Think of everything this country has dealt with this year: Covid-19, the economic shutdown, riots and looting in our major cities, record setting levels of political rancor, and finally, our President testing positive for Covid-19. Then look at the Standard and Poor’s 500 Index (SPX) price chart below. SPX gapped open higher Thursday morning and then repeated that performance Friday morning. I’m glad but it is truly hard to believe. SPX closed Friday at 3477, up 30 points on Friday and up 3.3% for the week. In light of everything that is going on, this is very surprising to me. Trading volume for the S&P 500 companies continues to largely track below average, and those lower trading volume levels on Thursday and Friday warn us not to get too far out over our skis.

The volatility index for the S&P 500 options, VIX, opened the week at 29.5%, and closed Friday at 25.0%. That 25% level served as support through most of September and I would remind all of us that 25% is a pretty high level of volatility. It is easy to become accustomed to these higher levels of volatility and become complacent.

IWM, the ETF based on the Russell 2000 group of companies, turned in an extremely bullish move this week, closing at 162.70, up nearly 5% this week alone. IWM gapped opened both Thursday and Friday mornings. The Russell 2000 companies are small to mid-capitalization stocks that tend to lead bull markets higher and bear markets lower. This is the second week that IWM has outperformed the S&P 500 – a strong bullish signal.

The NASDAQ Composite index closed yesterday at 11,580 for a gain of 159 points or 1.4%. NASDAQ outperformed SPX this week, gaining 3.7% with two opening price gaps higher on Thursday and Friday. But even NASDAQ couldn’t match IWM’s gains. Similar to SPX, NASDAQ trading volume continues to generally track below the 50-day moving average.

This is the second week that the Russell 2000 companies have outperformed SPX and NASDAQ. These small to mid-cap stocks are signaling “risk on”. I restate my conclusion from last week: this market has strong bullish support. However, volatility levels remain elevated and are effectively warning us to be cautious. If you are able to accept moderate levels of risk, there are several solid blue chip stocks like FDX, COST, DE, and AAPL that are trending favorably. But watch your positions carefully.

Remain vigilant. This volatility isn’t going away anytime soon.