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The Standard and Poors index (SPX) fell out of bed this week, with the largest loss occurring today with a loss of 1.3%. Today’s trading closed at 4166, down 1.9% for the week. SPX bounced off the 50-day moving average (dma) this morning and appeared to be stabilizing. You may recall that the 50 dma was the support level for the market’s earlier pull backs this year. But that proved to be wishful thinking as trading became more bearish this afternoon. Today’s close at 4166 was well below the 50 dma at 4182. Trading volume was below average Monday and Tuesday but accelerated the balance of the week, gaining steam each day.

VIX, the volatility index for the S&P 500 options, made the complete trip this week, opening Monday at 16%, near lows for the year, and closing today at 21%. We hit volatility lows for the year last week, but that is long gone.

The IWM ETF, based upon the Russell 2000 index, declined steadily through Thursday, but kept recovering from intraday lows, suggesting the bulls were buying the lows. That all changed today with a gap opening lower this morning and breaking the 50 dma at the opening trade, closing the day at 222.13, down 2.3% today and down 4.4% for the week. The small to mid-cap stocks that make up the Russell 2000 are the high beta stocks that tend to lead bull markets higher and bear markets lower. This could be a significant turning point, although we thought that back in early May as IWM collapsed.

The NASDAQ Composite index is the outlier this week, closing today at 14030, down 131 or 0.9%. NASDAQ opened the week at 14038, resulting in a decline of only 0.4% for the week, the strongest broad market index this week by far. The 50 dma is nearly 2% below today’s close. NASDAQ’s trading volume ran along the 50 dma most of the week and actually declined today. NASDAQ was punished in earlier pull backs this year, but not today.

What a difference a week can make. Last week, I noted that we had seen steady price rises since May 19th, SPX had set a new all-time high and both NASDAQ and IWM were nearing their all-time highs. What changed?

Worries about impending inflation have been brewing for a couple or three weeks and one might think the calming remarks from Yellen and Powell would have put that to rest, but, if anything, the concerns deepened.

I was surprised to see analysts focusing on the FOMC’s dot map, committee members' predictions for a variety of key economic indicators for the next two years. A couple of committee members predicted rate hikes in 2023 or perhaps as early as November 2022. Powell assured the press that the committee has not even begun to discuss interest rate hikes or the ending of the bond purchase program. He also saw inflation prospects as moderate and even explained how higher inflation would be a normal expectation as the economy reopens and begins to grow strongly. The FOMC even predicted GDP growth this year of 7.1%. Why are we so panicked?

This discussion gives the reader a reasonable synopsis of my thinking. However, this also shows why I found myself closing several positions today and taking larger losses than I should have because I waited too long. I was trading and managing my positions based on my rationale for the market and what made sense to me. I should be trading what the market gives me and not trying to rationalize the market’s moves. I know that rule, but...

The market this year has been characterized by several pull backs, followed by bullish recoveries. The result has been whipsawing traders in and out of the market and I am no exception.

Over the past two days I closed many positions for losses and several more positions will expire worthless this weekend. The end result is that my cash basis went from 39% to 92%. I was tempted to think today was a buying opportunity, but I resisted that temptation and decided it would be best to re-evaluate the markets next week. For now, cash is king. And this posture will make it easier to relax this weekend.

When I saw that IBD had shifted their assessment from Confirmed Uptrend to Uptrend Under Pressure after the market closed today, that reinforced my decision to step aside.

Be extremely cautious next week. Remaining on the side lines may be the wisest course of action.