- Details
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 2764
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.
- Details
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 2590
During my lifetime, one would only hear from the president of the United States on rare occasions. And each of those events would be highly scripted and carefully managed. None of us really knew who he was or what he was thinking. We only saw and heard the carefully managed persona. The internet hit the White House of President Obama. That was the first time I recall the White House having a web page and hearing people discuss what they had read there. The Twitter phenomenon certainly preceded President Trump, but I think he has been the first president to use this technology to communicate with the people in an almost continuous manner. Increased transparency is a good thing, just as I thought Bernanke initiating periodic news conferences helped us better understand the goals and activities of the FOMC. Greenspan was an excellent poker player but that left us in the dark most of the time.
The price volatility of the stock market has been increasing for many years. I have attributed much of that to the growth of large-scale algorithmic trading. President Trump’s tweets have added to this increased volatility. I am sure those computer programs track his tweets closely, looking for key words to trigger some lines of code. My acquaintances seem to be of two minds about the president’s tweets. Some welcome it as open and candid communication. Others complain that it isn’t “presidential”. There is truth in both perspectives. But one result is undeniable. The market reacts to President Trump’s tweets. Today was one more example. I keep thinking that the market will become accustomed to the president’s candor, but it is hard to teach computers to use different filters to parse language of different people. You and I do it all the time. Of course, it doesn’t help that the news media feign panic and outrage regardless of what President Trump tweets.
China issued a trade announcement this morning, announcing new tariffs on U.S. companies. As many have learned over the past two years, you cannot poke at this president and not expect a reaction. President Trump responded by increasing tariffs from 10% to 15% on some products and from 25% to 30% on other products. The market panicked.
The Standard and Poors 500 Index (SPX) closed at 2847 today, down 76 points or almost 3%. The only good news was a small bounce near the end of the trading session. Large down days that close at the low of the day are ominous. Today’s drop causes me to focus on that support level at 2820 formed about two weeks ago. Today’s carnage didn’t reach that level. As one might expect on a day like this, trading volume spiked today after running below average all week.
The Russell 2000 Index (RUT) closed down over 47 points at 1459, a loss of over 3%. Russell closed at 1487 on August 5th and even closed a bit lower at 1462 in the retest of the correction on August 15th. Today’s close even broke the low set on May 31st at 1465. It is interesting to note that the February 2018 correction hit a low of 1464, but the December 2018 correction bottomed out at 1267.
The NASDAQ Composite index behaved more like the S&P 500, not quite matching the August 5th low at 7726. NASDAQ lost 240 points or about 3% in today’s closing at 7752. I would draw the support line at the intraday low of August 5th, around 7663. If NASDAQ breaks that level, this could be much more than a transient, tweet inspired panic. NASDAQ’s trading volume ran below the 50 dma all week, but spiked today on this rapid pull back.
The China trade negotiations took center stage with President Trump’s tweet on August 1st and that led to the correction low on August 5th before bouncing. The markets recovered somewhat since then, but SPX and NASDAQ never regained their 50 day moving averages. Russell was even weaker in that it never even recovered to the 200 dma.
I have to admit I was caught by surprise today. It appeared like we had largely recovered from the August 5th correction, but that recovery was short lived. One conclusion is obvious. This market is fundamentally bullish. It quickly recovers from each rumor or tweet inspired panic. When we get some kind of trade deal signed with China, it will likely be full speed ahead. Until then, we are in a nervous and dangerous market. I will be watching the market very closely on Monday. I expect at least a small bounce Monday due to the extreme reaction of the markets today.
Be extremely diligent. Watch your positions carefully. In all cases, trip your stops aggressively. Don’t wait and hope in this market.
- Details
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 2599
The Standard and Poors 500 Index (SPX) opened slightly higher this morning, but began a steady climb late morning that continued until only a few minutes before the close. SPX closed at 3026, up 22 points on the day and setting a new all-time high in the process. SPX opened the week at 2982 and tacked on 1.5% for the week.
Trading volume in the S&P 500 companies continues to run lower than average. It managed to break the 50-day moving average (dma) yesterday, but only came in at 1.7 billion shares today, under the 50 dma at 1.9 billion shares. The markets are setting new highs, but these are fragile highs. Lower trading volume on these new highs suggests a lot of money is on the sidelines. Traders are waiting on the resolution of some key issues: China trade and the Fed’s decision on interest rates.
The Russell 2000 Index (RUT) continues to lag behind SPX and NASDAQ. Russell opened the week at 1550 and closed at 1579, gaining 1.9% this week for a strong showing. RUT took quite a tumble on Thursday, but regained all of that today. Russell never fully recovered from the December correction lows last year. RUT’s all-time high was set at 1741 in late August, 2018. Russell remains over 10% below that all time high. The recent high was set in early May at 1615, about 2% above today’s close. Russell’s bearish inclination is a significant hindrance for a strong bull market. Until these high beta stocks start to accelerate, the bulls are clearly not on a strong “risk on” path.
The NASDAQ Composite index broke its May 3rd high of 8164 on July 10th, but broke down below that support level last Friday. NASDAQ opened above that level on Monday and traded up 1.9% to close today at 8330. Today’s new all-time high for the NASDAQ Composite broke the previous high from this past Wednesday, which, in turn, had broken the high from July 15th. NASDAQ’s price chart pattern is much stronger than Russell’s and even slightly stronger than SPX.
NASDAQ’s trading volume is low, even weaker than that of the S&P 500 index, having remained below its 50 dma since the July 4th holiday. It is hard to get too excited about strong market days like today when trading volume is downright dismal.
The prospects of a rate cut coming out of next week’s FOMC meeting appears to be the primary bullish motivation for this market. Public interviews by Powell and other FOMC members a couple of weeks ago had convinced many market analysts that a rate cut was on the table for next week’s meeting. That pushed the indices higher. The discussions documented in the last Fed meeting’s minutes (last week’s Beige book) seemed to throw doubt on that prospect and that weakened the market last week. Did today’s GDP number of +2.1% encourage the bulls that a rate cut might be probable after all? Is that what drove today’s bullish run?
The bulls are still driving this market, but anticipation of the restart of the China trade negotiations on Tuesday and the Fed announcement on Wednesday is on everyone’s minds. Therefore, my outlook remains unchanged. Trade with expectations of a sideways to slightly bullish market, but be prepared to hit the stops earlier rather than later. More conservative traders would be well advised to wait until after the Fed announcement on Wednesday before moving additional capital into the market.
- Details
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 2609
I enjoy roller coasters. It’s a thrill. Somehow, it isn’t quite as thrilling to have my money taking that wild ride. That phenomenon has become very common in recent markets. After hitting a high of 2952 on May 1st, the S&P 500 index dropped 7% in 23 trading sessions. But then the market turned and recovered all of those losses in only 13 trading sessions. This is typical of the modern “V” shaped correction: a rapid, scary ride down followed by an incredibly rapid recovery in short order.
We witnessed part of that pattern again over the past two weeks. The Standard and Poors 500 Index (SPX) closed at 3026 on July 26th and then proceeded to lose 6% through the close on August 5th. Thursday’s close recovered half of that loss in only three days. SPX closed yesterday at 2919, down 19 on the day.
Trading volume has run below average since the July 4th holiday, but that changed with this correction. Trading volume in the S&P 500 companies spiked on July 31st and only dropped back close to the 50-day moving average (dma) yesterday. It is significant that the only increases in trading volume are coming with market declines, not bullish runs higher. Money remains on the sideline as the market rises, but traders take profits quickly at the least sign of trouble.
The volatility index for the S&P 500 options, VIX, spiked as high as 25% on the worst day of the correction and has declined since then, closing yesterday at 18%. That remains a relatively high level of volatility. All is not yet calm.
The Russell 2000 Index (RUT) continues to lag behind SPX and NASDAQ. Russell began the correction at 1587 on 7/31 and closed down 6.3% at 1487 on 8/5. By Thursday, Russell had recovered almost half of that loss, but it gave much of it back yesterday, closing at 1513, down 19 points. Russell never fully recovered from the December correction lows last year. Before this most recent correction, RUT had not yet even regained its high from early May of this year. Yesterday’s close remains over 15% below RUT’s
all-time high. This chart’s bearish nature is a significant caution sign for the bulls.
The NASDAQ Composite index set a new all-time high of 8330 on July 26th, but lost over 7.3% in this recent correction. NASDAQ recovered some of that loss this week, closing Friday at 7959, down 80 points.
NASDAQ’s trading volume has trended even weaker than that of the S&P 500 index since the July 4th holiday, but volume rose above the 50 dma during this correction and has remained above average throughout this week.
Traders were buoyed by the prospects of a rate cut coming out of last week’s FOMC meeting and were somewhat disappointed by the quarter point cut, but the markets remained positive. Then the China trade negotiations took center stage once again with President Trump’s tweet last Thursday. The markets have recovered somewhat since then, but remain very fragile.
My suggestion to my most conservative clients is to remain largely on the sidelines. Focus on conservative blue chips. Selling ITM calls is a good strategy for income and providing 3-4% percent of protection.
I have worked through a large number of stock charts this week, focusing on stocks that have not broken their 50 dma during this correction. A finer screen would be those stocks that were trading sideways or higher yesterday. The following stocks met both criteria, remaining above the 50 dma during the correction and trading higher on Friday: CMG, EW, HSY, and SBUX.
Be extremely diligent. Watch your positions carefully. In all cases, trip your stops aggressively. Don’t wait and hope in this market.
- Details
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 2595
The Standard and Poors 500 Index (SPX) gave back most of last week’s gains this week. SPX closed Friday at 2977, down 19 points on the day, and down 1.4% for the week. The support level to watch is from the early May high around 2950. A secondary support level would be the 50-day moving average (dma) at 2900.
Trading volume in the S&P 500 companies hit a low after the July fourth holiday and has steadily risen for the past two weeks, but remains below the 50 dma. This reinforces the lack of conviction among the bulls. They may not be selling off strongly, but they certainly aren’t buying aggressively either. The Fed meeting next week will eliminate some of the uncertainty holding this market in check. As long as the uncertainty of the China trade negotiations remains, the bulls will remain largely on the sidelines.
VIX spiked up to 14% on Wednesday after opening at 12.6% that morning. Friday afternoon’s sell-off spiked VIX up to 14.5%. I regard volatility levels below 15% to be relatively benign, but this increased level of VIX confirms a moderate level of concern on the part of traders.
Small to mid-capitalization stocks, as represented in the Russell 2000 Index (RUT), may be regarded as the proverbial canary in the coal mine. These are high beta stocks, meaning they will rise faster than the S&P 500 in a bull market and lose value faster in a bear market. Russell stocks are the classic “risk on” and “risk off” stocks, leading bull markets higher and bear markets lower. Russell closed the week at 1548 after opening the week at 1571, down 1.5%, a touch more than SPX’s decline for the week. RUT has been in a steady decline since the beginning of July. SPX and NASDAQ eclipsed their May highs during July, but RUT has yet to recover even its February highs.
After breaking its May highs last week, the NASDAQ Composite index broke that support level on Friday, closing down 61 points to 8147. The pattern in trading volume is similar to the S&P 500, running steadily below the 50 dma since the July fourth holiday. NASDAQ was down 1.4% for the week.
The broad market indices were being cautiously held up by the prospects of a rate cut coming out of next week’s FOMC meeting. The FOMC discussions documented in the last meeting’s minutes were released this week, and it appears that the committee sees the economy as moderately strong, so a rate cut is unlikely. Basic economic data would have to cause the Fed some concern, and the data are pretty solid.
I see three evidences of a nervous market:
• Consistently below average trading volumes
• Modestly higher volatility
• Sideways to lower trending in the small caps, as represented by the Russell 2000
Therefore, my outlook remains unchanged. Trade with expectations of a sideways to slightly bullish market, but be prepared to hit the stops earlier rather than later. More conservative traders would be well advised to wait until after the Fed announcement on Wednesday before moving additional capital into the market.
