​Amid Indecision and Uncertainty, Sometimes Opportunity Arises

MoneyShow  |

This market presents many opportunities, but it remains an uncertain, nervous market. For example, Chipotle Mexican Grill  (CMG). Keep your stops close, writes Dr. Kerry Given.

The S&P 500 Index has been locked in a sideways dance since June 25 when it closed at 2717.

SPX closed Tuesday (July 3) at 2713. But it has been a wild dance in the meantime.

On Monday, SPX opened and immediately broke the 50-day moving average (dma) and traded down over 22 points.

I am sure I wasn’t alone in closing several positions because the market was looking so weak. But then SPX recovered and traded up over 28 points to close for a nice gain. Tuesday was exactly the opposite: large positive futures leading to a positive open and a strong morning of bullish trading, but the last hour of trading gave it all back and ended the day in the red.

I drew a downward trending line on the SPX chart, starting with the high on January 26 and then touching the March 13 peak.

Many of the perennial bears were telling anyone who would listen that the bear market was underway. I also drew a trend line on the chart that tracks this bull market back to November 4, 2016. That trend line remained unbroken until February 8 of this year.

In April and May we saw a couple of closes above that long-term bullish trend line, but we couldn’t hold it. Then we had about a week in early June where it seemed like the bulls were back in charge. But it didn’t last long.

On June 25 we closed at the 50 dma and SPX has been just treading water ever since.

The standard explanation for this market’s weakness is anxiety about a possible trade war.

I have read quite a bit on this subject and you may easily find a wide range of opinions, each seemingly backed with solid data. Some are extremely dire and others claim it is all overblown.

A recent phenomenon complicates our analysis even further.

Never in my lifetime have I seen anyone openly wishing for a recession simply for political gain. But that is a common occurrence today. It makes me suspect some of the fear mongering about a trade war. After all, a critical component to trading the markets is the analyst’s perception of the data and perhaps even his wishful thinking.

Trading volume is an important technical indicator that we understand in a very pragmatic sense. When we see trading volume spike upward, it reinforces the price direction. Increasing volume on a price spike higher accentuates the bullish nature of that price move, and conversely for price declines.

But trading volume won’t be of much help analyzing this holiday week in the markets.

Only 1.1 billion shares of the S&P 500 traded Tuesday, roughly half of the 50-day moving average. Most likely, trading volume on Thursday and Friday will remain well below the 50 dma.



The Russell 2000 Index has traded much more bullishly than SPX most of this year. RUT didn’t pull back as far during the February correction and put on a remarkable run from the first of May through June 20, gaining nearly 11% in eight weeks.

And the difference was obvious again Tuesday, with Russell holding a nice gain while SPX and NASDAQ gave back their gains.

The Russell 2000 index is predominantly made up of domestic companies. These stocks may not be as spooked by the prospects of a trade war and this may explain the divergence of SPX and RUT.

The NASDAQ Composite closed at 7503 Tuesday, down 65 points. The price action on this chart matches SPX very well, finding support at the 50 dma and just drifting sideways.

The CBOES&P 500 Volatility Index closed Tuesday at 16.1%, and has moved in a range of about 15% to 18% as SPX has traded sideways. 16% isn’t what I would call a high or alarming level of volatility, but it is far from complacence. This moderate level of volatility is another indicator of the market’s indecision and uncertainty.

The S&P 500 price chart I plotted at the beginning of this article shows the state of indecision in several ways. The most obvious is this recent sideways trend right in the middle between the bullish trend from 2016 and the bearish trend from late January of this year. The wide price swings we observed Monday and Tuesday are more evidence of the indecision and uncertainty.

Traders are nervous and they are running from one side of the ship to the other.

Corporate earnings are setting records, beating analyst estimates at unusually high rates. Companies are even complaining of being unable to fill open positions – what a change from a couple of years ago! But you wouldn’t know that by watching the major market indices.

Corporate earnings and virtually all of the hard economic data are very positive, but that doesn’t seem to assure traders. News is interpreted with the worst possible implications. The doom and gloom folks must be enjoying this moment in time.

The downside for those of us trading this market was illustrated Monday. The markets opened lower and continued lower, tripping several of my stops. Then the market recovered and thumbed its nose at me. Don’t let those events cause you to lose your trading discipline. Risk management is always the name of the game.

One of the characteristics of this nervous market is overreaction. A recent example is Chipotle. Its new CEO revealed his turnaround plan for the company last Wednesday and the stock price plunged over 6% the next day. Contrast CMG with the overall market Monday and Tuesday. While the major market indices were giving back early gains, CMG gained 5%. I took advantage of that overreaction, going long CMG stock on Friday and selling a put spread on Tuesday.

Kerry W. Given, Ph.D.
Parkwood Capital, LLC

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Companies

Symbol Name Price Change % Volume
CMG Chipotle Mexican Grill Inc. 449.99 -1.20 -0.27 117,496 Trade

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