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The markets opened lower this morning but then continued their strong bounce back higher with SPX gaining $11 to close at $1830 and RUT closing at $1148, up $15. Volatility was essentially flat with the VIX coming in at 14.1%, down two tenths of a percentage point. Trading volume was mixed today as the market spurted higher. Trading volume dropped 1% on the NYSE and increased 11% on NASDAQ. As of 5:30 pm ET, the S&P 500 volume data was not available.
If you are looking for economic data to account for this bullishness, you will search in vain. Initial unemployment claims rose eight thousand to 339 thousand, but continuing unemployment claims dropped off by eighteen thousand. Retail sales for January declined 0.4%, even greater than the 0.1% decline in December - since we aren't allowed to mention Christmas any more, maybe everyone stopped buying gifts.
SPX is now about $20 from its all time high and RUT solidly broke out above its 50 dma at $1139. GOOG, NFLX, PCLN, TSLA, and FB all achieved all time highs today. Of these stocks, I think TSLA and FB are the most significant because their fundamentals just don't support these price levels. But that is one of the characteristics of a strong bull market - it doesn't have to make sense; just buy; it's going higher.
Needless to say, this market bounce worries me. SPX corrected 6.1% at its intraday low on February 5th, but that was only on Wednesday of last week and SPX has gained $92 from that low. Could we be setting up the classic head and shoulders reversal pattern? On the other hand, we repeated this same pattern several times last year, with a pull back of 4-5% and then a quick reversal back to make a new high. But I remain cautious. Maybe this time is different?
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After four intense days straight up, the markets took a breather. SPX was unchanged at $1819 while RUT tacked on another $3 to close at $1133. SPX delivered a classic doji candlestick, the sign of indecision. This often suggests that the bulls and bears are approximately equally matched; this could be a tipping point to break higher or lower, or it could presage a period of sideways consolidation. The good news for the bulls is that the break-out above the 50 dma appears to be solid. RUT came within a couple of dollars of its 50 dma intraday but pulled back to close lower.
Trading volume fell off with 2.2 billion shares of the S&P stocks trading; trading on the NYSE dropped 10%, but trading volume on NASDAQ edged up 2%.
There wasn't any market moving economic data today. Treasury reported that we are going broke at a slower rate (the deficit, or the increase in debt, is lower four months into the fiscal year). I suppose that's good news.
If you are looking for a return to the strong bull market of 2013, I think that signal will be SPX breaking out above the previous high at $1850. We are a long ways from that happening, but a three day spurt like we had recently would do the trick. But before I rule out further declines, I would like to see RUT solidly above its 50 dma. My best guess is for some sideways consolidation trading, but my crystal ball is a little smudged.
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Last week's trading was certainly stressful. Monday brought a big sell-off and prompted talk of a mega-correction. Who would have guessed that we would have recovered all of those losses and then some by the end of the week? By contrast, today's trading was slow and mostly sideways. SPX closed at its high for the day, $1800, up $3. RUT gained $2 to close at $1119. The markets mostly chopped sideways and really only moved into the black for about the last two hours of trading. Trading volume fell off from Friday's exuberance with 2.1 billion shares of the S&P 500 stocks trading. This is the first time SPX volume has fallen below the 50 dma since January 3rd. Trading volume dropped 9% on the NYSE and decreased 12% on NASDAQ.
I found today's slow sideways and slightly positive trading to be encouraging. After such a strong rally Friday, I was concerned traders would come in Monday a little scared that we had moved too far, too fast, and start selling to lock in gains. The pattern of trading today builds additional support for the case that this most recent downturn will be a pullback similar to the several we saw last year rather than a dramatic correction of 10% or more.
There weren't any significant economic reports today. Many traders are waiting to see how FOMC Chair Janet Yellen does tomorrow with the House and later in the week in the Senate. But it seems unlikely that we will be surprised by any of that testimony. After all, she has been the Vice Chair during all of this quantitative easing under Bernanke; a new direction isn't likely. But we will wait and see if there is a surprise.
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SPX easily broke through the 50 dma and closed at $1820, up $20 on the day. The 50 dma also coincided with resistance set by the highs back in late November and early December, so breaking that level so convincingly was significant. RUT gained $10 to close at $1129. Volatility continued to decline with the VIX closing at 14.5%, down almost a full percentage point. Trading volume increased today, further underscoring the upward move. About 2.3 billion shares of the S&P 500 stocks traded today. Trading on the NYSE increased 11% and trading volume on NASDAQ increased 10%.
RUT corrected more strongly than SPX, so it is still well below its 50 dma at $1139. From peak to trough, RUT corrected 8.4%, as compared to a 6.1% correction on SPX.
FOMC Chair Janet Yellen made her official debut with Congress today and generally portrayed herself as in line with Bernanke's policies; she didn't appear to be signaling much change to the current path of the Fed. She said that the current slow reduction in the Fed's stimulus programs will likely continue, barring no significant economic deterioration.
Now the question is whether the markets will simply run back up, break through the earlier highs, and continue the bull market run? That seems unlikely, given the weakness of the economy, but there I go again with rational analysis. This sharp "V" pattern of a sudden market decline followed by a sharp recovery reminds me of the several pullbacks of 2013. Last October, SPX dropped 5% in 15 trading days; the current decline took 14 days. In October, it only took six days to recover all of those losses. Today's close on SPX represents a recovery of 73% of the losses in this pullback in only four days. This just proves once again that it is hard to keep up with this volatile market (price volatility, not implied volatility). If you feel like this market is jerking you around, you aren't alone.
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Yesterday I thought we were at a tipping point and could either bounce back upward and end the correction, or dip even lower. When I saw the weak jobs report this morning, I thought the worst. But the markets took off as though we had achieved full employment overnight! SPX gained $24 to close at $1797 and RUT closed up $13 at $1117. SPX closed just one dollar below today's highs. And volatility pulled back nearly two points with the VIX closing at 15.3%. Amazing. Trading volume was close to flat with 2.5 billion shares of the S&P 500 trading today; trading volume dropped 2% on the NYSE and increased 7% on NASDAQ.
The non-farm payrolls report came in with an anemic 113 thousand jobs and tells us unemployment ticked down to 6.6%. Does this make any sense? The unemployment rate continues to drop while a pathetic number of jobs are added to the economy?
And then the market reacts by buying with both hands. Does that make any sense? Some analysts suggest that the market sees the poor data as evidence that the Fed will slow or stop its stimulus reduction. Really? Markets have always defied reason from time to time, but it seems as though this is becoming the new normal. Don't get me wrong. I am glad the market didn't crash, but it would certainly be nice if I understood the rationale for the exuberant buying.
As my dad used to say, "Don't look a gift horse in the mouth", so I will accept the gift graciously (trivia question for today: where did that saying come from?).
Enjoy your weekend.
