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The Standard and Poors 500 Index (SPX) turned in another sideways performance this week, opening at 2726 and closing at 2721, down five points for the week. I have drawn a downward trending line on my SPX chart, starting with the high on January 26th and then touching the March 13th peak. Many analysts had concluded that the bull market was over and were pointing to this trend line. But then SPX broke through that trend line on May 9th and even gapped open higher the next day, and that price action appeared to confirm that the bull market was alive and well.
I drew a new trend line on my SPX chart this week that tracks this bull market back to November 4th, 2016. That trend line remained unbroken until the February 8th correction this year. On May 11th and then again on May 14th, SPX closed above that long term bullish trend line. But then we started treading water. In the next trading session, May 15th, SPX opened at 2719, only two points below today’s close. SPX remains above the recent bearish trend line, but SPX is also below the long-term bull market trend line. The market has just wandered sideways for nine trading sessions and is in what I am calling “no man’s land” – not bullish and not bearish.
Trading volume is an important technical indicator that we may understand in a very pragmatic sense. When we see trading volume spike higher, it reinforces the price direction. Increasing volume on a price spike higher accentuates the bullish nature of that price move, and conversely for price declines. The recent trend in trading volume confirms the sideways, non-directional nature of this market. Trading volume for the S&P 500 companies has been well below the 50-day moving average (dma) for the past sixteen trading sessions. In fact, if we exclude just five days of above average trading volume, this low volume trading market is in its eighth week.
The Russell 2000 Index (RUT) has traded much more bullishly than SPX most of this year. RUT didn’t pull back as far during the February correction and has put on a remarkable run from early May through this past Monday, gaining nearly 6% in less than a month. Conventional wisdom ascribes this difference to the fact that the Russell 2000 index is predominantly, if not entirely, made up of domestic companies. These stocks may not be as spooked by the prospects of a trade war and may explain the divergence of SPX and RUT.
The S&P 500 index’s volatility index, VIX, opened the week at 13.4%, and closed today at 13.2%, essentially unchanged for the week. These markets and the accompanying volatility remind me of Goldilocks – not too hot and not too cold.
This is an unusual market in my experience. Corporate earnings are setting records, beating analyst estimates at unusually high rates. Companies are even complaining of being unable to fill open positions – what a change! But you wouldn’t know that by watching the market recently. News is interpreted with the worst possible implications. The doom and gloom folks must be enjoying this moment.
ABMD, HFC, and NFLX continue to trade higher this week in this sideways market.
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The Standard and Poors 500 Index (SPX) opened the week at 2675 and trended down all week, losing almost 2% at yesterday’s close. However, today’s market was a different animal, with SPX trading higher by 34 points, or 1.3%, to close at 2663. But before we break out the champagne, it is worth noting that SPX remains down nearly one percent for the year.
2018 has been a rough ride. The February correction took us down by 10.2% and then the April retest of the correction was severe on its own at -7.5%.
Trading volume in the S&P 500 companies has remained relatively low since the February correction, rarely bouncing above the 50-day moving average (dma). Today’s strong move higher was not as positive as it might have been since it occurred on volume of 1.9 billion shares, well below the 50 dma at 2.3 billion shares.
The positive news for this market has occurred over the past two weeks of trading. SPX has traded down close to the 200 dma on four occasions, including today, but has managed to bounce higher each time. My rose-colored glasses were smashed earlier this year, so I don’t think I am imagining this positive signal. The 200 dma is acting as a solid line of support. That is a strong rebuttal to all of the doom and gloom voices that are all too common these days. In fact, I have to wonder if we aren’t talking ourselves into a bearish view of the markets. This market’s squeamish behavior is inconsistent with the economic data.
The analysts at FactSet published a report this week on the occasion of 50% of the S&P 500 companies having now reported earnings for the first quarter. 74% of those companies beat the revenue estimates of the analysts and 79% beat the earnings estimates. This is the best rate of earnings “beats” since FactSet started tracking these numbers in the third quarter of 2003. Today’s jobs report included a new low in the unemployment rate, down to 3.9%, the lowest since the year 2000. The unemployment rate among blacks is the lowest ever recorded. Doesn’t that make you wonder what’s going on with this market? Have we just fallen victim to the negativity that seems so common?
The Russell 2000 Index (RUT) consists of largely domestic companies that are much smaller in capitalization than the blue chips of the S&P 500. These are the so called “risk on” stocks. Thus, it is ironic that this index has performed better than SPX all year. The February and April corrections broke the 200 dma on SPX and SPX has been bouncing off its 200 dma for the past couple of weeks, but trading in RUT this week has been around the 50 dma, not flirting with the 200 dma. RUT closed today at 1566, up 19 points or 1.2%.
The NASDAQ Composite closed at 7210 today, up 121 points or 1.7%. Much of that spurt was fueled by Apple and that price spurt was fueled by Buffett’s investment in Apple. NASDAQ broke through its 50 dma today, but the trading volume remained below the 50 dma.
Early in my market training, I was frequently told that the market is essentially a present value calculation, so it is always looking forward and attempting to price assets on the basis of their future prospects. On that basis, it is hard to rationalize this market. We continue to see economic data and corporate earnings setting records, but it seems as though the market is preoccupied with prospects of doom and gloom at every turn.
I also learned long ago not to trade my carefully analyzed predictions in the face of a market going the other way. I may see many reasons why this market’s nervous oscillations shouldn’t be happening, but they are. It is what it is.
I have pared back on my positions. In my Conservative Income service, I have a preponderance of covered call positions on industry sector ETFs to minimize single stock risk during this earnings season. That probably explains why we are up 8% this year while the S&P 500 is down almost 1%. I am now looking for stocks that are boringly trading sideways during this market’s whipsaws. Calendar spreads placed after earnings announcements on those boring stocks are relatively safe trades, but also with relatively low returns. Iron condors on the large market indices are also becoming more attractive.
Above all, manage your risk.
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This week's relatively calm trading was certainly a welcome change. The Standard and Poors 500 Index (SPX) closed today at 2656, up about 1.5% for the week, so we celebrated a positive week for a pleasant change. I heard some analysts begin to celebrate the S&P 500 moving back into positive territory for the year this morning, but that hope was short-lived. We came close, but the market retreated into the close. SPX remains down 1% for this year. At least we didn’t have any stomach-wrenching declines this week. At this point, that fact alone is worth celebrating.
Trading volume in the S&P 500 stocks declined all week. That isn’t encouraging. The next big resistance level is the 50-day moving average (dma) at 2599. Institutional traders will be watching for that break-out before “going all in”.
Trading in the Russell 2000 Index (RUT) matched its big brothers this week, climbing out of the hole, but then pulling back today.
SPX’s volatility index, VIX, declined steadily this week, closing today at 17.4%. You have to go back to the middle of March to find a lower value of VIX. That reflected the calming effect of this week’s trading.
Several of the large banks announced earnings this morning and the large prominent names did very well. Citibank, JP Morgan and Wells Fargo all beat their earnings estimates. Those stocks traded higher in the pre-market but gave up those advances during the day. That is not a good sign. Perhaps traders are worried that excellent earnings growth will prompt the Fed to raise interest rates even more aggressively to keep inflation in control, but perhaps at the expense of the economy’s growth.
The price to earnings ratio for the S&P 500 is now at 16.1, right at the five-year average. That would seem to suggest this pullback has had the expected sobering effect on the market. But the reaction to the large banks' positive earnings may suggest that positive earnings won’t be enough during this earnings cycle. FactSet reported that earnings estimates have grown from an average of 11.4% growth on December 31st, to 17.3% today. That level is unprecedented and should be very bullish for the market. The essence of stock price evaluation is derived from the projected future cash flows of the stock.
I have been slowly testing the waters a bit. The Apple diagonal spread we entered in the trading group last week is doing very well, now up 52%. The NFLX calendar spread we entered as a play on earnings is doing well. But I remain cautious. Today’s reaction to the banks' earnings and the declining trading volume all week are my principal concerns.
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It is often humbling to write about the market and speculate on the future trends. I was amused as I thought about some positive advice I gave some clients last week. We ended this week feeling anything but happy. The Standard and Poors 500 Index (SPX) opened the week at 2670 and closed today at 2670 – no need to calculate that percent change. On Thursday, I found reassurance in SPX finding support at the 50-day moving average (dma), but that was short lived as SPX sliced through that support level this morning.
Trading volume steadily increased all week, but only reached its 50 dma today. Trading volume in the S&P 500 companies has remained below the 50 dma all month. The decline in trading volume last week as the market traded higher was disappointing. That suggested the large institutional traders were not entering the market aggressively, even though the indices were rising. Rising trading volume this week, as the market weakened, is a cautionary signal.
The Russell 2000 Index (RUT) mimicked the larger indices this week, trading higher through mid-week, but then pulling back over the last two days. The big difference is the location of RUT’s 50 dma. RUT’s 50 dma is 1543, so while RUT closed down 10 points today to close at 1564, it remains well above the 50 dma.
The NASDAQ Composite broke its 50 dma this morning, finally closing at 7146, down 92 points. NASDAQ’s trading volume has been flatter this week and remains well below its 50 dma. It may seem bizarre to say this, but I find lower trading volume as the market declined the past two days is somewhat reassuring. Higher volumes in declines indicate more panic. And that’s never good.
SPX’s volatility index, VIX, declined Monday and Tuesday, but then ticked higher the rest of the week, closing today at 16.9%. This remains relatively modest historically, but a concern nonetheless.
I cautiously opened the Apple diagonal spread in our trading group a couple of weeks ago, and that was fortunate timing as it turned out. After Taiwan Semiconductor delivered bearish views of the semiconductor market for the balance of the year, it triggered a selloff in many stocks dependent on semiconductor chips, and Apple was one of the unfortunate casualties. Apple dropped 5 points on Thursday and I closed our diagonal spread for a 39% gain. One of the advantages of a diagonal spread is the lowering of the cost basis as one rolls the short options each week. That served us well in this case, driving our cost basis from $440 to $287 over the course of the trade.
This is a perplexing market. The underlying economic data are strong, yet traders appear to be very nervous and anxious to sell on any pretext. One of the old adages about the market is that a bull market climbs a wall of worry. This market is just the opposite. It reacts strongly to any and every piece of negative news. Be careful out there. Happy days are not here again...
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Let’s begin our analysis of the patient with a review of his recent history. The Standard and Poors 500 Index (SPX) closed at 2581 on February 8th, down 10% from the high on January 26th. The rest of February and early March were textbook post correction trading: a recovery followed by a test of the correction lows. Then it appeared we were out of the woods. But SPX closed on March 23rd at 2588, which was not only coincident with the February 8th low, but also the 200-day moving average at 2585. The market thrashed about last week and began this week with another retest of the February 8th correction low. Monday’s close was 2582, only one dollar off of the close on February 8th.
Then the patient recovered and the gap open yesterday morning appeared to be what we were expecting: the correction low has been tested and we are on our way to a full recovery and can put the correction behind us. But our patient had a relapse today, losing 58 points, or 2.2%, to close at 2604, just above the 200 dma at 2594.
The market’s fall in early February was triggered by fears of a trade war after President Trump announced he was considering 25% tariffs on imported steel and aluminum. The EU, Britain, and Canada all complained and threatened retaliation. Then back room negotiations exempted those countries from any new tariffs. Then a deal was announced with South Korea with concessions on both sides. That left China, the principal supporter of North Korea. Perhaps more than tariffs are on the table.
Let’s return to the SPX price chart. The February 8th correction was accompanied by extreme trade volume spikes. Last week’s market weakness resulted in trading volumes that barely reached the 50 dma. This week’s trading volume was even more benign, starting at the 50 dma and declining all week. How is that possible with these extreme market swings?
Given the wild swings and reversals in SPX this week, volatility has been surprisingly steady and mild. VIX closed at its high for the week on Monday at 23.5% and hit its low yesterday at 19%. But today’s reversal didn’t seem to panic traders, with VIX closing at 21.5%.
There is a dichotomy in this market analysis. If I just focus on the extreme price swings and price reversals day after day, I am ready to panic and look for psychiatric help. But low trading volumes and relatively low volatility are sending us a very different message. An additional fact from the SPX price chart isn’t consistent with the “sky is falling” conclusion: the combination of the lows from the February correction and the 200 dma are holding very well as support. That level has been tested five times over the past two weeks of trading, and it has held. That is powerful support.
What is my diagnosis for the patient, Mr. Market? He is nervous, afraid of every shadow, and dives under the table after every tweet from President Trump. But he has not yet fallen out of bed. The 200 dma is holding.
I am slowly and selectively picking my spots, e.g., the Apple diagonal spread I opened this week. Apple is drowning in cash as a result of the tax reform bill. Strong stock buy-back programs and increasing shareholder dividends are most likely on the drawing board for the earnings announcement on May 1st. Analysts are already increasing their price targets.
Keep your powder dry.
