Out of the Woods?

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Category: Dr. Duke's Blog
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The markets opened strongly this morning, and for a change, remained strong throughout the day. SPX traded up through its 50 dma and closed at $1862, up $19. RUT gapped open this morning and closed up $12 at $1132. For the record, that only happened because I closed my April put spreads yesterday.

Volatility continued to pull back with VIX losing one and a half points to close at 14.2%. Trading volume fell off from yesterday's highs with 2.2 billion shares of the S&P 500 stocks trading today, falling just below the 50 dma at 2.3B. Trading volume dropped 15% on the NYSE and decreased 23% on NASDAQ.

The question for us to consider: Is this pull back over?

1) How far have we corrected? We are down 4.0% on SPX and 8.1% on RUT on a closing basis. By comparison, the February pull back was 5.7% and 7.4%, respectively. Many analysts will argue this was not an adequate correction, given recent market bullishness.

2) Today's gap open higher was accompanied by decreased trading volume - not reassuring.

3) SPX built strong support at $1815 on Friday, Monday and Tuesday. Tuesday's price action was particularly bullish; SPX traded down to $1816, but then traded 27 points higher. RUT behaved similarly, bouncing off the 200 dma on Friday, Monday and Tuesday. Both indexes gapped open higher this morning.

4) The FOMC beige book appeared to give traders encouragement. Yellen has committed to holding interest rates low even after the economy begins to recover. And don't forget that the Fed is still pumping $50B per month into this economy.

My take is that this pull back is over, but I am not so sure we will see the "straight up" type of bull run we saw so many times in 2013. I am remaining cautious for one other critical reason. Throughout 2013 and so far in 2014, this market has displayed huge price volatility - the price action where we have seen the markets trade fifty points downward and then recover those fifty points within just a few days. For that reason, I am looking at sideways to slightly bullish trades, but I remain cautious.