Category: Dr. Duke's Blog
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This was a shortened week due to the Labor Day holiday, but the bulls came out in strength. The Standard and Poors 500 Index (SPX) opened Tuesday at 2909, and closed today at 2979, an increase of 70 points or +2.4% in a single week. SPX had been caught in a trading range from 2822 to 2940 since August 8th, but the market gapped open strongly Thursday morning and solidly broke through the 50-day moving average (dma) at 2944. Lest we get ahead of ourselves, trading volume remains weak. Volume remained below the 50 dma until Thursday, but only touched the average then and dropped back lower today. As the bulls drive this market higher, they do so carefully. They are not “all in”.

When we plot the Bollinger bands on the SPX chart with two standard deviations above and below the 20 dma, it makes the significance of this move more apparent. SPX started the week near the center of the bands, but Thursday’s price spurt closed outside the upper edge of the Bollinger bands, a relatively rare event. And SPX maintained just enough bullish price action today to close right on the upper edge of those bands. From a statistical, random walk point of view, it will be hard for next week’s market to match this week’s strong climb higher.

The volatility index for the S&P 500 options, VIX, opened this week at 21% and closed today at 15%. I regard 15% as the “line in the sand”. Volatility levels below 15% are relatively benign, but I start to raise the caution flag above that level. So we are right on the edge: not panicky, but not calm either.

It is old news to observe that the Russell 2000 Index (RUT) continues to trade far more weakly than its big brother indices. Whereas SPX gained 2.4% this week, Russell’s close today at 1505 represented an increase of only 0.7% for the week. RUT is bouncing off resistance at its 200 dma. That is weak. Russell would have to gain 7.3% just to return to its May highs. And those May highs are far from the all-time high set in August of last year at 1741, almost 16% above today’s close. These small to mid-cap stocks are the “risk on” stocks – a sobering thought.

The NASDAQ Composite index ran parallel to the S&P 500 index this week, opening at 7906 and closing today at 8103, up 197 points for the week or +2.4%. NASDAQ gapped open on Thursday and solidly broke out above the 50 dma, but it gave back about 14 points of those gains today. NASDAQ’s trading volume ran below the 50 dma all week, and was especially low today. The same thing occurred last week and I attributed it to the holiday weekend. This isn’t the beginning of another holiday weekend. The bulls may be buying, but they are playing safe.

The China trade negotiations continue to be the principal worry for traders. We are caught in a particularly dangerous market. It will spike higher or lower in seconds on the basis of a tweet or even a rumor. But this market recovers quickly from each rumor or tweet inspired panic, demonstrating a fundamentally bullish posture. Traders exit the market in volume on the least provocation. It remains a twitchy, and therefore dangerous, market.

In my trading group, we play moderately conservative trades. The riskiest trades we enter are plays on a stock’s earnings announcement. These trades are riskier than our usual trades simply because they are binary trades – you are either right or wrong. There is no time to hedge or adjust the trade. It is over in 24 to 48 hours.

Earnings trades may be thought of as relatively safe in this volatile market. Getting in and out quickly has a certain appeal. The overall market’s twitches are less relevant to these trades. Hence, we only entered three trades this week: two earnings trades on PANW and one earnings play on LULU. I closed one PANW position the next day for a 61% gain. The other PANW trade and the LULU trade will expire worthless this weekend for gains of 18% and 14%, respectively.

This is analogous to the day trader. We commonly think of day trading as very risky, but at the end of the trading session, the day trader is safely out of the market. When we are in a volatile and unpredictable market, entering and exiting quickly has its merits.

Limit your trading to stocks that are demonstrating steady strength in the midst of this volatile market. I believe the following stocks meet those criteria: CMG, CTAS, HSY, ICE, and SBUX.

My advice remains the same. Position your stops conservatively and don’t hesitate to trip those stops. Don’t wait and hope in this market.