Dr. Duke's Blog
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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.
Waiting on the Deal
- Written by Dr. Duke
The Standard and Poors 500 Index (SPX) declined over the first three days this week, but recovered most of those losses by the end of the week, closing at 2942 today, essentially flat for the week (actually down nine points or 0.3%). The recovery over the past two days seems to suggest that traders are expecting a resolution to the trade negotiations this weekend.
Trading volume ran below average all week, until today when volume spiked to 2.7 billion shares, well above the 50-day moving average (dma) at 2.0 billion shares. I find it curious that we have seen trading volume spikes for the past two Fridays, but below average volumes in between those spikes. Is this the result of bullish expectations for trade news over the weekends?
The volatility index for the S&P 500 options, VIX, was running above 16% earlier this week, but declined to close at 15.1% today. That puts volatility right on the edge. Values below 15% are reasonably complacent, but higher values start to get my attention. The markets are bullish, but not relaxed and confident either.
The Russell 2000 Index (RUT) gapped open higher this morning, closing up twenty points at 1567. In two trading sessions, Russell wiped out four days of losses. This is the most bullish signal we have observed in the small cap index in some time. This is very encouraging because the small caps normally lead bull markets higher. But we need to get a trade deal done with China before we jump on the bulls’ bandwagon.
The NASDAQ Composite index gapped open higher this morning and closed at 8006, up 38 points. NASDAQ outperformed SPX in trading volume with a huge spike up to 4.1 billion shares, well above the 50 dma at 2.1 billion shares. The China trade negotiations continue to be the principal dark cloud hanging over this market. The prospect of an agreement this weekend encouraged traders, resulting in today’s spike in the markets on increased volume.
But that bullish attitude may be premature. Until we see a definitive resolution of the China trade negotiations, this market will be volatile. And that may be especially true this coming week. Even if we have a confirmed trade agreement on Monday, it isn't clear which way this market will move. I remain very cautious.
Market Moves Higher This Week
- Written by Dr. Duke
The Standard and Poors 500 Index (SPX) came back to life and took another step higher this week, closing at 2950 today and up 2.1% for the week. SPX is attempting to break out above the highs set in early May, but thus far that resistance level is holding. S&P 500 trading volume rose with the bull market this week. Today’s volume spiked up to 2.9 billion shares, much higher than the 50-day moving average (dma) at 2.0 billion shares. One must go back to March 15th to find higher trading volume figures.
This week’s bullish run resulted in SPX running just below the upper edge of the Bollinger bands for the last four days of this week. Will next week repeat the pattern of the past two weeks and take a pause after this week's run higher? A slower rate of increase is probably the best the bulls may expect, but a flat week of treading water may be more likely in view of the G20.
The volatility index for the S&P 500 options, VIX, declined early in the week, as one might expect in a rising market. But the situation changed yesterday. VIX hit an intraday low of 13.2%, but then moved up to close at 14.8%. Today’s market took volatility a bit higher, closing up a little over half a point at 15.4%. This is a VIX divergence, with VIX moving higher as the market moved higher. This often foretells a drop in the market in the next trading session.
The Russell 2000 Index (RUT) has steadily traded higher since June 1st. In fact, RUT’s pattern of gains has been steadier and more consistent than SPX or NASDAQ. Russell gained 1.8% this week, but traded lower today, closing down 14 points to 1550.
The NASDAQ Composite index closed today at 8032, down 20 points, but rose 2.7% this week. On Tuesday, NASDAQ gapped open higher and solidly broke through its 50 dma. Perhaps more importantly, NASDAQ held that breakout through the rest of the week. Similar to SPX, NASDAQ’s trading volume spiked today to 2.9 billion shares, well above the 50 dma at 2.1 billion shares.
We enjoyed a pretty strong bull market this week, but several warning signs are concerning:
• Today’s trading volume spiked on a weak market, and this was amplified by the same pattern in SPX and NASDAQ.
• The volatility divergence for the past two trading sessions; VIX is trading higher with a flat to increasing market.
• Russell declined more strongly today, as compared to SPX and NASDAQ.
Today’s spike in trading volume could represent some profit taking as the large institutions saw the market flatten. They also may be hedging their bets ahead of the G20 Economic Summit and that may be raising VIX as they buy protection.
The China trade negotiations are the principal dark cloud hanging over this market. The announcement that Trump will meet with Xi Jinping while attending the G20 buoyed the market, but I think traders worried about it as the week wore on. A scheduled meeting is certainly a positive development, but it doesn’t guarantee an agreement on terms to end the trade tariff threats.
I expect this next week’s market to trade flat or possibly even slightly lower simply as traders pause to wait for news from Trump and Xi. I remain in a moderately bullish, but cautious stance. Until we see a definitive resolution of the China trade negotiations, this market will be volatile. And that may be especially true this coming week.
Just a Pause?
- Written by Dr. Duke
This is the key question that keeps coming up since the first of the year. The Standard and Poors 500 Index (SPX) broke down through the 200-day moving average (dma) on March 8th, but immediately turned back higher and closed this past Thursday at 2855, a market high since the September and October highs before the corrections last fall. In total, SPX had gained 504 points or 21% since the low point on December 24th. But then the market tumbled Friday and, even more ominously, closed at its low for the day at 2801, down 54 points or 1.9%.
Before we panic too much, let’s check the trading volume. Volume rose slightly this week, but it barely exceeded the 50 dma, even on Friday with this perceived run for the exits. I conclude that we are seeing some minor profit taking, not wholesale unloading of positions by the large institutional trading firms.
The S&P 500 volatility index, VIX, increased slowly this week and spiked Friday up to 17.5% before pulling back to close at 16.5%. This level of volatility doesn’t reflect panic mode at all, but it is moderately cautionary. Economic data and corporate earnings remain very positive, but the trade negotiations with China worry traders. The growing economic slowdown in Europe has raised concerns about possible negative effects on our economy.
The Russell 2000 Index (RUT) continues to trade more weakly than the broad market. RUT never did break through the 200 dma, and after Friday’s sell off, Russell has even broken below its 50 dma. Russell closed Friday at 1506, down 56 points or 3.6%. By contrast, the S&P 500 declined 1.9% on Friday. Russell’s weakness is the principal bearish signal for the current market.
The NASDAQ Composite index closed Friday at 7643, down 196 points or 2.5%. NASDAQ remains well above its 200 dma at 7490, but remains far off of the September and October highs around 8100. Trading volume in the NASDAQ stocks rose steadily this week and spent the last four days of the week above the 50 dma.
Corporate revenues and earnings reported during this earnings cycle have been excellent, but traders are worried about the Mueller probe, the China trade negotiations, and slowing economic conditions in Europe. With the release of the Mueller investigation report Friday, we may put some of these anxieties to rest, although I expect much of the political turmoil to continue. The trade negotiations with China may be making progress, but that isn’t clear. I think this remains the primary concern for market analysts. All of these factors will result in continued market volatility.
In volatile markets, the best advice is cautionary. When you face a choice in your investments, take the conservative alternative.
- Written by Dr. Duke
The broad markets slowed this week, with the Standard and Poors 500 Index (SPX) closing Friday at 2804, up 19 points for the day, but dead flat for the week. It appears that SPX bounced off resistance around 2817, the highs reached in mid-October and early November after the first couple of downdrafts last fall. It will be difficult for the market to make new highs until the trade negotiations with China reach a conclusion. Trading volume on the S&P 500 continues to run well below average, but trading volume broke above the 50-day moving average (dma) on Thursday’s decline. It is a nervous market.
The S&P 500 volatility index, VIX, closed at 13.5% on Friday, almost precisely at its close the previous Friday. Volatility rose this week as the market weakened, but then declined Friday as the market strengthened. This level of volatility is far from calm and complacent, but not really alarming either. It just underscores the cautious nature of this market.
Whereas the S&P 500 index solidly broke above its 200 dma last week, the Russell 2000 Index (RUT) cannot quite make that break higher. This week’s trading just tracked sideways along the 200 dma. The severity of last fall’s corrections is evident in RUT’s chart with the 50 dma so far below the 200 dma. The gap is closing, but remains significant.
The NASDAQ Composite index closed Friday at 7595, up 63 points. NASDAQ confirmed last week’s break out above its 200 dma by consistently trading above the 200 dma all week. Wednesday’s weakness bounced off the 200 dma to recover for a gain and close higher.
My analysis of the market’s condition remains the same as the past several weeks. The series of corrections that lasted through December 24th were not founded on solid economics. The excellent revenues and earnings reported during this earnings cycle are exceptional, but you wouldn’t know it from the broad market averages. The market has recovered significantly, but the China trade negotiations remain the largest worry for market analysts.
My market index iron condor positions are all profiting from this slowly rising and almost sideways market. We now have booked a full year with no losses.
In spite of the overall market being rather sluggish this week, a few stocks continue to make new highs. CYBR, LLY, IBRT, and XLNX all were called away from me this week because the stock price had traded so much higher that I could not roll the calls out for a reasonable credit.
Until we see a definitive resolution of the China trade negotiations, this market will be volatile. Some stocks are trading bullishly in spite of the overall market. Be picky and be cautious.
The January Barometer
- Written by Dr. Duke
The Standard and Poors 500 Index (SPX) has traded higher since December 26th and closed Friday at 2707, up 2.3% for the week. Monday and Tuesday of this week, together with most of last week, consisted of a sideways pause in this rally, but the last three days were very strong, including two gap openings higher. Trading volume in the S&P 500 remains below average, as it has since December 26th, the beginning of this bullish run. Volume only exceeded the 50 dma once this week. This suggests that the large institutions remain uncertain about this market.
Volatility, as measured by the S&P 500 volatility index, VIX, declined for the last three days, closing Friday at 16.1%. I normally think of 15% as the borderline before I become concerned. By that standard, we should remain cautious.
The Russell 2000 Index (RUT) broke through the resistance set by the February correction low at 1464 last Friday (1/25), and stayed solidly above that resistance level this week. Similar to the S&P 500, Russell had strong positive days for the last three trading sessions, closing Friday at 1502, up 3 points.
The NASDAQ Composite index traded higher on Wednesday and Thursday, but was held back Friday by Amazon. Traders were disappointed with Amazon’s earnings announcement and weak forward guidance on Thursday evening. AMZN took it on the chin Friday, losing 92 dollars per share or 5.4%. That resulted in the NASDAQ Composite trading weaker than the other broad market indices.
The market’s recovery since December 26th has been impressive. The S&P 500 has gained 15% since the opening on December 26th. But we should keep that gain in perspective. Today’s level is equivalent to that of October 23rd, just before we tipped over to the October correction low on October 29th. In spite of our strong recovery in January, we remain about 8% below the highs in early October before the series of fall corrections began.
The January Barometer was developed by Yale Hirsch, creator of the Stock Trader’s Almanac, and this indicator has an 88% record of success since 1950. The essence of the January Barometer is that the S&P 500 index for the year will follow January’s performance. Yesterday’s close made it official with a 15% gain; the January Barometer is now in the books, predicting a positive year for the S&P 500 in 2019. That would be a welcome prognosis after last year’s 7% loss. However, traders remain concerned about continued political turmoil and the outcome of trade negotiations with China. Each day’s market is subject to the latest news or even rumors of news. That makes it dangerous for traders.
I am focusing on stocks that have weathered the fall storm of corrections well, and are now trading well above their 50 and 200 day moving averages. For example, take a look at ADI, ADSK, NOW, PANW, and PAYC. I remain in a more conservative stance during this bullish run. When I can close trades with even modest gains, I am taking that opportunity. This is a nervous market, and so am I. Be cautious.
Proceed With Caution
- Written by Dr. Duke
This week’s trading continued the positive price trend with the Standard and Poors 500 Index (SPX) posting a 2.4% gain for the week and closing yesterday at 2596. SPX broke through the resistance level at 2581 set by the February correction on Wednesday and held those levels for the balance of the week. The one worrisome observation this week was the declining trading volume in the S&P 500. Volume steadily declined all week and had returned to holiday levels by Friday. Are the trading desks still partially empty or is money waiting on the sidelines?
SPX broke through the 20-day moving average (dma) in the center of the Bollinger bands on Monday and is now entering the upper quartile of the bands. Perhaps the market will be taking a breather after solidly breaking through the February correction resistance.
The S&P 500 volatility index, VIX, closed yesterday at 18.2%. VIX has steadily declined from its opening December 26th at 36%. However, volatility levels at 18% are far from calm. We have only just returned to the volatility levels we experienced through October and November.
The Russell 2000 Index (RUT) closed yesterday at 1447, up 2 points. Russell led this correction, trading down 25% from early October to December 24th. It was encouraging to see Russell gain 4.8% this week. RUT is now leading SPX higher.
The NASDAQ Composite index closed yesterday at 6971, down 15 points, but NASDAQ gained 3.2% this week, and similar to SPX, NASDAQ broke the resistance levels set by the February correction on Tuesday and held those levels the balance of the week.
Both the NASDAQ Composite and the Russell 2000 outperformed the S&P 500 this week. Russell led the race with its gain of nearly five percent this week. The NASDAQ Composite and the S&P 500 both broke through the resistance level set by the February correction, but Russell has the largest losses to recover and has not yet broken that key resistance level.
One of the traditional forward-looking indicators for the coming year is to monitor the S&P 500 gains or losses for the first five trading days of January. That indicator is solidly green for 2019, but was way off the mark in 2018. The first five trading days of January indicator has historically been accurate 83% of the time. That indicator plus the very strong market performance since the December 24th low prompted me to venture back into the market this week with a couple of trades. The January Barometer was developed by Yale Hirsch, creator of the Stock Trader’s Almanac, now edited by his son, Jeffrey Hirsch. The January Barometer states that as the S&P 500 goes in January, so goes the year. This indicator has an 88% record of success since 1950. Neither the First five Days nor the January Barometer were on target for 2018, but that was an odd year in the markets in many ways.
I was encouraged by the follow through day on January 4th and the consistent positive price action this week. However, volatility remains relatively high, so proceed with caution.
Is the Correction Finally Over?
- Written by Dr. Duke
It now appears that this severe correction hit its low on December 24th, when the Standard and Poors 500 Index (SPX) closed at 2351, representing a decline of 20% since October 3rd. SPX closed Friday at 2532, up 84 points on the day. The major market indices rallied strongly the day after Christmas, and gave traders hope. Technical analysts often look for what they call a follow through day after a correction low is recorded. This follow through day is considered the signal that traders may once again enter the market with some confidence that the correction is past. One begins counting days after the strong bullish move following the correction low (December 26th). The day count continues as long as the low price of day one isn’t broken. On day four or later, the analyst watches for a strong bullish trading day with volume equal or higher than the previous day. When that is achieved, the follow through day has occurred. Friday’s strong push higher satisfied the criteria for the follow through day. Trading volume in the S&P 500 has run below the 50-day moving average (dma) throughout the holidays. Thursday and Friday’s trading volume finally reached back up to the 50 dma.
Volatility, as measured by the S&P 500 volatility index, VIX, closed yesterday at 21.4%. The high point for VIX came on December 24th at 36%. This was almost an exact match of the peak in volatility in the February correction at 37%.
The Russell 2000 Index (RUT) closed yesterday at 1381, up 50 points. Russell has led this correction, down 25% from early October to December 24th. The NASDAQ Composite index closed yesterday at 6739, up 275 points. NASDAQ lost 23% from early October to the low on December 24th. I am a little surprised that NASDAQ’s correction wasn’t the largest of the broad market indices given the damage incurred by many of the high-tech names in the NASDAQ. Russell has led this correction from the beginning, trading lower and more consistently lower week after week.
Price trends since December 24th have been reassuring and the achievement of the follow through day this week probably contributed to Investors Business Daily changing their market assessment on Friday from “Market in Correction” to “Market in Confirmed Uptrend”.
I have never understood this correction from day one since it seemed to have no basis in solid economic terms. Yes, prices are higher, but companies have not grown earnings this rapidly in many years. Likewise, we have not seen GDP growth in the 3.5% range in decades. I believe this correction was largely self-inflicted. The financial news has been infected with the rancor of the front-page news. I am amazed at how often I have heard and read the term “recession” over the past several months. In my first economics course as an undergraduate, I learned that a recession is defined as two consecutive quarters of negative economic growth. That definition hasn't changed, and we have been posting GDP growth numbers in excess of three percent. Recent GDP growth rates are light years from going negative. Businesses are complaining that they can’t hire people fast enough. Wage growth is at historic highs, while unemployment is at historic lows. Talk of recession makes no economic sense.
Why have we turned into a crowd of Chicken Littles?
I am encouraged by the recent market trends, but remain somewhat concerned about the volatility that appears to have become part of the normal market. Therefore, I may send out a trade alert this week, but I remain cautious. This market is going to have to show me that it has gotten over its “sky is falling” fears.