With apologies to Charles Dickens, this market reminded me of his great book, A Tale Of Two Cities.
Today’s markets gave us a wide range of price action with a huge decline on NASDAQ contrasted with the small caps in the Russell 2000 index finally coming to life after trading sideways all year. What should we conclude?
The Standard and Poors 500 Index (SPX) opened the week at $2437 and closed today, essentially unchanged, at $2432. Today’s price action on SPX ranged widely, trading up as high as $2446 this morning, but then trading down to $2416 this afternoon, before recovering somewhat into the close. SPX trading was very bullish over the last fifteen minutes of trading today. Trading volume spiked during those last few minutes. I find this significant increase in trading volume as prices recovered to be a very bullish signal – another example of market participants buying the dip. The bulls are still in control.
The Russell 2000 Index (RUT) has stubbornly lagged behind the other major market indices all year, but RUT woke up late this week, with large moves higher yesterday and today. RUT closed today at $1422, up $6. This close is right at the upper edge of the trading range that RUT has held since last December. RUT broke out and traded as high as $1434 earlier today, but couldn’t hold that high. Historically, small and mid-cap stocks always lead bullish markets upward and bearish markets downward. When traders are bullish, they tend to buy higher beta stocks with higher profit potential. Conversely, when markets cool, these same high beta stocks are the first to be sold. Russell’s apparent revival may be a leading indicator of the continuation of this bullish trend higher yet. I will be watching RUT next week to see if it can break out and close well above the upper edge of the trading range. That would be the final bullish indicator that has been missing thus far.
The Dow set an all-time high today, RUT made a valiant effort to break out of its sideways trading range, and SPX remained essentially unchanged. But the NASDAQ Composite told a completely different story. NASDAQ plunged $114 to close at $6208, nearly a 2% decline. This huge decline on NASDAQ was triggered by a Goldman Sachs report critiquing the high stock prices of the high tech market leaders such as Apple, Google, Nvidia, and FaceBook. The resulting high tech sell off triggered the S&P 500 volatility index (VIX) spiking up over 12% today, but VIX recovered significantly, closing at 10.7%, only up about a half percent on the day.
The bullish strength of this market is remarkable when you consider all of the political and global distractions. This market consistently trades higher, seemingly ignoring all of the negative distractions. I will continue to play this bullish market trend, but I am keeping my stops reasonably tight. It remains a nervous market. When in doubt, I close.