The Standard and Poor’s 500 Index (SPX) has been setting bullish records for the past several months, but SPX set records of a different type on Friday when it closed down 58 points at 3226. Given all of the doomsday hype in the news on Friday you may be surprised that the week’s loss was only 0.6%. As you may see from the chart, Friday’s intraday low hit two support levels. One was support from December 20th through January 6th, and the other is the 50-day moving average (dma) at 3211. SPX did not close at its low on Friday, a minor but positive sign for the optimists. If SPX breaks that support level next week, it could easily fall to 3175 for a 5% correction.
Trading volume has been very strong this month, and has only dipped below the 50 dma twice since January 2nd. Trading volume during Friday’s sell off was the highest of the month.
The volatility index for the S&P 500 options, VIX, opened the week at 17.4% and reached a low for the week on Thursday at 15.5%. Trading on Friday spiked VIX to an intraday high of 20%, but it pulled back a bit to close at 18.8%.
IWM, the ETF based on the Russell 2000 group of companies, has been trading lower since the open on January 17th. IWM broke support from early December around 162 on Friday and closed at 160.35, down 3.4. This represented a loss of 1.4% for the week, far more than the broad market indices for the blue chips.
The NASDAQ Composite index closed Friday at 9151, down 148 points. NASDAQ gapped open much lower on Monday, opening at 9092. This set up the surprising result that NASDAQ turned in a weekly gain of 0.6%. NASDAQ’s trading volume dropped below the 50-day moving average (dma) on Tuesday and Wednesday, but finished the week well above the 50 dma.
There are now eight confirmed cases of coronavirus infections in the U.S. The markets began to be affected this week as traders fell prey to the alarmist news reports. The normal flu season falls during the fall and winter months with peak flu infections in December through February. At this point in the 2019/2020 flu season, CDC has reported 19 million cases of flu in the U.S. with approximately 10,000 deaths. But those numbers don’t make the evening news. We normally don’t pay too much attention to family members and friends contracting the flu. But the flu can be very serious for children and older adults. News reports of a new flu virus strain with a specific name and nightmarish reports out of China captivate our attention. We forget that the sanitary conditions and level of healthcare in this country are light years beyond most of China. And few countries have anything comparable to the CDC. Take reasonable precautions and don’t panic.
The driving forces behind this strong bull market remain valid: two major trade agreements and strong economic data. Those trade agreements will add a minimum of one percent to this year’s GDP growth rate. The fact that the FOMC appears committed to low interest rates for the near future is icing on the cake. Earnings and revenue growth in this earnings announcement cycle have been very strong. Market prices are ultimately determined by the underlying economics. My trading posture is unchanged. I describe it as cautiously bullish. Some stocks are holding up well while others are taking a hit. My ADSK diagonal call spread is an excellent example. It now stands at a gain of 44%. ADSK declined Friday, but didn’t hit my stop loss price at $189.75. ADSK hit a low of $193.31, but recovered most of its losses as it closed at $196.85.
Remain disciplined and follow your stop loss prices. Don’t panic.