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.
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.
Cautious Bulls Drive the Market
- Written by Dr. Duke
The Standard and Poors 500 Index (SPX) opened slightly higher this morning, but began a steady climb late morning that continued until only a few minutes before the close. SPX closed at 3026, up 22 points on the day and setting a new all-time high in the process. SPX opened the week at 2982 and tacked on 1.5% for the week.
Trading volume in the S&P 500 companies continues to run lower than average. It managed to break the 50-day moving average (dma) yesterday, but only came in at 1.7 billion shares today, under the 50 dma at 1.9 billion shares. The markets are setting new highs, but these are fragile highs. Lower trading volume on these new highs suggests a lot of money is on the sidelines. Traders are waiting on the resolution of some key issues: China trade and the Fed’s decision on interest rates.
The Russell 2000 Index (RUT) continues to lag behind SPX and NASDAQ. Russell opened the week at 1550 and closed at 1579, gaining 1.9% this week for a strong showing. RUT took quite a tumble on Thursday, but regained all of that today. Russell never fully recovered from the December correction lows last year. RUT’s all-time high was set at 1741 in late August, 2018. Russell remains over 10% below that all time high. The recent high was set in early May at 1615, about 2% above today’s close. Russell’s bearish inclination is a significant hindrance for a strong bull market. Until these high beta stocks start to accelerate, the bulls are clearly not on a strong “risk on” path.
The NASDAQ Composite index broke its May 3rd high of 8164 on July 10th, but broke down below that support level last Friday. NASDAQ opened above that level on Monday and traded up 1.9% to close today at 8330. Today’s new all-time high for the NASDAQ Composite broke the previous high from this past Wednesday, which, in turn, had broken the high from July 15th. NASDAQ’s price chart pattern is much stronger than Russell’s and even slightly stronger than SPX. NASDAQ’s trading volume is low, even weaker than that of the S&P 500 index, having remained below its 50 dma since the July 4th holiday. It is hard to get too excited about strong market days like today when trading volume is downright dismal.
The prospects of a rate cut coming out of next week’s FOMC meeting appears to be the primary bullish motivation for this market. Public interviews by Powell and other FOMC members a couple of weeks ago had convinced many market analysts that a rate cut was on the table for next week’s meeting. That pushed the indices higher. The discussions documented in the last Fed meeting’s minutes (last week’s Beige book) seemed to throw doubt on that prospect and that weakened the market last week. Did today’s GDP number of +2.1% encourage the bulls that a rate cut might be probable after all? Is that what drove today’s bullish run?
The bulls are still driving this market, but anticipation of the restart of the China trade negotiations on Tuesday and the Fed announcement on Wednesday is on everyone’s minds. Therefore, my outlook remains unchanged. Trade with expectations of a sideways to slightly bullish market, but be prepared to hit the stops earlier rather than later. More conservative traders would be well advised to wait until after the Fed announcement on Wednesday before moving additional capital into the market.
- Written by Dr. Duke
The Standard and Poors 500 Index (SPX) gave back most of last week’s gains this week. SPX closed Friday at 2977, down 19 points on the day, and down 1.4% for the week. The support level to watch is from the early May high around 2950. A secondary support level would be the 50-day moving average (dma) at 2900.
Trading volume in the S&P 500 companies hit a low after the July fourth holiday and has steadily risen for the past two weeks, but remains below the 50 dma. This reinforces the lack of conviction among the bulls. They may not be selling off strongly, but they certainly aren’t buying aggressively either. The Fed meeting next week will eliminate some of the uncertainty holding this market in check. As long as the uncertainty of the China trade negotiations remains, the bulls will remain largely on the sidelines.
VIX spiked up to 14% on Wednesday after opening at 12.6% that morning. Friday afternoon’s sell-off spiked VIX up to 14.5%. I regard volatility levels below 15% to be relatively benign, but this increased level of VIX confirms a moderate level of concern on the part of traders.
Small to mid-capitalization stocks, as represented in the Russell 2000 Index (RUT), may be regarded as the proverbial canary in the coal mine. These are high beta stocks, meaning they will rise faster than the S&P 500 in a bull market and lose value faster in a bear market. Russell stocks are the classic “risk on” and “risk off” stocks, leading bull markets higher and bear markets lower. Russell closed the week at 1548 after opening the week at 1571, down 1.5%, a touch more than SPX’s decline for the week. RUT has been in a steady decline since the beginning of July. SPX and NASDAQ eclipsed their May highs during July, but RUT has yet to recover even its February highs.
After breaking its May highs last week, the NASDAQ Composite index broke that support level on Friday, closing down 61 points to 8147. The pattern in trading volume is similar to the S&P 500, running steadily below the 50 dma since the July fourth holiday. NASDAQ was down 1.4% for the week.
The broad market indices were being cautiously held up by the prospects of a rate cut coming out of next week’s FOMC meeting. The FOMC discussions documented in the last meeting’s minutes were released this week, and it appears that the committee sees the economy as moderately strong, so a rate cut is unlikely. Basic economic data would have to cause the Fed some concern, and the data are pretty solid.
I see three evidences of a nervous market:
• Consistently below average trading volumes
• Modestly higher volatility
• Sideways to lower trending in the small caps, as represented by the Russell 2000
Therefore, my outlook remains unchanged. Trade with expectations of a sideways to slightly bullish market, but be prepared to hit the stops earlier rather than later. More conservative traders would be well advised to wait until after the Fed announcement on Wednesday before moving additional capital into the market.
- Written by Dr. Duke
The Standard and Poors 500 Index (SPX) traded steadily higher this week, closing Friday at 3014, up 1.1% for the week. Friday’s trading seemed a little subdued in the morning, but rallied late in the day to push to a new all-time high at 3014. But new all-time highs must be tempered by the weak trading volume. Trading volume in the S&P 500 companies started July almost precisely at the fifty-day moving average (dma) of 2 billion shares. But that was the high for the month thus far. The low trading volume after the holiday last week was to be expected, but trading volume has continued to meander along at low levels this week. This isn’t the sign of a confident bull market.
VIX hit an intraday high on Tuesday at 14.7%, but steadily declined the balance of the week, closing the week at 12.3%. VIX is often called the fear indicator and the market is not panicked by any measure, but it isn’t perfectly calm either. This is a bullish, but nervous, market.
Market analysts watch the small cap stocks carefully as a measure of the market’s comfort with taking on more risk. The Russell 2000 Index (RUT) is composed of small to mid-capitalization domestic companies. Russell closed the week essentially unchanged at 1570 after opening the week at 1574. In fact, without Friday’s strong intraday move of eleven points, RUT would have posted a very negative week. This stands in contrast to the steady gains of the S&P 500 stocks. Russell’s price chart is another indicator of a nervous market.
The NASDAQ Composite index paralleled trading in the S&P 500 this week, setting a new all-time high on Friday at 8244. The pattern in trading volume was also similar to SPX, coming in below the 50 dma since the first of July, and even declining the last three days of this week. NASDAQ set a new all-time high, but without much conviction.
The broad market indices are being cautiously held up by reasonably positive reports concerning the trade negotiations with China, but that could change at any moment with the next news story or rumors from either side of the table.
The prospects of a decrease in the federal discount rate at the upcoming FOMC meeting on July 30-31 is encouraging a bullish mood for the markets, but I think that prospect is unlikely. Interest rates are historically low, and lowering rates is one of the most powerful tools available to the Fed. Basic economic data would have to send up some alarms before the Fed pulls that lever. And economic data is positive on virtually all fronts.
That leaves the China trade negotiations as our principal concern. Given the fact that it could rain on that parade at any moment, the nervousness of this market is not surprising. We see the signs in three principal areas:
• Consistently low trading volumes
• Modestly higher volatility
• Sideways trading in the small caps, as represented by the Russell 2000
Therefore, my outlook remains unchanged. Trade with expectations of a sideways to slightly bullish market, but be prepared to hit the stops earlier rather than later.