Category: Dr. Duke's Blog
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The Standard and Poors 500 Index (SPX) came back to life and took another step higher this week, closing at 2950 today and up 2.1% for the week. SPX is attempting to break out above the highs set in early May, but thus far that resistance level is holding. S&P 500 trading volume rose with the bull market this week. Today’s volume spiked up to 2.9 billion shares, much higher than the 50-day moving average (dma) at 2.0 billion shares. One must go back to March 15th to find higher trading volume figures.

This week’s bullish run resulted in SPX running just below the upper edge of the Bollinger bands for the last four days of this week. Will next week repeat the pattern of the past two weeks and take a pause after this week's run higher? A slower rate of increase is probably the best the bulls may expect, but a flat week of treading water may be more likely in view of the G20.

The volatility index for the S&P 500 options, VIX, declined early in the week, as one might expect in a rising market. But the situation changed yesterday. VIX hit an intraday low of 13.2%, but then moved up to close at 14.8%. Today’s market took volatility a bit higher, closing up a little over half a point at 15.4%. This is a VIX divergence, with VIX moving higher as the market moved higher. This often foretells a drop in the market in the next trading session.

The Russell 2000 Index (RUT) has steadily traded higher since June 1st. In fact, RUT’s pattern of gains has been steadier and more consistent than SPX or NASDAQ. Russell gained 1.8% this week, but traded lower today, closing down 14 points to 1550.

The NASDAQ Composite index closed today at 8032, down 20 points, but rose 2.7% this week. On Tuesday, NASDAQ gapped open higher and solidly broke through its 50 dma. Perhaps more importantly, NASDAQ held that breakout through the rest of the week. Similar to SPX, NASDAQ’s trading volume spiked today to 2.9 billion shares, well above the 50 dma at 2.1 billion shares.

We enjoyed a pretty strong bull market this week, but several warning signs are concerning:

•    Today’s trading volume spiked on a weak market, and this was amplified by the same pattern in SPX and NASDAQ.
•    The volatility divergence for the past two trading sessions; VIX is trading higher with a flat to increasing market.

•    Russell declined more strongly today, as compared to SPX and NASDAQ.

Today’s spike in trading volume could represent some profit taking as the large institutions saw the market flatten. They also may be hedging their bets ahead of the G20 Economic Summit and that may be raising VIX as they buy protection.

The China trade negotiations are the principal dark cloud hanging over this market. The announcement that Trump will meet with Xi Jinping while attending the G20 buoyed the market, but I think traders worried about it as the week wore on. A scheduled meeting is certainly a positive development, but it doesn’t guarantee an agreement on terms to end the trade tariff threats.
I expect this next week’s market to trade flat or possibly even slightly lower simply as traders pause to wait for news from Trump and Xi. I remain in a moderately bullish, but cautious stance. Until we see a definitive resolution of the China trade negotiations, this market will be volatile. And that may be especially true this coming week.