Dr. Duke's Blog

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Written by Dr. Duke

Created: 18 April 2020

The market put on a strong finish to this week, with the Standard and Poor’s 500 Index (SPX) closing at 2489, for a gain of 3.3% for the week. However, a large portion of that gain occurred on Friday. SPX gapped open higher in the morning and broke out above the 50 day moving average (dma). Trading volume for the S&P 500 companies ran below the 50 dma all week and just touched the average level today. The enthusiasm appeared to be generated by a combination of positive news from GILD on remdesivir, Boeing’s announcement of resumed production on April 20th, and President Trump’s announcement of guidelines for reopening the economy.

VIX, the volatility index for the S&P 500 options, opened the week at 44.6% and steadily declined all week to close today at 38.2%. Declining volatility is welcome news, but this level of volatility is normally near the peak of severe corrections, so remain vigilant. The large institutional players remain on edge.

IWM, the ETF based on the Russell 2000 group of companies, gapped open higher Friday and closed at 122.06. In spite of the strength in IWM, it ended the week very close to unchanged. IWM remains well below its 50 dma. The Russell stocks are small to mid-cap stocks that may be more susceptible to significant economic damage resulting from the economic shutdown. That may be the reason IWM is trading less strongly than the S&P 500 companies or the NASDAQ Composite. Normally, these stocks would be leading a strong bullish move like we have seen over the past two weeks.

The NASDAQ Composite index closed Friday at 8650, up 118 or 1.4% on the day. NASDAQ gained 6.4% for the week. NASDAQ gapped open yesterday, pulled back during the day, but recovered to close near its open. This intraday recovery was a strong bullish signal. NASDAQ broke above its 50 dma on Tuesday and confirmed that breakout yesterday and today. Trading volume varied this week, exceeding the 50 dma twice and closing today just below average.

The high levels of volatility should give us pause. This market will continue to fluctuate widely based on daily news and rumors. It is fair to say that the depths of the correction were definitely oversold and those overreactions are normal for the market. The critical question is determining what stock prices will be justified once all of the damage to the economy has been clarified. We know it is bad, but how bad? It would not be reasonable to expect the market to recover to the pre-correction levels anytime soon, but it is unclear at this point what market levels are sustainable.

I do not subscribe to the extreme market bulls who believe reopening the economy will get us back on track in short order. However, the doomsday gurus are out in force with their dire predictions. Reality will be somewhere in between these extremes.

Stay calm and remain disciplined. Take small positions and place your stops aggressively. It is possible to make a lot of money in high volatility markets, but keep one perennial point in mind. High volatility correlates with high potential gains, but those gains are always accompanied by higher risk.

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Written by Dr. Duke

Created: 29 March 2020

The Standard and Poor’s 500 Index (SPX) closed Friday at 2541, and for a welcome change of pace, SPX was actually up almost 11% for the week. Trading volume for the S&P 500 companies fell off this week as the market started to recover but remained above the 50-day moving average (dma) all week.

VIX, the volatility index for the S&P 500 options, opened the week at 74% and closed the week at 66%, exactly where VIX closed last week. Tuesday posted a huge intraday low of 36%, but that couldn’t hold. The markets may be calming somewhat, but we are far from normal.

IWM, the ETF based on the Russell 2000 group of small to mid-cap stocks, closed Friday at 112.56 for a weekly gain of 10.9%. All of the broad market indices paused on Friday after a week of positive daily moves higher, but IWM didn’t give back much of the week’s gains. The relative strength of the Russell 200 stocks is encouraging.

The NASDAQ Composite index closed Friday at 7502 for a weekly gain of 9.6%. NASDAQ’s low on Wednesday set this index’s correction at 32%. Like the other broad market indices, NASDAQ posted gains all week but gave a little back on Friday. Trading volume declined slowly over the week but remained above the 50 dma all week.

The source of this severe market correction is not the usual economic cycle downturn or the crashing of a housing or dot com bubble. This correction is the result of the coronavirus pandemic. The latest CDC update of March 29th reports a total of 122,653 coronavirus infections and 2,112 deaths in the U.S. CDC changed its reporting for the current flu season this week and changed all results to ranges based on the uncertainty of their data gathering procedures. Current CDC estimates are 38 to 54 million flu infections and 24 to 62 thousand resulting deaths.
 
The media continue to handle this pandemic irresponsibly. Just listen to the press questions at any of the coronavirus press conferences. The press have an agenda and it isn’t connected to the well-being of the public. They are promoting panic. Even when CDC officials say it is safe to return to work, people will be too scared to leave their houses. Then the headlines will turn to the economic depression that the media created for their own purposes.

I described IBD’s (Investor’s Business Daily’s) Follow Through Day methodology in the March 13th newsletter. The day count of that methodology begins with a strong bullish day on above average trading volume. That day count began with the strong bullish day on the S&P chart this past Tuesday. The count continues as long as Tuesday’s low of 2344 isn’t broken. Friday makes Day Four. Now we watch for a strong bullish day on above average trading volume. That will be the Follow Through Day and gives us a higher probability of reentering the market successfully after the correction. If SPX breaks 2344, we restart the process.

In the meantime, be extremely picky with your trades. AMZN, WMT and DPZ are benefiting from this economic lock down and may be good choices for sticking your toes back in the water. Be cautious about entering any new positions. When you do decide to pull the trigger, trade small.
Stay calm and remain disciplined.

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Written by Dr. Duke

Created: 21 March 2020

The Standard and Poor’s 500 Index (SPX) closed Friday at 2305, down 8.1% for the week. Wednesday’s intraday low at 2281 for a correction of 33% is the low thus far. It was encouraging to see the intraday lows on Thursday and Friday did not break that correction low. Of course, you may recall my hope that last Thursday’s low was the capitulation, but that wasn’t the case. Trading volume for the S&P 500 companies has remained well above the 50-day moving average (dma) since this correction began and set a new high on Friday with 5.3 billion shares. That record high volume together with a low closing index value suggests capitulation. But the media are working overtime to keep the hysteria going.

VIX, the volatility index for the S&P 500 options, opened the week at 58 and closed the week at 66%. But that ignores some extreme volatility during the week, with intraday highs of 85.5% on Wednesday and 84.3% on Thursday. Friday’s range in VIX was huge with a high at 70%, a low at 57% and a close at 66%. VIX remains at very high levels, but it seems that the extremes of 80% plus may be behind us. VIX hit its record high of 89.5% on October 24th, 2008.

IWM, the ETF based on the Russell 2000 group of small to mid-cap stocks, closed Friday at 101.40 for a weekly loss of 6.6%. The intraday low on Thursday at 95.69 represented a 43% correction from the recent high on February 20th. All of the broad market indices posted gains on Thursday, but IWM gave back the least on Friday. The relative strength of the Russell 200 stocks is encouraging.

The NASDAQ Composite index closed Friday at 6880 for a weekly loss of 6.9%. NASDAQ’s low on Wednesday set this index’s correction at 32%. Like the other broad market indices, NASDAQ posted gains this past Thursday but gave it all back on Friday. The only good news is that the lows set Wednesday weren’t broken. Trading volume was above average all week and popped up to 4.8 billion shares on Friday.

The source of this severe market correction is not the usual economic cycle downturn or the crashing of a housing or dot com bubble. This correction is the result of the coronavirus pandemic. The latest CDC update of March 20th reports a total of 15,219 coronavirus infections and 201 deaths in the U.S. At the same time, CDC reports over 
twenty-three 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.
 
The media have created and fueled the coronavirus panic. Many are using this crisis to further their political ambitions and the media are happy anytime they have the opportunity to create sensational headlines. The true tragedy is not the number of people who are and will be afflicted with this latest viral epidemic. It is the far greater number of people who are losing their jobs and income, plus losing significant portions of their retirement assets in 401k and IRA accounts. The so-called journalists who are irresponsibly creating the panic are among the wealthiest of Americans. This crisis won’t affect them.

The damage is done. Let’s concentrate on optimizing our market posture. It is too early to proclaim any good news, but we can take some comfort in the fact that the lows posted for all of the broad market indices remained unbroken on Friday. The correction high for VIX, the S&P 500 volatility index, was 85.5% and VIX closed Friday at 66.0%. The peaking of volatility is a tentatively positive sign, even though a VIX reading of 66% is certainly not encouraging.

In the meantime, be extremely picky with your trades. When I saw VIX getting very close to the 2008 high, I sold the VIX Apr 85/90 call spread. This is certainly a speculative trade, so I entered it in relatively small volume. Begin to build a watch list of solid stocks that have handled this correction reasonably well. For example, focus on stocks where the 50 dma remains above the 200 dma, and the stock price is above the 200 dma. The following stocks not only met those criteria, but the current stock price remains above the 50 dma: CHWY, CLX, CTXS, GSX, NET, REGN, and ZM. Be cautious about entering positions with these stocks now; see what next week brings. When you do decide to pull the trigger, trade small.

Stay calm and be disciplined.

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Written by Dr. Duke

Created: 19 March 2020

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.

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Written by Dr. Duke

Created: 14 March 2020

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.

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Written by Dr. Duke

Created: 07 March 2020

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.

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Written by Dr. Duke

Created: 28 February 2020

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.

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Written by Dr. Duke

Created: 08 February 2020

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.

Details

Written by Dr. Duke

Created: 01 February 2020

The Standard and Poor’s 500 Index (SPX) has been setting bullish records for the past several months, but SPX set records of a different type on Friday when it closed down 58 points at 3226. Given all of the doomsday hype in the news on Friday you may be surprised that the week’s loss was only 0.6%. As you may see from the chart, Friday’s intraday low hit two support levels. One was support from December 20th through January 6th, and the other is the 50-day moving average (dma) at 3211. SPX did not close at its low on Friday, a minor but positive sign for the optimists. If SPX breaks that support level next week, it could easily fall to 3175 for a 5% correction.
 Trading volume has been very strong this month, and has only dipped below the 50 dma twice since January 2nd. Trading volume during Friday’s sell off was the highest of the month.

The volatility index for the S&P 500 options, VIX, opened the week at 17.4% and reached a low for the week on Thursday at 15.5%. Trading on Friday spiked VIX to an intraday high of 20%, but it pulled back a bit to close at 18.8%.


IWM, the ETF based on the Russell 2000 group of companies, has been trading lower since the open on January 17th. IWM broke support from early December around 162 on Friday and closed at 160.35, down 3.4. This represented a loss of 1.4% for the week, far more than the broad market indices for the blue chips.

The NASDAQ Composite index closed Friday at 9151, down 148 points. NASDAQ gapped open much lower on Monday, opening at 9092. This set up the surprising result that NASDAQ turned in a weekly gain of 0.6%. NASDAQ’s trading volume dropped below the 50-day moving average (dma) on Tuesday and Wednesday, but finished the week well above the 50 dma.

There are now eight confirmed cases of coronavirus infections in the U.S. The markets began to be affected this week as traders fell prey to the alarmist news reports. The normal flu season falls during the fall and winter months with peak flu infections in December through February. At this point in the 2019/2020 flu season, CDC has reported 19 million cases of flu in the U.S. with approximately 10,000 deaths. But those numbers don’t make the evening news. We normally don’t pay too much attention to family members and friends contracting the flu. But the flu can be very serious for children and older adults. News reports of a new flu virus strain with a specific name and nightmarish reports out of China captivate our attention. We forget that the sanitary conditions and level of healthcare in this country are light years beyond most of China. And few countries have anything comparable to the CDC. Take reasonable precautions and don’t panic.

The driving forces behind this strong bull market remain valid: two major trade agreements and strong economic data. Those trade agreements will add a minimum of one percent to this year’s GDP growth rate. The fact that the FOMC appears committed to low interest rates for the near future is icing on the cake. Earnings and revenue growth in this earnings announcement cycle have been very strong. Market prices are ultimately determined by the underlying economics. My trading posture is unchanged. I describe it as cautiously bullish. Some stocks are holding up well while others are taking a hit. My ADSK diagonal call spread is an excellent example. It now stands at a gain of 44%. ADSK declined Friday, but didn’t hit my stop loss price at $189.75. ADSK hit a low of $193.31, but recovered most of its losses as it closed at $196.85.

Remain disciplined and follow your stop loss prices. Don’t panic.

Details

Written by Dr. Duke

Created: 10 January 2020

The Standard and Poor’s 500 Index (SPX) opened this first full week of the new year at 3218 and closed today at 3265, for an increase of 47 points or 1.5%. The January Barometer, was created by Yale Hirsch in 1972 and publicized in his Stock Traders Almanac, currently run by his son, Jeff Hirsch. There are two parts of the January Barometer: trading results for the S&P 500 index over the first five days of January and then for the full month of January. The first five days were narrowly positive with the new year opening at 3245 and the fifth trading day, 1/8/20, closing at 3253. So now we anticipate the close in three weeks for the full January barometer forecast for the year. Both measures have success records of over 80% in predicting the direction of the market for the coming year.

SPX trading volume remained weak, running roughly at or below the 50-day moving average (dma) all week. Trading volume fell off today almost like we were entering a three-day weekend.

The volatility index for the S&P 500 options, VIX, opened the week at 15.5%, and steadily declined to close today at 12.5%. This suggests that the mood of the large institutional traders remains largely bullish on the market.

IWM, the ETF based on the Russell 2000 group of companies, traded more bearishly than SPX, opening the week at 163.85 and closing at 164.89, up 0.6%. These are the high beta stocks that should be leading this bull market, but they aren’t. The bulls remain somewhat tentative.
The NASDAQ Composite index set the pace for the bulls this week, opening at 8944 and closing at 9179, up 2.6% for the week, eclipsing the S&P 500 by a full percentage point.

NASDAQ’s trading volume was also much more bullish, running consistently above the 50-day moving average (dma) every day this week.

This market is undeniably strong. In fact, it is so strong that it unnerves many observers, and I feel some of that sentiment as well. It is interesting that the current crop of bears can only argue that the bull market has lasted too long, but they have no argument other than the length of this bull market. The economic data are strong, and the Fed remains committed to low interest rates.

Draw trend lines from early October through today on the SPX, IWM and NASDAQ charts and I think you will see something interesting. Note that SPX and NASDAQ are trading well above their trend lines. Even the recent hiccups over the last couple of days of December and first couple of days in the new year didn’t take either index close to that trend line. But the IWM trendline is markedly different. Intraday trading on January 2nd touched the trend line but bounced higher. But the price action on January 3rd broke that trend line and IWM remains below the trend line today. I consider this a shot across the bow of the bulls’ ship. The bulls are running, but that run is largely in the high-tech favorites, the FANG stocks and others. You see that favor in the strong performance of NASDAQ versus the S&P 500. The high beta stocks, that are members of the Russell 2000 and make up the IWM ETF, are trading sideways. These are the stocks that should be leading the bulls’ charge, but they aren’t.

My posture remains unchanged. I am bullish, but I also remain cautious. This week’s market largely ignored the sword rattling in the Middle East, but this market remains nervous. The large institutional traders will act quickly to preserve their profits. They will sell first and analyze their actions later.

Take advantage of the bullish run, but stay alert. Don’t get too euphoric.