Dr. Duke's Blog
Do you know any trading coaches who publish the results of their trades daily? Dr. Duke posts the trading track records of his Flying With The Condor™, Conservative Income, Dr. Duke's Trading Group, and The No Hype Zone Newsletter services in the free downloads section of this web site. If you have questions about any of the trades, Ask Dr. Duke.
A Strong Week
- Written by Dr. Duke
The Standard and Poors 500 Index (SPX) opened the week by setting a new all-time high at $3032 and then added 1.2% this week to close Friday at 3067, another all-time high. The choppy trading resulting from the China trade negotiations that has characterized recent weeks was generally absent this week. The bulls are in charge. Unlike recent weeks, trading volume for the S&P 500 companies broke out above the 50-day moving average (dma) four days this week. That has not happened in a long time. Perhaps the bulls have opened up their wallets a bit.
VIX, the volatility index for the S&P 500 options, opened the week slightly above 13% and steadily declined to close the week at 12.3%. Volatility hasn’t been this low since July. The market apparently isn’t too concerned about the China trade negotiations and all of the breathless impeachment talk.
I have always used the Russell 2000 Index (RUT) to track small capitalization stocks and compare those performances to the large blue-chip stocks of the S&P 500. Unfortunately, the Russell company has raised their prices so much that my charting service, StockCharts.com, has given up carrying the Russell 2000 index. A few months ago, the software that I use to analyze and back test option trades quit offering intraday pricing for RUT options due to the rising prices for the data. I am changing over to tracking the price chart of the ETF, IWM, which is based on the Russell 2000 group of companies. IWM is roughly one tenth the price of the Russell index (similar to the relationship of SPX and SPY). IWM closed at 158.10 on Friday, and RUT closed at 1589.33. The minor differences in price are due to the stocks in the Russell 2000 index being weighted by shares outstanding whereas IWM contains shares of the Russell 2000 companies weighted by market capitalization.
IWM broke through the previous highs from September and July, and closed Friday at 158, up 3 points. IWM remains well below its all-time high of 171 in August 2018.
The NASDAQ Composite index gapped open Monday morning at 8286, and proceeded to add another 1.2% to close at 8386, up 94 points on Friday. This represents another all-time high for NASDAQ. NASDAQ trading volume hit the 50 dma on Monday and traded above the average Thursday and Friday.
This week brought us several bullish signals. First of all, we finally are beginning to see some increased trading volume. Money is coming in off the sidelines. An even more bullish signal came from IWM. The Russell 2000 companies, all domestic small cap stocks, outperformed both the S&P 500 and NASDAQ this week, up 1.3%, as compared to 1.2% for SPX and NASDAQ. SPX and NASDAQ set new all-time highs this week and the Dow is one point away from setting a new all-time high. Several of these broad market indices displayed multiple gap openings higher this week – all in all, a very bullish week.
My caution is beginning to diminish a bit and I am putting more of my cash to work. However, I won’t be strongly bullish until we settle the trade dispute with China. Some negative news on that front could hit the market at any time. On the other hand, a signed deal would spike this market higher. Stay alert. Whenever possible, use trailing stops to protect your gains.
- Written by Dr. Duke
The Standard and Poors 500 Index (SPX) closed Friday at 3023, up 12 points. Friday’s close represented a gain for the week of 0.9%. Although it was a bullish trend for the week, it was a choppy path higher as each day brought a new report or rumor about the trade negotiations with China.
Trading volume for the S&P 500 companies only broke above the 50-day moving average (dma) on one day this week, and Friday’s trading came in significantly below average. The lower volume continues to stand as a caution flag for this market. The bulls are buying, but they are also nervous and taking profits when they are available.
VIX, the volatility index for the S&P 500 options, declined significantly Wednesday through Friday, closing the week at 12.7%. Volatility hasn’t been this low since July. The market is calming in spite of all of the China trade and impeachment talk.
The Russell 2000 Index (RUT) continued to track higher this week, closing Friday at 1559, up 1.1% on the week.
The NASDAQ Composite index broke through resistance this week and closed Friday at 8243, up 57 points, capping off a strong week’s performance of 1.3%. Watch for the next resistance level at July’s high of 8330. NASDAQ trading volume was below average all week, but managed to touch the 50 dma on Friday.
It is worth noting that both the Russell 2000 and the NASDAQ Composite outperformed the S&P 500 index this week. That is a strong bullish signal.
This week’s trading was generally bullish, but each day brought a new twist, sometimes higher and sometimes lower. The trade negotiations with China continue to hang over the market. We are fortunate the U.S. economy is strong enough to persevere through these tariffs.
I am continuing to be somewhat cautious in this market. It is certainly a bullish market, but the bulls are nervous and it doesn’t take much to cause them to hit the sell button. I am picking my stocks carefully and favoring the solid blue chips like AAPL, COST and JPM. My iron condor trades on SPX are doing very well, gaining 27% in October and 16% for the November position. Stay alert. Whenever possible, use trailing stops to protect your gains.
- Written by Dr. Duke
News and rumors continue to jerk this market around on a daily basis. The Standard and Poors 500 Index (SPX) closed Friday at 2986, down 12 points. SPX remained modestly positive for the week, up 0.7%. It was a choppy week for the markets with a new report or rumor about the trade negotiations with China driving the market almost on a daily basis. Last Friday’s evening star candlestick was not confirmed by trading this week. The bullish underlying trend remains, but each day brings a new dose of either confidence or pessimism. It is a difficult market to trade. When it moves higher, traders take profits, and then the next rumor drives it lower, and the bulls buy the lows.
Trading volume for the S&P 500 companies broke above the 50-day moving average (dma) on Friday but the first four days of the week traded at volumes well below average. The lower volume continues to stand as a caution flag for this market. The bulls are buying, but they are also taking profits.
VIX, the volatility index for the S&P 500 options, reflected the choppy market action this week, opening the week at 15.7% and then moving to a low on Thursday of 13.8%. But Friday’s market weakness took its toll, increasing volatility to 14.6%. This is a moderate level of volatility, not exactly calm, but not scary either.
The Russell 2000 Index (RUT) appears to be attempting a rebound over the past couple of weeks after a very weak September. Russell closed Friday at 1525, down five points on the day, but up 1.2% for the week.
The NASDAQ Composite index appeared to hit resistance this week at the highs set in May and September. NASDAQ closed Friday at 8090, down 67 points, but up 0.6% for the week. NASDAQ trading volume was below average all week, but managed to touch the 50 dma on Friday.
This week was a repeat of last week’s trading with wide swings one day and then a doji candlestick the next day, driven by the latest rumors and/or news on the trade negotiations with China. This remains a dangerous market. I expect the volatility will continue and I remain less than fully invested. Pick your trades carefully and stop out positions aggressively.
Don't Get Too Excited
- Written by Dr. Duke
Encouraging news from the China trade negotiations buoyed the market this week. The Standard and Poors 500 Index (SPX) opened Monday at 2944, but declined on Monday and Tuesday to a closing low on Tuesday of 2893. Then the bulls started hearing positive rumors from the China trade negotiations and the market rallied the balance of the week, with SPX closing Friday at 2970, up 2.7% from Tuesday’s close. Don’t get too excited yet. SPX gapped open Friday morning and traded as high as 2993, before fading into the close at 2970. This resulted in the classic “evening star” candlestick on Friday. This was matched in the Nasdaq 100 and the Nasdaq Composite, but less so for the Dow or the Russell 2000 indices. The evening star often signals the top of a bullish trend, predicting a possible bearish reversal. Watch the trading closely next week to confirm this signal. Trading volume in the S&P 500 companies ran below average all week and barely made it up to the 50-day moving average (dma) on Friday. The lower volume continues to stand as a caution flag for this market. The bulls are buying, but they are also taking profits.
VIX, the volatility index for the S&P 500 options, spiked back up to 20.3% on Tuesday’s bearish price action, but traded lower the balance of the week, closing at 15.6% on Friday. This is a borderline level of volatility. Remain circumspect.
The Russell 2000 Index (RUT) tried to match recent lows on Tuesday’s market weakness, but bounced back the rest of the week, closing at 1512 on Friday. Friday’s price action broke out above the 50 dma at 1512 and then touched the 200 dma at 1527 before pulling back to close at the 50 dma. Russell’s bearish trend for the past several months remains a significant cautionary sign for the overall market.
The NASDAQ Composite index mimicked the S&P 500 price action this week, trading much higher after Tuesday’s down day, gapping open Friday morning, trading through the 50 dma, and closing up 106 points at 8057. The cautionary news is that the intraday high was one hundred points higher at 8116. NASDAQ trading volume was below average all week, but managed to break the 50 dma on Friday.
This week was typical of recent market activity with wide swings almost daily, based on the latest rumors and/or news (although it is often difficult to distinguish the two). Tuesday’s trading looked ugly, but then the market stabilized, traded higher Wednesday and Thursday, and then turned in a large gap opening higher Friday morning. All the financial news anchors were euphoric. Recall that they were all repeating “manufacturing recession” ad nauseum last week.
Encouraging reports from the trade negotiations with China helped turn the tide in the market this week, but Friday’s fade late in the day underscores traders’ nervousness. They took profits when given the chance. Don’t let Friday’s price action get you too excited. We may not have seen the worst of this market and I expect the volatility will continue. This week’s optimism was based on reports of positive progress in negotiations with China, but that could easily be overturned by next week’s news.
Is the Storm Over?
- Written by Dr. Duke
The trade war with China continues to haunt this market. The result is a sideways market with sudden and unpredictable twitches on the latest trade negotiation news. The Standard and Poors 500 Index (SPX) attempted to match the July highs in mid-September, but turned lower and declined modestly for about ten days before plunging on October 1st and 2nd. SPX declined to 2856 on Thursday before bouncing and recovering over half of the previous day’s losses. SPX gapped open Friday morning, broke through the 50-day moving average (dma) at 2942, and closed up 41 points at 2952. This particular market tantrum appears to have ended, but the storm will continue until we get confirmation of a China trade deal. Trading volume has generally remained below average for the past couple of weeks with a notable exception on Wednesday as we hit the lows for the week. Volume declined Thursday and Friday as the market recovered. The bulls have not given up on this market, but they are clearly nervous, and definitely not “all in”.
VIX, the volatility index for the S&P 500 options, opened the week at 17.2%, spiked to an intraday high of 21.5% on Wednesday, and then declined to close Friday at 17.0%. This remains a moderately high level of volatility that is worthy of caution.
The Russell 2000 Index (RUT) steadily trended lower from its high of 1585 on September 16th to a close of 1480 on Wednesday for a decline of nearly 7%. Russell is by far the most bearish of all of the broad market indices. Thursday’s intraday low at 1462 was close to the lows in August around 1456. RUT closed higher at 1500 on Friday, but remains about 1% below its 50 dma at 1521 and its 200 dma at 1523.
The NASDAQ Composite index lost about 5% in this pullback. NASDAQ bounced on Thursday, finding support at the lows from August and its 200 dma at 7720. NASDAQ closed Friday at 7982, up 110 points, or 1.4%. NASDAQ’s trading volume spiked on Wednesday’s gap opening lower, but ran at or below average the rest of the week.
This was a scary week for the markets. That gap opening lower on Wednesday spooked me, but when the broad indices recovered somewhat near the end of trading on Wednesday, I saw a glimmer of hope. That was confirmed on Thursday with the long lower candlestick shadows on all of the broad market indices. Traders saw those lows as a buying opportunity and that continued into Friday.
The bottom line for this market has not changed. The trade war with China and political squabbling are making traders nervous. The entertainment and scare mongering that masquerade as financial news was revved up on Wednesday as talking heads on the financial networks breathlessly repeated “manufacturing recession” all day. I long for the old days of neutral, but boring, financial anchors.
Nervous institutional traders hit the sell button on the basis of the lamest of rumors and investigate later. But then they quickly jump back on board lest they miss out on the gains.
It pays to be cautious and focus on solid blue-chip stocks. The following stocks remain above their 50 day moving averages and have made solid gains in this week’s otherwise scary market: NEE, EQIX, INVH and TGT.
Waiting On China
- Written by Dr. Duke
The trade negotiations with China remain the principal worry for the markets. The political turmoil appears to be a minor irritant at this point. The result is a sideways market with sudden and unpredictable twitches on the latest trade news. The Standard and Poors 500 Index (SPX) closed today at 2962, down 16 points. The candlesticks of the past four days of trading have long lower shadows, suggesting the market is finding support from the 50-day moving average (dma) at 2949 and the May high at 2952. Trading volume continues to reflect the market’s uncertainty, remaining below the 50-day moving average (dma) all week. The volatility index for SPX, VIX, closed at 17.2%, up about 1.2 points today. This is a moderately worrisome level of volatility. Stay attentive and be cautious.
The Russell 2000 Index (RUT) put in its second week of steady declines, closing at 1520 today, down 2.4% this week alone. Today’s price action was particularly worrisome, breaking down through the 50 dma and closing on the 200 dma. The only positive note is that Russell broke through the 200 dma in late afternoon trading, but recovered to close right at the 200 dma. Technical analysts have always regarded a break of the 200 dma on a stock or an index as very bearish.
The NASDAQ Composite index came close to trading as bearishly as Russell, losing 2% of its value this week as it closed today at 7940, down 91 points. NASDAQ flirted with its 50 dma all week, but decisively broke it today, closing a little over 100 points below the 200 dma at 8041. With the exception of Tuesday, NASDAQ’s trading volume ran below average all week.
Chairman Powell’s news conference appears to have finally squashed all of the recession talk. Now the “sky is falling” crowd can better focus on the trade war with China.
Regardless of which index you prefer to follow, this was an ugly week for the markets. The only glimmer of optimism might be derived from the S&P 500 chart as the index repeatedly appeared to find support on the 50 dma. The long lower candlestick shadows the past four days may not be strong bullish signs, but they show significant support. The large institutional traders have not yet thrown in the towel.
The bottom line for this market has not changed in my opinion. Traders are nervous and exit the market in volume on the least provocation. It pays to be cautious and focus on solid blue-chip stocks. I found it interesting today to see a few stocks defy the overall market and post gains: HAS, RH, FSS, AME and ROST.
The Fed Cuts Interest Rates
- Written by Dr. Duke
The market was on edge this week as the FOMC met on Tuesday and Wednesday and issued their announcement of a quarter point rate cut. This created some price volatility on Wednesday, but it appeared the net market assessment of the move was moderately positive. Then the other market hobgoblin, China trade negotiations, hit the markets on Friday. The Standard and Poors 500 Index (SPX) opened higher on Friday, traded up to 3016 and held a positive gain until about 1:00 pm ET, when news hit the wires of the Chinese trade delegation cancelling a trip to Montana. SPX fell off rapidly and closed at 2992 for a 15-point loss on the day.
Trading volume continues to tell a bearish story in these markets. Even in the earlier part of this week, when price action was moderately positive, SPX trading volume was below the 50-day moving average (dma) and declined all week. Friday’s spike higher was an anomaly based on options and futures contract expiration. As the bulls drive this market higher, they do so carefully. They are not “all in”.
The volatility index for the S&P 500 options, VIX, opened this week at 14.9% and closed Thursday at 14.0%. But Friday’s China trade panic pushed volatility up, closing up 1.3 points at 15.3%.
The Russell 2000 Index (RUT) has traded far more weakly than its big brother indices all year. Russell surprised us with a strong 7.4% run higher from September 4th through this past Monday when it closed at 1585. The rest of this week has been a series of red candlesticks on my chart (maybe they are black on yours). Russell closed Friday at 1560, down 2 points. It was a tough week for small to mid-cap stocks and those are the stocks that lead bull markets.
The NASDAQ Composite index was almost perfectly flat this week, opening at 8122 and closing Friday at 8118. NASDAQ’s intraday lows came close to the 50 dma on Wednesday and Friday, but recovered to close higher. The 50 dma is the line in the sand to watch for NASDAQ. NASDAQ’s trading volume was below average all week, but it spiked significantly on Friday, due to options and futures contracts expiring.
The financial news has been filled with discussions of impending recession for the past several weeks. Journalists of all stripes, including financial journalists, now regularly show their political bias in their writing. Econ 101 will define a recession as two consecutive quarters of negative GDP growth. Given our GDP growth of 2% to 3% over the past two years, talk of a recession is puzzling. This week’s Fed meeting provided additional support for a positive economic outlook.
Chairman Powell went out of his way during the news conference to deny that this latest rate cut was a reaction to prevent a recession. His comments were in reaction to several media questions asserting the danger of an imminent recession. Powell said the rate cuts were designed to “insure against downside risks to the outlook from weak global growth and trade tensions”. He clearly stated that the current economic data do not support any talk of a recession or a forecast of a recession.
Friday’s markets illustrated the price volatility I have repeatedly discussed over the past several weeks. This week’s markets were relatively calm and the price moves were modest, even surrounding the Fed announcement. That changed in a flash around 1:00 pm ET Friday, based on a change in the China trade delegation’s travel plans while here in the states. There could be good reasons for that change of plans, but no one seems to know. Traders assume the worst and sell.
As I have written in earlier newsletters, Traders exit the market in volume on the least provocation. This market remains nervous and therefore dangerous. It pays to be cautious. I am focusing on solid blue-chip stocks whose prices have held up reasonably well as we hit these down drafts, e.g., DHI, JPM, KLAC, LMT, MLM, SYK, TGT, TWTR, and VMC.
Have We Forgotten About China?
- Written by Dr. Duke
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.
- Written by Dr. Duke
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.
Roller Coaster Ride
- Written by Dr. Duke
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.