The Standard and Poors 500 Index (SPX) declined over the first three days this week, but recovered most of those losses by the end of the week, closing at 2942 today, essentially flat for the week (actually down nine points or 0.3%). The recovery over the past two days seems to suggest that traders are expecting a resolution to the trade negotiations this weekend.
Trading volume ran below average all week, until today when volume spiked to 2.7 billion shares, well above the 50-day moving average (dma) at 2.0 billion shares. I find it curious that we have seen trading volume spikes for the past two Fridays, but below average volumes in between those spikes. Is this the result of bullish expectations for trade news over the weekends?
The volatility index for the S&P 500 options, VIX, was running above 16% earlier this week, but declined to close at 15.1% today. That puts volatility right on the edge. Values below 15% are reasonably complacent, but higher values start to get my attention. The markets are bullish, but not relaxed and confident either.
The Russell 2000 Index (RUT) gapped open higher this morning, closing up twenty points at 1567. In two trading sessions, Russell wiped out four days of losses. This is the most bullish signal we have observed in the small cap index in some time. This is very encouraging because the small caps normally lead bull markets higher. But we need to get a trade deal done with China before we jump on the bulls’ bandwagon.
The NASDAQ Composite index gapped open higher this morning and closed at 8006, up 38 points. NASDAQ outperformed SPX in trading volume with a huge spike up to 4.1 billion shares, well above the 50 dma at 2.1 billion shares. The China trade negotiations continue to be the principal dark cloud hanging over this market. The prospect of an agreement this weekend encouraged traders, resulting in today’s spike in the markets on increased volume.
But that bullish attitude may be premature. 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. Even if we have a confirmed trade agreement on Monday, it isn't clear which way this market will move. I remain very cautious.