The Standard and Poors 500 index (SPX) closed today at 5,344, up 25 points or 0.5%. SPX opened the week at 5,151, setting up a weekly gain of 3.7%. Trading volume spiked on Monday but then declined all week, ending the week at 2.1 billion shares, well below the 50-day moving average (dma) at 2.7 billion shares.

VIX, the volatility index for the S&P 500 options, gave us a wild ride this week, opening Monday at 23.4%, spiking to 66% and then steadily declining to today’s close at 20.4%. It certainly appears as though the market panicked on Monday and then steadily realized that nothing much had changed.

I track the Russell 2000 index with the IWM ETF, which closed today at 206, almost unchanged, down 0.4 points or -0.2%. IWM remains below its 50 dma.

The NASDAQ Composite index closed today at 16,745, up 85 points or 0.5%. NASDAQ opened the week at 15,713, setting up a strong weekly gain of 6.6%. After spiking higher on Monday, NASDAQ’s trading volume declined to the 50 dma for the rest of the week.

Many of us, including me, had not heard of the Sahm Rule before last Friday. Claudia Sahm is currently the chief economist with New Century Advisors and once held a senior position with the Federal Reserve Board. The rule attributed to her states that a recession is underway when the three-month average of the unemployment rate increases more than 0.50% in one year. On Monday, the signal triggered at 0.53% and the market panicked. The S&P 500 dropped 228 points or 4.3%.

In many ways, the market was set up for this dark prediction because most analysts were disappointed the FOMC did not reduce rates on July 31 and feared the Fed was leading us to a classic “hard landing”. The S&P 500 stocks, the NASDAQ Composite stocks and the Russell 2000 small caps all gapped open lower last Friday and then repeated that performance again on Monday. The lows on Monday had the S&P 500 at -10%, NASDAQ at -16% and the Russell 2000 at -12%.

It would be premature to declare the market correction is over, but the recovery this week has been significant with the S&P 500 at +3.0%, NASDAQ at +3.4% and the Russell 2000 at +2.0%. The decline in trading volume is another positive sign.

I have found Investors Business Daily’s Follow Through Day methodology very helpful for determining when it is safe to begin reinvesting in the market after a correction. For the time being, we remain largely in cash. Corrections often retest the initial lows. It is prudent to not jump back in too quickly.



For now, I am watching for the Follow Through Day signal. Be patient.