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I am late with yesterday's blog due to travel and other commitments.
In earlier blogs, I
noted the declines in the Russell 2000 Index (RUT) as SPX traded sideways or
higher, and said that could be the early warning signal of market weakness, or
the “canary in the coal mine”. Apparently, it was.
SPX tried to rebound Friday morning after Thursday's big drop, but couldn’t
manage to get back above $1850, closing down $5 at $1841. Friday’s intraday high
on SPX was encouraging, but the fact that bulls could not hold those highs is a
negative. Evidence for the bottom having been reached comes from RUT, closing higher by $5 at $1181. But traders have to be concerned about what may happen over the weekend
in the Ukraine.
The volatility index, VIX, has spiked higher over the past two days,
hitting its high for the week Friday afternoon at 18.2%. Perhaps more ominously,
VIX closed at 17.8%, near its high for the day, another sign of traders’
concerns going into the weekend.
Global markets were all down this week, so it isn't surprising for our markets to also reflect that weakness. One technical indicator stands out on the SPX chart: the MACD crossed zero moving downward on Thursday. This signal last triggered on January 7th, and that turned out to be a leading indicator for the correction that culminated with an intraday low on February 5th.
Forget about the Ukraine until Monday morning. Enjoy the weekend.
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When I checked the futures this morning, it looked like we
would see a modestly positive open, and that is exactly what happened. But that
positive note only lasted about an hour before the slide began. SPX hit a low
of about $1842 about 45 minutes before the close and then bounced a bit to
close at $1846, down $22 for the day. RUT closed off $15 at $1177. As you might
expect on a day like this, volatility spiked up almost two points, with the VIX
closing at 16.2%.
Trading volume spiked upward today, reaffirming the big bearish day. Trading in the S&P 500 stocks increased to 2.4 billion shares. Trading volume increased 10% on the NYSE and increased 12% on NASDAQ.
Today’s price action in RUT and SPX was the classic “outside day” on the bar chart or a
bearish engulfing pattern in candlestick analysis. Either way, this is a strong
warning of a possible move lower. RUT’s slow decline from March 5th through the 11th was indeed the “canary in the coal
mine”. Now the question is whether the bulls will just jump back in tomorrow
and drive the market higher as they have done so many times over the past year.
Take a look at the RUT chart and March 3rd in particular. The price action that day was very similar to today's, trading to an intraday low and then bouncing to close at $1176 (today's close was $1177). But then RUT shot up over $22 the following day. So I will be watching the markets very closely to see if we are really entering a correction or if the bulls are going to pull another whip saw on us.
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SPX traded up at the open, and traded up from there to its intraday high at $1882 by late morning, but slowly traded downward over the rest of the trading session. SPX broke support at $1870, trading as low as $1864, and then closing at $1868, down $10 on the day. But I regard this as a "technical break" - yes, it broke support at $1870, but support and resistance levels should be regarded as fuzzy bands of price. I will wait until tomorrow to see if we really broke support. But RUT has been predicting a pull back for some time now, trading downward each day as SPX bounced off support and remained largely unchanged. Today RUT traded off more than SPX, down $13, closing at $1187. This brings RUT close to support at $1182, the high from January 22nd and the break-out of late February.
Trading volume in the S&P 500 was up a bit from yesterday with 2.0 billion shares today but remains below the 50 dma at 2.3 billion shares. Trading volume on the NYSE dropped 7%, but volume rose 19% on NASDAQ.
Volatility rose modestly with the VIX rising almost one point to 14.8% - as Goldilocks said, not too hot, but not too cold.
Let's reflect on the past ten days of trading: Last Monday, we dropped about $12 on SPX because of the Ukraine/Russia problems, but all of that loss and then some was recovered the next day with a $25 rise. For the past three sessions, SPX has tested support at $1870, and with the exception of today, has held that support level well. But at the same time RUT has now traded lower five days in succession. Hmm... Is RUT telling us something? Or should we focus on SPX's relative strength? My conclusion is that the bulls have demonstrated that they are not about to go away quietly. Having the Fed's support is intoxicating. Perhaps the big players are just taking some of their higher risk assets off the table (RUT).
The dividend yield of the S&P 500 at 1.8% is near record lows - you have to go back to August of 2000 to see slightly lower yields at 1.1%. So the need for a "pause that refreshes" is hard to dispute. But I am inclined to think a huge correction is unlikely simply because of the Fed's ongoing support. It seems to me we have a tug of war with very powerful forces on both sides. Maybe some sideways or even slightly downward trading is the most likely answer? I am still largely playing trades sideways to slightly bullish, but I am protecting my downside as well. One thing about this market is clear - it can break and run hard in either direction very quickly.
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SPX closed yesterday at $1868, just below support at $1870. Today SPX traded down as low as $1854 before rebounding to close at $1868 for a gain of one dollar on the day. Earlier today, I was watching the tape and thought, "support is truly broken". But later I had to conclude, "maybe not". Hence the title of today's blog, Clinging To Support. RUT posted a gain for the first time in six sessions, rising $4 to close at $1191. Volatility was largely unchanged with the VIX closing at 14.5%. Trading volume in the S&P 500 was flat at two billion shares. Trading volume on the NYSE dropped 4% and volume decreased 14% on NASDAQ.
The long lower shadow on the SPX candlestick suggests support was found in the neighborhood of $1850, the highs from December 31st and later in mid-January. So maybe we wander sideways for a while? Is that the form of the pull back this time?
I came across an interesting report on margin debt this afternoon. Stock account margin debt is now around $460 billion, exceeding the peak of approximately $380 billion set in 2000 and hit again in 2007. So we have yet another set of data confirming this bull market should be tired. But all of this data ignores one big difference as we compare past markets to today's market - the FOMC.
So maybe the bull has more life in him...
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A report of declining exports from China came out over the weekend and caused Asian markets to trade down last evening. That continued into the western markets today with SPX opening weakly and breaking down through support at $1870 to reach $1867 late morning before bouncing. SPX strengthened all day and hit its high for the day at $1878 just before close at $1877, down $1. RUT lost $3 to close at $1201. VIX spiked up as high as 15.3%, but settled down as the market strengthened and closed unchanged at 14.2%. Trading volume fell off markedly today with 1.8 billion shares of the S&P 500 trading. Trading volume on the NYSE dropped off 15% and trading decreased 3% on NASDAQ.
The hammer candlestick on SPX is consistent with the recent dojis. Every time the bears manage to pull SPX lower over the past few trading sessions, the bulls come in and bid it back up. Today was an exception in that the $1870 support level was pierced before the bulls regained control. The hammer at the top of a rising trend could be a sign of the underlying bullish strength, but it may also be significant that the bulls could only manage to get back to the opening price by the end of the day.
I also noted a continuation of the pattern we have seen now for four trading sessions: SPX manages to close close to unchanged while RUT slowly declines. That could be a sign of traders taking their profits in the small cap stocks they consider most at risk in a decline. In any case, all that may confidently be concluded is that the bulls and bears remain relatively well balanced at this point. We remain at a tipping point. Be cautious.
