Dr. Duke's Blog

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Written by Dr. Duke

Created: 19 August 2023

The Standard and Poors 500 index (SPX) closed Friday at 4370, with a small decline of less than one point. However, this culminates a steady decline of 4.8% since the high on July 31st. Trading volume continues to run well below the 50-day moving average (dma).

VIX, the volatility index for the S&P 500 options, opened the week at 15.9% and closed yesterday at 17.3% after an intraday spike to 18.9%. VIX has appeared to be lower than one might expect after the steady decline in the S&P 500 index over the last two weeks. Are all the large players already hedged?

I track the Russell 2000 index with the IWM ETF. IWM closed up Friday, closing at 196.9 after finding support at the 200 dma. However, IWM has booked a significant loss of 6.2% since its high on 7/31. The Russell 2000 stocks are leading the market lower – not a good sign.

The NASDAQ Composite index closed Friday at 13,291, down 26 points for a 0.2% loss. NASDAQ wins the race to the bottom, now down 7.4% since its recent high at 14,358 on 7/19.


IBD moved their market assessment from Uptrend Under Pressure to Market in Correction on Thursday. VestorVest’s market analysis is now Bearish and they recommend not buying any stocks at this time.

Fitch’s downgrade of U.S. debt about two weeks ago continues to haunt the markets, as does the concern about future bank failures. PacWest (PACW) is one of many banks that has experienced significant withdrawals of deposits and is rumored to be on the brink of failure.

All of the broad market indices are down significantly:

The S&P 500 is down 4.8% since its high July 31

The NASDAQ Composite is down 7.4% since its high July 19

The Russell 2000 is down 6.2% since its high July 31

This could be a comparably minor market correction, but the underlying U.S. economy is not healthy. Our level of debt has reached record levels; the cost of servicing that debt is growing rapidly with rising interest rates. Unfortunately, our politicians are turning a blind eye to our fiscal problems. It is hard to imagine how this situation may be sustainable. The public’s focus has been on the effect of rising interest rates on their personal debt and our government’s debt situation is completely analogous. The path out of this situation may be quite painful.

I have closed all of my positions except some Jan 2024 covered calls on blue chip, dividend paying stocks and long term OTM iron condors on the S&P 500 index. I am watching this market very carefully. I fear we have not yet seen the bottom.


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Written by Dr. Duke

Created: 04 August 2023

The Standard and Poors 500 index (SPX) was trading sideways earlier this week, but the downgrade of U.S. debt spooked traders and the market lost 2.3% this week, closing today at 4478, down 4 points or 0.5%. Trading volume continues to run at or below the 50-day moving average (dma).

The effects of the Fitch debt downgrade pushed VIX, the volatility index for the S&P 500 options, higher on Wednesday and Thursday, rising above 17% both days, but VIX opened and moved lower today, reaching 14.6% before spiking higher to close at 17.1%. Are we whistling in the dark?

I track the Russell 2000 index with the IWM ETF. IWM traded down with the rest of the market but with a smaller move lower. IWM closed at 194.2 today down 0.4 points or -0.2%. The weekly loss was 1.4%, less than SPX’s loss of 2.3%.

Similar to the S&P 500 index, the NASDAQ Composite index closed at 13,909, down 50 points today for a 0.3% loss. But NASDAQ had a tough week, losing 3.0%. The trading action yesterday and today seemed to show the index finding support just below 13,900 (today’s low at 13,898 and yesterday’s low at 13,881).

I find it interesting that the debt crisis of our country has been given little or no attention in the financial media. It is almost as though those stories are not allowed. The scary facts are that our debt to GDP ratio is approximately the same as Greece’s debt ratio was several years ago. Their solution required significant hardships for the Greek citizens, and also help from the European Union. But who is in a position to help the United States?
The downgrade of our debt only occurred two days ago, and the story is already fading. We are behaving like an addict, making excuses, and refusing to admit we have a problem.

The discussion that has replaced the debt crisis is whether the combination of inflation and Fed rate hikes will result in a “hard landing”, code for a painful recession. Unfortunately, our leadership in Washington largely consists of feckless people who have never had to run a business, pay the bills, and balance the books. It is becoming harder to kick the can down the road.

IBD moved their market assessment from Confirmed Uptrend to Uptrend Under Pressure on Wednesday. Be cautious about entering new positions. Cash is king.

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Written by Dr. Duke

Created: 28 July 2023

After dropping over one percent yesterday, the Standard and Poors 500 index (SPX) traded up today, closing at 4582, up 45 points or +1% on the day, but posted a weekly gain of 0.9%. Trading volume ran under the 50-day moving average (dma) all week, except for Thursday’s down session.

VIX, the volatility index for the S&P 500 options, spiked above 15% during yesterday’s bear market, opened today at 14.0%, and moved down to 13.3% at the close of trading today.

I track the Russell 2000 index with the IWM ETF. IWM traded down with the rest of the market yesterday but closed up 2.5 points at 196.4 today. IWM opened the week at 194.6 for a 0.9% weekly gain.

Similar to the S&P 500 index, the NASDAQ Composite index fell out of bed yesterday, but recovered today, closing at 14,317, up 1.9% on the day and up 1.7% for the week.

The FOMC meeting was the center of attention this week, raising the federal discount rate by 25 basis points to a current rate of 5.25% to 5.50%. The markets didn’t respond much in either direction after the announcement on Wednesday. After sleeping on the news, traders woke up in a very negative mood on Thursday and the markets declined significantly.

The prevailing talking heads claimed the markets realized that inflation pressures were coming down after the Personal Consumption Expenditures report came out this morning, so the market recovered yesterday’s losses. I find these pat answers a little simplistic. Those rising interest rates will increase the pressure on stressed banks and will continue to slow economic growth. The latest estimate of GDP growth for the second quarter is a positive 2.4%. But I expect the third quarter numbers will show the results of that continuing pressure.

I entered some bullish trades today, but I remain cautious longer term. I see too many negatives in our economy to be bullish.

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Written by Dr. Duke

Created: 21 July 2023

After setting a new high for this year on Wednesday, the Standard and Poors 500 index (SPX) paused yesterday and today, closing today at 4536, essentially unchanged on the day, but still posted a weekly gain of 0.6%. Trading volume exceeded the 50-day moving average (dma) starting Tuesday and spiked higher today, although I am unsure why – maybe taking profits?

VIX, the volatility index for the S&P 500 options, opened the week at 13.8% and was largely unchanged all week, closing today at 13.6%. This moderately high level of volatility may hint at continued put demand for hedging.

I track the Russell 2000 index with the IWM ETF. IWM traded down the past two days, closing down 0.6 points at 194.5 today, but IWM maintained a positive week’s gain at +1.7%. IWM touched its high for the year on Wednesday but could not hold it, trading lower the balance of the week.

Similar to the S&P 500 index, the NASDAQ Composite index set its high for the year on Wednesday, but then traded off sufficiently to turn in a weekly loss of 0.8%. NASDAQ’s trading volume ran at or above average all week.

In light of continuing inflation, increasing interest rates, and fear of more bank failures, this week’s trading was rather calm. With the current positive numbers in employment and housing, it is hard to be bearish. But high rates of inflation and rising interest rates are taking their toll. Here in the Western suburbs of Chicago, we have a large number of empty storefronts. The national debt continues to grow, and rising interest rates are raising the servicing costs for that debt.

Consumers are being squeezed in a similar manner. The interest rate on the 
TJ Maxx credit card recently rose to 32%, close to loan shark territory. Presumably, people learned the lesson to avoid adjustable-rate mortgages back in 2008, but for anyone holding much personal unsecured debt, the pressure is building.

The broad market averages remain moderately bullish, but I don’t see much enthusiasm with traders. My clients are pulling in their horns.

I booked some quick gains playing the earnings announcements of NFLX and TSLA this week. Normally I would consider those trades rather risky. In this market environment, being in a quick “in and out” trade somehow doesn’t seem so bad.

I remain cautious.

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Written by Dr. Duke

Created: 14 July 2023

That was the robot’s warning in the sixties TV show, Lost In Space. That may be too old a reference for some of you, but that sentiment is my message. The Standard and Poors 500 index (SPX) closed down five points at 4505, in stark contrast to this week’s gain of over 2.5%. Three of the morning market openings this week were gap openings higher, and dramatically so on Wednesday and Thursday. Today’s market started higher but could not hold the new high and closed lower on the day. Trading volume ran below the 50-day moving average (dma) all week.

VIX, the volatility index for the S&P 500 options, opened the week at 16.1% and steadily declined all week, closing today at 13.3%. VIX spiked just over 17% last Thursday but continued its decline into this week.

I track the Russell 2000 index with the IWM ETF and IWM started the week strongly higher but slowed starting on Wednesday and continuing through today. IWM closed at 192, down two points or down one percent, but still maintained a weekly gain of 3.8%. We expect the small cap stocks of the Russell 2000 to lead both bull and bear markets, but they remain well below the February highs.

The NASDAQ Composite index closed at 14,114 today, down 25 points or -0.2% but NASDAQ had a very bullish week, up 3.4%. NASDAQ’s trading volume ran at or above average all week.

I follow the CBOE SKEW Index chart along with several others to monitor the overall state of the market, e.g., NYSE New Highs – New Lows, the CBOE Put/Call Ratio, etc. SKEW compares the implied volatility of ITM options versus the implied volatility of OTM options. If the implied volatility is rising for OTM puts, that implies increased demand and may suggest increasing probability of a black swan event, i.e., a large correction or market crash. The SKEW index over the past three years shows a couple of peaks during 2021 as the bear market developed. By the end of 2022, we had reached a minimum in the SKEW index. But now SKEW is rather high, over 150 in early June and closing today around 148.

The FOMC and central banks around the globe reduced interest rates to historically record levels to avoid a recession caused by the pandemic. Many banks and individuals purchased low interest treasury bonds to at least generate some measure of income. When interest rates rise, the prices of bonds decline to keep the effective yield of the bonds at market levels. If the average market rate is 6%, you would not pay the nominal value of $1000 for a treasury bond; the market will discount that bond to a level where the bond’s posted two percent rate yields a rate of return consistent with current levels of interest.

Individuals build bond ladders with a portfolio of bonds with different interest rates and maturities. When rates rise, one or more of those groups of bonds decline in price, reducing the value of the bond portfolio. When a particular group of bonds (a rung on the bond ladder) matures, the investor receives the full nominal value of the bond ($1,000) and replaces that portion of the bond portfolio with new bonds bearing the current market interest rate.

What happens when a bank holds billions of dollars of 2% treasury bonds? The bank’s balance sheet declines significantly due to the declining value of those bank assets. The bank may then be in danger of not being able to fulfill the requests of depositors for a portion of their funds. Rumors fly and this results in a run on the bank; the bank closes and the federal bank examiners take over. In most cases, FDIC insurance reimburses the depositors, but that is limited to $250,000 per account. The first bank to close was Silicon Valley Bank; their depositors were not middle-class Americans; many were Silicon Valley venture capitalists with multi-million dollar accounts. As you might expect, those depositors had political clout and new Federal rules were quickly created to make them whole. The next group of banks that were in danger of failing were saved in a different manner. Treasury officials found a larger bank and convinced it to buy the smaller bank to keep it financially “whole”. It isn’t clear if more banks will follow. It is a scary scenario.

I tell you this long story to illustrate the underlying problem. The fundamental mandates of the Federal Open Markets Committee (FOMC) are to maintain steady economic growth, prevent economic recession and control inflation. Their two main tools are buying and selling treasury bonds to control the money supply and establishing the federal discount rate, the interest rate charged by the Federal Reserve to member banks. That rate is marked up as it filters down through the banks to businesses and individuals.

As inflation heated up over the past two years, the FOMC began to raise interest rates to slow down inflation and return the inflation rate to the federal target rate of 2%. Those rising rates have put the banks holding 2% treasury bonds in a tight spot. The FOMC is also in a tight spot. Should they continue to raise rates in order to bring down inflation at the expense of some banks failing and possibly risk pushing the economy into a severe recession? I am sure Powell is receiving a lot of political pressure to back off on the rate hikes.

Now you see why the SKEW index may be at such high levels. The risk of a recession is increasing, and traders are buying OTM puts for protection. We have seen the failure of several reasonably large banks. Are more failures on the horizon?

In light of this background, I find the recent bullish stock market strength we have witnessed to be very surprising. The weak trading volume we have observed all year shows a lack of conviction by the bulls. A lot of capital remains on the sidelines. The hesitancy of the Russell 2000 to join in the rally is another bearish sign. Those small to mid-cap stocks normally lead bull markets.

I am even more cautious now. I am not a day trader, but the day trader is always fully in cash at the end of each day of trading and that appears very attractive to me right now. Be careful out there.

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Written by Dr. Duke

Created: 07 July 2023

The Standard and Poors 500 index (SPX) closed down at 4399, down 13 points or 0.3%. Monday’s open at 4450 set up a down week of -1.1%. Yesterday’s market took a tumble, but the long lower shadow on the candlestick was encouraging. However, today’s candlestick was the classic shooting star, commonly presaging a downturn. Trading volume was well below the 50-day moving average (dma) on Monday, but it didn’t fare much better all week.

VIX, the volatility index for the S&P 500 options, opened the week at 13.9% and generally rose all week, closing today at 14.8%. VIX spiked just over 17% on Thursday’s market drop, but recovered to close the day at 15.4%.

I track the Russell 2000 index with the IWM ETF and IWM had a disappointing week, closing at 184.7, up two points or +1% today, but down 1.2% for the week. IWM almost gave up all of its gains from last week. We expect the small cap stocks of the Russell 2000 to lead both bull and bear markets, but they seem to only lead the downturns of late. IWM remains well below its February highs.

The NASDAQ Composite index closed at 13,661 today, down 18 points or -0.1% on the day and down 1.0% for the week. Today’s candlestick on NASDAQ was the shooting star we noted on SPX, a bearish sign for next week. NASDAQ’s trading volume ran above average all week with the single exception of the half day of trading on Monday.

Last week, the market ignored Powell’s clear message to Congress that the Fed isn’t through raising the discount rate. That set up a solid market run that almost reached the mid-June highs. The FOMC minutes on Thursday confirmed Powell’s sentiment that the inflation rate remains too high and more rate hikes will be required. That appeared to surprise the market and it took a tumble. Today’s trading recovered some of yesterday’s losses, but the pattern of the intraday trading looks rather bearish (the shooting star candlestick). I am concerned what Monday will bring.

Trading volume on the S&P 500 stocks remains below average and that is, at best, an unenthusiastic bullish signal. I think it shows a lack of conviction by the bulls.

I am picking at some trading opportunities, but I remain cautious. Whenever there is a doubt, I close the trade and preserve my cash.

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Written by Dr. Duke

Created: 30 June 2023

The Standard and Poors 500 index (SPX) gapped open higher this morning and took off to close at 4450 for the day, up 54 points or 1.2%. SPX opened the week at 4345, setting up a weekly gain of 2.4%. Today’s close technically broke the resistance level set by the high on 6/16, but we will have to wait until after the holiday next week to confirm that break-out. Trading volume ran below the 50-day moving average (dma) all week and barely touched the 50 dma today.

VIX, the volatility index for the S&P 500 options, closed today at 13.6%, down from 14.4% on Monday. This week’s volatility trend was almost identical to last week, starting at 14.4% on Monday and closing the week at 13.4%.

I track the Russell 2000 index with the IWM ETF, and IWM had a spectacular week, closing at 187.3, up 0.9 points or 0.5% today, but up nearly 4% for the week. IWM gapped open higher at the opening of trading three times this week. But that’s where the good news ends. IWM remains below its high from mid-June and almost 6% below its high from early February. We expect the small cap stocks of the Russell 2000 to lead both bull and bear markets, but it is running significantly behind in this latest rally in SPX and NASDAQ.

The NASDAQ Composite index closed at 13,788 today, up 197 points or +1.5% on the day and up 2.4% for the week. But NASDAQ couldn’t break its high from 6/16. NASDAQ’s trading volume ran below average all week with the single exception of Tuesday.
 
After last week’s dismal performance, it was surprising to see this week’s market essentially regain all that was lost last week. The reasoning seems a bit obscure to me. Powell spoke to Congress this week and he made it clear that the Fed isn’t through raising the discount rate. It almost seems like the market has its rose-colored glasses on and believe all is well.

Today’s big rally was set off by this morning's favorable PCE report which suggested that the inflationary forces are weakening – maybe. But notice today’s trading volume; it was very weak. That could be due to the beginning of a long weekend for many traders on Wall Street. It could also show a lack of conviction in this bullish rally.

I opened several trades on Thursday and that was rewarded today. But I remain nervous. I sound like a broken record but be cautious. Keep a cash cushion on the sideline.

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Written by Dr. Duke

Created: 23 June 2023

The Standard and Poors 500 index (SPX) closed today at 4348, down 34 points on the day or -0.8%. This decline began last Friday and continued during this shortened four-day week to post a 1.1% weekly decline. Trading volume ran below the 50-day moving average (dma) all week but spiked higher today.

VIX, the volatility index for the S&P 500 options, closed today at 13.4%, down from 14.4% on Tuesday. Today was the first day VIX has shown some life since June 13th.

I track the Russell 2000 index with the IWM ETF, which declined significantly this week, closing today at 185.2, down -1.5% on the day and down 2.5% for the week. The small cap stocks of the Russell 2000 really fell out of bed this week, gapping open lower every day this week. IWM’s 50 dma is running below its 200 dma and IWM's closing price today is trading just above the 200 dma at 178. This is the most negative signal for the current market.

The NASDAQ Composite index closed at 13,493 today, down 138 points or -1% on the day and lost 1.1% for the week. NASDAQ remains above its August 2022 high, but it gave up about half of that margin this week. NASDAQ’s trading volume was flat and slightly declining all week but spiked much higher today.

This was an ugly week for the markets. To my view, it seemed as though the market had ignored the obvious message from Powell last week that at least one more rate hike may be coming this year (and maybe two). That reality dawned on the market this week. The spike in trading volume both last Friday and again today suggest the large institutional traders are taking their profits from this latest rally.

The small cap stocks of the Russell 2000, as measured by the IWM, are really on life support. Traditionally these high beta stocks lead bull markets higher and bear markets lower. As SPX and NASDAQ were trading higher last week, IWM tracked sideways. As SPX and NASDAQ were declining this week, IWM was taking a loss approximately double that of its big brothers. That is a worrisome sign for the short-term future.

The VIX finally came to life today, although it only rose 4%. Many analysts see a low level of volatility as a sign of an impending correction, but it also may be viewed as an overall lack of anxiety.

Keep a close eye on your investments. Be prepared to increase your cash levels if warranted.

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Written by Dr. Duke

Created: 16 June 2023

The Standard and Poors 500 index (SPX) closed today at 4410, down 16 points on the day or -0.4%. SPX broke the August 2022 high on Monday and closed the week with a gain of 2.4%. Trading volume ran barely above the 50-day moving average (dma) all week, but spiked higher to 4.0 billion shares today, much higher than the 50 dma at 2.4 billion shares.

VIX, the volatility index for the S&P 500 options, closed today at 13.5%, down from 14.4% on Monday. This low reading for the VIX is surprising, given the sell off this afternoon.

I track the Russell 2000 index with the IWM ETF, which traded sideways this week, closing today at 185.9, down 1.5 points or -0.8%. IWM opened the week at 185.2, for a weekly gain of 0.4%. The small cap stocks of the Russell 2000 have been trading sideways for the last eight trading sessions. These high beta stocks are not leading this market. That is not a good sign.

The NASDAQ Composite index closed at 13,690 today, down 93 points or -0.7% on the day, but rose 2.7% for the week. NASDAQ remains well above its August 2022 high, broken last week. NASDAQ’s trading volume grew steadily all week, spiking today to 8.1 billion shares versus the 50 dma at 4.8 billion.

SPX and NASDAQ have now both broken out above the August highs from last year. Trading volume has run above average on both indices this week and spiked dramatically higher today as the markets sold off during the last three hours of trading. This trading volume spike on a price decline is a classic distribution day, suggesting the large institutional traders were taking their profits.

However, market volatility, as measured by the VIX on the S&P 500, remains at very low levels. The sell off this afternoon suggests some fear on the part of the large players, but they aren’t hedging themselves (which would lead to a higher VIX). Maybe they are already hedged? I closed some positions this morning for nice gains rather than wait another week to add to the profits. This afternoon’s sell off suggests I may have been prudent to take some risk off the table.

My closing remarks are the same as last week. I continue to watch this market very carefully. The party could end quickly.

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Written by Dr. Duke

Created: 09 June 2023

The Standard and Poors 500 index (SPX) closed today at 4299, up 5 points on the day or +0.1%. SPX closed the week at a gain of 0.4%. Trading volume has returned to its track under the 50-day moving average (dma).

VIX, the volatility index for the S&P 500 options, closed today at 13.8%, down 10% for the week. We haven’t seen volatility this low since January of 2020, just before the Covid lockdown correction. Should we be concerned?

I track the Russell 2000 index with the IWM ETF, which closed today at 185, up 1.5 points or +0.8% on the day. IWM closed the week with a gain of 2.3%. The small cap stocks of the Russell 2000 are now moving more in line with the S&P 500. It has traded strongly higher over the past two weeks, including two gap openings higher, but it remains well below the highs of February.

The NASDAQ Composite index closed at 13,259 today, barely up on the day but up almost two percent for the week. SPX and NASDAQ have now broken their February highs, but NASDAQ solidly broke out above its August 2022 highs this week. NASDAQ is leading this latest market rally. However, NASDAQ’s trading volume fell off significantly this week, closing the week with 3.5 billion shares traded versus the 50 dma at 4.6 billion.


NASDAQ’s price action has been much stronger and steadier since early May, having now broken the August highs from last year. The S&P 500 is threatening those highs but has not managed to break through as yet. Trading volume on both indices is weak. This bullish trend is a welcome relief but a lot of money is waiting patiently on the sidelines.

Market volatility, as measured by the VIX on the S&P 500, is now at lows unmatched since January of 2020, just before we slid off the Covid shutdown cliff in March. Low levels for VIX certainly show large institutional investors complacency, but we don’t have any clear signals of a strong, “risk on” posture either. It would take very little to crush this rally, e.g., another bank failure?

My trades are doing well; the Flying With The Condor™ service is up 26% on the year, and the trading group meeting last evening reviewed 12 positions we had opened since the previous meeting in May. One contract entered in each position would be up $1,114 over the past month.

However, I will continue to watch this market very carefully. The party could end quickly.