The Standard and Poors 500 index (SPX) recovered earlier losses in the week and closed up 51 points at 3882, up 1.4% on the day and up 2.9% for the week. Trading volume ran at or above the 50-day moving average (dma) all week.

VIX, the volatility index for the S&P 500 options, closed down today at 24.6% after opening the week at 26.9%. Even though the market declined significantly after the FOMC announcement, VIX steadily declined all week. This divergence was an early signal that the decline earlier in the week wasn’t likely to continue today.

I track the Russell 2000 index with the IWM ETF. IWM followed the lead of the large blue chips today and rallied 1.4% to close at 178.68. But IWM remains down nearly two percent for the week. IWM’s rise yesterday was another signal that the decline earlier in the week wasn’t likely to continue.

The NASDAQ Composite index closed up 1.3% at 10,475 but remained down five percent for the week. NASDAQ’s trading volume fell below the 50 dma today.

The market has been focused on two issues: record rates of inflation and the concern that the Fed would raise interest rates significantly to curtail inflation. Market analysts have been debating whether the Fed policies will result in a so-called soft or hard landing for the economy. This week’s announcement has pushed more analysts into the hard landing camp.
 
The key question now is the degree to which earnings will be decreased by the record rates of inflation. The most fundamental analysis of a stock price is to view it as the price of the time adjusted cash flow for the stock’s business. Hence, if earnings are declining, the stock price must decline. Higher interest rates exacerbate this decline.
 
This week’s announcement of another 75 basis point increase in the federal discount rate was priced into the markets – no surprise there. However, Powell’s comments during the press conference spiked worries that more rate hikes are coming. Markets rose initially but then plummeted. Yet the VIX declined. This VIX divergence was a signal that the market consensus has not panicked.
 
I am not in the camp of the “sky is falling” bears, expecting a severe market crash, but I can’t be bullish in the middle of a recession. My recommendation remains to stay on the sidelines.