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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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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.
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One of the measures of a strong bearish market is a close at the lows of the day, as we saw last Thursday and Friday on SPX. Monday plunged even lower, but recovered some of those losses before closing. Just as we caught our breath yesterday, the market fell out of bed late in the day to close at the lows once again. We finally saw a close hear the highs of the trading session today with SPX hitting a high at $1943, and closing at $1941, up $73. RUT traded even more bullishly, trading lower to match yesterday's close, and then RUT rallied higher to close at $1132, up $28. Volatility pulled back six points with the VIX closing at 30%, still a relatively high volatility level, but not nearly as high as Monday's intraday high at 53%.
Trading volume was unchanged from yesterday, but remains above average with 3.8 billion shares of the S&P 500 trading. Trading on the NYSE was up 6%, but trading volume on NASDAQ was up only 1%.
I think most market observers have concluded that we are not going over the cliff and starting a bearish trend, but instead, we are observing a relatively significant market correction of about 12%. The resulting question on everyone's minds is whether we have seen the bottom yet? The closing lows for SPX in the last significant correction (Oct 2014) were around $1862. Monday's intraday low and Tuesday's close were at $1867 and $1868, respectively. So it looks like the October correction low may provide support for this correction. But correction bottoms are always messy affairs. We will likely see some choppy markets before we see a definitive recovery begin.
For those of you willing to take a little more risk, selling OTM put spreads on the broad market indexes at these volatility levels is attractive. As volatility declines, it will make it easier to close for a larger percentage of the profits. Of course, this presumes we have seen the worst of this market decline. Therein lies the risk.
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Markets closed much higher today, but the closes looked better than the intraday trading which was extremely volatile. Toward the end of the day many observers feared we were going to surrender much of today's gains. SPX opened higher this morning and continued to climb until around 1 pm ET, when SPX hit its high for the day at $1990, but then traded off by over forty points until just after 3 pm ET, and then traded strongly higher into the close at $1988, up $47 on the day. RUT behaved similarly, gaining $21 to close at $1154. After peaking around 53% on Monday, the VIX has now dropped to 25.7%, down almost five points just today. That level of volatility remains high, but it has come down significantly over the past couple of days.
Trading volume declined from yesterday with 3.2 billion shares of the S&P 500 trading, but this is still well above the 50 dma at 2.4B. Trading dropped 3% on the NYSE and declined 10% on NASDAQ.
The big economic news today was the second estimate of second quarter GDP, revised higher to +3.7%. This helped reassure investors that the recent market weakness was over-done. Pending home sales increased 0.5% for July, up from the -1.7% of June. Initial unemployment claims came in at 271k, down slightly from last week's 277k. Continuing unemployment claims increased by 13 thousand to 2.27 million.
The last two days of trading have been very strong, so much so that many analysts are skeptical that this correction is over. Today's last hour of trading certainly appeared to suggest that the bulls are back in charge. But it still pays to be cautious. Dip your toe in carefully.
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I was encouraged a bit yesterday with a small bounce near the close; for once, we didn't close at the low of the day. Today SPX opened above yesterday's close and proceeded to recover a large proportion of yesterday's losses - too good to be true. The last hour of trading was ugly, resulting in a lower close at $1868, down $26. RUT also traded down $8 to close at $1104. The VIX peeled off nearly five points to close at 36% - still very high, so we are clearly not yet out of the woods. Trading volume began to contract with 3.7 billion shares of the S&P 500 companies, but the 50 dma is 2.3B, so this remains an elevated level. Trading volume declined 25% on the NYSE and also declined 26% on NASDAQ.
SPX is now down 9.3% for 2015 and this correction stands at a negative 12.2% since the recent high on July 20.
There wasn't any significant economic data reported today. The Jackson Hole symposium comes on Thursday and I am sure we will hear many sound bites from the participants and speculation from the analysts. The commentary will be breathless in the aftermath of Monday's flash crash.
It's too early to say we are near a bottom, but the initial signs are encouraging. At least the free fall ended today. But tomorrow is another day...
