Is A Correction On The Horizon?

he last two weeks have rattled many market analysts. As part of my effort to monitor the markets for my clients, I track several newsletters, read various blogs, and watch selected programs on the financial cable networks. The large number of analysts recommending their clients move to cash and/or hedge the markets by buying index put options has surprised me.
The Standard and Poor’s 500 Index (SPX) closed yesterday at 2425, up 15, but the severe dip last Friday (6/30), and Thursday’s collapse down to 2423 unnerved many market participants. The bulls came back to the table yesterday, recovering all of Thursday’s losses, and bringing SPX solidly back to the middle of the recent trading range. The bulls have bought the dip one more time.
The Russell 2000 (RUT) price chart is markedly different from SPX or the NASDAQ Composite – much choppier, as RUT has largely just traded sideways all year. RUT traded down to the 50-day moving average (dma) this past Thursday, but recovered almost all of that loss yesterday. The Russell 2000 index has been much more volatile than the other major market indices. RUT hit an all-time high in late April, and then proceeded to decline to its recent trading lows by mid-May. Then RUT swung all the way back to match the April highs in early June.
The SPX volatility Index, VIX, spiked on last Thursday’s decline, and exceeded 15% briefly on Thursday this past week, but closed yesterday at 11.2%, well within the range from earlier this year. Comparing yesterday’s closing VIX at 11.2% with the minor pullbacks in April and May of 15% to 16% appears comforting, but if we look at the November 2016 correction, VIX peaked at 23%. And that didn’t happen overnight. It required nine days to climb from 12.9% to that high of 23%. We aren’t seeing that kind of volatility spike building here.
Trading volume is another critical market indicator, whether we are looking at an individual stock or a broad market index. Above average trading volume reinforces the momentum of the price move; everyone either wants to jump into this stock or everyone is trying to get out. Trading in SPX yesterday at 1.7 billion shares was well below the 50 dma at 2.1 billion shares. The NASDAQ Composite followed suit with 1.7 billion shares, below its 50 dma at 2.0 billion shares. This tells me that the large institutional traders are not panicked and making any large moves, whether that be moving to cash or going “all in”.
One final comparison is worthwhile. Pull up the SPX price chart for the flash crash of August 2015. For several days of the week preceding the flash crash on Monday and Tuesday, SPX traded lower and closed at or near the lows for the day. In recent weeks, we are seeing several long lower candlestick shadows – traders are buying when the market hits the intraday lows. They aren’t selling into the close.
I don’t believe this current price volatility is preceding a “sky is falling” moment. However, many market analysts are nervous, so we will continue to see price volatility. I remain cautiously bullish. Watch your positions carefully. Keep your stops tight.
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Trader Velizar Mitov