Category: Dr. Duke's Blog
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Friday’s market reminded me of the classic Monopoly game card. The Standard and Poors 500 index (SPX) collapsed Friday after the latest CPI report, losing 117 points to close at 3901, down 2.9% in one day. This culminated a disastrous week for the S&P 500 with a 5.7% loss. Support levels from the May lows are 3875 and 3801. However, trading volume remained below average all week, only touching the 50-day moving average (dma) on Friday.

VIX, the volatility index for the S&P 500 options, spiked as high as 30% on Friday and then declined to close at 28%. VIX opened the week at 25% and declined to 23% by Wednesday, but increased Thursday and Friday. The increase on Friday seemed less than I would have expected for a large gap opening lower that continued even lower with no intraday recovery.

I track the Russell 2000 index with the IWM ETF. IWM gapped open lower on Friday and lost nearly five points or 2.7%. IWM opened the week at 188.79 and closed Friday at 178.59 for a decline of 5.4%.

The NASDAQ Composite index gapped open lower Friday and closed at 11,340, down 414 points or 3.5% and down seven percent for the week. Trading volume was modest all week and only slightly above the 50 dma, even during Friday’s market collapse.

The 2022 market has been declining steadily for multiple reasons:
·      Record levels of inflation
·      Sharply rising energy prices
·      Rising interest rates
·      A negative Q1 GDP estimate

Overall market trading was largely constrained to a sideways trading pattern for the last couple of weeks but that dramatically changed Friday after another record setting CPI report.
Stagflation is the term for a period of high inflation coupled with a slow growing or even a recessionary economy. The Fed’s cure for inflation is largely constrained to raising interest rates to slow the economy and consequently slow wage and price increases. They raised rates a quarter point at their last meeting and will likely raise rates by a half point on Wednesday.
An additional concern is whether the current market is overpriced. The broad market indices are all substantially lower at this point. The declines in 2022 follow:
·      The S&P 500 index: -19%
·      The NASDAQ Composite: -28%
·      The Russell 2000 index: -20%

I consider removing 20% or more from the market indices probably trims prices to a more reasonable level. On the other hand, the price increases of consumer goods and energy are setting all-time records and we have not yet seen any softening of those prices. Technical analysts watch for a trading volume spike at a market low that may be interpreted as “capitulation”, the last surge of selling, representing a large number of stockholders throwing in the towel. We have not seen that volume spike as yet. It could get worse before it gets better.

Remain on guard. Trade small and leave a substantial amount of your investment capital in cash or in relatively safe utility and REIT stocks.