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Alfred E. Neuman’s infamous quote seemed appropriate as we set new all-time record market highs with the economy in tatters. The Standard and Poor’s 500 Index (SPX) closed trading today at 3714, up 15 points. Incredible as it may seem, the S&P 500 marched 4.2% higher this week. The only sobering sign was watching trading volume steadily decline all week.
VIX, the volatility index for the S&P 500 options, reached 37.2% last week and closed today at 20.9% in about ten days. If one ignores VIX and just watches the market indices, you would think a return to 20% volatility was the all-clear signal. When you can sell puts of solid blue chips stocks for close to one percent yield per week, these are dangerous levels of volatility. Don’t be deceived.
IWM, the ETF based on the Russell 2000 group of companies, closed at 221.65 today, down 3.03. But the incredible news is that today’s close culminated a growth rate of 6.5% for this week. This is the classic ultra-strong bull market where the high beta stocks outperform the blue chips as investors scramble for higher gains. It sounds a little frothy, doesn’t it?
The NASDAQ Composite index closed today at 13,856, up 79 and setting another all-time high. NASDAQ outperformed the S&P 500 with a weekly growth rate of 4.8%. NASDAQ’s trading volume has declined since last week and dipped below the 50 dma today.
What a difference a week can make! Last week’s market had all of the signs of tipping over the edge into a downtrend or at least a pullback. This week saw every index gaining 4% or more. The Russell 2000 gained 6.5%. These aren’t strong gains; they are extraordinary gains.
This underscores the need for caution. I am not suggesting burying all of your cash in the backyard. But I am very carefully positioning my stops and closing trades when they trip the stop – no exceptions and no dreams of recovery. In my opinion, this is an excellent time for selling options. But be conservative. Trade only solid blue chip stock options. Don’t use any margin and close at the first sign of trouble.
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The Standard and Poor’s 500 Index (SPX) closed trading Friday at 3714, down 73 points on Friday and down 3.6% for the week. The close occurred at the fifty-day moving average (dma), often a key inflection point for the market. Trading volume spiked up above the 50 dma for the last three days of the week, underscoring the losses.
VIX, the volatility index for the S&P 500 options, closed Friday at 33.1% after spiking as high as 37.5% on Wednesday and earlier Friday morning. These are dangerous levels of volatility.
IWM, the ETF based on the Russell 2000 group of companies, closed down 3.16 points to 205.56 on Friday, down 4.4% for the week. As expected, IWM’s high beta stocks are outperforming the S&P 500 stocks to the downside as the market declined this week. However, IWM remains well above its 50 dma at 196.36.
The NASDAQ Composite index closed Friday at 13,071, down 266 for the day, and down 4.5% for the week. The recent market leaders are leading the market lower this week. NASDAQ’s trading volume remained well above the 50 dma all week but declined in the latter part of the week.
The concerns I have written about in the last several newsletters continue and the “sky is falling” cries are becoming more shrill. So far, I have simply been closing positions that hit their stops, so the majority of my trades remain open. I have not panicked as yet. One positive sign was the slight recovery of the S&P 500 on Friday. Go back and look at the S&P price chart in late February and early March last year and you will see several closes at the lows of the day. Those are serious bearish signals.
Be cautious about entering new trades until we see some evidence of the markets finding support.
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The Standard and Poor’s 500 Index (SPX) turned south late this week, causing many analysts to begin speculating on an imminent correction. SPX closed the week at 3768, down 27 points on Friday. However, it is significant that SPX traded as low as 3750 before bouncing to recover some of the losses. It is much more of a concern when the market closes lower and then also closes at the low for the day. That usually is an ominous sign for the next trading session. But that didn’t happen yesterday. Take a look back at the price chart in late February and early March to see the number of closes at the lows of the day. That’s scary.
Trading volume on the S&P 500 increased and moved above the 50 day-moving-average (dma) Thursday and Friday as the index declined, adding some concern about those declines.
VIX, the volatility index for the S&P 500 options, closed last week at 21.5%, but opened this week higher and peaked intraday Friday at 25.8%, before closing at 24.3%. The decline in volatility Friday afternoon reflected the bounce from SPX’s intraday low on Friday.
IWM, the ETF based on the Russell 2000 group of companies, hit an all-time high on Thursday at 213.94 and closed Friday at 210.75. Friday’s candlestick was a classic doji with the opening and closing prices almost at the same point after trading quite a bit higher and lower during the trading session. Doji candlesticks signal market indecision. This suggests the market could go either way next week.
The NASDAQ Composite index closed Friday at 12,999, down 114 for the day, and down 0.4% for the week. NASDAQ’s trading volume has remained far above the 50 dma over the past two weeks.
I have been surprised by the strength of the post-correction 2020 market. The increases did not seem supported by the historic levels of unemployment and closing of so many small businesses. We have suffered significant economic damage, and our national debt has been pushed even farther out of line by the stimulus spending. Our debt now exceeds our annual GDP and the new congress is talking about adding two trillion dollars to the debt. We now join the ranks of countries like Greece whose debt exceeded their GDP before they went to the EU looking for help. Who will bail out the U.S.?
Predictions of of a market correction are becoming commonplace. To my mind, a market pullback to some degree is inevitable. The question is the timing and the extent of the decline.
Market implied volatility, as measured by VIX, has been running above 20% since February 21st of last year. I suspect this run of higher volatility sets a new record. Of course, the underlying economic, political and health concerns that drive this volatility continue to be exacerbated. It is easy to become accustomed to these levels of volatility, but don’t forget that this level of volatility is warning us of the risk inherent in this market.
Be cautious out there.
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It is difficult to discern a direction for the markets today. The Standard and Poor’s 500 Index (SPX) has steadily tracked higher since early November, but the daily price changes have become more volatile, gaining one day and then giving it back the next day. Many market observers are becoming more concerned about whether the market prices accurately reflect the current economic situation of this country. SPX closed the week at 3841, down 12 points. However, this close represented an increase of 1.3% over this shortened week, but it doesn’t “feel” like the market traded higher. Trading volume on the S&P 500 has remained at or below the 50-day moving average (dma) all week.
VIX, the volatility index for the S&P 500 options, closed Friday at 21.9%. VIX opened Tuesday morning at 23.0% and declined slightly through the week. Historically, these twenty-plus levels of implied volatility are rather high. Often this level of volatility was typical of minor pullbacks and was temporary. It is sobering to realize that it has been nearly a year since VIX was below 20%. VIX spiked up several times in 2018 and 2019 and settled down to levels around 12%. And if we go back to 2017-2018, VIX ran at foundational levels of approximately 10-11%. My point is to caution us not to become accustomed to these high levels of volatility. VIX is flashing caution. Stay alert.
IWM, the ETF based on the Russell 2000 group of companies, hit all-time highs last week and closed Friday near those highs at 215.00. IWM seems to be more solid than the broad market. The stocks that make up the Russell 2000 are the high beta stocks that are sold first when institutions get nervous. Thus far, IWM is holding up well and serves as a bullish signal.
The NASDAQ Composite index closed Friday at 13,543 , up 12 for the day, and up 3.1% for the week. The traditional high-tech stocks continue to lead this market. NASDAQ’s trading volume stands out, having remained well above average for the first four weeks of this new year.
The commentary from the “sky is falling” crowd is increasing in volume, and I certainly understand the underlying concerns. However, we have a clear choice: hide under the bed or remain invested. Solid risk management is especially important in this market.
As I mentioned above, VIX has been running above 20% since early last year. Be sure you have clear stops in place for all of your positions and monitor those positions every day. Stay alert.
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The Standard and Poor’s 500 Index (SPX) opened the new year Monday morning at 3765, but then declined the rest of the day. However, the rest of the week was a different story with gains every day and gap openings higher on Thursday and Friday. SPX closed today at 3825, up 21 points. Trading volume on the S&P 500 increased this week over the previous holiday weeks but didn’t rise too much over the 50-day moving average (dma), so these index price increases are a bit tentative.
VIX, the volatility index for the S&P 500 options, spiked up intraday on Monday over 29%, but declined the rest of the week, closing today at 21.6%. This remains a relatively high level of volatility, even though we may be becoming accustomed to it. Remain vigilant.
IWM, the ETF based on the Russell 2000 group of companies, opened the week at 197.54, but gapped open higher on Wednesday and Thursday, posting new all-time highs both days. IWM weakened today to close down at 207.72. Today’s pause in IWM may be a precursor to next week’s market action in the large cap indices.
The NASDAQ Composite index opened the year at 12,959 and closed today at 13,202, a new all-time high, after strong gap openings higher on Thursday and Friday. NASDAQ’s trading volume was far above the 50 dma all week. The tech sector appears to be alive and well.
This latest bullish run began with the Covid vaccine but was given a boost this week after the election was finally settled. It still puzzles me that the market is trading so strongly. We have suffered significant economic damage, and our national debt has been pushed even farther out of line by the stimulus spending. Our debt now exceeds our annual GDP. We join the ranks of countries like Greece and it didn’t end well for them.
Perhaps the higher implied volatility is derived from those concerns. Higher volatility makes selling option premium very lucrative but don’t forget that this same volatility is warning us of the risk inherent in those expensive options.
As we begin the new year, allow me to brag about Parkwood Capital's services. The Trading Group finished 2020 with a gain of 370%. The Conservative Income service gained 26% and the Weekly Newsletter's trade recommendations gained 44%.
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