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That was the robot’s warning in the sixties TV show, Lost In Space. That may be too old a reference for some of you, but that sentiment is my message. The Standard and Poors 500 index (SPX) closed down five points at 4505, in stark contrast to this week’s gain of over 2.5%. Three of the morning market openings this week were gap openings higher, and dramatically so on Wednesday and Thursday. Today’s market started higher but could not hold the new high and closed lower on the day. Trading volume ran below the 50-day moving average (dma) all week.
VIX, the volatility index for the S&P 500 options, opened the week at 16.1% and steadily declined all week, closing today at 13.3%. VIX spiked just over 17% last Thursday but continued its decline into this week.
I track the Russell 2000 index with the IWM ETF and IWM started the week strongly higher but slowed starting on Wednesday and continuing through today. IWM closed at 192, down two points or down one percent, but still maintained a weekly gain of 3.8%. We expect the small cap stocks of the Russell 2000 to lead both bull and bear markets, but they remain well below the February highs.
The NASDAQ Composite index closed at 14,114 today, down 25 points or -0.2% but NASDAQ had a very bullish week, up 3.4%. NASDAQ’s trading volume ran at or above average all week.
I follow the CBOE SKEW Index chart along with several others to monitor the overall state of the market, e.g., NYSE New Highs – New Lows, the CBOE Put/Call Ratio, etc. SKEW compares the implied volatility of ITM options versus the implied volatility of OTM options. If the implied volatility is rising for OTM puts, that implies increased demand and may suggest increasing probability of a black swan event, i.e., a large correction or market crash. The SKEW index over the past three years shows a couple of peaks during 2021 as the bear market developed. By the end of 2022, we had reached a minimum in the SKEW index. But now SKEW is rather high, over 150 in early June and closing today around 148.
The FOMC and central banks around the globe reduced interest rates to historically record levels to avoid a recession caused by the pandemic. Many banks and individuals purchased low interest treasury bonds to at least generate some measure of income. When interest rates rise, the prices of bonds decline to keep the effective yield of the bonds at market levels. If the average market rate is 6%, you would not pay the nominal value of $1000 for a treasury bond; the market will discount that bond to a level where the bond’s posted two percent rate yields a rate of return consistent with current levels of interest.
Individuals build bond ladders with a portfolio of bonds with different interest rates and maturities. When rates rise, one or more of those groups of bonds decline in price, reducing the value of the bond portfolio. When a particular group of bonds (a rung on the bond ladder) matures, the investor receives the full nominal value of the bond ($1,000) and replaces that portion of the bond portfolio with new bonds bearing the current market interest rate.
What happens when a bank holds billions of dollars of 2% treasury bonds? The bank’s balance sheet declines significantly due to the declining value of those bank assets. The bank may then be in danger of not being able to fulfill the requests of depositors for a portion of their funds. Rumors fly and this results in a run on the bank; the bank closes and the federal bank examiners take over. In most cases, FDIC insurance reimburses the depositors, but that is limited to $250,000 per account. The first bank to close was Silicon Valley Bank; their depositors were not middle-class Americans; many were Silicon Valley venture capitalists with multi-million dollar accounts. As you might expect, those depositors had political clout and new Federal rules were quickly created to make them whole. The next group of banks that were in danger of failing were saved in a different manner. Treasury officials found a larger bank and convinced it to buy the smaller bank to keep it financially “whole”. It isn’t clear if more banks will follow. It is a scary scenario.
I tell you this long story to illustrate the underlying problem. The fundamental mandates of the Federal Open Markets Committee (FOMC) are to maintain steady economic growth, prevent economic recession and control inflation. Their two main tools are buying and selling treasury bonds to control the money supply and establishing the federal discount rate, the interest rate charged by the Federal Reserve to member banks. That rate is marked up as it filters down through the banks to businesses and individuals.
As inflation heated up over the past two years, the FOMC began to raise interest rates to slow down inflation and return the inflation rate to the federal target rate of 2%. Those rising rates have put the banks holding 2% treasury bonds in a tight spot. The FOMC is also in a tight spot. Should they continue to raise rates in order to bring down inflation at the expense of some banks failing and possibly risk pushing the economy into a severe recession? I am sure Powell is receiving a lot of political pressure to back off on the rate hikes.
Now you see why the SKEW index may be at such high levels. The risk of a recession is increasing, and traders are buying OTM puts for protection. We have seen the failure of several reasonably large banks. Are more failures on the horizon?
In light of this background, I find the recent bullish stock market strength we have witnessed to be very surprising. The weak trading volume we have observed all year shows a lack of conviction by the bulls. A lot of capital remains on the sidelines. The hesitancy of the Russell 2000 to join in the rally is another bearish sign. Those small to mid-cap stocks normally lead bull markets.
I am even more cautious now. I am not a day trader, but the day trader is always fully in cash at the end of each day of trading and that appears very attractive to me right now. Be careful out there.
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The Standard and Poors 500 index (SPX) closed down at 4399, down 13 points or 0.3%. Monday’s open at 4450 set up a down week of -1.1%. Yesterday’s market took a tumble, but the long lower shadow on the candlestick was encouraging. However, today’s candlestick was the classic shooting star, commonly presaging a downturn. Trading volume was well below the 50-day moving average (dma) on Monday, but it didn’t fare much better all week.
VIX, the volatility index for the S&P 500 options, opened the week at 13.9% and generally rose all week, closing today at 14.8%. VIX spiked just over 17% on Thursday’s market drop, but recovered to close the day at 15.4%.
I track the Russell 2000 index with the IWM ETF and IWM had a disappointing week, closing at 184.7, up two points or +1% today, but down 1.2% for the week. IWM almost gave up all of its gains from last week. We expect the small cap stocks of the Russell 2000 to lead both bull and bear markets, but they seem to only lead the downturns of late. IWM remains well below its February highs.
The NASDAQ Composite index closed at 13,661 today, down 18 points or -0.1% on the day and down 1.0% for the week. Today’s candlestick on NASDAQ was the shooting star we noted on SPX, a bearish sign for next week. NASDAQ’s trading volume ran above average all week with the single exception of the half day of trading on Monday.
Last week, the market ignored Powell’s clear message to Congress that the Fed isn’t through raising the discount rate. That set up a solid market run that almost reached the mid-June highs. The FOMC minutes on Thursday confirmed Powell’s sentiment that the inflation rate remains too high and more rate hikes will be required. That appeared to surprise the market and it took a tumble. Today’s trading recovered some of yesterday’s losses, but the pattern of the intraday trading looks rather bearish (the shooting star candlestick). I am concerned what Monday will bring.
Trading volume on the S&P 500 stocks remains below average and that is, at best, an unenthusiastic bullish signal. I think it shows a lack of conviction by the bulls.
I am picking at some trading opportunities, but I remain cautious. Whenever there is a doubt, I close the trade and preserve my cash.
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The Standard and Poors 500 index (SPX) closed today at 4348, down 34 points on the day or -0.8%. This decline began last Friday and continued during this shortened four-day week to post a 1.1% weekly decline. Trading volume ran below the 50-day moving average (dma) all week but spiked higher today.
VIX, the volatility index for the S&P 500 options, closed today at 13.4%, down from 14.4% on Tuesday. Today was the first day VIX has shown some life since June 13th.
I track the Russell 2000 index with the IWM ETF, which declined significantly this week, closing today at 185.2, down -1.5% on the day and down 2.5% for the week. The small cap stocks of the Russell 2000 really fell out of bed this week, gapping open lower every day this week. IWM’s 50 dma is running below its 200 dma and IWM's closing price today is trading just above the 200 dma at 178. This is the most negative signal for the current market.
The NASDAQ Composite index closed at 13,493 today, down 138 points or -1% on the day and lost 1.1% for the week. NASDAQ remains above its August 2022 high, but it gave up about half of that margin this week. NASDAQ’s trading volume was flat and slightly declining all week but spiked much higher today.
This was an ugly week for the markets. To my view, it seemed as though the market had ignored the obvious message from Powell last week that at least one more rate hike may be coming this year (and maybe two). That reality dawned on the market this week. The spike in trading volume both last Friday and again today suggest the large institutional traders are taking their profits from this latest rally.
The small cap stocks of the Russell 2000, as measured by the IWM, are really on life support. Traditionally these high beta stocks lead bull markets higher and bear markets lower. As SPX and NASDAQ were trading higher last week, IWM tracked sideways. As SPX and NASDAQ were declining this week, IWM was taking a loss approximately double that of its big brothers. That is a worrisome sign for the short-term future.
The VIX finally came to life today, although it only rose 4%. Many analysts see a low level of volatility as a sign of an impending correction, but it also may be viewed as an overall lack of anxiety.
Keep a close eye on your investments. Be prepared to increase your cash levels if warranted.
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The Standard and Poors 500 index (SPX) gapped open higher this morning and took off to close at 4450 for the day, up 54 points or 1.2%. SPX opened the week at 4345, setting up a weekly gain of 2.4%. Today’s close technically broke the resistance level set by the high on 6/16, but we will have to wait until after the holiday next week to confirm that break-out. Trading volume ran below the 50-day moving average (dma) all week and barely touched the 50 dma today.
VIX, the volatility index for the S&P 500 options, closed today at 13.6%, down from 14.4% on Monday. This week’s volatility trend was almost identical to last week, starting at 14.4% on Monday and closing the week at 13.4%.
I track the Russell 2000 index with the IWM ETF, and IWM had a spectacular week, closing at 187.3, up 0.9 points or 0.5% today, but up nearly 4% for the week. IWM gapped open higher at the opening of trading three times this week. But that’s where the good news ends. IWM remains below its high from mid-June and almost 6% below its high from early February. We expect the small cap stocks of the Russell 2000 to lead both bull and bear markets, but it is running significantly behind in this latest rally in SPX and NASDAQ.
The NASDAQ Composite index closed at 13,788 today, up 197 points or +1.5% on the day and up 2.4% for the week. But NASDAQ couldn’t break its high from 6/16. NASDAQ’s trading volume ran below average all week with the single exception of Tuesday.
After last week’s dismal performance, it was surprising to see this week’s market essentially regain all that was lost last week. The reasoning seems a bit obscure to me. Powell spoke to Congress this week and he made it clear that the Fed isn’t through raising the discount rate. It almost seems like the market has its rose-colored glasses on and believe all is well.
Today’s big rally was set off by this morning's favorable PCE report which suggested that the inflationary forces are weakening – maybe. But notice today’s trading volume; it was very weak. That could be due to the beginning of a long weekend for many traders on Wall Street. It could also show a lack of conviction in this bullish rally.
I opened several trades on Thursday and that was rewarded today. But I remain nervous. I sound like a broken record but be cautious. Keep a cash cushion on the sideline.
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The Standard and Poors 500 index (SPX) closed today at 4410, down 16 points on the day or -0.4%. SPX broke the August 2022 high on Monday and closed the week with a gain of 2.4%. Trading volume ran barely above the 50-day moving average (dma) all week, but spiked higher to 4.0 billion shares today, much higher than the 50 dma at 2.4 billion shares.
VIX, the volatility index for the S&P 500 options, closed today at 13.5%, down from 14.4% on Monday. This low reading for the VIX is surprising, given the sell off this afternoon.
I track the Russell 2000 index with the IWM ETF, which traded sideways this week, closing today at 185.9, down 1.5 points or -0.8%. IWM opened the week at 185.2, for a weekly gain of 0.4%. The small cap stocks of the Russell 2000 have been trading sideways for the last eight trading sessions. These high beta stocks are not leading this market. That is not a good sign.
The NASDAQ Composite index closed at 13,690 today, down 93 points or -0.7% on the day, but rose 2.7% for the week. NASDAQ remains well above its August 2022 high, broken last week. NASDAQ’s trading volume grew steadily all week, spiking today to 8.1 billion shares versus the 50 dma at 4.8 billion.
SPX and NASDAQ have now both broken out above the August highs from last year. Trading volume has run above average on both indices this week and spiked dramatically higher today as the markets sold off during the last three hours of trading. This trading volume spike on a price decline is a classic distribution day, suggesting the large institutional traders were taking their profits.
However, market volatility, as measured by the VIX on the S&P 500, remains at very low levels. The sell off this afternoon suggests some fear on the part of the large players, but they aren’t hedging themselves (which would lead to a higher VIX). Maybe they are already hedged? I closed some positions this morning for nice gains rather than wait another week to add to the profits. This afternoon’s sell off suggests I may have been prudent to take some risk off the table.
My closing remarks are the same as last week. I continue to watch this market very carefully. The party could end quickly.
