The Standard and Poor’s 500 Index (SPX) closed Friday at 3427, down 28 points on the day. Thursday and Friday took their toll on the market with the S&P companies losing 2.4% this week. On August 24th we broke out above the pre-correction high of 3386 and kept trading higher. But that pre-correction high appears to have served as support Friday as SPX broke down through that level to hit its intraday low mid-morning but then began a steady recovery of much of the day’s losses before the close of trading.
For several months trading volume for the S&P 500 companies has run well below the 50-day moving average (dma). That changed on Thursday and Friday as trading volume spiked on the large trading declines. I initially took that as an emphatic underscoring of the declines. But Friday’s recovery was also at above average trading volume. That was encouraging.
The volatility index for the S&P 500 options, VIX, spiked higher on Thursday and Friday as SPX collapsed. VIX closed Friday at 30.8% after hitting an intraday high of 38.3%. I will be watching VIX closely as the market reopens on Tuesday.
IWM, the ETF based on the Russell 2000 group of companies, followed the broad market indices off the cliff Thursday and Friday, closing at 152.80 on Friday, down 2.8% for the week. The S&P 500 declined 2.4% for the week. Normally, the Russell 2000 rises and declines at a much faster rate. This four tenths of a point differential seemed smaller than I expected. This may suggest that the recovery we saw Friday afternoon will continue next week. IWM bounced off its 50 dma at 149.98 before closing at 152.80 on Friday.
The NASDAQ Composite index closed Friday at 11313 for a loss of 145 points. NASDAQ lost 3.5% of its value this week, which was not surprising since this market rally has been led by NASDAQ stocks. This index bounced off its 50 dma to recover strongly on Friday. NASDAQ remains 13% above its pre-correction high. That is rather amazing.
I have been worried about this market for several weeks now. It just didn’t seem reasonable that the market prices should be back to pre-correction highs after all of the self-inflicted economic damage that has been done (and continues here in Illinois). When I saw the market drop off significantly on Thursday and then open lower on Friday, my only question was how low it would go. But then it started recovering Friday and that surprised me.
One of the fundamental lessons of trading is to trade what the market gives you, not what you think makes sense. In that spirit, I began to stick a couple of toes back into the water late Friday. I am largely in cash and feeling comfortable with that over this long weekend. However, I did take a flyer Friday. I surveyed my watch list and noted the stocks that were holding up best in this downturn. TSLA stood out. TSLA opened Friday at $403, traded down to $372 and then traded higher to close at $418, up 11 points on the day. I could not resist. I bought 100 shares of TSLA at 406.07 and sold the Sep(9/11) $405 call for $26.30. The assigned return would be 6.6%.
Watch the opens Tuesday morning carefully. Don’t jump too quickly. Even if it opens higher, it could reverse itself in that first hour of trading. It is a dangerous market. Remaining largely in cash is prudent.
Enjoy your holiday weekend. Remember to thank those people in your life whose work ethic made your life what it is today.