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The prospect of the markets making new highs seems to be elusive. SPX closed at $2099, up $2, after a trading day that was mostly underwater. RUT gained $8 to close at $1163. Volatility was flat with the VIX unchanged at 14.2%. The high for SPX from last November was just above $2110, and SPX touched that level intraday in mid-April, but fell back. This latest run higher now seems to have stalled. Trading volume remains below average at 2.0 billion shares of the S&P 500 stocks; the 50 dma is 2.2 billion shares. The markets hit their lows for the day right after the open this morning and then slowly improved throughout the day. Some analysts attributed the improvement to prospects of an oil production deal from tomorrow's OPEC meeting, but it is anyone's guess what will come out of that meeting.
Economic data remain mediocre at best, even though the President began a pep rally tour on the economy in Indiana today. Yesterday, the Chicago PMI dropped from 50.4 to 49.3 for May. Today's ISM manufacturing index continues to flirt with that 50 level - the dividing line between economic expansion and contraction, coming in at 51.3 for May, up from 50.8. Over the past ten months, we have had five reports over 50 and five under fifty. Construction spending declined 1.8% in May after a 1.5% gain in April. This is the largest decline in construction spending in five years. The minutes from the last FOMC meeting, the Beige book, gave the economy faint praise as "showing moderate economic growth". The decline in construction spending has prompted several analysts to reduce their second quarter GDP estimates.
If we turn to a review of historical price data from the Stock Traders Almanac, we see that we are entering the weakest three months of the year for the markets, July through September. From 1971 through 2016, the NASDAQ Composite declines in June and hits negative numbers in September, before beginning to recover in October. Based on historical data alone, we might be well served to limit our involvement in the markets for the next couple of months. I think the uncertainties of the presidential election will add even more price volatility for the next few months. It will be hard for the bulls or the bears to take control of this market.
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The S&P 500 index (SPX) closed at $2099 today, up 2.3% this week alone. The Russell 2000 Index (RUT) closed at $1150, up $11. This strong bullish week has a lot of people seeing only blue skies - is that appropriate? Today's close on SPX at $2099 is approaching the high set last month, so some traders are talking about a break-out. When we expand the SPX chart, the picture is much less bullish. The end of the dot com era ended with SPX around $1525 in March 2000. SPX beat that by a few points in October 2007 before the financial meltdown. In May of last year, SPX hit another all-time high around $2135. The bulls unsuccessfully attempted to break that high in June and July last year, but then the flash crash hit in August. But those persistent bulls, led by the Fed, pushed the SPX back to roughly $2115 last November. Should we be excited SPX is on the doorstep of that $2115 mark? My answer is no. Looking at the big picture, we see that the S&P 500 has been flat or declining since those highs in May 2015. I will want to see a couple of closes above $2135 before breaking out the champagne.
Consider the small caps in the Russell 2000 Index (RUT) and we see an even weaker picture. RUT hit its all-time high in June of last year around $1295, and it only made it back to $1205 last November, shy by 7%. RUT closed today at $1150; it would have to rally 13% to reach the 2015 high. Again, we see a similar picture to SPX in that RUT remains far off of its 2015 highs. But that deficit is much larger in the case of RUT.
Now add in today's weak GDP number for the first quarter (+0.8% growth) and the less than stellar earnings announcements of the past few weeks. And the FOMC appears to be doing its best to telegraph another interest rate hike at the June meeting. This doesn't look like the setup for the equity markets breaking out to new all-time highs.
In this environment, I think it prudent to take profits when they are available and be cautious. Consequently, I closed the June RUT iron condor from the Flying With The Condor™ advisory service this week for a 13% gain. That freed up capital to roll out and establish a new position in the August expiration. I feel safer when I have more time to hedge and adjust positions, especially in this market.
Enjoy your holiday with family and friends. But remember the true meaning of this Memorial Day. We have a lot to be thankful for due to some incredible sacrifices.
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The markets were trading higher until the release of the FOMC minutes from the last meeting. SPX traded up to $2061 before the release, plummeted to $2034 after the release and then recovered to close at $2048, within a few cents of being unchanged for the day. RUT gained $5 to close at $1103. Trading volume on the S&P 500 was up a bit to 2.5 billion shares, above the 50 dma at 2.3 billion shares.
The minutes from the last FOMC meeting were released this afternoon and the market turned sharply lower. The minutes revealed a general discussion of the prospect of raising the interest rates at the June meeting. This surprised traders who had been expecting the next rate hike later this year. The concern is that the economy is too weak to absorb higher interest rates. However, some economists believe higher interest rates would stimulate the housing market by encouraging banks to lend. But higher rates make capital investment more expensive for business. Capital investment has remained low in spite of low interest rates. Why? Is that because of weak economic forecasts or burdensome regulations? Now fast food businesses are starting to roll out automated order entry systems to lower labor costs after minimum wage law increases. Politicians need to refresh their understanding of the Law Of Unintended Consequences.
Our June condor position on RUT in the Flying With The Condor™ service is up 6% and the July position on SPX is up 7%. The markets continue to trade sideways. RUT is trading very close to its August flash crash levels from last year. SPX seems to be trading in the channel of $2040 to $2110.
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The equity markets took off higher today with SPX gaining $28 to close at $2076, near the December 2015 high just above $2080. RUT traded even more strongly, up $24 to $1135. Volatility dropped about 1.4 points to 14.4% on the VIX. Trading volume popped up as well with 2.1 billion shares of the S&P 500 trading, but remains below the 50 dma at 2.3B. Trading rose 11% on the NYSE and was up 3.5% on NASDAQ. The strength of today's move prompted IBD to shift to an assessment of "Market In Confirmed Uptrend".
New home sales may have had a role in today's strong market, as they reported an annualized rate of 619 thousand homes for April, up from March's 531 thousand. This is the highest new home sales number since January of 2008.
We closed the volatility trade we entered on ULTA in the trading group on May 6th for a 23% gain. This trade began as a diagonal call spread and was predicated on the June options rising in implied volatility as the earnings announcement approaches. Join us in our next trading group meeting June 2nd.
We have two positions open in the Flying With The Condor™ service; the Jun RUT iron condor at 1010/1020 and 1220/1230 stands at a net gain of 14% and the July SPX condor at 1860/1870 and 2170/2180 is up 10%.
The second estimate of first quarter GDP will be reported Friday. Will that pull the market back into the sideways channel? Or will that report be revised upward and energize the bulls? SPX is close to resistance around $2080, the high from last December. The next resistance level is $2110, the high from November of last year.
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The retail sales numbers that were released today appeared to put a damper on the market, but the market has really been lackluster for the last three days. We seem to be in a "three days up and then three days down" pattern - not really, but you get the point. The market is going nowhere. SPX closed down $18 to $2047 and RUT closed down $6 to $1102. Volatility inched up almost one point on the VIX to 15.1%. Trading volume declined with 2.1 billion shares of the S&P 500 trading. Trading volume declined 8% on the NYSE and declined 13% on NASDAQ. So we have declining prices on declining volume - not very inspiring for the bulls or the bears.
Retail sales came in at a modest +1.3% for April, up from -0.3% for March. FactSet reported that internet sales were up in the first quarter (year over year) 143%. Next best was home improvement at +12%. Department stores were down 48%. The Producers price Index (PPI) reported +0.2% for April, up from last month's -0.3%. The University of Michigan's consumer sentiment survey increased from 89.7 to 95.8 in May.
The bulls have just enough strength to hold support (so far), but not enough strength to push to new highs. On the other hand, the bears can't seem to take control to break major support levels. We may be stuck in this sideways channel until after the election.
Have a great weekend.
