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The Standard and Poor’s 500 Index (SPX) has been stair stepping its way higher since early November. Last week was the step down and this week was the step up to a new all-time high set yesterday. SPX opened the week at 3675 and closed today at 3709, down 13 points on the day, but SPX remained up just under one percent for the week. Similar to last Friday, today’s trading ended with a long lower candlestick shadow that often foretells bullish future price action. It is a good sign when the sellers push prices down to the low for the day, but the buyers come in to recover most of those losses before the close of trading.

Trading volume on the S&P 500 spiked higher on this quadruple witching Friday, the result of the simultaneous expiration of stock index options, stock index futures, stock options, and single stock futures. The expiration of these products coincide four times per year on the third Fridays of March, June, September and December. SPX trading volume hit 4.1 billion shares today, much higher than the 50-day moving average (dma) at 2.5 billion shares.

VIX, the volatility index for the S&P 500 options, opened the week at 22.7% and closed today at 21.6%, but that doesn’t tell the whole story. VIX traded as high as 23.8% intraday before declining into the close and once again confirming the nervous nature of this market.

IWM, the ETF based on the Russell 2000 group of companies, continued its barn burning run higher this week, opening Monday at 191.96 and closing today at 195.96, up 1.8% for the week. As one may see from the price chart, IWM is trading higher with only a couple of minor pauses. The strong behavior of these small to mid-cap stocks is a very bullish sign for the entire market.

The NASDAQ Composite index closed today at 12,756 and wins the prize for the strongest performance of a broad market index this week. NASDAQ opened the week at 12,447 and today’s close represented a stellar gain of 2.5% - in one week! Surprisingly, NASDAQ’s trading volume did not reflect the normal quadruple witching spike.

The most significant bullish signal for the past month or so has been the bullish price action of the Russell 2000 index. Whereas the other broad market indices have gained and paused as they traded higher, Russell has not lost a beat. Last week Russell continued its steady gains while the other indices lost ground. This week, Russell tacked on a gain of nearly two percent while the broad market, as best represented by the S&P 500, managed to gain less than one percent. These are the high beta stocks that tend to be sold first when the large institutional players get nervous, but they aren’t being sold; they are being bought.

The conventional wisdom gives credit for this bullish market to the Covid vaccine. While I don’t see an imminent economic recovery unfolding, the market is a future discounting mechanism, and the current strong market reflects the conviction that the worst is behind us. I hope the market has 20:20 vision.

I sound like a broken record, but I must continue to remind us that twenty-plus percent volatility is historically high. Higher volatility makes selling option premium very lucrative but don’t forget that this same volatility is warning us of the risk inherent in those expensive options.

Quantitative evidence is found in the year end results of our Conservative Income trading service. With our December positions closing this weekend, this service stands at a gain of 26% for 2020, while the S&P 500 is up 14%. Selling those expensive options was indeed lucrative. More importantly, we demonstrated the strength of this style of trading during the March correction. While the S&P 500 index lost 35%, we lost 9%. More importantly, our portfolio recovered those losses in thirty days while it took SPX five months to crawl out of the correction.  Join us in Conservative Income as we start a new year.

I won't be writing any blogs for the next two weeks. I wish you and your families a very Merry Christmas and a healthy and prosperous New Year.