After the Standard and Poors 500 index (SPX) hit an all-time high on November 8th, the broad market indices traded down steadily until the bullish spike higher yesterday. SPX gapped higher at the open and tacked on twenty-one points before the day’s trading was done. But today was a different story with SPX closing down 7 points at 2579 on declining volume. I think the tax reform soap opera is taking its toll on the markets.
We have nearly completed the earning announcement cycle for the third quarter and it was one of the better earnings cycles with 80% of companies beating analyst earnings estimates. With solid corporate earnings growth, a strong bull market shouldn’t be a surprise. Perhaps this market isn’t as reliant on passage of a tax bill as many have speculated. The recent market slide through this past Wednesday was said to be based on rumors of the tax reform push meeting significant hurdles. If that were true, why did the market pop back so strongly yesterday? If anything, it is becoming clear that the probability of a tax bill reaching the President’s desk is seriously eroding.
The Russell 2000 Index (RUT) has become the anti-establishment index. October 3rd started a steady slide in RUT, giving up 48 points or 3.2% by the close on this past Wednesday – a 3% decline at the same time that the broad market indices were setting new highs. RUT played ball with its big brothers and spiked higher on Thursday. But today’s trading continued higher on Russell, with a close at 1493, up 6 points.The volatility index for the Standard and Poors 500 index, VIX, rose during the recent market decline, from a low of 10.5% on November 9th to an intraday high of 14.5% on Wednesday this week. VIX closed today in much calmer territory at 11.4%.
Continue to trade from a bullish posture, but we need to become more selective in our stock picking. Keep a close watch on your positions and set tight stops. This is a nervous market. I believe we can still achieve some nice gains in this market, but it will pay to be more picky in our trade selection and to quickly cut losses.