as the market declined the past two days is somewhat reassuring. Higher volumes in declines indicate more panic. And that’s never good.

SPX’s volatility index, VIX, declined Monday and Tuesday, but then ticked higher the rest of the week, closing today at 16.9%. This remains relatively modest historically, but a concern nonetheless.

I cautiously opened the Apple diagonal spread in our trading group a couple of weeks ago, and that was fortunate timing as it turned out. After Taiwan Semiconductor delivered bearish views of the semiconductor market for the balance of the year, it triggered a selloff in many stocks dependent on semiconductor chips, and Apple was one of the unfortunate casualties. Apple dropped 5 points on Thursday and I closed our diagonal spread for a 39% gain. One of the advantages of a diagonal spread is the lowering of the cost basis as one rolls the short options each week. That served us well in this case, driving our cost basis from $440 to $287 over the course of the trade.

This is a perplexing market. The underlying economic data are strong, yet traders appear to be very nervous and anxious to sell on any pretext. One of the old adages about the market is that a bull market climbs a wall of worry. This market is just the opposite. It reacts strongly to any and every piece of negative news. Be careful out there. Happy days are not here again...

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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.

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This week's relatively calm trading was certainly a welcome change. The Standard and Poors 500 Index (SPX) closed today at 2656, up about 1.5% for the week, so we celebrated a positive week for a pleasant change. I heard some analysts begin to celebrate the S&P 500 moving back into positive territory for the year this morning, but that hope was short-lived. We came close, but the market retreated into the close. SPX remains down 1% for this year. At least we didn’t have any stomach-wrenching declines this week. At this point, that fact alone is worth celebrating.

Trading volume in the S&P 500 stocks declined all week. That isn’t encouraging. The next big resistance level is the 50-day moving average (dma) at 2599. Institutional traders will be watching for that break-out before “going all in”.

Trading in the Russell 2000 Index (RUT) matched its big brothers this week, climbing out of the hole, but then pulling back today.

SPX’s volatility index, VIX, declined steadily this week, closing today at 17.4%. You have to go back to the middle of March to find a lower value of VIX. That reflected the calming effect of this week’s trading.

Several of the large banks announced earnings this morning and the large prominent names did very well. Citibank, JP Morgan and Wells Fargo all beat their earnings estimates. Those stocks traded higher in the pre-market but gave up those advances during the day. That is not a good sign. Perhaps traders are worried that excellent earnings growth will prompt the Fed to raise interest rates even more aggressively to keep inflation in control, but perhaps at the expense of the economy’s growth.

The price to earnings ratio for the S&P 500 is now at 16.1, right at the five-year average. That would seem to suggest this pullback has had the expected sobering effect on the market. But the reaction to the large banks' positive earnings may suggest that positive earnings won’t be enough during this earnings cycle. FactSet reported that earnings estimates have grown from an average of 11.4% growth on December 31st, to 17.3% today. That level is unprecedented and should be very bullish for the market. The essence of stock price evaluation is derived from the projected future cash flows of the stock.

I have been slowly testing the waters a bit. The Apple diagonal spread we entered in the trading group last week is doing very well, now up 52%. The NFLX calendar spread we entered as a play on earnings is doing well. But I remain cautious. Today’s reaction to the banks' earnings and the declining trading volume all week are my principal concerns.

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We suffered a down market this week with the Standard and Poors 500 Index (SPX) opening Monday at 2791 and closing today at 2752, down 39 points for the week. In fact, we lost five points in the last two minutes of trading this afternoon. That will give us something to think about this weekend. Is this a residual effect of the correction? Or is this a market reaction to the discussion of trade tariffs?

The healthy effect of a correction is to adjust prices to more reasonable levels. Maybe the market is sending us a message something like:

The market high of 2873 toward the end of January was definitely over-valued.

Recovering over 70% of the correction by the end of February was too much, too soon.
Trying for that high again last week was still too much, too soon.

Perhaps the recent market range for SPX from the low this month to the high last Friday represents the trading range for the near-term future?

The Russell 2000 Index (RUT) has outperformed SPX handily since the correction and came very close to matching its previous all-time high last Friday. But this week took the wind out of RUT’s sails, closing today at 1586 after opening the week at 1602.

The NASDAQ Composite was even more bullish than RUT last week, breaking its previous all-time high last Friday and then again on Monday. But NASDAQ just settled lower the rest of the week, closing today at 7482.

Most analysts attributed the market weakness two weeks ago to trade tariff talk and fears of a trade war. Then they declared tariffs old news and cited the excellent jobs report as the driver of last Friday’s strong market. But this week’s market weakness is now blamed once again on fears of a trade war.

I saw the Secretary of Commerce, Wilbur Ross, interviewed last week and his analysis of the proposed 25% steel tariff claimed it would only add about $150 to the cost of the average new car. That seems pretty innocuous. But then I saw a Congressman claiming his study concluded the proposed steel tariffs would result in the loss of five jobs in our steel consuming industries for every job gained in our steel industry. Both of these conclusions can’t be true. Perhaps we have another case of the statistics being manipulated to suit a particular agenda.

Of course, we can’t forget that Trump is the consummate negotiator. Perhaps the end result of all of this tariff talk will be some relatively palatable tariff adjustments and all of the fear mongering was unnecessary.

I am inclined toward the alternative explanation that this is simply the market’s ongoing correction: first the market over shot to the downside and bounced hard, but overshot on the upside, and swung back lower, and so forth. If this explanation holds  any water, we should see the market oscillations slow in amplitude, resulting in a range bound market for a few weeks with the ultimate result of a more reasonably priced market. If I stand back and look at the big picture of the market, this explanation appears quite reasonable. The S&P 500 price chart does look like oscillations that are dampening on each cycle. If we accept that hypothesis, what market posture should we take?

The underlying bullish strength of this market is undeniable. Given that premise, I will be trading based upon sideways to slightly bullish expectations. Stocks like GRUB and PANW have been largely unaffected by the market uncertainties and can be played full out bullish. Stocks like AAPL are best played with trades like diagonal call spreads that allow for some slow trimming of the cost basis over a few weeks.