Dr. Duke's Blog

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Written by Dr. Duke

Created: 06 October 2023

The Standard and Poors 500 index (SPX) put on quite a show today, running up 50 points or +1.2% to close at 4309. SPX opened the week at 4285 for a weekly gain of 0.6%.  The low this week on Tuesday and each day afterward was just above the 200-day moving average (dma), so it appeared to be finding support, but today’s move was dramatic. Trading volume ran close to or just above the 50 dma all week.

VIX, the volatility index for the S&P 500 options, closed today at 17.5%, down significantly from the intraday highs this week around 21%.

I track the Russell 2000 index with the IWM ETF, which closed today at 173, up 1.7 points or one percent. IWM opened the week at 176 for a loss of 1.7% for the week. IWM is the weakest broad market index, having broken both the 50 dma and the 200 dma during this correction. IWM would have to gain nearly 5% just to recover its 200 dma.

The NASDAQ Composite index closed today at 13,431, up 212 points or 
1.6%. NASDAQ opened the week at 13,218 for a weekly gain of 1.6%. NASDAQ appeared to find support near its lows from mid-August.

VIX, the volatility index for the S&P 500 options, closed today at 17.5%, down significantly from the intraday highs this week around 21%.

The broad market context for the past several weeks was ugly to say the least. All of the broad market indices had broken down through the 50 dma and the Russell 2000 had broken down through the 200 dma. S&P’s decline since 7/27 was 8.5%; that got my attention. I bought some SPX puts for protection, but today’s spike higher forced me out of those. Hopefully, it doesn’t whipsaw on me next week.



When I was a boy growing up in Florida, hurricane Donna came through Orlando. Dad built our house in preparation for that night, so we were quite safe. Suddenly the sound of the wind and rain stopped. We walked out into the yard. You could see the stars. It was eerie. We quickly went back inside. You don’t know the size the eye of the hurricane. This market reminds me of that night. Perhaps the storm is over, but the winds may come up again next week.

This is still a good time to be in cash.

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Written by Dr. Duke

Created: 22 September 2023

The Standard and Poors 500 index (SPX) closed today at 4320, down ten points on the day or -0.2%. SPX opened the week at 4445 for a weekly loss of 2.8%. SPX broke down through its 50-day moving average (dma) last week and fell farther this week, leaving the index about midway between the 50 dma and the 200 dma. Trading volume remains well below average.

VIX, the volatility index for the S&P 500 options, closed today at 17.2%, down slightly from yesterday’s 17.5%. VIX remains below the volatility spike  around 18-19% during the mid-August correction, even though SPX broke those 
mid-August lows yesterday.

I track the Russell 2000 index with the IWM ETF, which closed today at 177, down about one half of one point or -0.2%. IWM opened the week at 184 for a loss of 3.6% for the week. IWM broke down through its 50 dma two weeks ago and broke down through its 200 dma early this week. IWM is now more than halfway down from its 7/31 high to its low of 2022.

The NASDAQ Composite index closed today at 13,212, down 12 points or 
-0.09% today, and losing 3.4% for the week. NASDAQ broke down through its 
50 dma last week but is now closing the gap to its 200 dma. NASDAQ found support today at its high from 2022.

The broad market context for the past several weeks isn’t pretty. It would be easy to be concerned that we are setting up for a more serious market correction and October is an infamous month for ugly corrections. As one might expect, Wall Street doomsday gurus are on every financial network. All three broad market indices have posted weekly losses over three consecutive weeks and are consistently below their 50-day averages. The worst chart belongs to Russell, which broke down through its 200 dma this week.

Conventional wisdom expected the FOMC to pause its rate hikes this month and I expected the market to react positively when it did pause. Instead, the market took significant steps lower. The relatively low levels of trading volume provide the only glimmer of hope.

This is a good time to be in cash.

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Written by Dr. Duke

Created: 15 September 2023

The Standard and Poors 500 index (SPX) closed today at 4450, losing 55 points on the day or 1.2%. SPX opened the week at 4481 for a weekly loss of 0.7%. SPX managed to break out above the 50-day moving average (dma) yesterday but gave that up decisively today, closing at 4450, 33 points below the 50 dma at 4483. Trading volume spiked today due to the simultaneous expiration of stock options, index options, and stock index futures. This occurs quarterly on the third Friday of March, June, September and December, and is sometimes still referred to as quadruple witching even though single stock futures are no longer traded.

VIX, the volatility index for the S&P 500 options, declined steadily this week, closing yesterday at 12.8%. VIX appeared to continue that trend this morning, opening at 12.7%, but then it spiked to 14.2% before settling at 13.8% at the close.

I track the Russell 2000 index with the IWM ETF, which closed today at 184, down two points or 1.1%. IWM opened the week at 185 for a loss of 0.5% for the week. IWM touched its 200 dma on Wednesday and today's low was very close the that support level. I follow the Russell 2000 because these high beta stocks are effectively the canaries in the coal mine. They haven't fallen off their perches, but they are twitching.

The NASDAQ Composite index closed today at 13,708, losing 218 points or 1.6% today, and also losing 1.3% for the week. NASDAQ recovered its 50 dma at 13,881 yesterday but today’s close broke well below the 50 dma and came close to the low of 13,749 set on Thursday of last week. NASDAQ’s trading volume spiked today due to triple witching.

The broad market hit highs toward the end of July, but then gave all of those gains back by the third week of August. Then it struggled to recover to a lower high by the first of September, then fell again to a low on 9/8 and today’s close was very close to that low last week. We were all taught the basics of defining a trend: a bullish series of higher highs and higher lows or a bearish series of lower highs and lower lows. The picture isn’t perfectly bearish, but it isn’t pretty.

The S&P 500, NASDAQ Composite and the Russell 2000 have all posted weekly losses both of the last two weeks and are consistently below their 50-day averages. The worst chart belongs to Russell, struggling to remain above its 200-day average. Note the small lower shadows on today’s candlesticks in SPX and NASDAQ. There aren’t many buyers willing to buy those lows of the day. Traders may be waiting on the FOMC announcement next week, but the mood is dark.


Note the CPI and PPI reports from earlier this week. Inflation appears to rising again. The FOMC is being squeezed. A rising inflation rate may dictate another hike in the discount rate. But higher interest rates are hurting banks as prices of low interest treasury bonds on their balance sheets are declining. Another rate hike may push some of the smaller regional banks over the edge. The Fed is caught in a classic dilemma.

It is only prudent to limit our exposure to this market.

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Written by Dr. Duke

Created: 08 September 2023

The Standard and Poors 500 index (SPX) closed today at 4457, up 6 points on the day or +0.1%. SPX opened the week at 4510 for a weekly loss of 1.2%. Trading volume remains below average, suggesting a relative lack of enthusiasm from the bulls or the bears.

VIX, the volatility index for the S&P 500 options, played see-saw this week, opening the week at 14.1%, increasing to 15.7% mid-week and closing today at 13.8%.

I track the Russell 2000 index with the IWM ETF, which closed today at 183.9, down 0.4 points, but posted a 3.1% loss for the week. IWM declined every day this week and even gapped open lower on Thursday. I follow the Russell 2000 because these high beta stocks tend to show the overall market’s trend. These are the stocks the institutions tend to sell when they sense danger.

The NASDAQ Composite index closed today at 13,762, up 13 points, but lost 1.7% for the week. NASDAQ solidly broke down through its 50 dma on Thursday. NASDAQ’s trading volume remains below average, declining steadily all week.

The market posted strong gains for May through the end of July, and then gave back about half of those gains through mid-August, when it tried to recover and made it to a high last Friday before declining all of this shortened holiday week.
 
This week's trading wasn’t a pretty picture. Today’s trading on both the S&P 500 index and the NASDAQ index included a strong bullish run to a higher price that the bulls couldn’t hold, with the bears coming in to sell, and closing near the opening price for the day.



The S&P 500 lost 1.2% this week, NASDAQ lost 1.7% and the Russell 2000 lost 3.1%. All of these indices have now broken through their 50 day moving averages.
 
I remain largely in cash. I will feel better when we get September and October behind us.

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Written by Dr. Duke

Created: 01 September 2023

The Standard and Poors 500 index (SPX) closed today at 4516, up 8 points on the day or +0.2%. SPX opened the week at 4426 for a weekly gain of 2%. All in all, it was a positive week, but trading volume dropped back below the 50-day moving average.

VIX, the volatility index for the S&P 500 options, continued its track lower all week, opening at 16.2% and closing today at 13.1%. It was unusual to see VIX track lower yesterday as the market fell, but apparently the large institutions were confident in this market. I can’t say I agree.

I track the Russell 2000 index with the IWM ETF, which closed up a little over two points at 191 and posted a 3.8% gain on the week. IWM solidly broke through its 50 dma today, although it did pull back a bit late in the day.

The NASDAQ Composite index closed today at 14,032, down 3 points or essentially unchanged on the day. NASDAQ opened the week at 13,695, resulting in a strong weekly gain of +2.5%. NASDAQ solidly broke out above its 50 dma this week and is approaching its July high around 14,400. NASDAQ’s trading volume remains below its 50 dma.

The trader’s most basic tactic is determining the trend of a stock or an index and then playing his prediction. But this market has been entirely too volatile for that approach. We had some nice gains in July, only to give it all back as we entered August, and now the market appears to be trying for a comeback run.

Perhaps this volatility will be the order of business until the FOMC meeting and announcement later this month. I remain very tentative and unwilling to devote much capital to this market. I recommend a cautious stance.

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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.