Stock Markets Struggle on Friday, but Finish Strong

Stock Market

After a string of successful weeks, this week saw U.S. stock indexes finish right around where they started. The second half of Friday did show us something good though.

U.S. stock markets struggled Friday after concerns of a further economic slowdown chilled markets in Asia and Europe earlier in the day. This was fueled by less than stellar economic numbers along with new concerns that trade negotiations between the United States and China are stalling.

We ended the week right around where we started it, and the positive action that we saw during the first 3 days of the week was given back on Thursday and Friday. Friday’s trading started out like we were poised to see a real pullback, with the Dow dropping well below 25,000 halfway through the session, although a second-half rally got us close to where we started the day, with only a 0.3% loss booked.

The S&P 500 (+0.07%) and the Nasdaq (+0.1%) both fought back to erase early losses, with both major stock indexes ending up a tiny bit in the positive at the bell.

The strength that was shown in the markets after two hours of significant selling pressure played out is pretty encouraging, and if we were seeing a meaningful pullback, this would have been an opportunity for sellers to pile on further.

Instead, we saw the bulls step up to the plate and rescue the day, which tells us that the bargain hunters are out there saw this downward move as more of a buying opportunity than a profit taking one or one driven by nervousness. While intraday moves like this are well beneath the radar of investors, there are often some real stories that emerge within a day’s trading, and what we saw on Friday certainly qualifies as this and does have some meaning for us.

In particular, key areas of support have been tested throughout all this, and the support has held up pretty well, including the psychological support of 25,000 with the Dow. It’s not that we really bounced off of this, as we did go below this by over 100 points at one time, but the index coming back and finishing up back over 25,000 is seen as important.

These psychological support areas are more important to individual stocks than indexes, which are the sum of the activity of many stocks, but since some people pay attention to such things, breaching these levels can affect the overall mood of the market somewhat. People see such things in the media and it can make some investors more nervous and can therefore affect their decisions, to hold off from adding to their positions or even to cut back on them.

If we had have gone lower during the second half of Friday as well as during the first half, this would have at least suggested that we may be in for more on the downside, and when there is concern in the market and you start out with such a blow to stock prices, if more are of a similar mood, this can build some real downward momentum.

Instead, we saw the opposite, a real show of strength on the buying side, which successfully beat back the bears and repaired the damage they caused. We then moved our way back up pretty steadily, followed by a climax of buying that took us considerably higher over the last 15 minutes of trading, which is another promising sign.

Michael Kramer of Mott Capital is among those who have been encouraged by the response to these market concerns and the increased selling pressure that resulted, remarking that “many of these major indexes tested key levels of support and resistance, held firm, and recovered from these losses.”

We still haven’t quite recovered from Thursday’s dip, and when we look on the daily charts, we do see a hook emerging, but this is normal, as nothing goes straight up. There are two things that we can see happen with this, a continuation of the downward trend, indicating a correction of some magnitude, or a reversal and continuation of the longer trend, which is what we are seeing so far anyway.

We really need a genuine up day to confirm that this is all just a brief period of consolidation, and what we will see on Monday and Tuesday will tell us more about which scenario we are in, but so far, the response has been positive.

We Can Also Learn From the VIX

Kramer also pointed us to the VIX, an index which measures volatility in the market, where a higher reading is seen to indicate more nervousness, with a lower reading suggesting more confidence.

The mean reading for the VIX is 19.28, and as we surpass this number, this is seen as telling us that the market has an above average degree of concern. As the number rises, so does the level of concern, and this indicator goes up a lot when we’re looking at big moves down.

We were up over 30 back on December 17, and we’ve headed lower since, now sitting at a little over 15. That’s a good number overall as far as how this bodes for moving further up the ladder with stock indexes, but 15 is also seen as an important number in itself.

The VIX is being watched closely and we are at an important juncture, where we may either bounce off of 15 and head higher, or go below this and solidify the view that things are still pretty well settled.

We did already make a move higher prior to the selloffs of Thursday and Friday, but this has been coming down since 11:00 Friday, a steady decline from 17.63 to end the day at 15.77.

While such things as intraday readings of something may seem to be way too short a period to be meaningful to investors, to those who are looking to learn more about where we may be headed over the next while, closing a week strong with both prices recovering and the VIX coming down like this does have a little predictive value, in concert with other pertinent information.

While the struggles of the last two days aren’t the way to end the week that many hoped, there are always battles that must be fought on the way up, and we’ve handled this little battle pretty well so far.

John Miller


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