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The Standard and Poor’s 500 Index (SPX) opened this week at 3094 and declined through the week to close Friday at 3009, down 2.7%. Friday’s trading broke the 200-day moving average (dma) at 3021. Roughly speaking, this brings SPX back to where we were about a week ago. Friday’s close is 11% below the high prior to the correction. Personally, I think that represents an extremely optimistic assessment of the economic damage. Trading volume for the S&P 500 companies has generally run below the 50-day moving average (dma) over the past two weeks. I am unsure why trading volume spiked so much yesterday. The spike last Friday was due to quadruple witching, but yesterday’s spike is puzzling.

VIX, the volatility index for the S&P 500 options, which had declined since the peak of the correction, spiked up to 43% on June 11th and closed Friday at 35%. We may be becoming numb to these levels of volatility, but it is worth reminding ourselves that these are historically high levels of volatility. This remains a nervous, and therefore dangerous, market.

IWM, the ETF based on the Russell 2000 group of companies, traded lower this week, closing Friday at 140.24, down 2.6% on the week. IWM broke down through its 200 dma on June 10th and is now approaching its 50 dma at 134.01.

The NASDAQ Composite index tumbled Friday afternoon, losing 260 points to close at 9757, down 1.9% for the week. Perhaps more significantly, NASDAQ surrendered its pre-correction high at 9817 on Friday. This week appeared to be the splash of cold water on the strong bullish trend since the correction lows in late March. It remains difficult to explain why the NASDAQ composite should be valued higher than it was in February after all of the economic damage done by the coronavirus lockdown of the economy. I don’t have hard supporting data, but I think the market pricing that corresponds to the current state of this economy is lower yet.

The S&P 500 is now 11% below its high on February 19th. This week’s unemployment data reported twenty million continuing unemployment claims. How can we have twenty million unemployed and yet value the S&P 500 companies only 11% below the pre-correction high? The media have continued their push to fuel the panic. Have you noticed the shift in emphasis? Since the beginning of the pandemic, the evening news always led with the number of covid deaths and projections of an eventual death toll of two to three million and mortality rates of 10% or more. Now the headlines focus on the number of covid cases, which are increasing as testing becomes more widely available. The mortality rate is now on the order of 0.2% or less, more in line with a serious flu season. And the inconsistencies abound. Our governor thinks it is perfectly acceptable to walk shoulder to shoulder with protesters without a mask but continues to order churches closed.

Regardless of how you view the current events, the high levels of volatility drive higher option prices and offer trading opportunities. On the other hand, higher levels of implied volatility also communicate higher risk. Allow me to illustrate with one example from this week. On Thursday I sold the COUP Jun(6/26) 270 call for $715 and then rolled out to Jul(7/2) on Friday for a credit of $618. I collected $1,333 in two days on an investment of $25,718. Of course, next week could bring a very different story – that illustrates the pros and cons of this trading environment.

Carefully weigh the risks of this market. Set tight stop losses and follow them with great discipline.

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The Standard and Poor’s 500 Index (SPX) opened this week at 3200 and continued to trade higher through Wednesday but then the long recovery came to a stop. SPX closed today at 3041, for a 5% decline just this week. Thursday’s trading broke the 200-day moving average (dma) but the index opened higher today and closed well above the 200 dma. Trading volume for the S&P 500 companies has been choppy for the last two weeks, running along below and just above the 50-day moving average (dma).

VIX, the volatility index for the S&P 500 options, had declined since the peak of the correction, and reached 24.5% last Friday, matching lows from late February. VIX moved higher this week and spiked as high as 43% on Thursday. VIX closed today at 36.1%, reminding us that this remains a nervous, and therefore dangerous, market.

IWM, the ETF based on the Russell 2000 group of companies, closed at 138.27, up 3.24 points today, but closed the week with a 9.2% decline. As usual, the small to mid-cap stocks in the Russell 2000 trade lower faster whenever traders get spooked.

The NASDAQ Composite index tumbled Wednesday and gapped open lower Thursday for a large loss. NASDAQ closed at 9589, up 96 points today, but lost 2.4% for the week. NASDAQ continues its role as the broad market leader, recovering its 
pre-correction high this week, but taking less of a hit as the market sold off over the past two days.

This was an interesting week in this trip back from the correction. The first surprise is how NASDAQ actually tacked on gains over the pre-correction highs. How does that make any economic sense? Even today’s close remains just below the previous highs.

I don’t think anyone has sufficient data to even roughly estimate where the market averages should settle after this man-made recession. So all we can do is trade what we see and have a bias toward the high-tech stocks that seem to have some immunity to the market damage. This week’s trading reminded us that this market will continue to be quite volatile. We closed our INTC trade this week for a 63% gain, but our AMD position took a hit with the market decline on Thursday.

Remain vigilant. Be prepared to go to cash quickly if necessary. Stay calm and remain disciplined.

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The market put on a strong finish to this week, with the Standard and Poor’s 500 Index (SPX) closing at 2489, for a gain of 3.3% for the week. However, a large portion of that gain occurred on Friday. SPX gapped open higher in the morning and broke out above the 50 day moving average (dma). Trading volume for the S&P 500 companies ran below the 50 dma all week and just touched the average level today. The enthusiasm appeared to be generated by a combination of positive news from GILD on remdesivir, Boeing’s announcement of resumed production on April 20th, and President Trump’s announcement of guidelines for reopening the economy.

VIX, the volatility index for the S&P 500 options, opened the week at 44.6% and steadily declined all week to close today at 38.2%. Declining volatility is welcome news, but this level of volatility is normally near the peak of severe corrections, so remain vigilant. The large institutional players remain on edge.

IWM, the ETF based on the Russell 2000 group of companies, gapped open higher Friday and closed at 122.06. In spite of the strength in IWM, it ended the week very close to unchanged. IWM remains well below its 50 dma. The Russell stocks are small to mid-cap stocks that may be more susceptible to significant economic damage resulting from the economic shutdown. That may be the reason IWM is trading less strongly than the S&P 500 companies or the NASDAQ Composite. Normally, these stocks would be leading a strong bullish move like we have seen over the past two weeks.

The NASDAQ Composite index closed Friday at 8650, up 118 or 1.4% on the day. NASDAQ gained 6.4% for the week. NASDAQ gapped open yesterday, pulled back during the day, but recovered to close near its open. This intraday recovery was a strong bullish signal. NASDAQ broke above its 50 dma on Tuesday and confirmed that breakout yesterday and today. Trading volume varied this week, exceeding the 50 dma twice and closing today just below average.

The high levels of volatility should give us pause. This market will continue to fluctuate widely based on daily news and rumors. It is fair to say that the depths of the correction were definitely oversold and those overreactions are normal for the market. The critical question is determining what stock prices will be justified once all of the damage to the economy has been clarified. We know it is bad, but how bad? It would not be reasonable to expect the market to recover to the pre-correction levels anytime soon, but it is unclear at this point what market levels are sustainable.

I do not subscribe to the extreme market bulls who believe reopening the economy will get us back on track in short order. However, the doomsday gurus are out in force with their dire predictions. Reality will be somewhere in between these extremes.

Stay calm and remain disciplined. Take small positions and place your stops aggressively. It is possible to make a lot of money in high volatility markets, but keep one perennial point in mind. High volatility correlates with high potential gains, but those gains are always accompanied by higher risk.

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The Standard and Poor’s 500 Index (SPX) gapped open Friday morning and continued to trade higher through the day, closing at 3194. The S&P 500 index is now only 6% below the pre-correction high. That doesn’t seem possible, but it is what it is. The 200-day moving average (dma) is now far behind us. It appears as though the pre-correction high at 3386 is now the next resistance level. Trading volume for the S&P 500 companies popped higher late this week, and spiked up to 4.7 billion shares today, well above the 50 dma at 3.3 billion shares.

VIX, the volatility index for the S&P 500 options, closed Friday at 24.5%. Although the VIX has steadily declined from the peak of the correction, the current level of volatility remains historically high. Traders should keep this volatility level in mind as we watch the markets just continue higher.

IWM, the ETF based on the Russell 2000 group of companies, gapped open higher Friday morning and closed at 150.20. IWM broke out well above its 200 dma at 146.57. IWM appears to be accelerating in its run higher, but remains 11% below its pre-correction high at 168.16.

The NASDAQ Composite index steadily traded higher this week and closed Friday at 9814. NASDAQ has now recovered its pre-correction high (to be precise, today’s close was 0.03% below the previous high). This should be good news, but it worries me.

Market analysts are trying to determine where the markets should be priced in light of the economic damage created by the overreaction to the coronavirus. The markets corrected between 32% and 43%. As of today’s close, the NASDAQ Composite has now recovered all of its correction losses. The S&P 500 companies are only off 6% from the pre-correction highs. How is this possible? Have we become too optimistic about this recovery? The strength of today’s market blew my mind. All three of the indices above gapped open strongly and never looked back.

What do we know about the economic damage?  I have seen estimates ranging from thirty to forty million Americans unemployed. The numbers being bandied about for small businesses that will never reopen are frightening. Even the current huge unemployment estimates may be low. How can the current market levels make economic sense? Many analysts were saying the market was overbought before this correction. Now what do they think?

However, one of the most fundamental of trading rules is to trade what you see and not what “you think should be happening”. I am continuing to make good money in this market. But don’t forget the market summary above. If market analysts start to reassess their estimates of the economic damage, this market could take a tumble. Remain vigilant. Be prepared to go to cash quickly if necessary. Stay calm and remain disciplined.

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The Standard and Poor’s 500 Index (SPX) closed Friday at 2541, and for a welcome change of pace, SPX was actually up almost 11% for the week. Trading volume for the S&P 500 companies fell off this week as the market started to recover but remained above the 50-day moving average (dma) all week.

VIX, the volatility index for the S&P 500 options, opened the week at 74% and closed the week at 66%, exactly where VIX closed last week. Tuesday posted a huge intraday low of 36%, but that couldn’t hold. The markets may be calming somewhat, but we are far from normal.

IWM, the ETF based on the Russell 2000 group of small to mid-cap stocks, closed Friday at 112.56 for a weekly gain of 10.9%. All of the broad market indices paused on Friday after a week of positive daily moves higher, but IWM didn’t give back much of the week’s gains. The relative strength of the Russell 200 stocks is encouraging.

The NASDAQ Composite index closed Friday at 7502 for a weekly gain of 9.6%. NASDAQ’s low on Wednesday set this index’s correction at 32%. Like the other broad market indices, NASDAQ posted gains all week but gave a little back on Friday. Trading volume declined slowly over the week but remained above the 50 dma all week.

The source of this severe market correction is not the usual economic cycle downturn or the crashing of a housing or dot com bubble. This correction is the result of the coronavirus pandemic. The latest CDC update of March 29th reports a total of 122,653 coronavirus infections and 2,112 deaths in the U.S. CDC changed its reporting for the current flu season this week and changed all results to ranges based on the uncertainty of their data gathering procedures. Current CDC estimates are 38 to 54 million flu infections and 24 to 62 thousand resulting deaths.
 
The media continue to handle this pandemic irresponsibly. Just listen to the press questions at any of the coronavirus press conferences. The press have an agenda and it isn’t connected to the well-being of the public. They are promoting panic. Even when CDC officials say it is safe to return to work, people will be too scared to leave their houses. Then the headlines will turn to the economic depression that the media created for their own purposes.

I described IBD’s (Investor’s Business Daily’s) Follow Through Day methodology in the March 13th newsletter. The day count of that methodology begins with a strong bullish day on above average trading volume. That day count began with the strong bullish day on the S&P chart this past Tuesday. The count continues as long as Tuesday’s low of 2344 isn’t broken. Friday makes Day Four. Now we watch for a strong bullish day on above average trading volume. That will be the Follow Through Day and gives us a higher probability of reentering the market successfully after the correction. If SPX breaks 2344, we restart the process.

In the meantime, be extremely picky with your trades. AMZN, WMT and DPZ are benefiting from this economic lock down and may be good choices for sticking your toes back in the water. Be cautious about entering any new positions. When you do decide to pull the trigger, trade small.
Stay calm and remain disciplined.