Dr. Duke's Blog
Do you know any trading coaches who discuss the market candidly without any marketing hype? Dr. Duke publishes a weekly newsletter and shares the track records of his trading services. If you have questions about any of his services, Ask Dr. Duke.
Hide Under the Bed!
- Written by Dr. Duke
The Standard and Poor’s 500 Index (SPX) looked weak last week, but it really fell out of bed this week. SPX opened the week at 3441, broke the 50-day moving average (dma) on Monday, and then gapped open lower on Wednesday. Thursday looked better, but today’s trading took us even farther down, closing at 3270, down 1.2% today and down 5% for the week. SPX found support today at 3234, near the high from June 8th. SPX bounced from there, recovering 36 points of today’s loss. That recovery gave the bulls something to cling to. Trading volume on SPX has been running consistently below average until Wednesday this week, and volume remained well above the 50 dma the balance of the week.
The volatility index for the S&P 500 options, VIX, closed today at 38% after opening at 41% this morning. VIX began the week at 29%, so it was quite a ride. Today’s decline gives the bulls some hope, but not much. This is close to if not at the “all in cash” level.
IWM, the ETF based on the Russell 2000 group of companies, resisted the downward trend last week and even to some degree on Monday and Tuesday, but IWM gave way on Wednesday, finally closing today at 153.09, down 1.3% for today and down 4.9% for the week. The low today at 151.39 was very close to the close on June 8th at 151.99. IWM recovered much of today’s losses, similar to the pattern observed in the S&P 500.
The NASDAQ Composite index has been trading steadily lower since October 13th, unlike SPX and RUT that seemed to resist the downward push until this week. NASDAQ closed today at 10,912, down 2.5% on the day and down 4.6% for the week. Surprisingly, NASDAQ’s trading volume barely reached the 50 dma today and didn’t spike much above average on Wednesday’s big drop. NASDAQ did not recover much of its losses today before the close, unlike SPX and IWM.
In summary, all of the broad market indices are screaming bear market this week. The small to mid-cap stocks of IWM and the Russell 2000 index are signaling “risk off”. The only bright spot to be found was the recovery from today’s lows before the close. But that may be grasping at straws.
The move today of IBD’s market assessment moved from Confirmed Uptrend to Market In Correction reinforces the seriousness of this bear market.
The conventional wisdom is that the market is spooked by the prospect of more economic closures in the states. But one has to believe that the upcoming election also has people taking risk off the table. That leaves us with the bottom line: How will the election result Tuesday affect the market?
The most prudent action is to sit on the sidelines and watch. In last week’s newsletter, I opined that it wasn’t a bad time to be largely in cash. I have changed my mind. Go to 100% cash on Monday if you aren’t there already.
- Written by Dr. Duke
Take a look at the price chart for the Standard and Poor’s 500 Index (SPX). The S&P 500 index hit its all-time high before the March correction at 3386 on February 19th. It recovered that high and set a new all-time high at 3581 on September 2nd. On October 12th, SPX attempted to retake that earlier September high, but only got as far as 3534. Since then SPX has been largely wandering sideways around 3450, closing today at 3465. We have support at the February high of 3386 and the 50 day moving average (dma) at 3408. Resistance will be found at the October high at 3534 and the September high of 3581. I expect SPX to continue this sideways dance until after the election. SPX closed Friday at 3465, up 12 points on the day but down 0.8% for the week. Trading volume for the S&P 500 companies continues to largely track below average, so none of the large players are venturing out very far in either direction. They are waiting for the dust to settle.
The volatility index for the S&P 500 options, VIX, rose on Monday and Tuesday, but declined for the rest of the week, with the close at 27.6% Friday being essentially unchanged for the week. These are elevated levels of volatility. Don’t make the mistake of becoming complacent.
IWM, the ETF based on the Russell 2000 group of companies, posted more bullish trading action than the larger blue cap indices. IWM’s pre-correction high was 167.59 and the close on October 12th at 163.79 was the closest IWM has come to recovering those levels. Since October 12th, IWM has effectively traded sideways, closing Friday at 163.07, less than five points below that previous high. The bullish behavior of the small to mid-cap stocks that make up the Russell 2000 index is encouraging. These are the “risk on” stocks for the market.
The NASDAQ Composite index took a large loss on Monday, but traded sideways the balance of the week, closing Friday at 11,548, down 1.6% for the week. Trading volume remains below average.
In summary, the S&P 500 index and NASDAQ Composite are trading sideways and holding price levels above their pre-correction highs and above their 50 day moving averages. The Russell 2000 companies nearly recovered their pre-correction highs on October 12th. Unlike the larger market indices, IWM has not declined much at all and is trading sideways within 2% of the highs set earlier this month. These small to mid-cap stocks are signaling “risk on”.
One other bullish signal comes from the candlestick analysis. When a stock or index price trades lower on the day and then recovers to close much higher, it results in a long lower candlestick shadow. That is a bullish signal because it documents the situation where the stock or index was being sold off, but then a large number of traders saw that lower price as a bargain and began a buying spurt to result in a much higher closing price for the day. The S&P 500 index, NASDAQ Composite, and Russell 2000 Index all displayed long lower candlestick shadows on both Thursday and Friday this week.
I conclude that this market has an underlying level of strong bullish support, but traders are cautious due to the uncertainty of this election. Elevated volatility levels are also warning us to be cautious. This sideways churning or treading water price pattern will continue through next week and maybe even into the following week if the election results are in doubt.
The underlying uncertainty plaguing this market will be with us at least until after the election and may last even longer. This isn’t a bad time to be largely in cash.
Price Volatility Reigns In This Market
- Written by Dr. Duke
This market turns on a dime and often very unpredictably. I call this price volatility, not to be confused with implied volatility, a different animal. I believe price volatility is largely caused by uncertainty with several different issues worrying traders simultaneously. We see the effects on the market nearly every week. Last week, the Standard and Poor’s 500 Index (SPX) was on a strong bullish run, gapping open higher three days in succession. SPX began this week with a nice gain, but then it fell out of bed. Thursday opened lower and seemed to be poised to continue the trend, but it reversed and booked a significant recovery for the week thus far. But that couldn’t hold; today’s trading was disappointing.
SPX closed today at 3484, up less than a point, and down about one half of one percent for the week. The most negative aspect of today’s trading was the fact that SPX could not hold the early high today at 3516. Trading volume for the S&P 500 companies continues to largely track below average, and those lower trading volume levels warn us that any bullishness we observe may be short-lived.
The volatility index for the S&P 500 options, VIX, opened the week at 26%, and closed today at 27.4%. VIX hit its high for the week intraday on Thursday at 29%. These are relatively high levels of volatility historically, even though we are probably becoming accustomed to them this year.
IWM, the ETF based on the Russell 2000 group of companies, has surprisingly outperformed its big brothers this week. Today’s close at 162.35 is very close to its recent high of 164.24 on Monday. The Russell 2000 companies are small to mid-capitalization stocks that tend to lead bull markets higher and bear markets lower. Seeing the Russell 2000 index outperforming the S&P 500 is a bullish signal.
The NASDAQ Composite index closed today at 11,672 for a gain of 42 points or 0.4%. But NASDAQ ended the week down by 0.5%. NASDAQ’s trading volume declined steadily all week - uninspiring. Is the bloom off the NASDAQ stocks?
The Russell 2000 companies have been trading more strongly than the large-cap indices for the past couple of weeks. This week, small to mid-cap stocks are signaling bullish support simply by resisting the downward pressure that is more obvious in SPX and NASDAQ. IWM, the ETF composed of the Russell 2000 stocks, remains very close to the high it set on Monday. IWM never did recover its pre-correction high, but it has been trading relatively more strongly for the past three weeks. That is a good sign for the overall market, but beware. This is a market full of nervous traders. The least rumor will cause them to hit the sell button. Be careful that you don’t get in the way of these elephants as they panic in the rush to protect their gains.
Remain vigilant. This price volatility isn’t going away anytime soon.
Hard To Believe
- Written by Dr. Duke
Think of everything this country has dealt with this year: Covid-19, the economic shutdown, riots and looting in our major cities, record setting levels of political rancor, and finally, our President testing positive for Covid-19. Then look at the Standard and Poor’s 500 Index (SPX) price chart below. SPX gapped open higher Thursday morning and then repeated that performance Friday morning. I’m glad but it is truly hard to believe. SPX closed Friday at 3477, up 30 points on Friday and up 3.3% for the week. In light of everything that is going on, this is very surprising to me. Trading volume for the S&P 500 companies continues to largely track below average, and those lower trading volume levels on Thursday and Friday warn us not to get too far out over our skis.
The volatility index for the S&P 500 options, VIX, opened the week at 29.5%, and closed Friday at 25.0%. That 25% level served as support through most of September and I would remind all of us that 25% is a pretty high level of volatility. It is easy to become accustomed to these higher levels of volatility and become complacent.
IWM, the ETF based on the Russell 2000 group of companies, turned in an extremely bullish move this week, closing at 162.70, up nearly 5% this week alone. IWM gapped opened both Thursday and Friday mornings. The Russell 2000 companies are small to mid-capitalization stocks that tend to lead bull markets higher and bear markets lower. This is the second week that IWM has outperformed the S&P 500 – a strong bullish signal.
The NASDAQ Composite index closed yesterday at 11,580 for a gain of 159 points or 1.4%. NASDAQ outperformed SPX this week, gaining 3.7% with two opening price gaps higher on Thursday and Friday. But even NASDAQ couldn’t match IWM’s gains. Similar to SPX, NASDAQ trading volume continues to generally track below the 50-day moving average.
This is the second week that the Russell 2000 companies have outperformed SPX and NASDAQ. These small to mid-cap stocks are signaling “risk on”. I restate my conclusion from last week: this market has strong bullish support. However, volatility levels remain elevated and are effectively warning us to be cautious. If you are able to accept moderate levels of risk, there are several solid blue chip stocks like FDX, COST, DE, and AAPL that are trending favorably. But watch your positions carefully.
Remain vigilant. This volatility isn’t going away anytime soon.
What Else Can Happen?
- Written by Dr. Duke
We have been dealing with higher than normal levels of volatility in the market all year: Covid-19, the economic shutdown, riots and looting in our major cities, and record setting levels of political rancor. Then we learn that the President has tested positive for Covid-19 and market volatility popped up even more on Friday.
The Standard and Poor’s 500 Index (SPX) closed yesterday at 3348, down 32 points or just under 1%. SPX had traded higher until the news about President Trump hit Friday and we gave back most of those gains, closing the week essentially flat, up 0.4%. With the exception of Wednesday, trading volume for the S&P 500 companies remained below average all week. Lower trading volume on Friday was actually good news, suggesting the market wasn’t too concerned about the news about the President.
The volatility index for the S&P 500 options, VIX, opened the week at 27.2%, and was pretty steady and somewhat lower until Friday when it spiked up to 28% on the news about the President. But VIX calmed a bit and closed at 27.6% Friday.
IWM, the ETF based on the Russell 2000 group of companies, had a much better week than the other large-cap market indices, opening the week at 148.37 and closing Friday at 152.85, up 4.48 points or 3% for the week. The Russell 2000 companies are small to mid-capitalization stocks that tend to lead bull markets higher and bear markets lower. The fact that IWM could tack on 3% in a week when the S&P 500 only managed less than one half of one percent is a notable bullish sign.
The NASDAQ Composite index closed yesterday at 11,075 for a loss of 251 points or 2.2%. Unlike the Russell 2000, NASDAQ was essentially flat for the week, opening at 11,084 and closing at 11,075, down 0.08% for the week. With the exception of Wednesday, NASDAQ trading volume was at or below the 50-day moving average all week. It is worth noting that trading volume was barely below the 50 dma on Friday after the bad news hit the market.
The news that President Trump had contracted Covid-19 was certainly a scary event for the country, and especially on top of all of the other turmoil. However, I take some comfort from the market’s reaction Friday. Losses on the large blue-chip market indices were minimal and trading volume was below average. Traders didn't hit the panic button.
The Russell 2000 companies traded higher all week and had a strong day on Friday, gaining almost a half of one percent on Friday alone. Those small to mid-cap stocks are the stocks we watch to see if we are going over the cliff. They are the canaries in the coal mine. The opposite is also true. These are the so-called “risk on” stocks.
All of these measures support the thesis that the market still has strong bullish support. But the market consensus is also very anxious and concerned. If you are able to accept moderate levels of risk, there are opportunities out there. But scale back on the amount of capital at risk in your trades and stop them out quickly.
Remain vigilant. This volatility isn’t going away anytime soon.
Sideways Market So Far
- Written by Dr. Duke
The Standard and Poor’s 500 Index (SPX) closed yesterday at 3298, up 52 points or +1.6%. That sounds great if we stop there, but SPX barely recovered Monday’s opening at 3286, so we were only up 0.4% for the week. Of course, we should be thankful for that. With all of the turmoil going on in this country, market volatility is to be expected. The June 8th high at 3232 provided support on Wednesday, and Thursday and Friday’s trading built on that base. However, we have yet to recover the 50-day moving average (dma) that was broken last week. The S&P 500 is now trading in a channel defined by the June high on the lower edge and the February pre-correction high on the upper edge. Trading volume for the S&P 500 companies opened the week above the 50 dma, but remained below average all week.
The volatility index for the S&P 500 options, VIX, opened the week at 28%, and closed Friday at 26%. It would be a mistake to count this decline as encouraging. Traders remain nervous and poised over the sell button.
IWM, the ETF based on the Russell 2000 group of companies, succumbed to the bearish pressure this week, closing up 1.6% at 146.41 on Friday, but remained down 1.9% for the week. The small to mid-cap stocks of the Russell 2000 are often the first to be sold in a bear market and the first to be bought in a bull market. Hence this week’s trading is a concern. IWM never did recover its pre-correction high.
The NASDAQ Composite index closed yesterday at 10,914 for a gain of 241 points or 2.3%. Even more positively, NASDAQ was up 2.9% for the week. It has not recovered its 50 dma, broken last week, but it is only 111 points away and remains 1,097 points above its pre-correction high at 9817. NASDAQ trading volume was at or below the 50 day moving average all week.
Markets hate uncertainty and is being fueld by the coronavirus epidemic, economic shutdowns, political turmoil, rioting and looting in our large cities. The market reflects those anxieties. This market is volatile and very nervous. Trading this week supports the thesis that we aren’t seeing the beginning of a bear market trend. Bullish support continues to hold support. NASDAQ remains well above its pre-correction high. Thursday and Friday’s market strength is encouraging. However, the light we think we see may be the train coming at us.
Remain vigilant and largely in cash.
- Written by Dr. Duke
The Standard and Poor’s 500 Index (SPX) closed yesterday at 3319, down 38 points or 1.1%. SPX lost 1.3% of its value over the week. The 50-day moving average (dma) provided support to the sell-off that started last week until yesterday when the index broke through the 50 dma at 3343. I wondered last week whether this was just a temporary step on an overall trend lower, or part of a sideways cooling off period. Friday’s break of the 50 dma along is evidence on the side of a more significant pull back.
Trading volume for the S&P 500 companies spiked up significantly on Friday. Normally I would interpret that as reinforcement of the drop of the index and the break of the 50 dma. However, Friday was what is known as quadruple witching, the expiration of stock index futures, stock index options, stock options, and single stock futures on the same day. This occurs on the third Friday of March, June, September, and December and always contributes to higher volatility and wild market swings. Perhaps that gives us hope for a bounce on Monday. Perhaps not.
The volatility index for the S&P 500 options, VIX, opened the week at 25.9%, declined to low of 24.8% on Wednesday and closed the week at 25.8%. All in all, volatility remains steady and moderately high. Traders are nervous and on guard.
IWM, the ETF based on the Russell 2000 group of companies, has managed to continue to trade along its 50 dma all week, closing down 0.4 points on Friday at 153.29. That represented an increase of 1.8% for the week, quite an accomplishment for this week.
The NASDAQ Composite index closed yesterday at 10793 for a loss of 117 points or 1.1%. However, NASDAQ was down 2% for the week, breaking the 50 dma on Thursday and confirming that break of support on Friday.
NASDAQ trading volume was below average all week and spiked on Friday due to quadruple witching, so we should not read too much into that volume spike.
Markets hate uncertainty and we are in the most turbulent times of my lifetime. The coronavirus epidemic, economic shutdowns, political turmoil, rioting and looting in our large cities are featured on every newscast. It is a challenge to remain even marginally optimistic. The market reflects those anxieties. This market is volatile and very nervous.
If you can’t watch it throughout the day, you would be well advised to stay largely in cash and wait on the sidelines. There is nothing wrong with taking a pass right now.
- Written by Dr. Duke
The Standard and Poor’s 500 Index (SPX) closed today at 3341, up a couple of points on the day but down almost one percent on the shortened holiday week. It appears as though the 50-day moving average (dma) provided support to the sell-off that started last week. The index nearly touched the 50 dma on Tuesday and Thursday, and then broke through the 50 dma today, but recovered decisively to close above support. It is hard to take much encouragement from today’s bounce; it has been a volatile week for the market. The question remains whether this is just a temporary step on an overall trend lower, or just part of a sideways cooling off period. Trading volume for the S&P 500 companies spiked up above the 50-day moving average (dma) on Tuesday but has declined the rest of the week. That decline in trading volume was a welcome relief, suggesting there was little interest in a strong move to cash.
The volatility index for the S&P 500 options, VIX, spiked higher on Tuesday, but dropped back at the close and has declined steadily all week – again, an encouraging sign. VIX closed today at 26.9% after hitting an intraday high of 36% on Tuesday. Much of the anxious edge has subsided this week.
IWM, the ETF based on the Russell 2000 group of companies, traded along its 50 dma all week, closing today at 149.15, down only one point today, but down 1.3% for the week. IWM traded more weakly than the broad market indices this week, as one would normally expect. The fact that IWM didn’t fall off the cliff is encouraging because these are usually the first stocks to be sold when the panic starts.
The NASDAQ Composite index closed today at 10,854 for a loss of 66 points. However, NASDAQ was relatively flat this week, closing down 0.4% for the week. The talking heads were talking sector rotation today, but NASDAQ remains reasonably solid. Trading volume was below average all week and the index essentially traded sideways. NASDAQ remains almost ten percent above its pre-correction high. For all the talk of NASDAQ being the poster child for this frothy market, it didn’t sell off as strongly as one might have expected.
As everyone around me knows, I have been worried about this market for quite a while now. The prices just didn’t seem consistent with the economic damage we continue to witness. Many of my stops tripped last week, but I have added new positions this week. I am not bullish, but I am doing my best to extract some quick profits where I can find them. In my opinion, the market remains over priced. There are opportunities if you have the freedom and expertise to find them.
I recommend you watch this market very diligently. It turns on a dime. I played the Peloton earnings announcement last evening and closed the trade only a few minutes after the market opened this morning for a 58% gain. If I had waited, nearly all of those gains would have been gone by noon.
This market is volatile and very nervous. If you can’t watch it throughout the day, you would be well advised to stay largely in cash and wait on the sidelines. There is nothing wrong with taking a pass right now.
Freak-Out or Head-Fake?
- Written by Dr. Duke
The Standard and Poor’s 500 Index (SPX) closed Friday at 3427, down 28 points on the day. Thursday and Friday took their toll on the market with the S&P companies losing 2.4% this week. On August 24th we broke out above the pre-correction high of 3386 and kept trading higher. But that pre-correction high appears to have served as support Friday as SPX broke down through that level to hit its intraday low mid-morning but then began a steady recovery of much of the day’s losses before the close of trading.
For several months trading volume for the S&P 500 companies has run well below the 50-day moving average (dma). That changed on Thursday and Friday as trading volume spiked on the large trading declines. I initially took that as an emphatic underscoring of the declines. But Friday’s recovery was also at above average trading volume. That was encouraging.
The volatility index for the S&P 500 options, VIX, spiked higher on Thursday and Friday as SPX collapsed. VIX closed Friday at 30.8% after hitting an intraday high of 38.3%. I will be watching VIX closely as the market reopens on Tuesday.
IWM, the ETF based on the Russell 2000 group of companies, followed the broad market indices off the cliff Thursday and Friday, closing at 152.80 on Friday, down 2.8% for the week. The S&P 500 declined 2.4% for the week. Normally, the Russell 2000 rises and declines at a much faster rate. This four tenths of a point differential seemed smaller than I expected. This may suggest that the recovery we saw Friday afternoon will continue next week. IWM bounced off its 50 dma at 149.98 before closing at 152.80 on Friday.
The NASDAQ Composite index closed Friday at 11313 for a loss of 145 points. NASDAQ lost 3.5% of its value this week, which was not surprising since this market rally has been led by NASDAQ stocks. This index bounced off its 50 dma to recover strongly on Friday. NASDAQ remains 13% above its pre-correction high. That is rather amazing.
I have been worried about this market for several weeks now. It just didn’t seem reasonable that the market prices should be back to pre-correction highs after all of the self-inflicted economic damage that has been done (and continues here in Illinois). When I saw the market drop off significantly on Thursday and then open lower on Friday, my only question was how low it would go. But then it started recovering Friday and that surprised me.
One of the fundamental lessons of trading is to trade what the market gives you, not what you think makes sense. In that spirit, I began to stick a couple of toes back into the water late Friday. I am largely in cash and feeling comfortable with that over this long weekend. However, I did take a flyer Friday. I surveyed my watch list and noted the stocks that were holding up best in this downturn. TSLA stood out. TSLA opened Friday at $403, traded down to $372 and then traded higher to close at $418, up 11 points on the day. I could not resist. I bought 100 shares of TSLA at 406.07 and sold the Sep(9/11) $405 call for $26.30. The assigned return would be 6.6%.
Watch the opens Tuesday morning carefully. Don’t jump too quickly. Even if it opens higher, it could reverse itself in that first hour of trading. It is a dangerous market. Remaining largely in cash is prudent.
Enjoy your holiday weekend. Remember to thank those people in your life whose work ethic made your life what it is today.
Is the Ride Over?
- Written by Dr. Duke
The Standard and Poor’s 500 Index (SPX) closed Friday at 3397, up 12 points on the day and up 0.5% for the week. On Tuesday, SPX broke the all-time high of 3386 set on 2/19/20. It still perplexes me how we could possibly be back where we were before this economy was effectively shut down a few months ago. The price chart reminds me of a math function asymptotically nearing its maximum value. The prices appear to have been flattening out as we neared the February high. Nothing changed this week on the trading volume front. Trading volume for the S&P 500 companies remains anemic, running well below the 50-day moving average (dma) all week. I interpret this as a sign of caution. Large amounts of cash remain on the sidelines or in safer investments.
The volatility index for the S&P 500 options, VIX, opened the week at 22.5% and closed unchanged Friday at 22.5%. VIX dipped early in the week, but then rose to close flat on the week. Volatility levels above 20% are relatively high historically, even though we may be becoming accustomed to them at this point. This remains a nervous market. Be cautious.
As the S&P 500 index leveled out this week, IWM, the ETF based on the Russell 2000 group of companies, declined. IWM opened the week at 157.50 and closed Friday at 154.61, down almost 2%. The small cap stocks on the Russell 200 act as the canaries in the coal mine and may be the early warning signal of a pullback. At a minimum, it adds to my caution.
The same old story is still unfolding for the NASDAQ Composite index. It opened the week at 11,083 and closed at 11,312, up 2.1%. Friday’s close set another all-time high for NASDAQ. NASDAQ’s trading volume has been running below the 50-day moving average (dma) with only two exceptions since the first of July, but volume did perk up a bit Thursday and Friday.
Where do we stand? One could superficially think the storm has passed. After all, we are back where started before this nasty correction. All is well. Baloney.
I don’t know of any rationale for these market price levels. Cautionary signs abound:
• Below average trading volume as prices move higher
• Flattening of the S&P 500 as we near the pre-correction highs
• The Russell 2000 turning downward
• Market volatility (VIX) remains moderately high
• Fifteen million people are unemployed
However, I am making a lot of money in this market. I brought in 5.2% in my trading accounts during the August expiration month. Don’t annualize that return; it will make your head explode.
The majority of that income has come from selling calls and puts against large blue-chip stocks. Volatility remains high and consequently the options are expensive. Traders often forget that higher volatility brings higher risk. I am managing the stops more conservatively so I shouldn’t give back much when this market ride ends.
Carefully weigh the risks of this market. There is money to be made but manage the risk prudently.