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I have wondered when the rigid linkage between oil prices and the U.S. stock market would weaken, but it isn't happening yet. The contraction of China's economy is certainly a major factor in a decline in demand for oil, but one can't ignore the flooding of oil supplies in the markets by OPEC, Iran, and ISIS. The conventional wisdom appears to assume the U.S. economy is either in or about to enter another recession. The economic data don't support that conclusion.
So oil prices dropped Friday, and the stock markets rose. Today, they gave back those gains as oil prices fell. SPX closed down $30 at $1877 and RUT fell $23 to $997. Volatility rose almost two points with the VIX closing at 24.2%.
Trading volume continued to decline with 2.8 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE dropped 15% and volume declined 11% on NASDAQ.
No significant economic data were released today. The FOMC meeting begins tomorrow and will end with an announcement on Wednesday. Hopefully, that announcement will put to bed this continued drum beat of four interest rate increases coming this year. The most significant economic data will be released Friday with the first estimate of fourth quarter GDP growth and the Chicago PMI.
We remain on the edge of our seats, wondering if we have seen the lows of this correction. From a technical standpoint, giving back Friday's gains is not a good sign. But it is normal to have a lot of choppy sideways trading for several sessions following the low. Take a look at the charts after the August flash crash. It took over a month to "get over" that correction and feel confident the markets were back on track.
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I hesitate to suggest we have finally seen a bottom to the market ugliness this year, but many signs suggest just that. SPX gained $38 to close at $1907 and RUT gained $23 to close at $1021. That was a 2.3% gain for RUT as compared to 2.0% for SPX; that may seem insignificant, but RUT has rarely outperformed SPX, not only this year, but throughout most of 2015. SPX gapped open higher at the open and remained pretty steady throughout the day. Trading volume dropped off with 3.2 billion shares of the S&P 500 stocks trading. Trading volume was down 4% on the NYSE and down 14% on NASDAQ.
The large lower shadows on the SPX and RUT candlesticks Wednesday was a strong signal, but yesterday brought a weak follow through. Today's close on SPX is well above the August flash crash lows, but much more damage was done to RUT. The small cal index remains below even the October 2014 correction low.
The elephant in the room is the price of oil. Oil traded up today and I think that was the principal confidence builder for the bulls. I believe that relationship is over done, but ignore it at your peril. Others pointed to the report of existing home sales for December, coming in at 5.76 million, a large increase over November's 4.76 million.
The big question is whether this market continues higher next week. We have a Fed meeting next week - good or bad? This market is impossible to predict with any certainty. But many are trying...
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China announced 6.9% GDP growth for 2015 this morning. Even though we would be jealous to have that level of growth, that's the low in a slow downward slide for China. But is that worth the U.S. market crashing and turning into a bearish trend? Oil prices continue to dominate the discussions and continue to be blamed for the market weakness. Yes, China is slowing and requires less oil. Yes, everyone and his cousins are pumping cheap oil and we are swimming in it. I continue to think this has been seriously overblown. Our economic data have been weak and muddling along for years. The politicians just try to tell us everything is rosy. But even my less rosy view of the economy doesn't paint the dreaded R word.
The markets opened and traded higher this morning, but the enthusiasm was short lived. SPX closed up one dollar at $1881 after being as low as $1865. The August flash crash lows are around $1870. RUT, as usual, traded more weakly with a $13 loss, closing at $995. For the previous three sessions, RUT appeared to be trying to settle around $1010 and RUT opened there this morning and traded up for a while before weakening.
VIX is interesting. In spite of all of the hand wringing of the doomsday gurus, VIX has remained relatively low. VIX pulled back 1.1 points today to 25.9%. That isn't low volatility, but it isn't crash mode either. On August 24th, VIX hit over 53% intraday and closed at 41%.
You may be following the Stock Traders Almanac as they discuss the three January indicators: the Santa Claus rally, the first five days of January indicator and the month of January indicator. The first two have already turned in negative signals. SPX has to get back to $2038 by the end of the month to be positive. Gaining $157 is feasible, but days like today do not appear to be increasing the odds. In years where all three indicators are negative, the past track record of predicting a flat or negative market for the year is impressive.
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This market has given us many days or weeks we would compare to roller coaster rides, but today took the cake. It looked weak from the open and forced me out of the few remaining positions. But it just became uglier and uglier. SPX opened at $1876 and dove as far as $1812 before recovering a bit. The intraday low in the October 2014 correction was $1821, so this was a significant pull back. SPX closed at $1859, down $22. At one point in the late afternoon, SPX had actually traded back up to the opening price at $1876 - that is a serious round trip. RUT was even more surprising. RUT closed up $4 at $999, after dipping down to $958. That is only the third positive day for RUT this year.
Volatility spiked up to 32% during all of this craziness, but closed back at 27.6%. Trading volume spiked higher with 4.3 billion shares of the S&P 500 stocks trading today. Trading volume rose 17% on the NYSE and increased 38% on NASDAQ.
The CPI reported for December at -0.1%, close to the previous month's 0.0%. How can CPI be zero when all of my grocery bills are higher? Housing starts came in at 1.149 million for December, down from 1.179. Building permits followed suit with a decline from 1.282 million to 1.232 million for December.
This reminds me of road trips with the kids when they were younger. "Are we there yet?" I don't know, but that long lower shadow on the SPX candlestick and a positive day on RUT certainly are signals in that direction.
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Traders will remember the first two weeks of 2016. SPX closed at $1880, down $42 today and down 7.7% for the year. SPX traded down and broke through the August flash crash lows today, but the good news is that SPX bounced and closed above those lows. But we will see if that matters on Tuesday. RUT closed at $1008, down $18. RUT traded weaker than SPX over all of 2015, and this year is no different so far. RUT is off 11% for the year. RUT broke through the August flash crash lows back on January 6th, and broke through the October 2014 correction lows on January 11th. RUT traded as low as $984 this afternoon before recovering somewhat into the close. You have to go back to the summer of 2013 on the charts to find RUT trading around $980.
Trading volume remains high with 3.9 billion shares of the S&P 500 stocks trading. Trading volume increased 17% on the NYSE and rose 6% on NASDAQ. But higher volumes on option expiration aren't unusual. Implied volatility has been high as the market has tanked; the VIX hit 31% intraday and closed today at 27%, up three points.
Our markets will be closed Monday. It is impossible to predict what news event might occur over the long weekend and either accelerate the downward spiral or stimulate a strong bounce higher. I have hedged our February iron condor position and been whipsawed several times. At the close today, that position is being held at about a 7% loss. We'll see what next week brings.
