- Written by Dr. Duke
- Category: Dr. Duke's Blog
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I entered the VIX trade this morning for our trading group based on two recent data points.
One was seeing VIX hit a high yesterday very close to the high reached during the 2008 financial crisis.
Two was an article I read this morning. Here is the link.
Dr. Ioannidis, an epidemiologist from Stanford points out the critical errors being made in the analysis of the infection date for coronavirus and the extreme responses from WHO, CDC and the media coverage. The main points:
The current mortality rate for ordinary flu so far this season is 0.6%.
The widely publicized mortality rates for coronavirus are exaggerated simply because of how few people have been tested and the fact that the ones being tested are largely the elderly who are most susceptible and therefore seeking medical assistance.
He maintains that the Diamond Princess cruise ship is the best set of data to date, in effect, a limited "test tube", resulting in seven deaths from 700 infected crew and passengers, or a 1% mortality rate. But the demographics of the passengers are predominantly the older members of our population who are most susceptible to not only this virus but also the ordinary flu virus. When he adjusted that data to match the demographics of the U.S. population, the mortality rate is estimated to be in the range of 0.03% to 0.6%. Adding uncertainties such as passengers dying later from their infections or the possibility that the number of underlying chronic health issues may have been higher in this data set, he adjusted his estimate of the mortality rate for the general population in the U.S. to 0.05% to 1%. Contrast that with the WHO mortality rate of 3.4%.
When you count the financial costs we are incurring, the cure is worse than the disease.
- Written by Dr. Duke
- Category: Dr. Duke's Blog
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The Standard and Poor’s 500 Index (SPX) closed Friday at 2711, down 5.3% for the week. But what a difference a day can make. SPX closed Thursday at 2481, down 13.4%. Wow! Friday afternoon’s price action was wild. Any traders who left their offices a half hour early had a surprise waiting for them when they arrived home. At 3:34 pm ET, SPX was trading at 2548, down almost one percent since the open. In those remaining 26 minutes the S&P 500 ran up 163 points or 6.4% to close at 2711, resulting in a 5.5% gain for the day. Thursday's low represented a correction of 27%.
We observed a much weaker bullish spurt last Friday afternoon, March 6th, and I was encouraged. Those hopes were dashed on Monday as the market gapped open lower and sunk to a new correction low of 19%. Was this past Thursday’s low finally the capitulation we have been waiting for? Or will this just turn out to be another head fake?
VIX, the volatility index for the S&P 500 options, opened the week at 41.9%, peaked Thursday at 76.8%, and closed the week at 57.8%. I am impressed with Friday’s market strength, but the market is still very spooked. This remains a dangerous market environment.
IWM, the ETF based on the Russell 2000 group of small to mid-cap stocks, closed Friday at 119.47 for a weekly loss of 10.9%. The intraday low on Friday at 109.55 represented a 35% correction from the recent high on February 20th. IWM’s bounce on Friday was very impressive. After opening the day at 118.31, IWM plunged to 109.55, and then recovered to close at 119.47, posting a gain of 7.50 points or about 1% for the day.
The NASDAQ Composite index closed Friday at 7875 for a gain of 673 or 9.4%. NASDAQ’s low on Thursday set this index’s correction at 27%. NASDAQ tested Thursday’s lows on Friday but then spiked higher in a strong recovery, opening at 7610, falling to 7219, and then spiking to close at 7875. Trading volume was above average all week but unexpectedly dropped off during the recovery Friday
The source of this severe market correction is not the usual economic cycle downturn or a crashing housing bubble that we saw in 2008. This correction is the result of the coronavirus pandemic. The latest CDC update of March 13th cites a total of 1,629 coronavirus infections and 41 deaths in the U.S. By contrast, the CDC reports over eighteen thousand people have died during this flu season and this year is tracking to be much less lethal than last year’s flu season, which claimed 80,000 lives.
Contrast this current reaction of CDC and the media to the coronavirus epidemic to the H1N1 viral epidemic in 2009. The actions taken by the CDC are very similar, if not identical. That should not be surprising. CDC leads the world in epidemiology and their play book is well established. But the media’s response could not be more different. We were certainly alerted to the problem and advised of proper precautions in 2009. But the media did not create a panic as they have today, resulting in people fighting over toilet paper, sports seasons cancelling their seasons, and even churches closing their doors. In 2009, 61 million H1N1 infections were reported to the CDC, resulting in 12,469 deaths.
By contrast, the fear of this coronavirus epidemic has been greatly overblown as compared to H1N1 in 2009. What is the difference? Allow me to address the elephant in the room. The difference is the occupant of the Oval Office. The media fawned over President Obama. They helped his administration assure the public that appropriate steps were being taken. The majority of the current media hate President Trump and take every opportunity to critique every action taken and promote fear of widespread death and the basic collapse of our society. You think that statement is too strong? How do we explain the run on bottled water and toilet paper? Whether I like President Trump or not is irrelevant to this analysis.
This irresponsible scare mongering has resulted in tangible economic consequences. When Disney closes their U.S. theme parks tomorrow, how many workers will be affected? And that list goes on and on through many industries. My wife and I went to one of our favorite breakfast restaurants this morning. We were the only customers in the dining room. How long before those employees lose their jobs? This will be the first media induced economic recession in history. The citizens of our country who are least able to weather the storm will suffer the most. The talking heads who sound the latest breathless alarms are collecting multi-million dollar salaries.
We can’t control the cause of the market correction or even reverse it at this point. But we can use our normal technical analysis together with some basic common sense to determine our market posture. Recurring price patterns commonly follow market corrections. The most obvious is the retest of the correction lows after we think all is well and the market is recovering. If we had been encouraged by the market’s recovery on the previous Friday (3/6), and entered strong bullish positions, we would have been scrambling on Monday.
Notice the size of the corrections. SPX and NASDAQ are identical at 27% and IWM (our surrogate for the Russell 2000 index) corrected 35%. IWM consists of higher beta stocks. These are the classic “risk on” and “risk off” stocks. When traders are confident in the underlying bull market, they buy these stocks to lock in higher percentage gains. Conversely, these are the first stocks sold when any fear arises, so a larger correction is expected.
The recovery on Friday afternoon tracks the percentage gain from the intraday lows for each index to its close; SPX and NASDAQ recovered 8.8% and IWM recovered 9.1%. The consistency here is encouraging. A possible negative sign would be a smaller recovery in the small to mid-caps stocks typical of IWM and the Russell 2000 index. A consistent recovery suggests a larger market consensus of the correction being at or near its bottom.
Don’t make any bullish moves yet. Let the market's price action recover sufficiently to give you confidence that the retests of the correction are over. In the meantime, build a watch list of solid stocks that recovered well on Friday. This isn’t a time for your favorite biotech with the cure for cancer in clinical trials. Some of the stocks on my list are: APPL, ADBE, COST, INTC, LLY, MSFT, PYPL, REGN, and UNH. All of these stocks made strong recoveries on Friday and some even regained their 50 dma.
Stay calm and be disciplined.
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 339
I am certainly glad this week is over. The Standard and Poor’s 500 Index (SPX) closed today at 2954, down 402 points for the week, or -13%. The most amazing price action occurred in the last 6 minutes of trading this afternoon. SPX gained 43 points or 1.5% in only six minutes. I am impressed by the large price recovery on the daily price chart of 98 points, or 3.4%, from the trading session lows to the close, but half of that increase occurred in the last six minutes. I have never seen such a large price move squeezed into such a narrow slice of time. I was tempted to bet the farm on SPX calls for Monday, but I resisted the urge.
Trading volume rose every day this week and remained above the 50-day moving average (dma) all week. Trading volume spiked to 5.1 billion shares today. One must go back to Christmas Eve 2018 to get close to this level of trading volume. Even the February correction of 2018 was at lower volume.
The volatility index for the S&P 500 options, VIX, gapped open to start the week at 22%, steadily rose all week, and then spiked up to 49% intraday on Friday before closing at 40%. These levels of volatility are pretty rare. The last time we saw volatility spike this high was in the market correction of February 2018.
The NASDAQ Composite index opened lower at 8270 but traded higher all day to close at 8567. NASDAQ was the only broad market index to trade positively from the open today. From the recent high on 2/19, NASDAQ corrected 16%. The high tech favorites of the NASDAQ took this correction the hardest earlier in the week, but recovered significantly today. Apparently that optimism spread to the S&P 500 late in the trading session.
I have been skeptical of the panic over an imminent coronavirus pandemic for the past several weeks. When I looked up the number of deaths resulting from flu infections each winter, it put this news and breathless media coverage in clearer perspective. The CDC clearly has a responsibility to protect the American public. Starting a panic isn’t helpful to that end. Publicly stating that a coronavirus epidemic in the U.S. was inevitable was irresponsible.
According to the latest comprehensive Global Health Security survey, here is the United States' current preparedness rank: Overall: #1, Prevention: #1, Detection and Reporting: #1, Rapid Response: #2, Health System: #1, and Compliance with International Norms: #1. By comparison, here is how China ranks: Overall: #51, Prevention: #50, Detection and Reporting: #64, Rapid Response: #47, Health System: #30, and Compliance with International Norms: #141. It is astounding, given the lethality of this coronavirus variant, that the death toll among China's almost 1.4 billion people, most of whom are impoverished, is not already an order of magnitude higher than reported.
All current economic data are very solid. But the markets are at high levels of valuation. Perhaps that set up traders to panic and sell at the slightest scare. The S&P 500 index corrected 16% in only seven trading sessions. Today’s trading patterns and the dramatic decline in volatility are strong signals that we have either found the bottom or are at least close to the bottom of this correction. But the market won’t recover in seven sessions. The correction of February 2018 required about six months to fully recover. Normally the market retests the correction low at least once before recovering. This is a dangerous time to jump back in with both feet. I will be keeping a close eye on that 2860 level on the S&P 500 index. It will be surprising if we don’t revisit that level before the storm is over.
Be cautious and nibble at some favorite stocks at bargain prices, but trade small. Even if the market opens strongly and trades higher on Monday, be cautious.
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 329
The Standard and Poor’s 500 Index (SPX) closed Friday at 2972, virtually unchanged from Monday’s opening at 2974. Friday’s price action was interesting, to say the least. SPX opened at 2954 and plunged to a low of 2902 in the first few minutes – that was scary. But the index slowly recovered and then largely chopped sideways through the balance of trading until 3:09 pm ET. At that point, SPX had touched the earlier intraday low, and in the remaining 51 minutes of trading, the index gained 69 points or 2.4%. That bullish spurt late Friday afternoon was very encouraging. First of all, the intraday low of 2856 from February 28th was tested but not reached. Secondly, a day of trading that began as a rout, ended very strongly. This was an excellent sign for next week’s market. Was this the capitulation we were waiting for?
SPX trading volume remained above the 50-day moving average (dma) all week and spiked upward on Friday, booking 3.9 billion shares, the largest trading volume for the week.
VIX, the volatility index for the S&P 500 options hit an intraday high of 49.5% on February 28th, as we set the low (so far) for this correction. VIX spiked up to 54.4% this past Friday during that initial plunge in the morning, but then settled down to 41.9% by the close of trading. Was that the high point for volatility in this correction?
IWM, the ETF based on the Russell 2000 group of companies, closed Friday at 144.40, less than a point above the intraday low of 143.91 on February 28th. Friday’s intraday low hit 16.5%, overturning the previous correction low of 15%. Similar to SPX, IWM recovered much of its early losses Friday, but it wasn’t as strong of a recovery signal as we saw with SPX.
The NASDAQ Composite index closed Friday at 8576. Intraday trading broke the 200 dma at 8417, but NASDAQ quickly recovered into the close. Trading volume was above average all week and spiked upward in the recovery Friday.
As you know, I have been skeptical of the hype surrounding the possibility of a coronavirus pandemic. Late this week, I began to see calmer voices bravely entering the discussion. I say bravely because each common sense reminder is met with hostile resistance. This incident is further evidence of the deterioration of the American people’s strength since the “Greatest Generation” that endured World War II. According to the CDC, 18,000 people have died during this flu season and this year is tracking to be much less lethal than last year’s flu season, which claimed 80,000 lives. Did you miss that headline? 80,000 deaths. About half that number die each year on our highways. I am confident that coronavirus deaths in the U.S. will be less than half of this season’s flu victims.
I am more and more convinced that the fear of a coronavirus epidemic has been greatly overblown. We will see the run on toilet paper, drinking water and hand sanitizer decline over the next few weeks. If that were the end of the story, it would be simply an illustration of the tendency of our media to generate dramatic headlines, create hysteria and get everyone tuned in for the next breathless news update. Unfortunately, that isn’t the end of the story.
This irresponsible scare mongering has resulted in tangible economic consequences. A friend of mine works for a multimedia marketing company, and he tells me the cancellations of March and April trade shows has pulled their revenues back to 2008 recession levels. The global supply chains are already showing signs of healing, but many of these losses cannot be recovered. It will leave a hole in our economy. There are several signs that today’s market price levels are oversold. Traders are trying to estimate the effects of this economic disruption and price equities appropriately.
As I pointed out last week, markets normally retest the correction lows at least once before recovering. Friday’s price action was in line with that pattern. But we aren’t out of the woods yet. My advice remains the same as last week: Be cautious and nibble at some favorite stocks at bargain prices, but trade small. Even if the market opens strongly and trades higher on Monday, be cautious.
- Written by Dr. Duke
- Category: Dr. Duke's Blog
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One week ago Friday (1/31), we watched the Standard and Poor’s 500 Index (SPX) close down 58 points at 3226. As it turned out, that was the low of the recent pullbacks. SPX corrected by 3.2% and began its recovery this past Monday. SPX had fully recovered all of the previous week’s losses by the close on Wednesday at 3335. The S&P 500 index traded a bit higher on Thursday and then declined modestly on Friday to close at 3328, up 2.8% for the week. Trading volume ran above the 50-day moving average (dma) most of the week, but steadily declined and dropped below the 50 dma on Friday. Strong trading volume is a reinforcing signal for whatever market action is observed, whether higher or lower. The bulls were clearly in charge Monday through Wednesday, as the market gapped open higher each morning, and trading volume gained each day. As the market weakened on Thursday and Friday, volume declined.
We have seen pullbacks hitting temporary lows on 1/27 and 1/31, but the S&P 500 index is now back to the highs set earlier in January. If one plots a typical Bollinger band plot on SPX, we see that SPX completed the round trip from the upper edge of the Bollinger bands to the lower edge in eight trading sessions, but only required four trading sessions to return to the upper edge of the bands. This was another demonstration of the bullish support for this market.
VIX, the volatility index for the S&P 500 options, opened the week at 18.6% and closed Friday at 15.5%. Even as the market set new highs on Wednesday, VIX remained at 15.2%. I personally regard 15% as the borderline level of volatility. When market volatility hits 15%, I start to pay closer attention and be more cautious. The coronavirus scare is still on traders’ minds.
IWM, the ETF based on the Russell 2000 group of companies, traded even more strongly than SPX as the market recovered, but it also accentuated the turn in sentiment on Thursday and Friday, gapping lower at the open on Friday and closing at 164.88. However, IWM remained up 2% for the week. IWM’s weakness shows us that we are not yet out of the woods.
The NASDAQ Composite index closed Friday at 9521, up 330 points or 3.6% for the week. NASDAQ outperformed SPX once again this week, reflecting the strong performance of high-tech stocks like AAPL and AMZN. NASDAQ’s trading volume matched the pattern we saw in the S&P 500 companies, running above the 50 dma through Wednesday, but declining to complete the week at below average volume levels.
Each day brings new reports of coronavirus cases around the world. There are now twelve confirmed cases of coronavirus infections in the U.S. One encouraging statistic is that the current number of deaths in China as a percentage of the number of confirmed infections is lower than what was observed during the SARS outbreak in 2003.
The markets continue to be affected as traders fall prey to the alarmist news reports.
The driving forces behind this exceptional bull market remain valid:
• Two major trade agreements signed.
• Continuing strong economic data, including record low unemployment, and record wage growth, especially in the middle class.
• FOMC remains committed to low interest rates for the near future.
• Earnings and revenue growth in this earnings announcement cycle have been very strong.
My trading posture is unchanged. I describe it as cautiously bullish. Some stocks are holding up well while others are taking a hit. Our ADSK diagonal call spread is an excellent example. It now stands at a gain of 151%. ADSK continued to gain ground on Friday, closing at $207.
Remain disciplined and follow your stop loss prices. Don’t panic.