Dr. Duke's Blog

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Written by Dr. Duke

Created: 04 February 2022

The Standard and Poors 500 index (SPX) certainly appeared to have found its footing this week, gaining just under 6% from last Friday through Wednesday of this week. But then it turned and bit us – ouch! SPX gapped open lower on Thursday and proceeded to lose over 2% in one day. SPX closed today at 4501, up 23 points or 0.5%. But Thursday’s loss took its toll on the week, resulting in a gain of 1.6% for the week. The only good thing I can say about today’s trading was that SPX appeared to find support at the 200 day moving average (dma).

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 198.38, up 0.85 points or +0.4%. IWM was up 3.5% for the week, but that is where the good news ends. IWM remains over 15 points, or nearly 8% below the 50 dma. The Russell 2000 is not giving us a strong bullish signal. It was looking rather weak even before Thursday’s loss.

The NASDAQ Composite index closed today at 14,098 , up 219 points or 1.6%. NASDAQ opened this week at 13,437, completing a strong weekly gain of 5%. But NASDAQ remains 637 points below its 200 dma. NASDAQ would have to tack on another 5% just to recover its 200 dma. Trading volume declined steadily all week.

Watching the S&P 500 index put on such a bullish performance from last Friday through Wednesday was mesmerizing and probably convinced many of us to jump back on the bullish train. I sold a SPY put on Wednesday, only to close it the next day. I told my clients I was sticking my toe in the water, but something bit it off!

Today’s price action was not very reassuring. Yes, it was generally positive and SPX appeared to find support at its 200 dma. But that is weak praise. Only the perennial bulls could find confidence in this market. I think the results of the last FOMC meeting are still scaring traders. The levels of inflation we are seeing are indeed scary. The Fed’s proposed actions to control inflation may be required, but bitter, medicine. It is hard to find a bull market in the midst of inflation, continued lockdowns, the end of the Fed’s bond purchases, and prospects of one or more discount rate hikes on the horizon.

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Written by Dr. Duke

Created: 28 January 2022

The Standard and Poors 500 index (SPX) opened and ended this week on positive notes, but the price action in between was unimpressive. SPX closed today at 4432, up 105 points or 2.4%. SPX opened the week at 4356, posting a weak 1.7% weekly gain. Monday’s price action was very bullish with SPX trading as low as 4223 before strongly recovering to close at 4410. Normally I would have jumped on that bullish signal, but I wasn’t tempted for two reasons: 1) it just looked too good to be true, and 2) the FOMC meeting was looming. Who trades ahead of that event? The next three days slowly trended lower. But SPX tried to put a good face on it and traded strongly enough today to post a positive week. However, SPX remains under the 200 day-moving-average (200 dma).

Trading volume of the S&P 500 companies ran above the 50-day moving average (dma) all week, Trading volume spiked quite high on Monday’s turnaround trading session.

VIX, the volatility index for the S&P 500 options, closed at 27.7% today, down almost three points. VIX opened the week at 28.2%, so volatility spiked in the middle of the week but ended the week nearly unchanged. No one is taking off those put options just yet.

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 195.25, up 3.73 points or +2%. The low point of IWM trading today was 188.09 which broke below the low for all of 2021. Note that IWM has yet to post a correction low – it broke Monday’s low today. If you are looking to the Russell 2000 for hope, you are looking in the wrong place.

The NASDAQ Composite index closed today at 13,771, up 418 points or 3.1%. NASDAQ opened this week at 13,482, completing a modest weekly gain of 2%. Trading volume spiked on Monday but remained flat the balance of the week, running along the 50 dma.

It has been excruciating to just sit on my hands for the past 2-3 weeks, but it beats losing money. All of my accounts are totally in cash. When you consider the summaries above of the S&P 500, IWM and NASDAQ, it doesn’t look like we are out of the woods. Only the perennial bulls could find confidence in this market.

When we add Fed actions to control inflation, the picture becomes even more bearish. The FOMC has previously discussed the discount rate cure for inflation as occurring sometime later this year or even in 2023. But we learned this week that the Fed plans to raise the discount rate at the March meeting and terminate all bond purchases at that time. Imagine what a series of two or three sequential discount rate increases will have on the markets. That means serious tightening on economic growth. Market prices are beginning to reflect that prospect.

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Written by Dr. Duke

Created: 21 January 2022

The Standard and Poors 500 index (SPX) continued its steady trek lower today, closing down 85 points to 4598, or 1.9% just today. But that is tame compared to the weekly decline at 5.1%. SPX is now down 8.5% since the January 4th open of 4805. Trading volume of the S&P 500 companies ran above the 50-day moving average (dma) all week and spiked higher today on the gap lower at the opening this morning and the break of the 200 dma.

VIX, the volatility index for the S&P 500 options, closed at 28.9% today, up a little over one point. VIX opened the week at 21.2%, so volatility is starting to really crank up. But given the severe market action, this level of volatility is surprisingly low.

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 broke below both its 50 dma and its 200 dma in one trading session on January 5th and remains well below its 200 dma today. IWM closed today at 196.99, down 3.76 points or -1.9%. Since January 4th, IWM has declined 12.8%.

The NASDAQ Composite index closed today at 13,769, down 87 points or 2.7%. NASDAQ opened this short trading week at 14,682, completing a large weekly decline of 6.2%. Today’s trading broke the October 4th low from last year. The next support level is 5.5% lower at 13,013. Trading volume was reasonably flat this week, running along the 50 dma.

With this market, what can I say? I am totally in cash and watching for clues of a recovery – not seeing anything even close so far.

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Written by Dr. Duke

Created: 14 January 2022

December was a tough month for the markets, but this year’s market appears to be trying to challenge those December lows. The Standard and Poors 500 index (SPX) closed at 4663, up 4 points, but almost flat for the week (+0.2%). You probably recall the classic hammer candlestick with its long lower candlestick shadow on Monday this week. That is a fairly reliable signal of a recovery from the downtrend. I was hopeful when SPX traded higher Tuesday, but then the classic doji candlestick posted on Wednesday, a signal of indecision and a possible turning point in either direction. The bad news came yesterday with SPX breaking its 50-day moving average (dma). Today’s increase barely made it back to yesterday’s close. SPX trading volume essentially traded sideways this week around the 50 dma.

VIX, the volatility index for the S&P 500 options, closed at 19.2% today, down a little over one point. VIX opened the week at 19.6%, so volatility is fragile and moving rapidly back and forth. Said another way, the large institutional traders are nervous.

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 since November 8th. IWM broke below both its 50 dma and its 200 dma in one trading session on January 5th and remains well below its 200 dma today. Bullish traders are swimming upstream.

The NASDAQ Composite index closed today at 14,894, up 87 points, but NASDAQ only managed to gain 1% for the week. NASDAQ opened this morning below its 200 dma but it climbed back above the 200 dma before the close, so at least that support level held. NASDAQ has been hit much harder than the S&P 500 this year. It appears traders are cashing in the returns on the high-flying high-tech stocks. Trading volume declined all week.

I only had two trades open in my trading group last Friday and I closed those this week. With the exception of the February condor in the Flying With The Condor™ service, I am entirely in cash. It is time for a long winter’s nap.

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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.