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It is difficult to tune in any financial program without hearing someone warning of an imminent market correction. Does that mean conservative investors should be moving to the sidelines and going largely to cash? Let’s apply to solid analysis to this question rather than falling for the emotional plea of the doomsday gurus.
The Standard and Poor’s 500 index (SPX) put on a strong run higher from September 27th through October 5th, up 49 points or 2% in seven trading sessions. But last week’s trading results were much more modest, up only two points, essentially unchanged. SPX opened this morning at 2556 and is trading sideways. Are the bulls losing momentum or is this just one more pause in this lengthy bull market? Another way to measure this past week is to note that three of five days were down days and one trading session yielded a doji candlestick, the classic mark of indecision. And it looks like today’s trading in SPX may yield another doji candlestick.
Trading volume of the S&P 500 companies hit a recent low last Monday at about 1.4 billion shares, well below the 50-day moving average at 1.8 billion shares. But trading volume rose the rest of the week, breaking above the 50 dma on Thursday and dipping back a bit Friday, but remaining above the 50 dma. I have to wonder if the lack of progress on tax reform in the Congress is beginning to weigh on this market. I believe this market has priced in tax reform, but many analysts are beginning to doubt Congress’ willingness to pass the administration’s plan. Time is running out.
The Russell 2000 Index (RUT) continued the decline that began the previous week, opening Monday at 1510 and closing at 1502. RUT opened at 1503 this morning and is modestly lower at 1500 as I write this article. These are small losses, but the down trend is becoming clear. The nature of the Russell 2000 index, composed largely small to mid-capitalization stocks, leads me to conclude that money managers are closing their high beta positions, thereby reducing risk. Perhaps they are anticipating a breather or even a minor pull back.
The Standard and Poors 500 volatility Index (VIX) spiked up a bit last Monday, but had returned to historically low values by Friday, closing at 9.6%. Today, Monday, 10/16, VIX opened up a little higher at 9.95%, but this remains historically low. I keep a close eye on VIX. Many market analysts have been predicting a correction simply because VIX has been running at historically low levels. The key is to watch for an increasing trend higher in VIX. VIX is the early warning signal for the correction.
CBOE SPX Volatility Index (VIX)
Chart courtesy of StockCharts.com
Let’s examine the flash crash of 2015 for pointers on impending corrections. I plotted VIX above for the period of June 1st through the end of the year in 2015. The S&P 500 lost 41 points on Thursday, August 20th and VIX popped up to 19%. That was the early warning signal. I closed my positions on Thursday. At a minimum, one should have closed on Friday as VIX rose to 28%. The flash crash occurred on Monday as SPX lost 71 points and VIX spiked to 53% intraday. SPX hit its low on Tuesday at 1867, a net loss of 10% from Thursday’s open. The flash crash on Monday was predicted by the previous two days of spiking VIX values.
I track VIX because it shows us when the largest institutional money managers are beginning to be concerned. And right now, they are as calm as they have been in years. Don’t let the doomsday gurus spook you. You don’t want to miss out on this huge bull market. But we could see a pull back or correction at any time. At a minimum, add trailing stops to your stock positions and contingency stop loss orders to your option positions. Continue to trade from a bullish posture, but keep your stops tight.
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The Standard and Poor’s 500 Index (SPX) broke out on Monday to set a new all-time high, but that was only the beginning of a very bullish week for stocks. SPX closed today at $2500, the fourth new all-time high this week.
Trading volume of the S&P 500 companies trended right at or just above the 50 day moving average (dma) all week, but spiked much higher today, up to 3.0 billion shares, as compared to the 50 dma at 1.9 billion shares. Today’s spike higher was due to what is called “quadruple witching”, the expiration Friday each quarter when stock index futures, stock index options, stock options, and single stock options all expire. This has always resulted in a high trading volume day in the markets.
The recent trends in the S&P 500 trading volume may be instructive. If we ignore the quadruple witching exception today, this week’s trading volume, as the market hit new all-time highs, was lower than last week, as the market was faltering. That tells me that traders are primarily focused on a fear of correction and avoiding losses. Market commentary this week seemed to focus on rationalizing why the market continues higher in spite of congressional dysfunction and North Korea’s saber rattling.
Last week, traders were worried about hurricane damages, and the week closed with everyone focused on North Korea’s Founders day on Saturday and what the short fat tyrant might do to celebrate. But Monday came and it was a rerun of Happy Days. The hurricanes were suddenly ancient history and even after North Korea launched another ICBM last night, and London endured another terrorist attack before the market opened this morning, the market remained ebullient.
The Russell 2000 Index (RUT) took a breather last week from its remarkable bullish run that started in late August. RUT joined its big brother indices this week and ran higher, but the difference is that Russell remains well short of its all-time highs that were set back in July. The collapse of RUT from July 28th to August 21st covered 6.4% - near market correction territory. Its run higher since then has been significant, up 5.4%, but it had a lot more to recover than SPX and the NASDAQ Composite. RUT closed today at $1432, well short of the $1450 close on August 25th. RUT seems to be behaving as the leveraged version of the S&P 500 Index. In one sense, this isn’t surprising since RUT is made up of higher beta stocks, but the behavior over the past several weeks seems extreme.
The NASDAQ Composite’s price action this week is unlike SPX or RUT. NASDAQ closed today at $6448, attempting unsuccessfully twice this week to break the resistance level set by the opening high of $6460 on July 27th.
NASDAQ trading volume was similar to SPX, trading at or just under the 50 dma all week, with the exception of today’s quadruple witching volume spike.
Market volatility remains historically low. The volatility Index for the Standard and Poors 500 Index, VIX, moved lower all week, closing today at 10.2%. I read and heard market analysts this week expressing concern that such low levels of volatility must be predicting a correction, but they are proving the old adage that the market can continue trading however it wishes far longer than your money will last.
I displayed the price charts for SPX, RUT and NASDAQ for the past 18 months and looked for the overall long-term trend. The differences were intriguing. Russell has run steadily higher since March 2016, but has largely traded sideways since May. However, Russell takes the prize for price volatility. NASDAQ displays a solid uptrend from July 2016 through July of this year, but is largely flat for the past six weeks or so. The S&P 500 has the steadiest and most consistent upward trend line from March 2016 to today’s close. This index price chart comparison reinforces the conclusion that the overall market trend is bullish, but far from a high trading volume, “risk off” or “all in” bull market. Market participants are enjoying their gains but worried that it has gone too high, too fast. We see rapid dips that are just as quickly bought back to recover the bullish trend. The more defensive stocks of the S&P 500 display the steadiest and most consistent bullish trend. The bulls are in control, but they are also nervous. Congressional dysfunction and North Korea are the “monsters in the closet”. Continue to trade largely from a bullish posture, but keep your stops tight. Don’t short this market. I was protecting my portfolio with long index puts last Friday and was burned on Monday as the markets shrugged off all worries to run higher.
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The last two weeks have rattled many market analysts. As part of my effort to monitor the markets for my clients, I track several newsletters, read various blogs, and watch selected programs on the financial cable networks. The large number of analysts recommending their clients move to cash and/or hedge the markets by buying index put options has surprised me.
The Standard and Poor’s 500 Index (SPX) closed yesterday at 2425, up 15, but the severe dip last Friday (6/30), and Thursday’s collapse down to 2423 unnerved many market participants. The bulls came back to the table yesterday, recovering all of Thursday’s losses, and bringing SPX solidly back to the middle of the recent trading range. The bulls have bought the dip one more time.
The Russell 2000 Index (RUT) price chart is markedly different from SPX or the NASDAQ Composite – much choppier, as RUT has largely just traded sideways all year. RUT traded down to the 50-day moving average (dma) this past Thursday, but recovered almost all of that loss yesterday. The Russell 2000 index has been much more volatile than the other major market indices. RUT hit an all-time high in late April, and then proceeded to decline to its recent trading lows by mid-May. Then RUT swung all the way back to match the April highs in early June.
The SPX volatility Index, VIX, spiked on last Thursday’s decline, and exceeded 15% briefly on Thursday this past week, but closed yesterday at 11.2%, well within the range from earlier this year. Comparing yesterday’s closing VIX at 11.2% with the minor pullbacks in April and May of 15% to 16% appears comforting, but if we look at the November 2016 correction, VIX peaked at 23%. And that didn’t happen overnight. It required nine days to climb from 12.9% to that high of 23%. We aren’t seeing that kind of volatility spike building here.
Trading volume is another critical market indicator, whether we are looking at an individual stock or a broad market index. Above average trading volume reinforces the momentum of the price move; everyone either wants to jump into this stock or everyone is trying to get out. Trading in SPX yesterday at 1.7 billion shares was well below the 50 dma at 2.1 billion shares. The NASDAQ Composite followed suit with 1.7 billion shares, below its 50 dma at 2.0 billion shares. This tells me that the large institutional traders are not panicked and making any large moves, whether that be moving to cash or going “all in”.
One final comparison is worthwhile. Pull up the SPX price chart for the flash crash of August 2015. For several days of the week preceding the flash crash on Monday and Tuesday, SPX traded lower and closed at or near the lows for the day. In recent weeks, we are seeing several long lower candlestick shadows – traders are buying when the market hits the intraday lows. They aren’t selling into the close.
I don’t believe this current price volatility is preceding a “sky is falling” moment. However, many market analysts are nervous, so we will continue to see price volatility. I remain cautiously bullish. Watch your positions carefully. Keep your stops tight.
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This week’s price action in the Standard and Poor’s 500 Index (SPX) has tracked almost perfectly sideways, closing Friday within a dollar of Monday’s open. Friday’s price action resulted in the classic doji candlestick, where the opening and closing prices are very close or identical (five cents apart on Friday). The doji candlestick is the result of market indecision; the strength of the bulls and the bears are almost perfectly matched. But note that this doji is very close to the all-time high of SPX, so the bulls are holding up this market very well.
The Russell 2000 Index (RUT) has been the weakest of the major market averages all year and the contrast last week was particularly stark as RUT ran steadily lower all week. RUT's bearish trend continued this week, but RUT bounced strongly on Friday, recovering almost all of Thursday’s losses. RUT now is running roughly at its March peak. RUT has now eclipsed four previous all-time highs and is almost three percent below its most recent high on July 25th. Support around $1396 held through June and July, so I will be keeping a close eye on that support level. If RUT breaks support, I will be concerned about the overall market following suit.
The SPX volatility Index, VIX, spiked up over 11% last week and essentially moved sideways with the markets this week, closing Friday at 10.0%. Volatility remains at historically very low levels. Some of the recent correction chatter is based on the history of periods of low volatility preceding a major correction. While that is true, they fail to note that those periods of low volatility may last a long time. As many wise traders have observed, you can lose a lot of money waiting on the market to do what you predicted.
This market is nearly perfect for my SPX iron condor trades with the August and September positions standing at gains of 14% and 4%, respectively. No adjustments have been necessary for these trades, in contrast to the July SPX iron condor that required three adjustments to finally reach a gain of 12%.
I am still playing this market as a sideways to bullish trend, but I am cautious. it is a nervous market. Many traders are concerned about giving back any of the gains from this bullish trend. Their hands are on their sell buttons.
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When the Standard and Poors 500 Index (SPX) gapped open lower and plunged on May 17th, traders panicked, but the bulls came back strongly the very next day and drove the market to new highs within several days, culminating in another all-time high at $2454 this past Monday. SPX traded weakly lower this week, opening Monday at $2443 and closing Friday at $2438. Most of this week’s trading was negative, but Friday was a moderately positive day. I find it interesting that trading volume spiked Friday. Last Friday’s trading volume spike was typical of options expiration. Yesterday’s spike suggested strong bullish support. The bulls are still in control.
The Russell 2000 Index (RUT) price chart stands in contrast to the almost perfectly bullish SPX price chart for the past six months. RUT has largely traded within a sideways channel since December. This is the most bearish indicator we currently have on this market. RUT opened the week at $1407 and closed yesterday at $1415. Last week’s spike higher to $1427 was short-lived. Russell’s position lagging the market indices may be contrasted with the NASDAQ Composite, which has been extremely bullish since mid-April. And this week’s trading continued that pattern as NASDAQ opened the week at $6197 and closed yesterday at $6265. The Goldman Sachs memo on June 9th took the wind out of NASDAQ’s sails by criticizing the high stock prices of many of the high tech market darlings: GOOGL, FB, AMZN, NFLX and others. NASDAQ opened June 9th at $6330 and is still struggling to get back to those levels.
NASDAQ’s trading volume spiked higher on Friday, just as we saw in SPX. It is interesting to note that trading volume yesterday exceeded the trading volume spike on June 9th as NASDAQ sold off.
Market volatility remains at historical lows, as measured by the VIX, closing at 10.0% on Friday.
Many market gurus are proclaiming an overbought market, but the bulls are strongly defending any attempts to push the market lower. You saw evidence of that bullish support in the trading volume spikes Friday on an otherwise modestly bullish day. If one watches any of the political commentary on cable TV, you would conclude that the country is on the verge of collapse. Yet this bull market just continues higher. Political intrigue, terrorist incidents and even crazies like Kim Jong Un don’t phase this market. But this is a nervous bull market. Consider the market
sell-offs of March 31st, May 17th and June 9th. All were triggered by events that didn’t seem very significant. But all of these pull backs were immediately bought by the bulls, and the market went on to set new highs in each case. Investors really don’t have a choice. We have to continue to trade this bullish trend. But it remains a nervous market. This is no time for complacency. Watch your positions carefully. Keep your stops tight.
