The Standard and Poor’s 500 Index (SPX) opened this week at 3155 and closed today at 3185 for a rise of nearly 1%. On Thursday, SPX’s 50 day moving average (dma) finally broke above the 200 day dma at 3021. A basic sign of recovery for a stock or an index is when the 50 dma overtakes the 200 dma. The S&P 500 remains nearly 6% underwater from the March correction. Trading volume for the S&P 500 companies has been running very low for the past several weeks. Today’s trading volume at 2.4 billion shares was well below the 50 dma at 3.1 billion shares. Today was the ninth trading session in succession with trading volume running below the 50 dma. I interpret this as general apprehension on the part of traders. We’re nervous about what tomorrow brings, and we are keeping a lot of cash on the sidelines. It is difficult or impossible to analyze what price makes sense for this market, given the extensive damage done by the shutdown. It is difficult to have the confidence “to go all in.”
VIX, the volatility index for the S&P 500 options, closed today at 27.3%. The recent low was 24.5% on June 5th. It may be hard to remember in the midst of this chaos, but volatility was running around 12% back in January. The current levels of volatility serve as a reminder that this remains a dangerous market.
IWM, the ETF based on the Russell 2000 group of companies, traded lower this week, closing Friday at 141.31, down 2.8% on the week. IWM bounced off of its 50 dma at 137.30 yesterday. Weakness in the small to mid-cap stocks has always been a reliable indicator of the market’s acceptance of risk. Like many of our citizens living in fear of the coronavirus, many traders are hiding under the bed, afraid for their investments.
The NASDAQ Composite index closed today at 10,617, a new all-time high for this index. NASDAQ gained 2.5% this week alone. Since June 29th, NASDAQ has been trading nearly straight upward, a run of 8.7%. But trading volume has been running below the 50 dma over this entire bullish run. This reinforces what we see with trading in the S&P 500.
I freely admit that I do not understand this market. Why is it possible that the NASDAQ composite has now set a new all-time high in the midst of the most severe (and self-inflicted) economic damage this country has seen since the Great Depression? Add in the rioting, looting, murder, and arson we are seeing in all of our major cities. Even more surprising, in almost every case, our government has stood by helplessly and allowed the mob to burn our cities, tear down statues, and even usurp public and private property and declare a new state. Many mayors and governors even defend the mob. The rule of law is not being enforced. Our very civilization is being threatened. But you wouldn’t know that from watching the NASDAQ hit new highs. The son of an acquaintance asked his dad why Costco was open, but they couldn’t go to church. Children often see the obvious that adults somehow miss.
You may disagree with my view of current events. A common response once was, “It’s a free country”, but it is now dangerous to express your views. Our civilization and our freedom are under siege. The S&P 500 remains 6% below its pre-correction highs and the Russell 2000 is 16% below its pre-correction highs. This week’s unemployment data improved but eighteen million remain on the unemployment rolls. I certainly wish the best for our leaders as they attempt to resurrect our economy. However, it is going to be a long, hard climb out of this hole.
The risk of this market is most succinctly illustrated by the current levels of volatility. Higher levels of implied volatility also communicate higher risk. As many of you know, the most conservative stock and options trade is a covered call on a blue-chip stock. My Conservative Income trading service has been using those trades this month and we are now up 3.7% for the month and up 13% for the year. You wouldn’t know we had a severe market correction. Those are better than average returns for this type of trading. Those elevated returns are a direct result of the higher levels of volatility that drive higher option prices and higher returns for this conservative style of trading.
The bottom line: It isn’t necessary to continue to hide under the bed from a financial viewpoint. We only took a 10% loss in March when the market lost 35%. And now we are up 13% year to date while the market remains down 6%. That is called risk management. Carefully weigh the risks of this market. Set tight stop losses and follow them with great discipline.