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The Standard and Poors index (SPX) encouraged us yesterday with a strong recovery, but it was just a head fake. SPX closed at 4538 today, down 39 points or 0.9%. The S&P 500 index lost two percent this week and has now lost nearly 4% since its opening at 4712 on November 22nd. Trading volume was above the 50 day moving average (dma) all week, which hasn’t happened very often this year. Over the past several months, SPX trading volume has tracked at or below the 50 dma. This increase in volume underscores this bearish move in the market.
VIX, the volatility index for the S&P 500 options, opened trading this morning at 27% and spiked up to 35% before settling down somewhat, closing at 30.5% today.
I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. IWM closed today at 214.71, down 4.05 or 2.1%. IWM opened the week at 226.22, so the week’s loss was over five percent!
The NASDAQ Composite index closed today at 15,085, down 296 points or 1.9%. NASDAQ opened the week at 15,719, setting up a loss of a little over four percent for the week. Trading volume was mixed this week, below average on Monday and Friday, but above the 50 dma for the middle of the week.
Last week’s strong decline on Friday of Thanksgiving week surprised me, but Monday’s positive opening seemed to suggest Friday’s sell off was excessive. Then the market sold off even further on Tuesday and Wednesday. Just like an abusive husband, the market turned nice on Thursday and assured us everything was OK. Today’s market was mixture of the extremes, with the S&P 500 opening higher and then plunging to an intraday low of 4495, before recovering 43 points to close at 4538. I may be desperately searching for a positive signal, but that late recovery today was indeed a hopeful sign. And that bounce was duplicated in NASDAQ and the Russell 2000.
But I cannot ignore that the S&P 500 index is now down 4% from its most recent high. Similarly, NASDAQ is down 6% and the Russell 200 is down 12%. This is becoming serious. Absent a sustained bounce next week, it may be time to close many of our trades.
In closing, I ask you to consider a simple question. What exactly needs to happen to allow the current restrictions on our freedoms to end? Covid 19 is no different than any other coronavirus. It will continue to mutate. The vaccine has not proven to be the savior we were promised, and the target is moving. When will it end?
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The Standard and Poors index (SPX) fell out of bed this morning, closing the shortened trading session at 4595, down 107 points or 2.3%. This was an extreme move in at least two aspects. First of all, one doesn’t expect significant market moves during holiday weeks. Many traders are away from their desks and trading is normally more sluggish. Secondly, today’s drop handily broke support around 4647, set during the last three days of trading last week.
VIX, the volatility index for the S&P 500 options, gapped open much higher this morning, opening at 26.6% after closing Wednesday at 18.6%. VIX ran as high as 28.5% and down to 23.9%, before settling near its open at 27.4%. Those VIX divergences of the past few weeks caught up with us.
I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. IWM closed today at 223.59, down 7.99 or 3.5%. IWM has traded steadily lower since November 8th and gapped open lower this morning and broke the 200 dma before recovering to close just slightly below the 200 dma. I wondered aloud last week if IWM was the canary in the coal mine – yes, it was. I should have paid attention!
The NASDAQ Composite index gapped open lower this morning and closed the shortened trading day at 15,492, down 354 points or 2.2%.
Last week, I wrote: “A severe correction is historically very unusual for a holiday shortened week like we will have next week, but I am still cautious.” I should have been more cautious, but I believed it unlikely that we would see a severe correction in a shortened holiday week. The market has a habit of surprising our predictions based on history.
My cash level increased a bit this week, from 58% to 60%, so the damages to my portfolio were minimal. Today’s price action seemed extreme to me. The conventional wisdom blamed a new covid variant. We have known that the common flu, a coronavirus like covid 19, mutates almost continually. That is why the flu vaccines have never resulted in perfect protection. That didn’t seem to stop us from leading our normal lives. We seem to have forgotten what we learned in the past, but it is difficult to learn when you are panicked.
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The Standard and Poors index (SPX) finally took a breather this week, closing today at 4682, up 33 points or 0.7%. SPX opened Monday at 4701 so the index was virtually unchanged for the week (down only 19 points). Trading volume has been lackluster this week, running at or slightly below the 50-day moving average (dma) all week. This level of trading volume is actually encouraging, since a spike higher on Tuesday and Wednesday as the market declined would have been much more bearish.
VIX, the volatility index for the S&P 500 options, closed today’s trading at 16.4%, virtually unchanged from last Friday’s close. VIX opened the week at 17.2% and spiked nearly to 20% on Wednesday before beginning a slow decline. The VIX divergences we observed last week did in fact predict the market’s decline this week, but fortunately it was not too severe.
The NASDAQ Composite index followed the other market indices this week, closing today at 15,861, down 0.8% for the week. NASDAQ posted a 1.0% gain in today’s trading to make up a large proportion of the week’s losses. NASDAQ’s trading volume ran above the 50 dma all week but declined to the average today.
The VIX divergences we observed last week did presage the pull back we observed this week, but it has proven minor thus far. Today’s strong market served to reassure many traders, including me. It is actually very healthy and normal for strong bull markets to take pauses or breathers as they rise. I am still left wondering about the absence of solid economic underpinnings to justify such a strong market. In spite of my doubts, my cash level decreased to 35% this week. I am doing my best to be selective in my trades but also take advantage of this bull market while I have the opportunity.
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The Standard and Poors index (SPX) recovered the losses of last week, closing today at 4698, down 7 points. SPX opened Monday at 4689 so the index was slightly higher for the week, up 0.2%. The S&P 500 set intraday
all-time highs early in November, but then took a minor tumble on November 9th and 10th. This week’s trading took the index back to those highs, but SPX pulled back both times that it touched that resistance level this week.
Trading volume climbed steadily this week and moved above the 50 dma for the past two days. That was solid reinforcement of the S&P 500’s steady climb higher this week.
VIX, the volatility index for the S&P 500 options, closed today’s trading at 18%, up a full percentage point from Monday’s open. VIX moved higher the last three days of this week, as the market moved higher on Thursday and opened higher this morning. The VIX divergences we saw last week have continued but have not been followed by the expected downturn.
I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. IWM closed today at 232.72, down 2.14. Unlike the other broad market indices, IWM has declined steadily this week, declining 3.3%. In fact, IWM has been steadily declining since 11/8. Is this the canary in the coal mine?
The NASDAQ Composite index gapped open higher this morning, setting a new all-time high with a close today at 16057, up 64 points and up slightly over one percent for the week. High tech is hot. Can it carry the market? NASDAQ’s trading volume ran above the 50 dma all week but fell well below average today.
VIX divergences occur when the S&P 500 index trades higher, but the VIX also moves higher. This suggests that the large institutional traders are concerned about the market and are bidding up the cost of the SPX puts. In my experience, VIX divergences are rare and are nearly always followed by a reasonably significant downturn. Even though that has not happened here, I still am concerned. The solid down trend in IWM is a serious warning sign. In addition, the S&P 500 index has now recovered its losses, but it appears to be hesitating as it approaches those highs from early in November. It could go either way from here. My cash level increased to 58% this week as I closed positions and chose to open fewer new positions. A severe correction is historically very unusual for a holiday shortened week like we will have next week, but I remain cautious.
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The Standard and Poors index (SPX) set several new all-time highs again this week, closing the week at 4698 for a weekly gain of 1.9%. I don’t believe I have ever seen the S&P 500 index move so far and so quickly. It worries me. Trading volume has reinforced this bullish run, starting at the 50-day moving average (dma) on Monday and then exceeding the 50 dma all week.
VIX, the volatility index for the S&P 500 options, closed today’s trading at 16.5%. VIX opened the week at 16.9% and steadily declined until Thursday when it posted a small gain to close at 15.4%. Today, it moved up a little over one point to close at 16.5%. We call these VIX divergences when both the VIX and the S&P 500 index rise in the same trading session. VIX divergences are rare and here we see two in succession. The market often pulls back after a VIX divergence. It is as though the big players see dangers on the horizon and start to buy protection even as the market continues higher.
I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. IWM has been extremely choppy for the past six months and that trading pattern continues. While the S&P 500 has moved up over 7%, it finally broke out of jail on 10/28 and has posted a strong run, setting several new all-time highs this week.
The NASDAQ Composite index is matching the performance of the S&P 500 index this week, setting a new all-time high every day and closing at 15972 today, up 2.8% for the week. NASDAQ’s trading volume ran above the 50 dma all week but declined to the average today.
When I look at the broad market indices, the S&P 500 index and the NASDAQ Composite, everything seems remarkably rosy. Even the Russell 2000 index has joined the “setting all-time highs” party. I have been concerned about this market for several weeks, simply because of marginal economic data that don’t support this booming market. The first VIX divergence posted yesterday when VIX and SPX both increased. Normally, these positive divergences, where the market is up, result in a market decline the next trading session. I think the extremely positive jobs report this morning set a very bullish tone, but that waned as the day wore on. Imagine my surprise this afternoon when I saw that we had posted another VIX divergence. I acted on that observation and closed several positions. I will relax a little more easily this weekend.
