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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) 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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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) 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%.
This is the home of The No Hype Zone. Join is for 2021.
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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.
