This week’s trading continued the positive price trend with the Standard and Poors 500 Index (SPX) posting a 2.4% gain for the week and closing yesterday at 2596. SPX broke through the resistance level at 2581 set by the February correction on Wednesday and held those levels for the balance of the week. The one worrisome observation this week was the declining trading volume in the S&P 500. Volume steadily declined all week and had returned to holiday levels by Friday. Are the trading desks still partially empty or is money waiting on the sidelines?
SPX broke through the 20-day moving average (dma) in the center of the Bollinger bands on Monday and is now entering the upper quartile of the bands. Perhaps the market will be taking a breather after solidly breaking through the February correction resistance.
The S&P 500 volatility index, VIX, closed yesterday at 18.2%. VIX has steadily declined from its opening December 26th at 36%. However, volatility levels at 18% are far from calm. We have only just returned to the volatility levels we experienced through October and November.
The Russell 2000 Index (RUT) closed yesterday at 1447, up 2 points. Russell led this correction, trading down 25% from early October to December 24th. It was encouraging to see Russell gain 4.8% this week. RUT is now leading SPX higher.
The NASDAQ Composite index closed yesterday at 6971, down 15 points, but NASDAQ gained 3.2% this week, and similar to SPX, NASDAQ broke the resistance levels set by the February correction on Tuesday and held those levels the balance of the week.
Both the NASDAQ Composite and the Russell 2000 outperformed the S&P 500 this week. Russell led the race with its gain of nearly five percent this week. The NASDAQ Composite and the S&P 500 both broke through the resistance level set by the February correction, but Russell has the largest losses to recover and has not yet broken that key resistance level.
One of the traditional forward-looking indicators for the coming year is to monitor the S&P 500 gains or losses for the first five trading days of January. That indicator is solidly green for 2019, but was way off the mark in 2018. The first five trading days of January indicator has historically been accurate 83% of the time. That indicator plus the very strong market performance since the December 24th low prompted me to venture back into the market this week with a couple of trades. The January Barometer was developed by Yale Hirsch, creator of the Stock Trader’s Almanac, now edited by his son, Jeffrey Hirsch. The January Barometer states that as the S&P 500 goes in January, so goes the year. This indicator has an 88% record of success since 1950. Neither the First five Days nor the January Barometer were on target for 2018, but that was an odd year in the markets in many ways.
I was encouraged by the follow through day on January 4th and the consistent positive price action this week. However, volatility remains relatively high, so proceed with caution.