The Standard and Poors index (SPX) posted a very bearish day last Friday and followed with even more losses on Monday. Similar to the past several pullbacks this year, SPX bounced off its 50-day moving average (dma) on Monday and began its dramatic recovery, closing today at 4411, up 1% on the day and 2.7% for the week. Monday morning’s gap opening lower after a large downturn on Friday was very disheartening. I closed several positions and hedged others. The S&P 500 index motored higher the rest of the week, as though nothing had happened. The trading volume of the S&P companies declined all week from its high on Monday.

VIX, the volatility index for the S&P 500 options, spiked upward to 25% on Monday but declined all week to close today’s market at 17%. Don’t become complacent. First of all, 17% isn’t very low, and secondly, VIX dipped to 16% today but could not hold it. Traders remain on guard and are buying protection.

I have plotted the prices of the IWM ETF below to track the Russell 2000 index. The owners of Russell have priced everyone out of Russell 2000 index and option data. That is why I plot the IWM prices. A single glance at the chart below stands in dramatic contrast to the large cap stocks that dominate the S&P 500 and the NASDAQ Composite. IWM recovered some of the earlier losses today, closing at 219.50, up 0.4% on the day and up 4.2% for the week. SPX and NASDAQ are both well above their 50 dma, but IWM remains 2.4% below its 50 dma. The caution flags are out.

The NASDAQ Composite index mirrored the recovery of the S&P 500, closing today at 14,837, up 152 points on the day or +1% and up +4.2% for the week. NASDAQ’s trading volume continued its below average track record and decreased significantly today.

As I observed last week, this year’s market has been a series of fits and starts with traders being whipsawed in and out of the markets. After Monday’s large gap opening lower, many traders were spooked, and I was among them. The S&P 500 index has consistently pulled back this year only to find support at its 50 dma. That happened again on Monday and the rest of the week was a dramatic run higher with four gap openings higher. You don’t see that very often.


The crucial question remains. When will buying the dip be a costly mistake? It has worked seven out of seven times this year…

I started the week 58% in cash and ended the week at 54%. I opened some new trades this week, but I remain cautious. This market remains nervous and twitchy. Be careful to maintain a moderate risk exposure.