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The Standard and Poor’s 500 Index (SPX) has been stair stepping its way higher since early November. Last week was the step down and this week was the step up to a new all-time high set yesterday. SPX opened the week at 3675 and closed today at 3709, down 13 points on the day, but SPX remained up just under one percent for the week. Similar to last Friday, today’s trading ended with a long lower candlestick shadow that often foretells bullish future price action. It is a good sign when the sellers push prices down to the low for the day, but the buyers come in to recover most of those losses before the close of trading.
Trading volume on the S&P 500 spiked higher on this quadruple witching Friday, the result of the simultaneous expiration of stock index options, stock index futures, stock options, and single stock futures. The expiration of these products coincide four times per year on the third Fridays of March, June, September and December. SPX trading volume hit 4.1 billion shares today, much higher than the 50-day moving average (dma) at 2.5 billion shares.
VIX, the volatility index for the S&P 500 options, opened the week at 22.7% and closed today at 21.6%, but that doesn’t tell the whole story. VIX traded as high as 23.8% intraday before declining into the close and once again confirming the nervous nature of this market.
IWM, the ETF based on the Russell 2000 group of companies, continued its barn burning run higher this week, opening Monday at 191.96 and closing today at 195.96, up 1.8% for the week. As one may see from the price chart, IWM is trading higher with only a couple of minor pauses. The strong behavior of these small to mid-cap stocks is a very bullish sign for the entire market.
The NASDAQ Composite index closed today at 12,756 and wins the prize for the strongest performance of a broad market index this week. NASDAQ opened the week at 12,447 and today’s close represented a stellar gain of 2.5% - in one week! Surprisingly, NASDAQ’s trading volume did not reflect the normal quadruple witching spike.
The most significant bullish signal for the past month or so has been the bullish price action of the Russell 2000 index. Whereas the other broad market indices have gained and paused as they traded higher, Russell has not lost a beat. Last week Russell continued its steady gains while the other indices lost ground. This week, Russell tacked on a gain of nearly two percent while the broad market, as best represented by the S&P 500, managed to gain less than one percent. These are the high beta stocks that tend to be sold first when the large institutional players get nervous, but they aren’t being sold; they are being bought.
The conventional wisdom gives credit for this bullish market to the Covid vaccine. While I don’t see an imminent economic recovery unfolding, the market is a future discounting mechanism, and the current strong market reflects the conviction that the worst is behind us. I hope the market has 20:20 vision.
I sound like a broken record, but I must continue to remind us that twenty-plus percent volatility is historically high. 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.
Quantitative evidence is found in the year end results of our Conservative Income trading service. With our December positions closing this weekend, this service stands at a gain of 26% for 2020, while the S&P 500 is up 14%. Selling those expensive options was indeed lucrative. More importantly, we demonstrated the strength of this style of trading during the March correction. While the S&P 500 index lost 35%, we lost 9%. More importantly, our portfolio recovered those losses in thirty days while it took SPX five months to crawl out of the correction. Join us in Conservative Income as we start a new year.
I won't be writing any blogs for the next two weeks. I wish you and your families a very Merry Christmas and a healthy and prosperous New Year.
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The Standard and Poor’s 500 Index (SPX) ended its bullish run at the market opening of 3706 on Wednesday. That bullish run began back in early November, but the last three days have taken the market a little lower each day. SPX opened the week at 3695 and closed today at 3663, down 32 points or 0.9% on the week. Perhaps it is only a breather in a bullish market. The long lower candlestick shadows yesterday and today were somewhat encouraging. Large declines that end the trading session at the low for the day are serious bearish signals. Trading volume on the S&P 500 ran below the 50-day moving average (dma) every day this week with the exception of Wednesday. That suggests that whatever selling drove the week’s lackluster performance was muted.
VIX, the volatility index for the S&P 500 options opened the week at 22.0% and closed today at 23.3%, an increase of almost 6%. We were given a glimmer of hope when VIX spiked up over 25% today but could not hold that high and dropped back to close at 23%.
IWM, the ETF based on the Russell 2000 group of companies, set itself apart this week. It was the only broad-based market index that posted a positive week, opening Monday at 188.23 and closing today at 190.30, up 1.1% for the week. These are the “risk on” high beta stocks.
The NASDAQ Composite index closed today at 12,378 for a loss of 28 points for today and a 0.7% decline for the week. NASDAQ’s trading volume remained above the 50 dma all week but fell well below the 50 dma today with 3.6 billion shares, significantly lower than the 50 dma at 4.2 billion shares.
If we use the S&P 500 index as our market surrogate, we now stand at a positive gain of nearly 13% for the year. That is remarkable when we recall that ugly 35% correction in March. If we shift our focus to the gains since the beginning of November through today, we are up 11.1%. Given all of the turmoil of rioting and protests leading up to the election and even the remaining uncertainty surrounding some of the election results, a double-digit gain for November and the first week of December is rather amazing.
The Russell 2000 index has taken the role of the market leader over the past several weeks, losing less when the market paused and gaining more when it traded higher. Russell was the only broad market index to post a positive gain this week. That is significant. These are the high beta stocks that tend to be sold first when the large institutional players get nervous, but they aren’t being sold.
Perhaps this market is anticipating the progress on a Covid vaccine that appears imminent. In any case, this market continues to hold up rather well, in spite of the uncertainty of the election, the pandemic and the vaccine. We may be becoming accustomed to these higher levels of implied volatility, but it pays to remind ourselves that twenty-plus percent volatility is historically high. I have been selling calls and puts since early April, and this has resulted in strong gains. As I rolled out several positions and created new ones today, I noticed that almost every option sale was yielding over one percent for one week! This isn’t normal and it carries an implicit warning. We are not collecting these rich option premiums because risk is low.
As the farmers say, make hay while the sun shines. But keep a close watch on the skies. High levels of implied volatility imply that storms may be coming.
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You may recall the old joke about the optimist and the pessimist that fell off a skyscraper. As the optimist passed one of the intermediate floors, he was heard to say, “So far, so good.” It would be unrealistic to expect another market performance this week like we saw last week. But the markets did hold. The Standard and Poor’s 500 Index (SPX) gained 48 points on Friday, closing at 3585, but that close was almost precisely where SPX opened the week, at 3583. Friday’s close matched SPX’s all-time high set on September 2nd. Monday’s trading volume matched record highs earlier this year, but volume fell each trading session this week with Friday’s volume of 1.93 billion shares coming in well below the 50-day moving average of 2.53 billion shares.
The volatility index for the S&P 500 options, VIX, opened the week at 24.8% and closed yesterday at 23.1%. Intraday lows all week ranged around 22.5%. These are the lowest levels of volatility since mid-August. The split nature of the election with neither party dominating the Congress appears to have reduced uncertainty, always a bullish factor for the markets.
IWM, the ETF based on the Russell 2000 group of companies, opened the week with a huge gap up in price, but then backed off that high and traded sideways the balance of the week, closing Friday at 173.50. IWM gained 6% from last Friday’s close to yesterday’s close. That represents a bullish move for the entire market.
In contrast to last week, the NASDAQ Composite index lagged behind this week, opening at 12,047 and closing Friday at 11,829, down 1.8% for the week. NASDAQ’s trading volume was similar to that of the S&P 500 companies, spiking Monday but declining the balance of the week.
This week’s market behavior was essentially sideways with minimal change in either direction. After the very strong market last week, this sideways move was very bullish. We could have easily seen a rash of profit taking this week and given back much of last week’s gains.
I am trading this market more aggressively now. We have survived the cautionary September - October period when so many crashes have occurred in the past. Barring some unforeseen news events, I think the bulls will remain in control. Volatility has declined but remains relatively high from a historical perspective. Watch your positions diligently.
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The markets continue to take a pause after the strong run higher since the beginning of November. The Standard and Poor’s 500 Index (SPX) just traded sideways to slightly lower this week, closing today at 3558, down 24 points for the day and down 1.2% for the week. To keep it in perspective, SPX gained over 333 points or ten percent since the first of the month. So, we have lost very little of those gains. That is significant. Trading volume for the S&P 500 companies declined steadily this week and ended the week well below the 50-day moving average (dma).
The volatility index for the S&P 500 options, VIX, was unchanged this week, opening at 23.7% on Monday and closing today at precisely 23.7%. But stay awake. This remains a heightened level of volatility.
IWM, the ETF based on the Russell 2000 group of companies, traded slightly higher this week, opening the week at 176.49 and closing today at 177.50, up about one half of one percent. That was a small gain, but the stocks of the Russell 2000 tend to be the high beta stocks that lead markets higher as the institutions shift to “risk on” mode.
The NASDAQ Composite index just treaded water this week opening at 11,847 and closing today at 11,855, essentially unchanged for the week. NASDAQ’s trading volume was much stronger than that of the S&P 500 companies, increasing almost every day this week.
After a strong bullish run since the first of November, it would not have been surprising to see traders taking profits, but the market has essentially held its gains. The strong behavior of the Russell 2000 index is particularly encouraging. The largest risk we face in this market derives from the external events and rumors. Each day seems to bring news or rumors about Covid-19, the development of the vaccines and, of course, the sorting out of the election results. But the market held up rather well this week as some states chose to lock down once again. As the old saying goes, the beatings will continue until morale improves. I don’t know how many small businesses will survive. Barring some surprises next week, I think the bulls will remain in control. Volatility has declined but remains relatively high from a historical perspective. Watch your positions diligently.
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It is hard to overstate the strength of the market this week. The Standard and Poor’s 500 Index (SPX) essentially recovered the losses of the past three weeks in five trading sessions this week. SPX opened the week at 3,296 and closed yesterday at 3,509, up 6.5% in one week! That included three trading session opens with large opening gaps higher. Even Friday’s pause in this week’s strong run had a positive aspect in that traders took the market lower, but that slight pause was seen as a bargain as traders pushed the market higher to close very close to Friday’s open. SPX trading volume spiked on Tuesday but trading volume then declined and closed the week well below average.
As one might have expected, the volatility index for the S&P 500 options, VIX, made a dramatic decline this week as SPX headed higher. VIX opened the week at 38.6% and closed yesterday at 24.5%, roughly at the base level of the past couple of months.
IWM, the ETF based on the Russell 2000 group of companies, ran higher this week, largely in parallel with the broad market indices. IWM opened the week at 154.77 and closed Friday at 163.62, up 5.7%. Although IWM’s increase this week was less than that of the S&P 500, it is worth noting that IWM didn’t decline as far in October as the broad market indices.
The NASDAQ Composite index was the star in this bullish market run this week, closing at 11,895 Friday, up 8.0% for the week. The high-tech stocks that were the center of the bullish run earlier this year have returned to center stage. Unlike the S&P 500, NASDAQ trading volume gained steadily this week.
All of the broad market indices made a strong recovery this week. Everyone has their own explanation, but I think the assessment to which I personally subscribe is that the market is reacting very positively to the prospects of a split election result with neither political party dominating. Many may feel that this election result is less than optimal, but markets prefer minimized economic and political changes simply because that minimizes the prospect of unintended consequences, resulting in reduced risk.
Another indicator of the rapid price swings of this market is seen in IBD’s market assessment that has moved from Confirmed Uptrend to Market In Correction, and then back to Confirmed Uptrend in only 33 trading sessions or about six weeks. I have not done the research, but I suspect this may be a record round trip.
I would caution readers about returning to the market too aggressively. This is especially true in two cases. If your risk profile is more conservative, then caution remains the rule. Even if you are willing to take on more risk, a significant criterion is whether you are able to monitor your positions closely throughout the day. This market moves quickly.
I have personally started investing more capital into the market this week, steadily increasing each day as the market continued higher. But the need for caution remains.
