The market was on edge this week as the FOMC met on Tuesday and Wednesday and issued their announcement of a quarter point rate cut. This created some price volatility on Wednesday, but it appeared the net market assessment of the move was moderately positive. Then the other market hobgoblin, China trade negotiations, hit the markets on Friday. The S&P 500 opened higher on Friday, traded up to 3016 and held a positive gain until about 1:00 pm ET, when news hit the wires of the Chinese trade delegation cancelling a trip to Montana. SPX fell off rapidly and closed at 2992 for a 15-point loss on the day.
Trading volume continues to tell a bearish story in these markets. Even in the earlier part of this week, when price action was moderately positive, SPX trading volume was below the 50-day moving average (dma) and declined all week. Friday’s spike higher was an anomaly based on options and futures contract expiration. As the bulls drive this market higher, they do so carefully. They are not “all in”.
The volatility index for the S&P 500 options, VIX, opened this week at 14.9% and closed Thursday at 14.0%. But Friday’s China trade panic pushed volatility up, closing up 1.3 points at 15.3%.
The Russell 2000 Index (RUT) has traded far more weakly than its big brother indices all year. Russell surprised us with a strong 7.4% run higher from September 4th through this past Monday when it closed at 1585. The rest of this week has been a series of red candlesticks on my chart (maybe they are black on yours). Russell closed Friday at 1560, down 2 points. It was a tough week for small to mid-cap stocks and those are the stocks that lead bull markets.
The NASDAQ Composite index was almost perfectly flat this week, opening at 8122 and closing Friday at 8118. NASDAQ’s intraday lows came close to the 50 dma on Wednesday and Friday, but recovered to close higher. The 50 dma is the line in the sand to watch for NASDAQ. NASDAQ’s trading volume was below average all week, but it spiked significantly on Friday, due to options and futures contracts expiring.
The financial news has been filled with discussions of impending recession for the past several weeks. Journalists of all stripes, including financial journalists, now regularly show their political bias in their writing. Econ 101 will define a recession as two consecutive quarters of negative GDP growth. Given our GDP growth of 2% to 3% over the past two years, talk of a recession is puzzling. This week’s Fed meeting provided additional support for a positive economic outlook.
Chairman Powell went out of his way during the news conference to deny that this latest rate cut was a reaction to prevent a recession. His comments were in reaction to several media questions asserting the danger of an imminent recession. Powell said the rate cuts were designed to “insure against downside risks to the outlook from weak global growth and trade tensions”. He clearly stated that the current economic data do not support any talk of a recession or a forecast of a recession.
Friday’s markets illustrated the price volatility I have repeatedly discussed over the past several weeks. This week’s markets were relatively calm and the price moves were modest, even surrounding the Fed announcement. That changed in a flash around 1:00 pm ET Friday, based on a change in the China trade delegation’s travel plans while here in the states. There could be good reasons for that change of plans, but no one seems to know. Traders assume the worst and sell.
As I have written in earlier newsletters, Traders exit the market in volume on the least provocation. This market remains nervous and therefore dangerous. It pays to be cautious. I am focusing on solid blue-chip stocks whose prices have held up reasonably well as we hit these down drafts, e.g., DR Horton Inc (NYSE:DHI), JPMorgan Chase & Co (NYSE:JPM), KLAC, Lockheed Martin Corporation (NYSE:LMT), MLM, SYK, TGT, TWTR, and VMC.