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One week ago Friday (1/31), we watched the Standard and Poor’s 500 Index (SPX) close down 58 points at 3226. As it turned out, that was the low of the recent pullbacks. SPX corrected by 3.2% and began its recovery this past Monday. SPX had fully recovered all of the previous week’s losses by the close on Wednesday at 3335. The S&P 500 index traded a bit higher on Thursday and then declined modestly on Friday to close at 3328, up 2.8% for the week. Trading volume ran above the 50-day moving average (dma) most of the week, but steadily declined and dropped below the 50 dma on Friday. Strong trading volume is a reinforcing signal for whatever market action is observed, whether higher or lower. The bulls were clearly in charge Monday through Wednesday, as the market gapped open higher each morning, and trading volume gained each day. As the market weakened on Thursday and Friday, volume declined.
We have seen pullbacks hitting temporary lows on 1/27 and 1/31, but the S&P 500 index is now back to the highs set earlier in January. If one plots a typical Bollinger band plot on SPX, we see that SPX completed the round trip from the upper edge of the Bollinger bands to the lower edge in eight trading sessions, but only required four trading sessions to return to the upper edge of the bands. This was another demonstration of the bullish support for this market.
VIX, the volatility index for the S&P 500 options, opened the week at 18.6% and closed Friday at 15.5%. Even as the market set new highs on Wednesday, VIX remained at 15.2%. I personally regard 15% as the borderline level of volatility. When market volatility hits 15%, I start to pay closer attention and be more cautious. The coronavirus scare is still on traders’ minds.
IWM, the ETF based on the Russell 2000 group of companies, traded even more strongly than SPX as the market recovered, but it also accentuated the turn in sentiment on Thursday and Friday, gapping lower at the open on Friday and closing at 164.88. However, IWM remained up 2% for the week. IWM’s weakness shows us that we are not yet out of the woods.
The NASDAQ Composite index closed Friday at 9521, up 330 points or 3.6% for the week. NASDAQ outperformed SPX once again this week, reflecting the strong performance of high-tech stocks like AAPL and AMZN. NASDAQ’s trading volume matched the pattern we saw in the S&P 500 companies, running above the 50 dma through Wednesday, but declining to complete the week at below average volume levels.
Each day brings new reports of coronavirus cases around the world. There are now twelve confirmed cases of coronavirus infections in the U.S. One encouraging statistic is that the current number of deaths in China as a percentage of the number of confirmed infections is lower than what was observed during the SARS outbreak in 2003.
The markets continue to be affected as traders fall prey to the alarmist news reports.
The driving forces behind this exceptional bull market remain valid:
• Two major trade agreements signed.
• Continuing strong economic data, including record low unemployment, and record wage growth, especially in the middle class.
• FOMC remains committed to low interest rates for the near future.
• Earnings and revenue growth in this earnings announcement cycle have been very strong.
My trading posture is unchanged. I describe it as cautiously bullish. Some stocks are holding up well while others are taking a hit. Our ADSK diagonal call spread is an excellent example. It now stands at a gain of 151%. ADSK continued to gain ground on Friday, closing at $207.
Remain disciplined and follow your stop loss prices. Don’t panic.
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The Standard and Poor’s 500 Index (SPX) has been setting bullish records for the past several months, but SPX set records of a different type on Friday when it closed down 58 points at 3226. Given all of the doomsday hype in the news on Friday you may be surprised that the week’s loss was only 0.6%. As you may see from the chart, Friday’s intraday low hit two support levels. One was support from December 20th through January 6th, and the other is the 50-day moving average (dma) at 3211. SPX did not close at its low on Friday, a minor but positive sign for the optimists. If SPX breaks that support level next week, it could easily fall to 3175 for a 5% correction.
Trading volume has been very strong this month, and has only dipped below the 50 dma twice since January 2nd. Trading volume during Friday’s sell off was the highest of the month.
The volatility index for the S&P 500 options, VIX, opened the week at 17.4% and reached a low for the week on Thursday at 15.5%. Trading on Friday spiked VIX to an intraday high of 20%, but it pulled back a bit to close at 18.8%.
IWM, the ETF based on the Russell 2000 group of companies, has been trading lower since the open on January 17th. IWM broke support from early December around 162 on Friday and closed at 160.35, down 3.4. This represented a loss of 1.4% for the week, far more than the broad market indices for the blue chips.
The NASDAQ Composite index closed Friday at 9151, down 148 points. NASDAQ gapped open much lower on Monday, opening at 9092. This set up the surprising result that NASDAQ turned in a weekly gain of 0.6%. NASDAQ’s trading volume dropped below the 50-day moving average (dma) on Tuesday and Wednesday, but finished the week well above the 50 dma.
There are now eight confirmed cases of coronavirus infections in the U.S. The markets began to be affected this week as traders fell prey to the alarmist news reports. The normal flu season falls during the fall and winter months with peak flu infections in December through February. At this point in the 2019/2020 flu season, CDC has reported 19 million cases of flu in the U.S. with approximately 10,000 deaths. But those numbers don’t make the evening news. We normally don’t pay too much attention to family members and friends contracting the flu. But the flu can be very serious for children and older adults. News reports of a new flu virus strain with a specific name and nightmarish reports out of China captivate our attention. We forget that the sanitary conditions and level of healthcare in this country are light years beyond most of China. And few countries have anything comparable to the CDC. Take reasonable precautions and don’t panic.
The driving forces behind this strong bull market remain valid: two major trade agreements and strong economic data. Those trade agreements will add a minimum of one percent to this year’s GDP growth rate. The fact that the FOMC appears committed to low interest rates for the near future is icing on the cake. Earnings and revenue growth in this earnings announcement cycle have been very strong. Market prices are ultimately determined by the underlying economics. My trading posture is unchanged. I describe it as cautiously bullish. Some stocks are holding up well while others are taking a hit. My ADSK diagonal call spread is an excellent example. It now stands at a gain of 44%. ADSK declined Friday, but didn’t hit my stop loss price at $189.75. ADSK hit a low of $193.31, but recovered most of its losses as it closed at $196.85.
Remain disciplined and follow your stop loss prices. Don’t panic.
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The Standard and Poors 500 Index (SPX) opened this shortened holiday week at 3226 and closed Friday at 3240, up about 0.4% for the week. Monday, Tuesday and Friday were typical for a holiday week, with largely sideways trading. Exchanges closed early on Tuesday and were closed Wednesday. But SPX traded strongly higher as the market reopened on Thursday. Friday’s trading was subdued and trading volume was significantly below average all week.
Traders are increasingly optimistic about the passage of the Mexico/Canada trade agreement and the proposed trade agreement with China. The bulls have been released and they are going all in. Apple (AAPL) is a good example, trading up 12% just in December. Apple’s stock price has been subject to some volatility as the trade negotiations with China seemed to spurt forward, stall, and then resume.
The volatility index for the S&P 500 options, VIX, has been running around 12% for the past two weeks. VIX dropped below 12% intraday on Thursday and Friday, but could not hold those lows and closed Friday at 13.4%. The small rise on Friday betrays some residual concern on the part of large institutional traders. The prevailing concern appears to be whether the market has run too high and too quickly. Traders may be hedging portfolios.
IWM, the ETF based on the Russell 2000 group of companies, pulled back a bit on Friday, closing at 166, down 0.8 on the day. This appears to be a magnification of the broad market indices trading a little more weakly on Friday. The Russell 2000 serves as a measure of the degree of “risk on” or “risk off” for the large institutional traders.
The bulls drove the NASDAQ Composite index higher on Thursday, but surrendered about half of those gains on Friday, closing at 9007, down 16 points on the day, but up 0.6% for the week. Trading volume on NASDAQ came in below the 50 day moving average (dma) every day this week.
It would be a mistake to read too much into the market’s trends based on a week shortened by one and a half days of trading and extremely low trading volume on the days the market was open. It is probably safe to expect the bulls to continue to push higher into next week, but the big question mark will be whether the so-called Santa Claus rally ends with the year or continues into January. Historically, the first five days of trading in January provide a pretty reliable prediction for the year’s market. But the November elections may throw a wrench into the works.
I am bullish, but I also remain cautious. The trends in VIX are instructive. It is reasonably low, but not too low. The large institutional traders are watching carefully. Retail traders like us would be well advised to do the same.
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The Standard and Poor’s 500 Index (SPX) opened this first full week of the new year at 3218 and closed today at 3265, for an increase of 47 points or 1.5%. The January Barometer, was created by Yale Hirsch in 1972 and publicized in his Stock Traders Almanac, currently run by his son, Jeff Hirsch. There are two parts of the January Barometer: trading results for the S&P 500 index over the first five days of January and then for the full month of January. The first five days were narrowly positive with the new year opening at 3245 and the fifth trading day, 1/8/20, closing at 3253. So now we anticipate the close in three weeks for the full January barometer forecast for the year. Both measures have success records of over 80% in predicting the direction of the market for the coming year.
SPX trading volume remained weak, running roughly at or below the 50-day moving average (dma) all week. Trading volume fell off today almost like we were entering a three-day weekend.
The volatility index for the S&P 500 options, VIX, opened the week at 15.5%, and steadily declined to close today at 12.5%. This suggests that the mood of the large institutional traders remains largely bullish on the market.
IWM, the ETF based on the Russell 2000 group of companies, traded more bearishly than SPX, opening the week at 163.85 and closing at 164.89, up 0.6%. These are the high beta stocks that should be leading this bull market, but they aren’t. The bulls remain somewhat tentative.
The NASDAQ Composite index set the pace for the bulls this week, opening at 8944 and closing at 9179, up 2.6% for the week, eclipsing the S&P 500 by a full percentage point.
NASDAQ’s trading volume was also much more bullish, running consistently above the 50-day moving average (dma) every day this week.
This market is undeniably strong. In fact, it is so strong that it unnerves many observers, and I feel some of that sentiment as well. It is interesting that the current crop of bears can only argue that the bull market has lasted too long, but they have no argument other than the length of this bull market. The economic data are strong, and the Fed remains committed to low interest rates.
Draw trend lines from early October through today on the SPX, IWM and NASDAQ charts and I think you will see something interesting. Note that SPX and NASDAQ are trading well above their trend lines. Even the recent hiccups over the last couple of days of December and first couple of days in the new year didn’t take either index close to that trend line. But the IWM trendline is markedly different. Intraday trading on January 2nd touched the trend line but bounced higher. But the price action on January 3rd broke that trend line and IWM remains below the trend line today. I consider this a shot across the bow of the bulls’ ship. The bulls are running, but that run is largely in the high-tech favorites, the FANG stocks and others. You see that favor in the strong performance of NASDAQ versus the S&P 500. The high beta stocks, that are members of the Russell 2000 and make up the IWM ETF, are trading sideways. These are the stocks that should be leading the bulls’ charge, but they aren’t.
My posture remains unchanged. I am bullish, but I also remain cautious. This week’s market largely ignored the sword rattling in the Middle East, but this market remains nervous. The large institutional traders will act quickly to preserve their profits. They will sell first and analyze their actions later.
Take advantage of the bullish run, but stay alert. Don’t get too euphoric.
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The Standard and Poors 500 Index (SPX) opened the week at 3184 and closed Friday at 3221, up 16 points on the day and 1.2% for the week. SPX gapped open higher Friday morning and held its gains through the day. Trading volume spiked higher, but this was probably due to the expiration of several index option and futures contracts, viz., this quarter’s quadruple witching.
The strength of the market this week was primarily due to increased optimism concerning our trade negotiations with China. Those reports are very preliminary with few solid details, so that remains a possible source of volatility for the markets.
VIX, the volatility index for the S&P 500 options, opened and closed the week at 12.5%. This isn’t a record low, but it does suggest that the large institutional traders are relatively calm. In the absence of any surprising news, volatility is likely to remain low this week as many traders are on holiday.
IWM, the ETF based on the Russell 2000 group of companies, mimicked SPX’s price action pretty closely this week, opening at 164 and closing up 1.2% at 166. IWM gapped open higher each morning this week. You don’t see that every day.
The bulls didn’t forget the NASDAQ Composite index this week, closing the week at 8925, up 1.5% on the week. NASDAQ displayed a strong gap opening higher Friday morning. Trading volume on NASDAQ came in above the 50 dma every day this week, and then spiked yesterday, primarily as a result of quadruple witching.
This week’s market delivered a strong performance with each of the broad market indices gaining 1.2% to 1.5%. If we take a longer term view of this year’s market, we find three major trading sessions. The first was a strong bullish market from the first of the year until early May.. Then the market traded roughly sideways through early October, and blasted higher for the balance of the year. The price action of IWM this week reinforced the overall bullish nature of this market. The high beta stocks are finally seeing some action as bullish traders begin to take on more risk. Speculation about the China trade negotiations will continue to deliver periods of price volatility. Threats from North Korea may send the markets a surprise as the new year approaches. I am bullish, but I also remain cautious. Keep a close eye on this market and keep your stops tight.
Merry Christmas and best wishes for a prosperous and happy new year.
