Published May 11, 2018
After a nearly vertical rise in January, stocks succumbed to their steepest 10% decline ever, giving back ALL of January’s gains and then some in what amounted to three huge days of selling. The S&P 500 tumbled 300 points, a decline of some 11%+, halted by the market index’s 200-day moving average, a reference line that went untouched for almost 18 months. That 10 day period of selling kicked off a harsh return to volatility after the most placid year on record in 2017. Stocks were trending downward as the blue line below shows. But the bottom was NOT falling out as the 200-day moving average continued to support the market (see chart below).
After three months of chopping around in this fashion, the market has been coiling up to make its next move (as we wrote in last week’s blog). That coiling up can be seen if we remove the price bars from the above chart and just look at the moving averages. We have moving averages for 20, 50, 100, and 200 days – so everything from about one month to almost a year. Three of those averages converge into almost a single line as shown below. This is what we are looking for as the market prepares for a big move.
The volatility that ripped higher in February has now calmed to normal levels as shown below. When looking at this chart recognize that a volatility level around 10 is exceptionally low, a “I have not a care in the world” low. The current level between 12-15 is a happy place for stocks.
We can see below that the three prior efforts buyers made to stop the market correction failed immediately with sellers quickly overwhelming buyers. That has not happened this week (green circle on right in the chart below) with buyers steadily winning the daily battles and moves higher in stocks broad-based.
The stock market bulls have delivered seven straight wins or draws after three months of struggle. Getting the S&P 500 back above 2750 (and staying there) would be a welcome move. But we only need to look at the riskiest part of the market to find reason for optimism. Investors would not be investing in the smallest, riskiest companies if fear was abounding. The Micro-cap index is going to close this week at an all-time high (shown below).
Stocks may or may not rise strongly from here. But the market’s tone, at least, has changed from “sour on everything” to a more balanced and optimistic view. The fears that drove the correction have largely dissipated with inflation, trade tariff concerns, et al. having largely quieted down. We will see if the next week can build on this week’s positive move.
Last week’s recovery in the market led to gains every day this week as investors sought to put the market correction behind them. Monday posted a +0.3% hike with rising oil prices continuing to support a strong energy group. Small-cap stocks demonstrated their recent leadership with an almost full +1% hike. Tuesday was dominated by President Trump’s announcement that the U.S. is pulling out of the nuclear deal with Iran. Energy stocks were the beneficiaries of the news as it is expected to keep oil prices high. The broad market, though, closed flat on the day. Stocks rallied +1% Wednesday encouraged once the S&P 500 cleared its 50-day moving average. This technical reference line had capped prior rallies, so investors cheered the market’s strength. The good technical news continued Thursday as the S&P 500 opened above 2700 and marched higher from there to a +0.9% gain. The strength was broad with the market’s largest stock, Apple (AAPL), riding higher for a 9th straight day. Supporting the market’s positive tone was an inflation report that was viewed as very mild, reducing the upward pressure on interest rates. After two strong days, stocks took a breather Friday with President Trump’s speech attacking drug prices seen as offering little specific policy ideas, which caused investors to buy the healthcare sector, sending that group higher by +1.5%. The broader market closed +0.2%.
A very solid week for stocks send the S&P 500 (SPY) higher by +2.57% in a bid to break its 3+ month downtrend. The Nasdaq 100 (QQQ) rose +2.78% while the small-cap Russell 2000 (IWM) touched new high ground after a +2.64% rally.
Warm wishes and until next week.