It now appears that this severe correction hit its low on December 24th, when the Standard and Poors 500 Index (SPX) closed at 2351, representing a decline of 20% since October 3rd. SPX closed Friday at 2532, up 84 points on the day. The major market indices rallied strongly the day after Christmas, and gave traders hope. Technical analysts often look for what they call a follow through day after a correction low is recorded. This follow through day is considered the signal that traders may once again enter the market with some confidence that the correction is past. One begins counting days after the strong bullish move following the correction low (December 26th). The day count continues as long as the low price of day one isn’t broken. On day four or later, the analyst watches for a strong bullish trading day with volume equal or higher than the previous day. When that is achieved, the follow through day has occurred. Friday’s strong push higher satisfied the criteria for the follow through day. Trading volume in the S&P 500 has run below the 50-day moving average (dma) throughout the holidays. Thursday and Friday’s trading volume finally reached back up to the 50 dma.
Volatility, as measured by the S&P 500 volatility index, VIX, closed yesterday at 21.4%. The high point for VIX came on December 24th at 36%. This was almost an exact match of the peak in volatility in the February correction at 37%.
The Russell 2000 Index (RUT) closed yesterday at 1381, up 50 points. Russell has led this correction, down 25% from early October to December 24th. The NASDAQ Composite index closed yesterday at 6739, up 275 points. NASDAQ lost 23% from early October to the low on December 24th. I am a little surprised that NASDAQ’s correction wasn’t the largest of the broad market indices given the damage incurred by many of the high-tech names in the NASDAQ. Russell has led this correction from the beginning, trading lower and more consistently lower week after week.
Price trends since December 24th have been reassuring and the achievement of the follow through day this week probably contributed to Investors Business Daily changing their market assessment on Friday from “Market in Correction” to “Market in Confirmed Uptrend”.
I have never understood this correction from day one since it seemed to have no basis in solid economic terms. Yes, prices are higher, but companies have not grown earnings this rapidly in many years. Likewise, we have not seen GDP growth in the 3.5% range in decades. I believe this correction was largely self-inflicted. The financial news has been infected with the rancor of the front-page news. I am amazed at how often I have heard and read the term “recession” over the past several months. In my first economics course as an undergraduate, I learned that a recession is defined as two consecutive quarters of negative economic growth. That definition hasn't changed, and we have been posting GDP growth numbers in excess of three percent. Recent GDP growth rates are light years from going negative. Businesses are complaining that they can’t hire people fast enough. Wage growth is at historic highs, while unemployment is at historic lows. Talk of recession makes no economic sense.
Why have we turned into a crowd of Chicken Littles?
I am encouraged by the recent market trends, but remain somewhat concerned about the volatility that appears to have become part of the normal market. Therefore, I may send out a trade alert this week, but I remain cautious. This market is going to have to show me that it has gotten over its “sky is falling” fears.