I am waiting for the storm clouds to clear before entering any new trades. As I mentioned earlier, my current watch list includes AAPL, MSFT, ULTA, UNH, and V. These are attractive candidates, but I don’t want to jump too soon, writes Dr. Kerry Given Friday.

The Standard and Poors 500 Index (SPX) closed Friday at 2659, down 4.1% for the week. Friday’s price action was wild, trading down as low as 2628 before recovering 31 points to close just above Wednesday’s close at 2656.

Since the SPX closing high on September 20, this blue-chip index has lost 9.3%.

Even more ominously, SPX is now underwater for the year, after opening at 2684 on January 2.

chart1
Standard and Poor’s 500 Index (SPX)
Chart courtesy of StockCharts.com

The 200-day moving average (dma) that appeared to be acting as support the previous week is now long gone. Friday’s close is 108 points below the 200 dma at 2767. Put another way, it would require a 4.1% gain for SPX the week starting Oct. 29 to recover the 200 dma, close to what was lost last week.

Trading volume in the S&P 500 companies steadily rose last week, peaking at 3.2 billion shares Friday, well above the 50 dma at 2.2 billion shares.

Is this the so-called capitulation trading session, where everyone throws in the towel? Trading volume hit 3.3 billion shares at the low of the February correction.

chart2
SPX with Bollinger Bands
Chart courtesy of StockCharts.com
SPX gave us all a false sense of confidence the previous week as it pulled back into the lower half of the Bollinger bands. But it fell outside the lower edge of the bands on Wednesday and touched that lower edge at today’s intraday low but pulled back into the bands at the close.

chart3
CBOE SPX Volatility Index (VIX)
Chart courtesy of StockCharts.com

The S&P 500 volatility index (VIX) peaked on Wednesday at 25.2%, and declined a bit to close at 24.2% Friday. This is certainly a higher level of volatility, but I admit to being a bit surprised it isn’t higher. VIX peaked at 41% in the August flash crash of 2015 and reached 33% in the recent February correction.

The Russell 2000 Index (RUT) closed Friday at 1484, after hitting an intraday low of 1459. Interestingly, RUT’s February correction low was 1464. It appears as though the February correction acted as support for RUT. Let’s hope so.

RUT has been leading this market lower thus far. Since RUT hit a high on August 31, this index has lost 14.8% of its value.

chart4
Russell 2000 Index (RUT)
Chart courtesy of StockCharts.com

The NASDAQ Composite index easily broke through the October 11 low on Wednesday and looked like it was going lower yet Friday morning, hit 7057 intraday. But NASDAQ recovered to close at 7167, down 4.3% for the week.

chart5
NASDAQ Composite Index
Chart courtesy of StockCharts.com

NASDAQ’s trading volume rose steadily all last week, peaking at 2.9 billion shares Friday, well above the 50 dma at 2.3 billion shares. NASDAQ’s trading volume peaked at 3.1 billion shares during the February correction.

I spent some time reviewing overall market bull/bear indicators Friday afternoon. Here are the salient points:

  • The CBOE put/call ratio was lower the week ending Oct. 26 at 0.80, but the values posted on October 5 and 19 at 0.82 and 0.84, respectively, were closer to those of the February correction at 0.88.
  • The percent of NYSE stocks trading above their 200 dma dropped to a low of 26% Friday. The August 2015 flash crash and January 2016 correction posted similar numbers, but this indicator only declined to 57% in the February correction.
  • The percent of NYSE stocks trading above their 50 dma hit 12% Friday. The February correction drove this percentage to the same neighborhood, at 16%.
  • The CBOE SKEW index is a measure of the far OTM puts being bid up, suggesting the possibility of a black swan event. SKEW hit 122 Friday and posted a higher value of 137 during the February correction.

To my surprise, the various ratios and values are negative, but not nearly as severe as I would have expected. I shudder to think it might get worse before it gets better.

Serious damage has been done to previous market darlings:

  • Align Technologies (ALGN) is down 42% since this correction began.
  • Grubhub (GRUB) is down 41%;
  • Facebook (FB) is down 33%;
  • Nvidia (NVDA) is down 32%;
  • Netflix (NFLX) is down 29%;
  • Amazon (AMZN) is down 19%;
  • Lululemon Athletica (LULU) is down 18%.
  • The IBD 50 stocks are down 22% since October 1st.

But there is some good news:

  • Apple (AAPL) is only down 7% since the market highs, and ULTA is down 5%.
  • AAPL, Microsoft (MSFT), Verizon (V), and United Health Group (UNH) are all at or near relative strength highs since the correction began.

I am keeping a close eye on AAPL, MSFT, ULTA, UNH, and V. These are attractive candidates once we get the all clear signal.

The severity of this correction is difficult to understand in light of such positive current economic data. Fear of the Fed increasing interest rates too rapidly and shutting down economic growth seems to be central to investor worries. I have read several articles citing fears of runaway inflation, but the current rate is at or near what previous Fed governors cited as the target for a healthy economy. Tariff wars and toxic politics round out the concerns. The market reaction certainly seems to be overdone.

I am waiting for the storm clouds to clear before entering any new trades. As I mentioned earlier, my current watch list includes AAPL, MSFT, ULTA, UNH, and V. These are attractive candidates, but I don’t want to jump too soon.

Kerry Given: Options don't have to be risky video.

Recorded: MoneyShow San Francisco August 24, 2018.
Duration: 36.34.

Kerry W. Given, Ph.D.

Parkwood Capital, LLC

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