The Standard and Poors 500 Index (SPX) has traded higher since December 26th and closed Friday at 2707, up 2.3% for the week. Monday and Tuesday of this week, together with most of last week, consisted of a sideways pause in this rally, but the last three days were very strong, including two gap openings higher. Trading volume in the S&P 500 remains below average, as it has since December 26th, the beginning of this bullish run. Volume only exceeded the 50 dma once this week. This suggests that the large institutions remain uncertain about this market.
Volatility, as measured by the S&P 500 volatility index, VIX, declined for the last three days, closing Friday at 16.1%. I normally think of 15% as the borderline before I become concerned. By that standard, we should remain cautious.
The Russell 2000 Index (RUT) broke through the resistance set by the February correction low at 1464 last Friday (1/25), and stayed solidly above that resistance level this week. Similar to the S&P 500, Russell had strong positive days for the last three trading sessions, closing Friday at 1502, up 3 points.
The NASDAQ Composite index traded higher on Wednesday and Thursday, but was held back Friday by Amazon. Traders were disappointed with Amazon’s earnings announcement and weak forward guidance on Thursday evening. AMZN took it on the chin Friday, losing 92 dollars per share or 5.4%. That resulted in the NASDAQ Composite trading weaker than the other broad market indices.
The market’s recovery since December 26th has been impressive. The S&P 500 has gained 15% since the opening on December 26th. But we should keep that gain in perspective. Today’s level is equivalent to that of October 23rd, just before we tipped over to the October correction low on October 29th. In spite of our strong recovery in January, we remain about 8% below the highs in early October before the series of fall corrections began.
The January Barometer was developed by Yale Hirsch, creator of the Stock Trader’s Almanac, and this indicator has an 88% record of success since 1950. The essence of the January Barometer is that the S&P 500 index for the year will follow January’s performance. Yesterday’s close made it official with a 15% gain; the January Barometer is now in the books, predicting a positive year for the S&P 500 in 2019. That would be a welcome prognosis after last year’s 7% loss. However, traders remain concerned about continued political turmoil and the outcome of trade negotiations with China. Each day’s market is subject to the latest news or even rumors of news. That makes it dangerous for traders.
I am focusing on stocks that have weathered the fall storm of corrections well, and are now trading well above their 50 and 200 day moving averages. For example, take a look at ADI, ADSK, NOW, PANW, and PAYC. I remain in a more conservative stance during this bullish run. When I can close trades with even modest gains, I am taking that opportunity. This is a nervous market, and so am I. Be cautious.