I am selectively picking my spots. Apple (AAPL) is drowning in cash as a result of the tax reform bill. Strong stock buy-back programs and increasing shareholder dividends are most likely for the earnings on May 1, says Kerry Given, PhD, founder of Parkwood Capital.

Let’s begin our analysis of the patient with a review of his recent history. The S&P 500 Index (SPX) closed at 2581 on February 8, down 10% from the high on January 26.

Some analysts marked the intraday low on February 9 as the bottom of the correction at 12%. The rest of February and early March were textbook post- correction trading: a recovery followed by a test of the correction lows.

Then it appeared we were out of the woods. But SPX closed on March 23 at 2588, which was not only coincident with the February 8 low, but also the 200-day moving average at 2585.

The market thrashed about the week ending March 30 and began the week (April 6) with a retest of the February 8 correction low. Monday’s close (April 2) was 2582, only one dollar off of the close on February 8.

chart 1
Standard and Poor’s 500 Index (SPX)
Chart courtesy of StockCharts.com

Then the patient recovered and the gap open Thursday morning appeared to be what we were expecting: the correction low has been tested and we are on our way to a full recovery and can put the correction behind us.

But our patient had a relapse April 6, losing 58 points, or 2.2%, to close at 2604, just above the 200 dma at 2594.

The market’s fall in early February was triggered by fears of a trade war after President Trump announced he was considering 25% tariffs on imported steel and aluminum.

The EU, Britain, and Canada all complained and threatened retaliation. Then back room negotiations exempted those countries from any new tariffs. Then a deal was announced with South Korea with concessions on both sides. That left China, the principal supporter of North Korea. Perhaps more than tariffs are on the table.

Let’s return to the SPX price chart.

The February 8 correction was accompanied by extreme trade volume spikes. The market weakness in the week ending March 30 resulted in trading volumes that barely reached the 50 dma. Last week’s trading volume was even more benign, starting at the 50 dma and declining all week.

How is that possible with these extreme market swings?

SPX closed April 2 at the lower edge of the Bollinger bands but the next three days of trading brought SPX near the 20 dma in the middle of the bands. Friday’s decline took us down, but we are still well above that lower edge where SPX had stayed since March 22.

chart 2
Standard and Poors 500 Index (SPX) with Bollinger Bands
Chart courtesy of StockCharts.com

The fact that we are no longer testing the lower edge of the Bollinger bands is a positive sign. And the low trading volume is another positive sign.

Let’s turn our attention to the other major market indices before we draw some conclusions.

The Russell 2000 Index (RUT) has traded much more positively during this recent correction madness. RUT hit its correction low at 1464 on February 8 for a 9% decline. The retest in early March didn’t even come close, hitting a low of 1507 on March 1.

RUT closed April 2 at 1493, closer to the retest on March 1 than the February correction low. But last Monday’s close was just above the RUT 200 dma – there is the similarity with SPX.

And Friday’s close at 1513 was much more benign for RUT, remaining well above Monday’s low and the 200 dma at 1490.

chart 3
Russell 2000 Index (RUT)
Chart courtesy of StockCharts.com

As has often been the case recently, the NASDAQ Composite found itself in between SPX and RUT, closing at 6915 Friday, well below the correction re-test on March 2 at 7100, but above the February 8 correction at 6777 and well above the 200 dma at 6762.

chart 4
NASDAQ Composite Index
Chart courtesy of StockCharts.com

NASDAQ’s trading volume was similar to SPX, starting the week slightly above the 50 dma, and declining all week.

Trading volume in NASDAQ popped up to just above the 50 dma April 6 but remains well below the spikes we saw during the February correction.

Given the wild swings and reversals in SPX this week, volatility has been surprisingly steady and mild. The CBOE Volatility Index (VIX) closed at its high for the week on April 2 at 23.5% and hit its low April 5 at 19%. But Friday’s reversal didn’t seem to panic traders, with VIX closing at 21.5%.

chart 5
CBOE SPX Volatility Index (VIX)
Chart courtesy of StockCharts.com

There is a dichotomy in this market analysis. If I just focus on the extreme price swings and price reversals day after day, I am ready to panic and look for psychiatric help.  

But low trading volumes and relatively low volatility are sending us a different message.

An additional fact from the SPX price chart isn’t consistent with the “sky is falling” conclusion: the combination of the lows from the February correction and the 200 dma are holding very well as support. That level has been tested five times over the past two weeks of trading, and it has held. That is powerful support.

What is my diagnosis for the patient, Mr. Market?

He is nervous, afraid of every shadow, and dives under the table after every tweet from President Trump. But he has not yet fallen out of bed. The 200 dma is holding.

I am slowly and selectively picking my spots, e.g., the Apple diagonal spread I opened last week.

Apple (AAPL) is drowning in cash as a result of the tax reform bill. Strong stock buy-back programs and increasing shareholder dividends are most likely on the drawing board for the earnings announcement on May 1.

Analysts are already increasing their price targets.

Keep your powder dry.

Kerry W. Given, Ph.D.
Parkwood Capital, LLC

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