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The markets opened upward this morning, then collapsed to hit lows around 1pm ET, and then turned around and proceeded to steadily climb all afternoon. SPX closed at $1843, up $12 and RUT closed up $4 at $1119. The VIX lost a half point, closing at 15.6%. Trading volume rose strongly today with 2.5 billion shares of the S&P 500 stocks trading. Volume jumped 18% on the NYSE and rose 27% on NASDAQ. I am tempted to conclude that this afternoon's steady climb had that strong volume underscoring the move, but I'm unsure that any of the normal rules apply to this market. A strong march upward with increased volume and a drop in volatility would normally be a bullish sign, but this is a fickle market.
SPX traded down as low as $1816 before rebounding. This is the third day for SPX to find support around $1816. Also note that SPX closed above the old support, now resistance, at $1840 - that's a positive sign. RUT broke down through its 200 dma, but bounced upward. Again, RUT has spent the last three days treating the 200 dma as support. All of this adds up to support for this market and an end to the recent pull back. But I remain cautious.
The CPI for March was released with an increase of 0.2%, and the Empire manufacturing survey collapsed in April to 1.3 from March's 5.6. Such a large move makes me wonder if there was an error somewhere. The NAHB housing market index remained steady at 47 for April, up one point.
For those of you trading am settlement options like SPX and RUT, don't forget that the exchanges will be closed this Friday, so tomorrow is the last day you can trade those positions before going into expiration. The settlement prices will be determined on Thursday this week.
I took advantage of RUT's strength this afternoon and closed my April put spreads. RUT may trade higher tomorrow and make me regret that, but I decided safer was better. Actually, I have been kicking myself for not closing them last week, but that's another story.
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Retail sales reported an increase of 1.1% for March, a nice improvement from the 0.7% increase in February. This boosted the market open this morning; the bears attempted to pull the market's gains back down this afternoon, but weren't entirely successful. SPX closed up $15 at $1831. RUT closed at $1115, up $4. Volatility fell off a bit with the VIX dropping one percentage point to close at 16.1%.
SPX opened Friday at $1831, traded down and closed at $1816. This morning, SPX opened at $1818, just above Friday's close, and closed today exactly at Friday's open, $1831. So we have one more example of the market almost precisely recovering the previous day's losses the very next trading day. These whiplashes make it difficult to hedge positions. I hedged my condors Friday and then sold those hedge options this morning.
RUT traded down today and bounced off the 200 dma at $1106 before recovering to close above Friday's close. Again, RUT is trading weaker than SPX. Judging from what I hear on CNBC and read in verious places, the tone of most analysts has turned markedly bearish from just a few weeks ago when everyone was signing from the bulls' hymnal. Is that the clue for a reversal?
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IBD officially declared this to be a "market in correction" on Friday. The market apparently heard about that and complied today with SPX losing $20 to close at $1845. RUT traded even weaker on a percentage basis, losing $18 to close at $1136. Volatility finally popped up a bit to 15.6%, up 1.6 points, but this still isn't really in correction territory for volatility. At the low of the February pull back, VIX was over 21%, and VIX hit 18.2% just a couple of weeks ago on March 14th.
RUT broke support at $1147 today, the high from December. The next support level is the high from November at $1123, and then the grand daddy of targets for a correction would be the February 5th low at $1083. RUT now stands at a 6% pull back from its March 4th high. RUT traded down more strongly than SPX again today with a decline of 1.6%, compared to SPX's 1.1% decline. SPX has a strong support band at $1840 to $1850, and the 50 dma is at $1839. SPX landed right in the middle of that band today after trading as low as $1841. If it breaks through $1840 tomorrow, this could get ugly (or uglier).
We saw several short lived pull backs last year, but SPX and RUT ran more in parallel. This pull back has been principally in RUT and the NASDAQ thus far. And trading volume moderated today. Trading in the S&P 500 was about the same as Friday with 2.6 billion shares, but trading on the NYSE was only up 4% and trading volume on NASDAQ declined 3%.
So far, this has appeared to be a sell-off associated with taking profits in the high fliers of the past year. Heaven help us if we get some market-rattling news. Market psychology has turned.
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Today's trading capped off a rough week in the markets. Tuesday and Wednesday brought nice spurts back to the upside, and may have reassured traders that the worst was over. But Thursday dashed those hopes with a $39 drop, slicing through long-term support at $1840. Trading opened down again this morning, but markets tried to make it back into positive territory around mid-morning. That positive move was met by the bears with more selling, driving the markets lower once again. SPX closed today at $1816, down $17. RUT closed at $1111, down $16. Volatility rose just over one point today, with the VIX closing at 17%.
Several aspects of this week's sell-off aren't typical or expected. First of all, many blue chip stocks like IBM have held up rather well throughout this debacle. IBM opened the week at $192 and closed today at $195. If you have been watching the financial news and watching the major market averages, that is probably surprising. I haven't done the research, but I don't think I have ever seen a market sell-off as severe as this week's together with minimal increases in volatility. The VIX is still under 18% and spent most of the week under 16%. One other surprising aspect is that there doesn't seem to be a significant news or economic report that triggered the selling. Biotech, high tech, and the market darlings all took it on the chin with the largest losses by far.
From SPX's closing high on April 2nd through today's close, SPX is down 4%. While 4% is typical of last year's several pauses, most analysts look for pull backs on the order of 7-10% to qualify as a "correction". So, that leaves us with the question for Monday: Is the worst over or will the markets be trading lower next week?
Try to forget about the markets and enjoy the weekend. They tell us we may enjoy temperatures above 70 degrees for the first time here in Chicago . I had decided the ice age had started, but maybe I was wrong.
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The non-farm payrolls report, aka, the jobs report, was released before the market opened this morning, and it appeared to be roughly in line with expectations with +192 thousand jobs and the unemployment rate remaining unchanged at 6.7%. The S&P futures rose a bit and the market opened an hour later with the S&P 500 up about $7, hitting its high for the day at $1897 around 10:30 am ET. Then the other shoe dropped. All of the broad market averages began a steady decline for the balance of the day. SPX closed down $24 at $1865. But RUT was much weaker, closing at $1153, down $28. Early indicators were for a significant increase in trading volume with a 32% increase on the NYSE and a 29% increase on NASDAQ. But volatility didn’t increase as much as one might expect, with the VIX closing at 14.0%, up 0.6 points.
This raises the question: Is this the long awaited correction or is it just the expected round of profit-taking after such a strong bull market? I am inclined toward the latter view for the following reasons:
SPX lost 1.3% today, but RUT lost 2.4% - small caps were being sold preferentially.
SPX lost 1.3% today, but NASDAQ lost 2.7% - high tech winners and momentum stocks like NFLX were being sold preferentially.
SPX took a large loss today, but didn’t even attempt to challenge strong support levels at $1840 and $1850.
RUT hit $1150 as its intraday low today, well above the recent pull back low and the support level set by the late December high.
VIX was up less than one percentage point and closed just under 14% - the big institutional traders aren’t hedging very strongly, if at all.
IBM closed today’s trading at $192, only down one dollar in this market.
Today was full of red ink, but RUT has been trading weaker than the rest of the market for the past couple of weeks; it never did approach its all-time highs earlier this week as SPX was setting records. RUT has been showing us weakness in the small cap space; but the question remains whether the small cap sell-off leads to more general market correction. I am encouraged by VIX remaining low today and stocks like IBM showing relative strength. We'll see.
Enjoy your weekend.
