Category: Dr. Duke's Blog
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The Standard and Poors 500 index (SPX) had another rough day, closing down 31 points to 4349, down 0.7% on the day and 1.5% on the week. The approximate low of the correction during the last week of January was 4300, so today’s closing price is getting close – will SPX find support and bounce? Or will the index break through and perhaps begin a severe market crash of 30%, 40%, or even more? Trading volume of the S&P 500 companies was below average all week, rising slightly above the 50 dma today.

VIX, the volatility index for the S&P 500 options, opened this morning at 27%, moved as high as 30% and then pulled back somewhat to close at 28%. One might say the smaller increase in volatility didn’t match the severe sell off of the past two days. Is that a sign of the negativity lessening? Maybe.

I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. IWM closed today at 199.47, down 1.73 points, down -0.9% on the day and down 1.1% for the week.

The NASDAQ Composite index closed today at 13,548, down 169 points or 1.2%. NASDAQ opened the week at 13,769, resulting in a weekly loss of 1.6%. NASDAQ has been hit hard by this correction. NASDAQ’s 50 dma and its 200 dma are very close to 14700. NASDAQ is now trading 1152 points below those moving averages. Put another way, NASDAQ would have to gain 8.5% to regain those moving averages. NASDAQ trading volume was below average all week.

With the S&P 500 index solidly under its 200 dma, we are experiencing a serious correction. Some technical analysts call any decline less than 10% just a minor pull back. The low toward the end of January was down about 11%. This correction isn’t irrational. We are setting records with recent measures of inflation. A more serious fear for traders is the Fed’s cure for inflation: ending their bond purchases (pumping up the money supply) and increasing the federal discount rate, the interest rate charged banks by the Federal Reserve. Both will put a strong damper on economic growth and hence stock prices.

That brings us to the key question: How much damage will that cause for the markets? Down 11%? Down 25%? More? Market pricing always reflects traders looking forward, predicting the price trend, and placing their bets (trading). You could say the majority opinion in the last week of January was trimming 11% was about right. Will that hold, or are traders starting to worry that the economy might be harder hit by inflation and higher interest rates?

The market seems to be oscillating between mild bullishness and panic. If the covid restrictions continue to decline, that will tend to stimulate significant recovery and growth. But if the next round of CPI and PPI data move higher yet, all bets are off.