Dr. Duke's Blog

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Written by Dr. Duke

Created: 07 January 2022

This first week of the new year opened with SPX trading near all-time highs, but after the FOMC’s minutes were released on Wednesday, we gave it all up and spent the last two days threatening to break the 50-day moving average (dma). SPX closed today at 4677, down 19 points for the day, and down 101 points or over 2% for the first week of the year. The fact that SPX did not break the 50 dma was the only bright spot this week. SPX trading volume resumed its normal levels around the 50 dma after the typical lows of the holidays as nearly everyone takes some time off.

VIX, the volatility index for the S&P 500 options, closed at 18.8% today, down almost a single point. VIX peaked during Wednesday’s downturn at 20.2%. However, we have seen much worse levels as the market pulled back over the last few weeks. In early December, we witnessed spikes over 35%.

I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. The Russell 2000 index has been signaling a bearish market for several weeks. On November 26th, IWM broke below both its 50 dma and its 200 dma in one trading session. And it remains well below its 200 dma today.

The NASDAQ Composite index closed today at 14,936, down 145 points or 1%. But it gets worse. NASDAQ opened the week at 15,733, losing 5.1% for the first week of trading in the new year. Trading volume generally ran below the 50 dma this week.

Santa brought us coal for our stockings this year, and the new year just piled on. All of the positions in the Conservative Income trading service are closed and I only have two trades open in my trading group. It is a weak start to the new year.

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Written by Dr. Duke

Created: 18 December 2021

The Standard and Poors index (SPX) looked good last week, closing near previous all-time highs. This week opened with traders worrying about the upcoming FOMC meeting and what they would say about inflation. After the announcement and press conference Wednesday, SPX spiked back to match last Friday’s closing high. Apparently, traders liked what they heard. But they must have changed their minds upon further reflection. Thursday’s trading gave back much of Wednesday’s gains. Then the market gapped open lower on Friday and traded down to the 50-day moving average (dma) before bouncing modestly to close at $4621, down 1% on Friday and down nearly two percent for the week. The fact that SPX did not break the 50 dma was the only bright spot this week.

Once each quarter the stock index futures, stock index options, stock options and single stock futures all expire on the same Friday. We call this quadruple witching and the fourth quarter event occurred Friday. Consequently, SPX trading volume spiked to the second highest level this year, 4.4 billion shares, with the 50 dma at 2.3 billion shares.

VIX, the volatility index for the S&P 500 options, closed at 21.6% today, after opening at 19.3% on Monday. Last week, I would have tentatively suggested this most recent pull back was behind us, but Friday’s decline in the market and the accompanying rise in volatility suggest otherwise. If I put on my rose-colored glasses, VIX has essentially tracked sideways, but that is weak even for an optimist.

I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. The Russell 2000 index has been the canary in the coal mine for these recent pull backs, declining quite consistently over the past six weeks. IWM closed yesterday at 215.14, up 1.96 or +0.9%. Even with yesterday’s move higher, IWM finished the week down 1.5%.

The NASDAQ Composite index closed Friday at 15,170 , down 11 points, essentially unchanged. NASDAQ opened the week at 15,621, setting up a loss of 2.9 percent for the week. Trading volume ran close to the 50 dma this week, before spiking for quadruple witching on Friday with 8.0 billion shares traded; the 50 dma is 5.1 billion shares.

Last week in the markets gave me some hope that the pullback was behind us, and we could begin to see the commonly occurring year end rally, often called the Santa Claus rally. This week certainly put a dent in that expectation.

Wednesday’s strong market recovery after the Fed meeting was sufficient to push Investors Business Daily (IBD) to move from Market In Correction to Confirmed Uptrend. I wonder if they have misgivings about that move. On Friday, they moved their market assessment to Uptrend Under Pressure. I’m not the only person being whipsawed by this market.

One of the fundamental measures of a stock or market index’s health is its position relative to its 50 dma. The S&P 500 index is 0.4% above its 50 dma. That is barely above the 50 dma, but SPX is alone up there. The NASDAQ Composite is 1.8% below its 50 dma and the Russell 2000 index is 5.4% below its 50 dma! I normally don’t follow the Dow Jones Industrials index (too few stocks to analyze the total market), but I checked it out for this comparison – it stands 0.3% below its 50 dma. The bottom line isn’t attractive at all. I tend to be a reasonably positive person, but it is hard to be optimistic here.

I closed all of the positions in the Conservative Income trading service yesterday and closed the last newsletter trade on December 7th. I only have three trades open in my trading group; one is solidly profitable; one is borderline, and one is likely to be closed Monday unless the Santa Claus rally shows up. In spite of these last several weeks, all of my trading services are finishing the year in the profit column. I think I will relax for the last two weeks of 2021 and wait for calmer weather.

Merry Christmas and Happy New Year!

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Written by Dr. Duke

Created: 10 December 2021

The Standard and Poors index (SPX) set the low of this recent pullback last Friday with an intraday low of 4495, but it was encouraging to see the S&P 500 recover almost half of the day’s losses before the close. SPX opened at the 50 day moving average (dma) Monday morning and traded higher. Tuesday brought us a huge present with a large gap opening higher and the index continued to trade higher into today’s close at 4712, up one percent on the day and up nearly 4% for the week. SPX opened at 4712 on 11/22 and declined from there to initiate this latest pullback. Today’s close was precisely back to that opening price of 11/22. Trading volume in the S&P 500 companies steadily declined all week, falling below the 50 dma on Wednesday and declining to 2.1 billion shares today.

VIX, the volatility index for the S&P 500 options, closed at 18.7% today, after opening at 29% on Monday. It appears that we have recovered from this latest pull back, although this year has trained us to hesitate before declaring it safe to go outside again. It appears that the storm is over, but…

I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. The Russell 2000 is the fly in the ointment of the otherwise positive S&P 500 market assessment. IWM closed today at 219.91, down 0.61 points or 0.3%. IWM opened the week at 219.91 and rose 1.6% for the week. IWM recovered its 200 dma on Tuesday but broke back below it on Thursday and traded even lower today.

The NASDAQ Composite index closed today at 15,631, up 113 points or 0.7%. NASDAQ opened the week at 15,118, setting up a gain of 3.4 percent for the week. Trading volume declined steadily this week, moving below the 50 dma on Wednesday and remained below average for the balance of the week. NASDAQ’s trading volume declined 35% this week.

This week of trading at least served to give us hope that the latest pull back is behind us, but it is impossible to be sure. It is always challenging to predict market direction, but this year has set records for capriciousness. I looked at the SPX price chart for the year and counted a minimum of nine of these 
mini-corrections this year. None of them were severe, but they have been sufficient to hit many of my stops and sent me into red ink. All of my trading services are posting positive returns year-to-date, but the results aren’t what I would like. These frequent pull backs take their toll.

I admit that I am of two minds about this market. On the one hand, I feel that the media and the politicians have scared everyone to death. One of the results is that the market pulls back on any negative covid news, whether it makes sense or not. On the other hand, I can’t believe the market is continuing to set new highs this year with an extremely fragile economy, high inflation, and staggering national debt.

If we use the S&P 500 index as our measure of market health, it has solidly recovered its 50 dma and is only a couple of points off the highs set earlier in November. That chart leaves me feeling that the storm is over. However, when I turn to NASDAQ, the picture isn’t nearly so positive. NASDAQ has recovered its 50 dma but it remains about one and a half percent below the highs set earlier in November. And my countenance really drops when I look at the Russell 2000 index. It remains well below its 200 dma and has not even come close to recovering its 50 dma.

Investors Business Daily (IBD) continues with its Market In Correction assessment. The FOMC will meet this coming week. Any talk of raising interest rates will spook traders. Perhaps the conclusion is simply that the market isn’t likely to trade much higher from here; the bulls will do well just to hold the market roughly in place. But fear mongering and dysfunctional politics will continue to contribute to a choppy sideways market with frequent pullbacks leading to transient recoveries. I don’t think calmer waters are in the forecast. It will remain a challenging market to trade.

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Written by Dr. Duke

Created: 03 December 2021

The Standard and Poors index (SPX) encouraged us yesterday with a strong recovery, but it was just a head fake. SPX closed at 4538 today, down 39 points or 0.9%. The S&P 500 index lost two percent this week and has now lost nearly 4% since its opening at 4712 on November 22nd. Trading volume was above the 50 day moving average (dma) all week, which hasn’t happened very often this year. Over the past several months, SPX trading volume has tracked at or below the 50 dma. This increase in volume underscores this bearish move in the market.

VIX, the volatility index for the S&P 500 options, opened trading this morning at 27% and spiked up to 35% before settling down somewhat, closing at 30.5% today.

I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. IWM closed today at 214.71, down 4.05 or 2.1%. IWM opened the week at 226.22, so the week’s loss was over five percent!

The NASDAQ Composite index closed today at 15,085, down 296 points or 1.9%. NASDAQ opened the week at 15,719, setting up a loss of a little over four percent for the week. Trading volume was mixed this week, below average on Monday and Friday, but above the 50 dma for the middle of the week.

Last week’s strong decline on Friday of Thanksgiving week surprised me, but Monday’s positive opening seemed to suggest Friday’s sell off was excessive. Then the market sold off even further on Tuesday and Wednesday. Just like an abusive husband, the market turned nice on Thursday and assured us everything was OK. Today’s market was mixture of the extremes, with the S&P 500 opening higher and then plunging to an intraday low of 4495, before recovering 43 points to close at 4538. I may be desperately searching for a positive signal, but that late recovery today was indeed a hopeful sign. And that bounce was duplicated in NASDAQ and the Russell 2000.

But I cannot ignore that the S&P 500 index is now down 4% from its most recent high. Similarly, NASDAQ is down 6% and the Russell 200 is down 12%. This is becoming serious. Absent a sustained bounce next week, it may be time to close many of our trades.

In closing, I ask you to consider a simple question. What exactly needs to happen to allow the current restrictions on our freedoms to end? Covid 19 is no different than any other coronavirus. It will continue to mutate. The vaccine has not proven to be the savior we were promised, and the target is moving. When will it end?

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Written by Dr. Duke

Created: 26 November 2021

The Standard and Poors index (SPX) fell out of bed this morning, closing the shortened trading session at 4595, down 107 points or 2.3%. This was an extreme move in at least two aspects. First of all, one doesn’t expect significant market moves during holiday weeks. Many traders are away from their desks and trading is normally more sluggish. Secondly, today’s drop handily broke support around 4647, set during the last three days of trading last week.

VIX, the volatility index for the S&P 500 options, gapped open much higher this morning, opening at 26.6% after closing Wednesday at 18.6%. VIX ran as high as 28.5% and down to 23.9%, before settling near its open at 27.4%. Those VIX divergences of the past few weeks caught up with us.

I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. IWM closed today at 223.59, down 7.99 or 3.5%. IWM has traded steadily lower since November 8th and gapped open lower this morning and broke the 200 dma before recovering to close just slightly below the 200 dma. I wondered aloud last week if IWM was the canary in the coal mine – yes, it was. I should have paid attention!

The NASDAQ Composite index gapped open lower this morning and closed the shortened trading day at 15,492, down 354 points or 2.2%.

Last week, I wrote: “A severe correction is historically very unusual for a holiday shortened week like we will have next week, but I am still cautious.” I should have been more cautious, but I believed it unlikely that we would see a severe correction in a shortened holiday week. The market has a habit of surprising our predictions based on history.

My cash level increased a bit this week, from 58% to 60%, so the damages to my portfolio were minimal. Today’s price action seemed extreme to me. The conventional wisdom blamed a new covid variant. We have known that the common flu, a coronavirus like covid 19, mutates almost continually. That is why the flu vaccines have never resulted in perfect protection. That didn’t seem to stop us from leading our normal lives. We seem to have forgotten what we learned in the past, but it is difficult to learn when you are panicked.

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Written by Dr. Duke

Created: 19 November 2021

The Standard and Poors index (SPX) recovered the losses of last week, closing today at 4698, down 7 points. SPX opened Monday at 4689 so the index was slightly higher for the week, up 0.2%. The S&P 500 set intraday 
all-time highs early in November, but then took a minor tumble on November 9th and 10th. This week’s trading took the index back to those highs, but SPX pulled back both times that it touched that resistance level this week.

Trading volume climbed steadily this week and moved above the 50 dma for the past two days. That was solid reinforcement of the S&P 500’s steady climb higher this week.

VIX, the volatility index for the S&P 500 options, closed today’s trading at 18%, up a full percentage point from Monday’s open. VIX moved higher the last three days of this week, as the market moved higher on Thursday and opened higher this morning. The VIX divergences we saw last week have continued but have not been followed by the expected downturn.

I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. IWM closed today at 232.72, down 2.14. Unlike the other broad market indices, IWM has declined steadily this week, declining 3.3%. In fact, IWM has been steadily declining since 11/8. Is this the canary in the coal mine?

The NASDAQ Composite index gapped open higher this morning, setting a new all-time high with a close today at 16057, up 64 points and up slightly over one percent for the week. High tech is hot. Can it carry the market? NASDAQ’s trading volume ran above the 50 dma all week but fell well below average today.

VIX divergences occur when the S&P 500 index trades higher, but the VIX also moves higher. This suggests that the large institutional traders are concerned about the market and are bidding up the cost of the SPX puts. In my experience, VIX divergences are rare and are nearly always followed by a reasonably significant downturn. Even though that has not happened here, I still am concerned. The solid down trend in IWM is a serious warning sign. In addition, the S&P 500 index has now recovered its losses, but it appears to be hesitating as it approaches those highs from early in November. It could go either way from here. My cash level increased to 58% this week as I closed positions and chose to open fewer new positions. A severe correction is historically very unusual for a holiday shortened week like we will have next week, but I remain cautious.

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Written by Dr. Duke

Created: 12 November 2021

The Standard and Poors index (SPX) finally took a breather this week, closing today at 4682, up 33 points or 0.7%. SPX opened Monday at 4701 so the index was virtually unchanged for the week (down only 19 points). Trading volume has been lackluster this week, running at or slightly below the 50-day moving average (dma) all week. This level of trading volume is actually encouraging, since a spike higher on Tuesday and Wednesday as the market declined would have been much more bearish.

VIX, the volatility index for the S&P 500 options, closed today’s trading at 16.4%, virtually unchanged from last Friday’s close. VIX opened the week at 17.2% and spiked nearly to 20% on Wednesday before beginning a slow decline. The VIX divergences we observed last week did in fact predict the market’s decline this week, but fortunately it was not too severe.

The NASDAQ Composite index followed the other market indices this week, closing today at 15,861, down 0.8% for the week. NASDAQ posted a 1.0% gain in today’s trading to make up a large proportion of the week’s losses. NASDAQ’s trading volume ran above the 50 dma all week but declined to the average today.

The VIX divergences we observed last week did presage the pull back we observed this week, but it has proven minor thus far. Today’s strong market served to reassure many traders, including me. It is actually very healthy and normal for strong bull markets to take pauses or breathers as they rise. I am still left wondering about the absence of solid economic underpinnings to justify such a strong market. In spite of my doubts, my cash level decreased to 35% this week. I am doing my best to be selective in my trades but also take advantage of this bull market while I have the opportunity.

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Written by Dr. Duke

Created: 05 November 2021

The Standard and Poors index (SPX) set several new all-time highs again this week, closing the week at 4698 for a weekly gain of 1.9%. I don’t believe I have ever seen the S&P 500 index move so far and so quickly. It worries me. Trading volume has reinforced this bullish run, starting at the 50-day moving average (dma) on Monday and then exceeding the 50 dma all week.

VIX, the volatility index for the S&P 500 options, closed today’s trading at 16.5%. VIX opened the week at 16.9% and steadily declined until Thursday when it posted a small gain to close at 15.4%. Today, it moved up a little over one point to close at 16.5%. We call these VIX divergences when both the VIX and the S&P 500 index rise in the same trading session. VIX divergences are rare and here we see two in succession. The market often pulls back after a VIX divergence. It is as though the big players see dangers on the horizon and start to buy protection even as the market continues higher.

I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. IWM has been extremely choppy for the past six months and that trading pattern continues. While the S&P 500 has moved up over 7%, it finally broke out of jail on 10/28 and has posted a strong run, setting several new all-time highs this week.

The NASDAQ Composite index is matching the performance of the S&P 500 index this week, setting a new all-time high every day and closing at 15972 today, up 2.8% for the week. NASDAQ’s trading volume ran above the 50 dma all week but declined to the average today.

When I look at the broad market indices, the S&P 500 index and the NASDAQ Composite, everything seems remarkably rosy. Even the Russell 2000 index has joined the “setting all-time highs” party. I have been concerned about this market for several weeks, simply because of marginal economic data that don’t support this booming market. The first VIX divergence posted yesterday when VIX and SPX both increased. Normally, these positive divergences, where the market is up, result in a market decline the next trading session. I think the extremely positive jobs report this morning set a very bullish tone, but that waned as the day wore on. Imagine my surprise this afternoon when I saw that we had posted another VIX divergence. I acted on that observation and closed several positions. I will relax a little more easily this weekend.

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Written by Dr. Duke

Created: 30 October 2021

The Standard and Poors index (SPX) set new all-time highs this week on Thursday and Friday, closing the week at 4605 for a weekly gain of 1.1%. It is hard to overstate how strong this recovery has been since the last pull back. Trading volume has reinforced this bullish run, starting below the 50-day moving average (dma) on Monday, but then exceeding the 50 dma in increasing magnitude all week.

VIX, the volatility index for the S&P 500 options, opened the week at 16.1% and closed Friday at 16.3%, essentially unchanged for the week. VIX moved higher Tuesday and Wednesday but declined over the last two trading sessions of the week. Historically, this level of volatility remains moderately high. Some are suggesting this represents low volatility based on the averages since the beginning of the pandemic. I continue to view this level of volatility with caution.

I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. IWM has been extremely choppy for the past six months and that trading pattern continues. While the S&P 500 has moved up over 7% since the bottom of the pullback on October 4th and set two new all-time highs this week, IWM remains two percent below its recent high. IWM has not even recovered the high it set on Monday. The market’s high beta stocks are not leading this charge. This is bearish.

The NASDAQ Composite index is matching the performance of the S&P 500 this week, setting two all-time highs and closing at 15498 on Friday, up 50 points. NASDAQ’s trading volume ran above the 50 dma all week but peaked on Tuesday and declined thereafter.

The S&P 500 and NASDAQ are on fire, but the Russell 2000 continues to lag behind. When I read and listen to the daily news, I don’t come away optimistic and bullish on our economic future. But the markets are setting new all-time highs. This doesn’t seem consistent. I admit to a bit of stubbornness. I prefer to think of it as tenacity. I do not understand the economic underpinnings of this market and I remain very cautious. A correction appears to be a rational expectation.

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Written by Dr. Duke

Created: 22 October 2021

The Standard and Poors index (SPX) set a new all-time high on Thursday at 4550 and then traded sideways today, closing at 4544, down almost five points on the day. SPX had a strong week, gaining 81 points or 1.8%. The lowest close in this most recent pull back was 4300 on October 4th. That computes to a 5.7% gain in fourteen trading sessions. It may be significant that this strong rise of the market this month has occurred with trading volume for the S&P 500 companies remained largely below the 50 day moving average (dma).

VIX, the volatility index for the S&P 500 options, opened the week at 17.3% and closed Friday at 15.4%. Although volatility declined this week, this level of volatility remains moderately high. Traders remain cautious.

I track the Russell 2000 index with the IWM ETF. The owners of Russell have priced everyone out of the Russell 2000 index and option data. That is why I plot the IWM prices. IWM has been extremely choppy for the past six months and that trading pattern continues. While the S&P 500 has been trading strongly higher since October 4th, up almost six percent, and set a new all-time high yesterday, IWM remains almost one percent below its recent high on September 2nd. The market’s high beta stocks are not leading this charge.

The NASDAQ Composite index managed a weekly gain of 1.7%, but the chart tells a different story. Today’s close at 15,090, down 126 points, took NASDAQ nearly back to Tuesday’s open. Monday’s strong gain was essentially the week’s gain. NASDAQ remains 284 points or 1.9% below its recent all-time high of 15,374 on September 7th. NASDAQ’s trading volume did manage to spike up above the 50 dma yesterday and today, although today was a down day, so that wasn’t reassuring.

I have been reeling from this market’s choppiness this year. It seems like the market twitches every few weeks, trips my stops and hands me a small loss. As I watched the stellar rise of the S&P 500 this week, it caused me to wonder about the long term trend and whether this market makes sense. Is this overall market trend consistent with the growth of the U.S. economy? Both the Producer Price Index and the Consumer Price Index are setting new records. On a recent driving vacation my wife and I took south, we frequently would stop at a fast food restaurant to take a break and get a snack and coffee. The dining room was usually closed because they only had enough staff to serve the drive through window. Even the Fed’s Beige Book mentioned staffing shortages as a common problem for businesses. And many businesses didn’t survive the economic shutdown. One fast food restaurant near our house is offering a hiring bonus of $500. The Fed is printing money every month and Congress is setting spending records. When interest rates finally start to rise, the bill to service our national debt will quickly become a significant burden. Remember Greece a few years ago?

Perhaps this explains the twitchy market this year. And it may explain why both the Russell 2000 and NASDAQ are not following the S&P 500 and setting new highs. My conclusions for this week are relatively unchanged. I am setting tight stops and taking profits early. This is not a healthy bull market and I remain very cautious.