The Standard and Poors 500 index (SPX) gapped open higher on Thursday recovering the losses on Wednesday. SPX closed today at 3993, up 37 points or +0.9% on the day and up 5.6% for the week. Trading volume ran below the 
50-day moving average (dma) early in the week and spiked higher on Thursday’s strong run higher.

VIX, the volatility index for the S&P 500 options, closed down today at 22.5% after opening the week at 25.7%. The largest decline in the week was on Thursday as the market spiked higher.

I track the Russell 2000 index with the IWM ETF. IWM followed the lead of the large blue chips all week, down on Wednesday and then spiking higher on Thursday. IWM closed today at 186.90, up 1.52 points or 0.8%, but up a full four percent on the week.

The NASDAQ Composite index closed today at 11,323, up 209 points or 1.9%, and up 7.7% on the week. NASDAQ’s trading volume spiked higher on Thursday’s strong bullish run but fell below the 50 dma today.

The market has been focused on two issues: record rates of inflation and the fear that the Fed would raise interest rates too aggressively to curtail inflation. Last week’s FOMC announcement pushed more analysts into the hard landing camp and the market responded negatively. The election results appeared to initially disappoint traders with a weak day on Wednesday. But the other core issue worrying the market has been the record rates of inflation and the CPI report this week provided some welcome news with the year over year CPI declining to 7.7% from the last reading of +8.2%.
 
I believe the decline in the CPI numbers encouraged traders that the Fed may be more inclined to moderate their rate hikes. However, all it will take is some hawkish comments from a Fed member to scare the market. I expect the extreme price volatility we have seen all year may continue.
 
The markets traded to a high on September 12th before entering this latest decline. At today’s close, SPX is 3.2% below those highs, NASDAQ is 8.4% below and IWM is only 1.1% below. The most bullish point here is how close the small to mid-cap stocks of the Russell 2000 (IWM) are to the earlier highs in September. IWM actually pulled back from that resistance level today. Those most recent highs are the next significant hurdle for the bulls.
 
This economy is far from healthy and one good CPI report doesn’t provide much confidence. I am testing the waters with a couple of bullish trades, but I remain cautious.