Cash Is Key Under These Conditions

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Friday’s relatively flat trading — in which the Dow Jones Industrial Average fell 0.1%, the S&P 500 gained 0.1% and the Nasdaq rose 0.3% — was positively boring compared to the week’s wild fluctuations. The week ended with the major indices scoring small gains despite the Dow’s insanely volatile 10,000-point total excursion from daily highs to lows and back up.

A three-day recovery resulted in net gains for the week for the major indices. But the wild volatility, which began on Aug. 20, resulted in losses for the month of 5.9% for the Dow, 5.5% for the S&P 500 and 5.9% for the Nasdaq.

Year to date, the Dow is off 6.6%, the S&P 500 has fallen 3.4% and the Russell 2000 is down 3.5%. Only the Nasdaq is up, and that by just 2%.

Crude oil was the biggest gainer on Friday. The spot WTI contract closed at $42.53 a barrel, up 10.3%. The Energy Select Sector SPDR (ETF) (XLE) gained 2.3% and iPath S&P GSCI Crude Oil Total Return (OIL) jumped over 7%.

Friday’s price spike was aided by two factors: China’s market intervention, which drove the Shanghai Composite up 4.8%, and comments from several Federal Reserve members who indicated that a rate hike may be postponed until December or even later.

At Friday’s close, the Dow Jones Industrial Average was off 12 points at 16,643, the S&P 500 rose 1 point to 1,989, the Nasdaq gained 16 points at 4,828, and the Russell 2000 was up 9 points at 1,163.

The NYSE’s primary exchange traded over 1 billion shares with total volume of 3.9 billion. The Nasdaq crossed 1.9 billion shares. On the Big Board, advancers outpaced decliners by 1.9-to-1, and on the Nasdaq, advancers led by 1.6-to-1.

SPY Chart
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Chart Key

Last week’s stunning decline and impressive rebound left us with more questions than answers. But rather than opine over the extreme volatility, we should focus on the technical analysis that provides strategies for dealing with these extremes.

SPDR S&P 500 ETF Trust (SPY) shows a bounce from the low under $183, but the ETF held above its October low of $182. So far, this has resulted in a successful test of a full-fledged correction.

But traders should note that upside volume is lower than downside volume, and a small upside gap was opened at $194.79 to $195.21. A downside gap still remains at $203.90 to $202.92 as well. Gaps are usually closed.

Thursday’s volume at 20-to-1 up was very bullish. Another strong day of upside volume would strengthen the bulls’ case for a genuine reversal.

IWM Chart
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For traders who consider the small caps’ action predictive, the past two trading days are encouraging. The iShares Russell 2000 Index (ETF) (IWM) made headway into the first level of resistance at $114 to $121. However, like SPY, its upside volume is considerably less than the high volume that accompanied five days of selling.

Conclusion

Volatility remains high, though reduced from the extreme levels of early last week. The VIX hit a high of 53.29 on Monday but closed the week at 26.05. However, we face two unknowns: the response to the economic picture by China and the Fed.

It has been reported that China’s late-day purchases were the result of “putting on a good face” prior to a Sept. 3 parade to celebrate the WWII victory over Japan. And the Chinese government has authorized huge stock purchases in order to avoid being embarrassed at this celebration. Second, the Federal Reserve’s hints that interest rate hikes may be delayed could be just another “test of the water” by the governors to see “if the boat floats.”

It is best to remain very flexible under these conditions. Hold mostly cash unless we experience another dramatic sell-off in which we may be given a second opportunity to purchase our favorite performers at bargain-basement prices.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/daily-market-outlook-cash-is-key-under-these-conditions/.

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