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The broad markets slowed this week, with the Standard and Poors 500 Index (SPX) closing Friday at 2804, up 19 points for the day, but dead flat for the week. It appears that SPX bounced off resistance around 2817, the highs reached in mid-October and early November after the first couple of downdrafts last fall. It will be difficult for the market to make new highs until the trade negotiations with China reach a conclusion. Trading volume on the S&P 500 continues to run well below average, but trading volume broke above the 50-day moving average (dma) on Thursday’s decline. It is a nervous market.
The S&P 500 volatility index, VIX, closed at 13.5% on Friday, almost precisely at its close the previous Friday. Volatility rose this week as the market weakened, but then declined Friday as the market strengthened. This level of volatility is far from calm and complacent, but not really alarming either. It just underscores the cautious nature of this market.
Whereas the S&P 500 index solidly broke above its 200 dma last week, the Russell 2000 Index (RUT) cannot quite make that break higher. This week’s trading just tracked sideways along the 200 dma. The severity of last fall’s corrections is evident in RUT’s chart with the 50 dma so far below the 200 dma. The gap is closing, but remains significant.
The NASDAQ Composite index closed Friday at 7595, up 63 points. NASDAQ confirmed last week’s break out above its 200 dma by consistently trading above the 200 dma all week. Wednesday’s weakness bounced off the 200 dma to recover for a gain and close higher.
My analysis of the market’s condition remains the same as the past several weeks. The series of corrections that lasted through December 24th were not founded on solid economics. The excellent revenues and earnings reported during this earnings cycle are exceptional, but you wouldn’t know it from the broad market averages. The market has recovered significantly, but the China trade negotiations remain the largest worry for market analysts.
My market index iron condor positions are all profiting from this slowly rising and almost sideways market. We now have booked a full year with no losses.
In spite of the overall market being rather sluggish this week, a few stocks continue to make new highs. CYBR, LLY, IBRT, and XLNX all were called away from me this week because the stock price had traded so much higher that I could not roll the calls out for a reasonable credit.
Until we see a definitive resolution of the China trade negotiations, this market will be volatile. Some stocks are trading bullishly in spite of the overall market. Be picky and be cautious.
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The Standard and Poors 500 Index (SPX) has traded higher since December 26th and closed Friday at 2707, up 2.3% for the week. Monday and Tuesday of this week, together with most of last week, consisted of a sideways pause in this rally, but the last three days were very strong, including two gap openings higher. Trading volume in the S&P 500 remains below average, as it has since December 26th, the beginning of this bullish run. Volume only exceeded the 50 dma once this week. This suggests that the large institutions remain uncertain about this market.
Volatility, as measured by the S&P 500 volatility index, VIX, declined for the last three days, closing Friday at 16.1%. I normally think of 15% as the borderline before I become concerned. By that standard, we should remain cautious.
The Russell 2000 Index (RUT) broke through the resistance set by the February correction low at 1464 last Friday (1/25), and stayed solidly above that resistance level this week. Similar to the S&P 500, Russell had strong positive days for the last three trading sessions, closing Friday at 1502, up 3 points.
The NASDAQ Composite index traded higher on Wednesday and Thursday, but was held back Friday by Amazon. Traders were disappointed with Amazon’s earnings announcement and weak forward guidance on Thursday evening. AMZN took it on the chin Friday, losing 92 dollars per share or 5.4%. That resulted in the NASDAQ Composite trading weaker than the other broad market indices.
The market’s recovery since December 26th has been impressive. The S&P 500 has gained 15% since the opening on December 26th. But we should keep that gain in perspective. Today’s level is equivalent to that of October 23rd, just before we tipped over to the October correction low on October 29th. In spite of our strong recovery in January, we remain about 8% below the highs in early October before the series of fall corrections began.
The January Barometer was developed by Yale Hirsch, creator of the Stock Trader’s Almanac, and this indicator has an 88% record of success since 1950. The essence of the January Barometer is that the S&P 500 index for the year will follow January’s performance. Yesterday’s close made it official with a 15% gain; the January Barometer is now in the books, predicting a positive year for the S&P 500 in 2019. That would be a welcome prognosis after last year’s 7% loss. However, traders remain concerned about continued political turmoil and the outcome of trade negotiations with China. Each day’s market is subject to the latest news or even rumors of news. That makes it dangerous for traders.
I am focusing on stocks that have weathered the fall storm of corrections well, and are now trading well above their 50 and 200 day moving averages. For example, take a look at ADI, ADSK, NOW, PANW, and PAYC. I remain in a more conservative stance during this bullish run. When I can close trades with even modest gains, I am taking that opportunity. This is a nervous market, and so am I. Be cautious.
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It now appears that this severe correction hit its low on December 24th, when the Standard and Poors 500 Index (SPX) closed at 2351, representing a decline of 20% since October 3rd. SPX closed Friday at 2532, up 84 points on the day. The major market indices rallied strongly the day after Christmas, and gave traders hope. Technical analysts often look for what they call a follow through day after a correction low is recorded. This follow through day is considered the signal that traders may once again enter the market with some confidence that the correction is past. One begins counting days after the strong bullish move following the correction low (December 26th). The day count continues as long as the low price of day one isn’t broken. On day four or later, the analyst watches for a strong bullish trading day with volume equal or higher than the previous day. When that is achieved, the follow through day has occurred. Friday’s strong push higher satisfied the criteria for the follow through day. Trading volume in the S&P 500 has run below the 50-day moving average (dma) throughout the holidays. Thursday and Friday’s trading volume finally reached back up to the 50 dma.
Volatility, as measured by the S&P 500 volatility index, VIX, closed yesterday at 21.4%. The high point for VIX came on December 24th at 36%. This was almost an exact match of the peak in volatility in the February correction at 37%.
The Russell 2000 Index (RUT) closed yesterday at 1381, up 50 points. Russell has led this correction, down 25% from early October to December 24th. The NASDAQ Composite index closed yesterday at 6739, up 275 points. NASDAQ lost 23% from early October to the low on December 24th. I am a little surprised that NASDAQ’s correction wasn’t the largest of the broad market indices given the damage incurred by many of the high-tech names in the NASDAQ. Russell has led this correction from the beginning, trading lower and more consistently lower week after week.
Price trends since December 24th have been reassuring and the achievement of the follow through day this week probably contributed to Investors Business Daily changing their market assessment on Friday from “Market in Correction” to “Market in Confirmed Uptrend”.
I have never understood this correction from day one since it seemed to have no basis in solid economic terms. Yes, prices are higher, but companies have not grown earnings this rapidly in many years. Likewise, we have not seen GDP growth in the 3.5% range in decades. I believe this correction was largely self-inflicted. The financial news has been infected with the rancor of the front-page news. I am amazed at how often I have heard and read the term “recession” over the past several months. In my first economics course as an undergraduate, I learned that a recession is defined as two consecutive quarters of negative economic growth. That definition hasn't changed, and we have been posting GDP growth numbers in excess of three percent. Recent GDP growth rates are light years from going negative. Businesses are complaining that they can’t hire people fast enough. Wage growth is at historic highs, while unemployment is at historic lows. Talk of recession makes no economic sense.
Why have we turned into a crowd of Chicken Littles?
I am encouraged by the recent market trends, but remain somewhat concerned about the volatility that appears to have become part of the normal market. Therefore, I may send out a trade alert this week, but I remain cautious. This market is going to have to show me that it has gotten over its “sky is falling” fears.
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This week’s trading continued the positive price trend with the Standard and Poors 500 Index (SPX) posting a 2.4% gain for the week and closing yesterday at 2596. SPX broke through the resistance level at 2581 set by the February correction on Wednesday and held those levels for the balance of the week. The one worrisome observation this week was the declining trading volume in the S&P 500. Volume steadily declined all week and had returned to holiday levels by Friday. Are the trading desks still partially empty or is money waiting on the sidelines?
SPX broke through the 20-day moving average (dma) in the center of the Bollinger bands on Monday and is now entering the upper quartile of the bands. Perhaps the market will be taking a breather after solidly breaking through the February correction resistance.
The S&P 500 volatility index, VIX, closed yesterday at 18.2%. VIX has steadily declined from its opening December 26th at 36%. However, volatility levels at 18% are far from calm. We have only just returned to the volatility levels we experienced through October and November.
The Russell 2000 Index (RUT) closed yesterday at 1447, up 2 points. Russell led this correction, trading down 25% from early October to December 24th. It was encouraging to see Russell gain 4.8% this week. RUT is now leading SPX higher.
The NASDAQ Composite index closed yesterday at 6971, down 15 points, but NASDAQ gained 3.2% this week, and similar to SPX, NASDAQ broke the resistance levels set by the February correction on Tuesday and held those levels the balance of the week.
Both the NASDAQ Composite and the Russell 2000 outperformed the S&P 500 this week. Russell led the race with its gain of nearly five percent this week. The NASDAQ Composite and the S&P 500 both broke through the resistance level set by the February correction, but Russell has the largest losses to recover and has not yet broken that key resistance level.
One of the traditional forward-looking indicators for the coming year is to monitor the S&P 500 gains or losses for the first five trading days of January. That indicator is solidly green for 2019, but was way off the mark in 2018. The first five trading days of January indicator has historically been accurate 83% of the time. That indicator plus the very strong market performance since the December 24th low prompted me to venture back into the market this week with a couple of trades. The January Barometer was developed by Yale Hirsch, creator of the Stock Trader’s Almanac, now edited by his son, Jeffrey Hirsch. The January Barometer states that as the S&P 500 goes in January, so goes the year. This indicator has an 88% record of success since 1950. Neither the First five Days nor the January Barometer were on target for 2018, but that was an odd year in the markets in many ways.
I was encouraged by the follow through day on January 4th and the consistent positive price action this week. However, volatility remains relatively high, so proceed with caution.
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According to what we all learned in Econ 101, higher interest rates are the tool used to slow a raging economy that is triggering runaway inflation. When the Fed was striving to recover from the financial meltdown of 2008, the FOMC’s target for inflation was a minimum of 2%. Bernanke frequently assured us that low interest rates weren't a problem as long as inflation remained contained at or below the FOMC target of 2%. Was Powell just trying to flex his muscle and show Trump who’s boss after Trump’s earlier tweets about the previous interest rate hikes? If so, Powell’s ego is costing ordinary Americans a lot of money. Earlier rate hikes this year could be justified, but this week’s rate increase, the fourth increase this year, just sent the market into the toilet for absolutely no good reason.
The Standard and Poors 500 Index (SPX) closed today at 2417, down 51 points. SPX is now down 21% from October 3rd, meeting the traditional definition of a bear market as opposed to a correction. The S&P 500 lost 6.7% this week alone and is now down 10% for the year. Unless something dramatic happens, 2018 is going into the record books as a losing year.
On Wednesday morning, the markets appeared to be finding support amid speculation that the Fed would not raise interest rates again. After the announcement, the positive gains for the day were erased and the plunge began in earnest. Trading volume in the S&P 500 companies ran above the the 50-day moving average (dma) all week and spiked today, but that was to be expected since this was quadruple witching.
SPX has run along the lower edge of the Bollinger bands every day this week, and this is very unusual. The February correction was more normal, with occasional pops back higher during the pullback. This was an unusually severe week in the markets.
Volatility, as measured by the S&P 500 volatility index, VIX, closed today at 30%. As one might expect in a week like this one, VIX moved higher each day this week after opening Monday at 22%. VIX reached highs around 25% in the October correction, and hit 37% in February. This correction is getting serious.
The Russell 2000 Index (RUT) closed today at 1292, down 34 points. Russell opened the week at 1411 and lost 8.4% this week, once again leading the overall market lower, just as it has been since early October.
The NASDAQ Composite index closed today at 6333, down 195 points, or 3%. NASDAQ broke through its February’s correction low at 6874 on Monday and has not slowed down all week. NASDAQ’s trading volume mirrored SPX, running above average all week and spiking today with quadruple witching.
SPX joined NASDAQ in breaking its February correction low on Monday, but Russell had already broken that support level last week. That effectively leaves market technical analysts without an obvious support level to watch for a bounce, signaling the end of this correction. It leaves us wondering, when will the market find the bottom?
The final estimate of third quarter GDP growth was reported this morning at +3.4%. The disconnect of our economy’s health and this market is remarkable. But four interest rate hikes this year are taking their toll. And the uncertainties surrounding the trade negotiations with China continue to worry investors.
