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Fears about China appeared to take a back seat and the markets traded back rather strongly with SPX gaining $48 to close at $1969. RUT gained $26 to close at $1162. And volatility pulled back quite a bit with the VIX closing at 24.8%, down three points today. Trading volume was slightly higher with 2.3 billion shares of the S&P 500 stocks trading, but this remains slightly below the 50 dma at 2.4B. Trading volume rose 5% on the NYSE and rose 10% on NASDAQ.
SPX opened higher this morning, in line with higher European markets today, and then basically traded sideways until about 1:30 pm ET, when SPX began to trade higher, closing the session at $1969, nearly its high for the day ($1970). That was pretty bullish chart action, but was missing the strong trading volume one would like to see confirm that bullish trading. SPX closed twenty dollars shy of its recent high after the crash, but RUT's close was within one dollar of its post-crash high.
I jumped back into the market after the crash and split my October put spreads on RUT between 950/960 and 1040/1050. Both spreads are now profitable. The lower spread is quite safe, but the 1040/1050 spread could require hedging if the market tests support again. A series of re-tests of support after a strong correction is common historically. But last October's correction was followed by a straight-up recovery. V-bottoms seem to be the new normal. But the jury is still out on this correction.
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Maybe it isn't too safe to jump into this market. Analysts are telling clients that many excellent stocks should be snatched up at what they regard as bargain prices. That may be true, but the time frame is the question. How long before the market bounces and I make money on these investments if I jump today? I am inclined to think we have hit the bottom, but we could wander sideways with days like today for some time before this market stabilizes. In fact, it seems likely to me that we won't see a clear direction higher or lower until after the FOMC meeting in a couple of weeks. It is hard to buy confidently with the Fed's actions a mystery.
SPX lost $30 to close at $1921. RUT traded down as well, closing at $1136, down $9. That marked a 1.5% decline for SPX, but only -0.8% for RUT. RUT is normally the "risk off" index. Should I be encouraged?
Trading volume also declined again today with 2.2 billion shares of the S&P 500 stocks trading. Trading on the NYSE declined 6% and volume dropped 13% on NASDAQ. Trading volume has been declining pretty steadily since August 24th. I find that encouraging; declining trading volume isn't a sign of traders in a panic and selling before the impending collapse. However, traders are concerned and at least somewhat fearful as indicated by the VIX moving up over two points today to 27.9%. The VIX spiked to over 53% on 8/24, but has declined since then. But a VIX level of 28% can't be ignored.
The jobs report contained mixed signals with a weak jobs number of 173k, but a lower unemployment rate of 5.1%. And the labor force participation rate stayed flat so this decline didn't just reflect people giving up and leaving the labor force. Will that lower unemployment rate push the Fed to move on interest rates?
The last couple of weeks have been stressful for traders. I hope you can put this all aside and enjoy a nice long holiday weekend. Labor Day is an important celebration. The American work ethic has formed the foundation of our prosperity, coupled with the freedom to take risk and compete. Relax and pat yourself on the back. You deserve it.
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China's PMI came out at 49.7, down from 50.0. That doesn't seem that dramatic on the face of it, but it renewed fears in the investment community that China's large economy is weakening and it will take the global economy with it. That seems a little overwrought to me, but rationale isn't always relevant in the markets. SPX closed at $1914, down $58. The only bright spot was a slight bounce in the last few minutes of trading; it always worries me when the markets close at the lows for the day. RUT followed suit, losing $31 to close at $1128. $1105 is the line in the sand set last week and that isn't far away. Another strong day like today would break last week's lows on both SPX and RUT. Volatility spiked higher with the VIX gaining nearly three points to close at 31.4%.
The pessimistic take on China is surprising. Third quarter GDP estimates for China are +6.4%. We in the US would love to see numbers like those. The ISM manufacturing index reported 51.1 for August, down modestly from July's 52.7. Construction spending increased 0.7% in July, up from June's +0.1%. Our wimpy economic data continue, but it isn't nearly as negative as the market would suggest.
Batten down the hatches; it's getting rough out there.
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After spooking us yesterday, the markets are tempting us to jump back in today. SPX gained $35 to close at $1949. RUT closed up $18 at $1146. Trading volume pulled back across the board with 2.4 billion shares of the S&P 500 companies trading today. Trading volume on the NYSE declined 12% and volume also declined on NASDAQ, down 18%. Volatility pulled back with the VIX dropping to 26.1%, down a little over five points.
Let's recap. The closing low on SPX last Tuesday was $1868. Then SPX rebounded strongly, trading as high as $1993 just three days later on August 28th. Just as we relaxed a bit, the markets did what they do best and surprised us with another move lower, trading down to $1914 at yesterday's close, and hitting that close on higher volume - not a good sign. But today, the bulls stepped back in and pushed SPX back higher to a close at $1949. Can we say the correction is over? I don't think so. I will feel much more confident once SPX trades and closes back above last Friday's close $1989.
I think we remain in classic "no man's land" as long as SPX remains between the low of 8/25 at $1868 and the intermediate high of $1989 last Friday. One likely scenario is that we trade within that range until after the FOMC meeting later this month. In the meantime, err on the side of caution; protect your downside.
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SPX opened and traded lower this morning, recovered most of that by noon, and then revisited the lows by late afternoon. But the bulls took control and recovered much of the losses before the close. SPX closed down $17 at $1272 and RUT lost $3 to close at $1159. I find it interesting that RUT led SPX into the market crash, trading much weaker than SPX for several weeks. But now it appears to be leading the market out of the hole. Trading volume continues to decline with 2.4 billion shares of the S&P 500 stocks trading today. Trading volume declined 0.3% on the NYSE and declined 1% on NASDAQ. Volatility, as measured by the VIX (based on SPX) rose over two points today to 28.4%. RVX, based on RUT, closed at 27.7% today, up about one point. Normally RVX runs higher than VIX since it is based on small caps that tend to be more volatile. It is unusual to see VIX and RVX this close to each other.
The Chicago PMI reported 54.4 for August, essentially flat with July at 54.7.
Markets tend to test levels of support a couple of times before rebounding. Of course, the now famous "V-bottoms" of the past couple of years haven't behaved that way. Go back and take a look at the chart around October 15th last year. The rebound out of the low of the correction was steeper than the drop into the hole. So, we have to ask ourselves some questions:
Is this just another V-bottom?
Will we see the markets pull back and test those lows made last week before heading higher?
Or will the market turn over and begin the bearish reversal lower?
I am inclined toward the V-bottom viewpoint. I think the China slowing scare has been over-done. And, of course, all of the hand wringing about the Fed and interest rates adds to the uncertainty, but I don't see their raising rates a quarter point or not raising rates having much of a meaningful effect on the markets.
But the rebound won't be confirmed until SPX can break above $2040. Then we can relax a bit.Until then, remain vigilant.
