The S&P 500 Index (SPX) opened last week at 3155 and closed at 3185 for a rise of nearly 1% and Kerry Given breaks down the major market indexes.
On Thursday, SPX’s 50-day moving average finally broke above the 200-day moving average at 3021. A basic sign of recovery for a stock or an index is when the 50-day moving average overtakes the 200-day. The S&P 500 remains nearly 6% underwater from the March correction (see chart).
Standard and Poor’s 500 Index (SPX)
Chart courtesy of StockCharts.com
Trading volume for the S&P 500 companies has been running very low for the past several weeks. Friday’s trading volume of 2.4 billion shares was well below the 50-day moving average at 3.1 billion shares, the ninth consecutive trading session with trading volume running below the 50-day moving average. I interpret this as general apprehension on the part of traders. We’re nervous about what tomorrow brings, and we are keeping a lot of cash on the sidelines. It is difficult or impossible to analyze what price makes sense for this market, given the extensive damage done by the shutdown. It is difficult to have the confidence “to go all in.”
I have drawn the Bollinger bands on the SPX chart below with two standard deviations above and below the 20-day moving average. SPX closed near the lower edge of the bands on June 26, and today’s close was near the upper edge. We have made the round trip. Purely on a statistical basis, we may expect a flat to slightly lower market next week.
SPX with Bollinger Bands
Chart courtesy of StockCharts.com
The Cboe Volatility Index (VIX), closed Friday at 27.3. The recent low was 24.5 on June 5. It may be hard to remember in the midst of this chaos, but volatility was running around 12% back in January. The current levels of volatility serve as a reminder that this remains a dangerous market.
CBOE SPX Volatility Index (VIX)
Chart courtesy of StockCharts.com
The iShares Russell 2000 ETF (IWM), based on the Russell 2000 group of companies, traded lower this week, closing Friday at 141.31, down 2.8% on the week. IWM bounced off of its 50-day moving average at 137.30 (see chart). Weakness in the small to mid-cap stocks has always been a reliable indicator of the market’s acceptance of risk. Like many of our citizens living in fear of the coronavirus, many traders are hiding under the bed, afraid for their investments.
IWM Exchange Traded Fund (ETF)
Chart courtesy of StockCharts.com
The Nasdaq Composite index closed Friday at 10,617, a new all-time high for the index. The Nasdaq gained 2.5% last week alone. Since June 29. it has been trading nearly straight up, a run of 8.7%. But trading volume has been running below the 50-day moving average over this entire bullish run (see chart below). This reinforces what we see with trading in the S&P 500.
NASDAQ Composite Index
Chart courtesy of StockCharts.com
I do not understand this market. Why is it possible that the Nasdaq composite has now set a new all-time high in the midst of the most severe (and self-inflicted) economic damage this country has seen since the Great Depression?
Add in the turmoil we are seeing in all of our major cities. Our very civilization is being threatened. But you wouldn’t know that from watching the Nasdaq hit new highs.
The S&P 500 remains 6% below its pre-correction highs and the Russell 2000 is 16% below its pre-correction highs. Last week’s unemployment data improved but 18 million remain on the unemployment rolls. I certainly wish the best for our leaders as they attempt to resurrect our economy. However, it is going to be a long, hard climb out of this hole.
The risk of this market is most succinctly illustrated by the current levels of volatility. Higher levels of implied volatility also communicate higher risk. As many of you know, the most conservative stock and options trade is a covered call on a blue-chip stock. My Conservative Income trading service has been using those trades this month and we are now up 3.7% for the month and 13% for the year.
You wouldn’t know we had a severe market correction. Those are better than average returns for this type of trading. Those elevated returns are a direct result of the higher levels of volatility that drive higher option prices and higher returns for this conservative style of trading.
The bottom line: It isn’t necessary to continue to hide under the bed from a financial viewpoint. We only took a 10% loss in March when the market lost 35%. And now we are up 13% year to date while the market remains down 6%. That is called risk management. Carefully weigh the risks of this market. Set tight stop losses and follow them with great discipline.
Kerry W. Given is the founder and managing director of Parkwood Capital, LLC, a business that consists of stock and options coaching, a weekly newsletter, and three trading advisory services. Given speaks frequently at trading conferences and on behalf of option brokerage firms. He is the author of “No Hype Options Trading” and “Time Is Money.”
