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With apologies to Charles Dickens, this market reminded me of his great book, A Tale Of Two Cities.
Today’s markets gave us a wide range of price action with a huge decline on NASDAQ contrasted with the small caps in the Russell 2000 index finally coming to life after trading sideways all year. What should we conclude?
The Standard and Poors 500 Index (SPX) opened the week at $2437 and closed today, essentially unchanged, at $2432. Today’s price action on SPX ranged widely, trading up as high as $2446 this morning, but then trading down to $2416 this afternoon, before recovering somewhat into the close. SPX trading was very bullish over the last fifteen minutes of trading today. Trading volume spiked during those last few minutes. I find this significant increase in trading volume as prices recovered to be a very bullish signal – another example of market participants buying the dip. The bulls are still in control.
The Russell 2000 Index (RUT) has stubbornly lagged behind the other major market indices all year, but RUT woke up late this week, with large moves higher yesterday and today. RUT closed today at $1422, up $6. This close is right at the upper edge of the trading range that RUT has held since last December. RUT broke out and traded as high as $1434 earlier today, but couldn’t hold that high. Historically, small and mid-cap stocks always lead bullish markets upward and bearish markets downward. When traders are bullish, they tend to buy higher beta stocks with higher profit potential. Conversely, when markets cool, these same high beta stocks are the first to be sold. Russell’s apparent revival may be a leading indicator of the continuation of this bullish trend higher yet. I will be watching RUT next week to see if it can break out and close well above the upper edge of the trading range. That would be the final bullish indicator that has been missing thus far.
The Dow set an all-time high today, RUT made a valiant effort to break out of its sideways trading range, and SPX remained essentially unchanged. But the NASDAQ Composite told a completely different story. NASDAQ plunged $114 to close at $6208, nearly a 2% decline. This huge decline on NASDAQ was triggered by a Goldman Sachs report critiquing the high stock prices of the high tech market leaders such as Apple, Google, Nvidia, and FaceBook. The resulting high tech sell off triggered the S&P 500 volatility index (VIX) spiking up over 12% today, but VIX recovered significantly, closing at 10.7%, only up about a half percent on the day.
The bullish strength of this market is remarkable when you consider all of the political and global distractions. This market consistently trades higher, seemingly ignoring all of the negative distractions. I will continue to play this bullish market trend, but I am keeping my stops reasonably tight. It remains a nervous market. When in doubt, I close.
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The markets opened weakly today, probably fueled by the weak earnings report from Macy's and perhaps the continuing soap opera in Washington. SPX opened at $2395 and fell as far as $2382 before bouncing and closing at $2394, down five dollars on the day. There is a strong support level at $2380 that was established on May 3rd and 4th, and that support was reinforced today. RUT traded in similar fashion, trading down as far as $1380 before recovering some of the losses to close at $1390, down $9. RUT has been trading at or just above $1390 for the past seven sessions.
Today's spike lower sent volatility upward, with the VIX hitting a high at 11.2% before settling back to 10.6%. Trading volume on both the S&P 500 and the NASDAQ Composite came in below the 50 day moving average today, in spite of this morning's plunge lower. That tells me that no one hit the panic button.
The price behavior of today's markets reinforces the fact that the bulls are firmly in control of this market. Buying the pull backs remains a profitable strategy.
The resilience of these markets is notable. My conclusion is that a break out to the upside is the most probable immediate future. The fact that volatility didn't completely erase its intraday spike higher suggests today's decline made some traders uneasy. I remain bullish but also very cautious.
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Wednesday’s market spooked traders of all stripes. The Standard and Poors 500 index (SPX) gapped open at $2383, down $18 from Tuesday’s close, and then proceeded to break through the 50-day moving average (dma) at $2369 and closed at $2357. The bulls reasserted themselves on Thursday and Friday, closing today at $2382, up $16 on the day. This didn’t quite recover all of Wednesday’s losses, but it was close. SPX has traded in the sideways range of $2320 to $2405 since mid-February and today’s close moved us toward the upper half of that trading range.
Trading volume on SPX spiked higher on Wednesday’s decline, but then pulled back as the market recovered. Thursday and Friday’s trading volume remained above average, which acts as a reinforcement of the market’s recovery. Although one could argue that trading volume wasn’t very strong for the past two days, so the reinforcement of the move was modest.
The Russell 2000 Index (RUT) has the strongest sideways trading pattern of all of the major market indices with a range of $1350 to $1420, held since early December. Wednesday’s decline was most severe on RUT, taking the index price down close to the lower edge of this trading range that remained as solid support since early December. Russell recovered weakly yesterday and today, closing at $1367 today, up $6. But this recovery effort fell short of the opening of $1388 on Wednesday. Once again, RUT is behaving more bearishly than the blue chip stocks of the S&P 500. That is a sign of traders’ hesitation in this market. The bulls are in control, but this isn’t an “all in” moment.
The S&P 500 volatility index (VIX) spiked up to 15.6% during Wednesday’s sell off, but closed today at 12.0%. This isn’t back to the very low volatilities we witnessed during most of May, but it is well within the range for most of 2017.
The markets have been trapped in a sideways trading pattern for several months now. The bulls are treading water and supporting this market for now, but that may change at some point. This week’s price action was reassuring, but sideways markets don’t last forever. At some point, the perceptions shift one way or the other.
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The S&P 500 Index (SPX) closed today at $2397, down $2 for the day. The Russell 2000 Index (RUT) closed at $1392, essentially unchanged (up twenty two cents). But the NASDAQ Composite Index closed up $18 for a new all-time high of $6121. Normally, we see these three major market indices to be somewhat in sync. Most commonly, we draw conclusions for the divergence of the large blue chips represented in the S&P 500 from the small to mid-cap stocks of the Russell 2000.
SPX is bouncing off resistance at the upper edge of a trading channel that dates back to March 1st. RUT has been even more neutral, currently in the middle of a trading channel that dates back to the first week of December. However, the NASDAQ is a different story. That price chart has been steadily climbing higher since the election and today was no exception. NASDAQ is being driven by the high technology stocks that are on fire. Stocks like AAPL, AMZN, FB, ISRG, PCLN, GOOGL and many others are driving the NASDAQ Composite. It wasn't long ago that Google was approaching $500, and I thought that to be rarified air, but no more. Many NASDAQ stocks are approaching $1,000 per share. PCLN closed at $1911 today. We are in the midst of a high tech boom in the stock market. Most smaller companies and the large traditional blue chips were not invited to the party.
I find it interesting that the very success of these NASDAQ stocks is scaring many analysts. Predictions of a correction or worse are common. Price measures, such as P/E ratios and dividend yields do indeed suggest an overbought market, but far from historical extremes. Recent earnings announcements have been very positive with large numbers of companies beating analyst estimates and the outlooks for next quarter have been generally positive. Anyone who has much market experience will be quick to tell you that corrections are exceedingly hard to predict. Bull markets will ignore a lot of negative news and then one day... they won't.
What is a trader to do? I have been buying diagonal call spreads on some of these hot NASDAQ stocks. I am hedging my bets a bit by selling the front dated call slightly in the money. That gives me a lower break-even price, allowing the trade to tolerate some minor pull-backs. But don't take a long nap. This market requires close monitoring.
