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What started the day as a sideways market turned ugly this afternoon. Starting around noon, SPX started declining and closed at $1890, down $48. SPX didn't close at its low for the day, but it was close. RUT was just as weak, giving up $35 to close at $1010. Trading volume remains high with 3.4 billion shares of the S&P 500 stocks trading. Volume on the NYSE increased 6% and trading on NASDAQ increased 18%. Volatility increased as the market declined, with VIX closing at 25.2%, up almost three points.
RUT is hitting new record lows, having broken the support levels set by the October 2014 correction on Monday and trading even lower today. SPX has not traded downward as aggressively and remains about twenty points above the August flash crash and sixty points above the October 2014 correction.
The most interesting question is "Why"? The financial news networks were interviewing all the gurus this afternoon, asking that very question. The answers were interesting. The most common answer was to blame dropping oil prices. But oil prices have been pretty steady this week, trading around $30. What changed this afternoon? One pundit claimed the markets are predicting a recession, but the last several GDP reports have been languishing around 2% growth for 2015. No one is happy with that, but it isn't negative (economists define a recession as two quarters in succession of negative GDP growth). Let's consider the oil price rationale.
Declining oil prices have traditionally been interpreted as resulting from reduced demand, suggesting lower economic activity. So declining oil prices often signal a slowdown in the economy. That may well be true if we have normal supply market reactions. But OPEC has just opened the spigots even more, flooding the market with oil. Reduced demand decreases prices but increasing supply also reduces prices. Add to this the reports of ISIS selling oil at $10 to fund their activities and we have a market flooded with cheap oil that may be primarily a supply problem, not a demand problem.
There is no question that the global economies are slowing, but none of the major economies are flirting with negative GDP growth. We are still seeing positive GDP growth here in the states; I may complain that it is too low, but it isn't negative.
Then why is the U.S. stock market in the tank?
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The intraday trading pattern of today's market was almost identical to yesterday's: higher at the open, then trading off with a rally into the close. One sign I interpreted as significant was that the VIX was declining even as SPX traded down this morning. SPX opened up at $1928 this morning and traded up to $1947, but almost immediately began to decline, reaching the low for the day at $1914 around 2 pm ET. Then the market rallied over the last 90 minutes of trading, closing at $1939, up $15. Today's open and close on SPX were back within the Bollinger band.
RUT traded similarly, but less bullish, closing up $3 at $1045. RUT's candlestick was a near perfect doji, the sign of balance between buyers and sellers, often signaling a trend transition. The VIX lost two points to close at 22.3%. That is a decline in volatility of about five points in two days - another signal of transition. Trading volume remains elevated with 2.9 billion shares of the S&P 500 stocks trading; the 50 dma is 2.4 billion shares.
The February position in the Flying With The Condor™ service is near break-even; at one point today, my position was actually profitable. The partial hedge is doing its job and buying us time. I closed the January position for a 13% gain, so we are off to a good start in 2016 in spite of all of the hysterics in the market. The cable business channels are dragging out all of the extreme bears. Their message is simple: "sell everything; buy a tent and move into the woods.". Fear sells.
I don't mean to be cavalier; this remains a dangerous market. But I put my money where my mouth is. I bought SPX calls yesterday and added to that position today.
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The Santa Claus rally refers to the historical trend for the S&P 500 index to rally the last 5 trading days of December and the first two days of January. The Santa Claus rally has failed to materialize 15 years since 1950, including this year. Two of those, in 2000 and 2008, preceded significant market drops. The next two indicators for the market are the first five days of January and the performance for the month of January. When all three indicators are negative, the market has been flat or down every year except 1982. So we aren't off to a great start. Looking back at 2015, the Santa Claus rally was negative, the first five days were weakly positive and the full month of January was negative. And we ended the year with the S&P 500 index down -0.7% or up 2%, if you count dividends in the return.
Trading volume dropped back from yesterday's highs with 2.4 billion shares of the S&P 500 stocks trading today, right at the 50 dma. Trading volume declined 12% on the NYSE and declined 8% on NASDAQ.
SPX strengthened a bit today and closed up $4 at $2017. RUT gained $2 to close at $1110. Volatility contracted with the VIX declining 1.4 points to 19.3%.
No new economic data was reported today, but the ISM services index, ADP's private employment payroll report, and factory orders are all expected tomorrow.
As we face the new year, I'm not seeing much positive news. Will we continue to see a range-bound market or is it going to get worse yet?
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Today marked the first time this year that I have seen some encouraging signs in the market. Although, "encouraging" may be too strong. The market opened higher, but, just as we have seen before, it turned and traded lower. But today proved different. SPX rallied strongly during the last 30 minutes today. That was refreshing. SPX closed at $1924, up $2. RUT closed down $4 at $1042. Volatility contracted with the VIX losing almost three points to 24.3%. Trading volume remains high with 3.1 billion shares of the S&P 500 trading. Trading volume on the NYSE rose 0.4% and volume rose 7% on NASDAQ.
The unofficial beginning of the earnings season is always marked by Alcoa, and the market liked what they heard after the close today; trading in AA rose after hours.
The positive signs I observed were:
1. SPX traded as low as $1901, but then recovered $23 to close.
2. RUT closed right at the correction low of October 2014 yesterday. RUT opened and traded down another fifteen points today, but then recovered ten points into the close.
3. AA missed analyst estimates for revenues, but beat earnings estimates by two cents. In spite of this, AA shares traded higher after hours. AA's business is always viewed as a good measure of the industrial economy.
4. Volatility contracted.
I don't want to read too much into it, but these signs appear to be a bit more positive that what we saw last week. Perhaps we are nearing the bottom.
The ultimate answer will be revealed later this week.
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Today was certainly not the way anyone would like to start the new year. China's stock market collapsed overnight and the dominos fell across the globe. SPX closed at $2013, down $31 and RUT lost $27 to close at $1109. SPX had traded down to $1990 by about 11 am ET and wandered sideways from there. But a surge in the last thirty minutes of trading brought SPX back to $2013. This keeps the index within the sideways range it has been trading within since the recovery from the August flash crash. RUT has been trading weaker than SPX for many months and today's close is near the August flash crash lows, whereas SPX remains about 140 points above the flash crash low. Trading volume jumped markedly after the low holiday trading with 2.8 billion shares of the S&P 500 stocks trading. Volume popped up 55% on the NYSE and was up 52% on NASDAQ. Volatility popped up over two points with the VIX closing at 20.7%. The only somewhat reassuring sign in the markets today was the recovery in the last few minutes of trading.
The price volatility of this market continues to whip traders back and forth. Investors Business Daily's market indicator moved to Confirmed Uptrend on 12/30/15 but whipped back to Market in Correction today. IBD's market indicator normally allows investors to be on the right side of longer term market trends, but that hasn't been the case for the past year or more, as prices whip back and forth almost daily.
The market was primarily reacting to China's market collapse, but U.S. economic data didn't help. The ISM manufacturing index came in at 48.2 for December, down from 48.6. Values in this index less than 50 denote contraction as opposed to expansion. Construction spending decreased 0.4% for November, going negative after the small, but positive, 0.3% increase in October.
I closed our January iron condor for the Flying With The Condor™ service on January 31st for a 13% gain. The February position is up 4% so 2016 is off to a good start. The Flying With The Condor™ service ended 2015 with a net gain of 40%, as compared to a -0.7% loss in the S&P 500 Index.
So much for the Santa Claus rally...
