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.
Merry Christmas and Happy New Year
- Written by Dr. Duke
The Standard and Poor’s 500 Index (SPX) has been stair stepping its way higher since early November. Last week was the step down and this week was the step up to a new all-time high set yesterday. SPX opened the week at 3675 and closed today at 3709, down 13 points on the day, but SPX remained up just under one percent for the week. Similar to last Friday, today’s trading ended with a long lower candlestick shadow that often foretells bullish future price action. It is a good sign when the sellers push prices down to the low for the day, but the buyers come in to recover most of those losses before the close of trading.
Trading volume on the S&P 500 spiked higher on this quadruple witching Friday, the result of the simultaneous expiration of stock index options, stock index futures, stock options, and single stock futures. The expiration of these products coincide four times per year on the third Fridays of March, June, September and December. SPX trading volume hit 4.1 billion shares today, much higher than the 50-day moving average (dma) at 2.5 billion shares.
VIX, the volatility index for the S&P 500 options, opened the week at 22.7% and closed today at 21.6%, but that doesn’t tell the whole story. VIX traded as high as 23.8% intraday before declining into the close and once again confirming the nervous nature of this market.
IWM, the ETF based on the Russell 2000 group of companies, continued its barn burning run higher this week, opening Monday at 191.96 and closing today at 195.96, up 1.8% for the week. As one may see from the price chart, IWM is trading higher with only a couple of minor pauses. The strong behavior of these small to mid-cap stocks is a very bullish sign for the entire market.
The NASDAQ Composite index closed today at 12,756 and wins the prize for the strongest performance of a broad market index this week. NASDAQ opened the week at 12,447 and today’s close represented a stellar gain of 2.5% - in one week! Surprisingly, NASDAQ’s trading volume did not reflect the normal quadruple witching spike.
The most significant bullish signal for the past month or so has been the bullish price action of the Russell 2000 index. Whereas the other broad market indices have gained and paused as they traded higher, Russell has not lost a beat. Last week Russell continued its steady gains while the other indices lost ground. This week, Russell tacked on a gain of nearly two percent while the broad market, as best represented by the S&P 500, managed to gain less than one percent. These are the high beta stocks that tend to be sold first when the large institutional players get nervous, but they aren’t being sold; they are being bought.
The conventional wisdom gives credit for this bullish market to the Covid vaccine. While I don’t see an imminent economic recovery unfolding, the market is a future discounting mechanism, and the current strong market reflects the conviction that the worst is behind us. I hope the market has 20:20 vision.
I sound like a broken record, but I must continue to remind us that twenty-plus percent volatility is historically high. Higher volatility makes selling option premium very lucrative but don’t forget that this same volatility is warning us of the risk inherent in those expensive options.
Quantitative evidence is found in the year end results of our Conservative Income trading service. With our December positions closing this weekend, this service stands at a gain of 26% for 2020, while the S&P 500 is up 14%. Selling those expensive options was indeed lucrative. More importantly, we demonstrated the strength of this style of trading during the March correction. While the S&P 500 index lost 35%, we lost 9%. More importantly, our portfolio recovered those losses in thirty days while it took SPX five months to crawl out of the correction. Join us in Conservative Income as we start a new year.
I won't be writing any blogs for the next two weeks. I wish you and your families a very Merry Christmas and a healthy and prosperous New Year.
A Pause or a Warning?
- Written by Dr. Duke
The Standard and Poor’s 500 Index (SPX) ended its bullish run at the market opening of 3706 on Wednesday. That bullish run began back in early November, but the last three days have taken the market a little lower each day. SPX opened the week at 3695 and closed today at 3663, down 32 points or 0.9% on the week. Perhaps it is only a breather in a bullish market. The long lower candlestick shadows yesterday and today were somewhat encouraging. Large declines that end the trading session at the low for the day are serious bearish signals. Trading volume on the S&P 500 ran below the 50-day moving average (dma) every day this week with the exception of Wednesday. That suggests that whatever selling drove the week’s lackluster performance was muted.
VIX, the volatility index for the S&P 500 options opened the week at 22.0% and closed today at 23.3%, an increase of almost 6%. We were given a glimmer of hope when VIX spiked up over 25% today but could not hold that high and dropped back to close at 23%.
IWM, the ETF based on the Russell 2000 group of companies, set itself apart this week. It was the only broad-based market index that posted a positive week, opening Monday at 188.23 and closing today at 190.30, up 1.1% for the week. These are the “risk on” high beta stocks.
The NASDAQ Composite index closed today at 12,378 for a loss of 28 points for today and a 0.7% decline for the week. NASDAQ’s trading volume remained above the 50 dma all week but fell well below the 50 dma today with 3.6 billion shares, significantly lower than the 50 dma at 4.2 billion shares.
If we use the S&P 500 index as our market surrogate, we now stand at a positive gain of nearly 13% for the year. That is remarkable when we recall that ugly 35% correction in March. If we shift our focus to the gains since the beginning of November through today, we are up 11.1%. Given all of the turmoil of rioting and protests leading up to the election and even the remaining uncertainty surrounding some of the election results, a double-digit gain for November and the first week of December is rather amazing.
The Russell 2000 index has taken the role of the market leader over the past several weeks, losing less when the market paused and gaining more when it traded higher. Russell was the only broad market index to post a positive gain this week. That is significant. These are the high beta stocks that tend to be sold first when the large institutional players get nervous, but they aren’t being sold.
Perhaps this market is anticipating the progress on a Covid vaccine that appears imminent. In any case, this market continues to hold up rather well, in spite of the uncertainty of the election, the pandemic and the vaccine. We may be becoming accustomed to these higher levels of implied volatility, but it pays to remind ourselves that twenty-plus percent volatility is historically high. I have been selling calls and puts since early April, and this has resulted in strong gains. As I rolled out several positions and created new ones today, I noticed that almost every option sale was yielding over one percent for one week! This isn’t normal and it carries an implicit warning. We are not collecting these rich option premiums because risk is low.
As the farmers say, make hay while the sun shines. But keep a close watch on the skies. High levels of implied volatility imply that storms may be coming.
The Market Pauses
- Written by Dr. Duke
The markets continue to take a pause after the strong run higher since the beginning of November. The Standard and Poor’s 500 Index (SPX) just traded sideways to slightly lower this week, closing today at 3558, down 24 points for the day and down 1.2% for the week. To keep it in perspective, SPX gained over 333 points or ten percent since the first of the month. So, we have lost very little of those gains. That is significant. Trading volume for the S&P 500 companies declined steadily this week and ended the week well below the 50-day moving average (dma).
The volatility index for the S&P 500 options, VIX, was unchanged this week, opening at 23.7% on Monday and closing today at precisely 23.7%. But stay awake. This remains a heightened level of volatility.
IWM, the ETF based on the Russell 2000 group of companies, traded slightly higher this week, opening the week at 176.49 and closing today at 177.50, up about one half of one percent. That was a small gain, but the stocks of the Russell 2000 tend to be the high beta stocks that lead markets higher as the institutions shift to “risk on” mode.
The NASDAQ Composite index just treaded water this week opening at 11,847 and closing today at 11,855, essentially unchanged for the week. NASDAQ’s trading volume was much stronger than that of the S&P 500 companies, increasing almost every day this week.
After a strong bullish run since the first of November, it would not have been surprising to see traders taking profits, but the market has essentially held its gains. The strong behavior of the Russell 2000 index is particularly encouraging. The largest risk we face in this market derives from the external events and rumors. Each day seems to bring news or rumors about Covid-19, the development of the vaccines and, of course, the sorting out of the election results. But the market held up rather well this week as some states chose to lock down once again. As the old saying goes, the beatings will continue until morale improves. I don’t know how many small businesses will survive. Barring some surprises next week, I think the bulls will remain in control. Volatility has declined but remains relatively high from a historical perspective. Watch your positions diligently.
So Far, So Good
- Written by Dr. Duke
You may recall the old joke about the optimist and the pessimist that fell off a skyscraper. As the optimist passed one of the intermediate floors, he was heard to say, “So far, so good.” It would be unrealistic to expect another market performance this week like we saw last week. But the markets did hold. The Standard and Poor’s 500 Index (SPX) gained 48 points on Friday, closing at 3585, but that close was almost precisely where SPX opened the week, at 3583. Friday’s close matched SPX’s all-time high set on September 2nd. Monday’s trading volume matched record highs earlier this year, but volume fell each trading session this week with Friday’s volume of 1.93 billion shares coming in well below the 50-day moving average of 2.53 billion shares.
The volatility index for the S&P 500 options, VIX, opened the week at 24.8% and closed yesterday at 23.1%. Intraday lows all week ranged around 22.5%. These are the lowest levels of volatility since mid-August. The split nature of the election with neither party dominating the Congress appears to have reduced uncertainty, always a bullish factor for the markets.
IWM, the ETF based on the Russell 2000 group of companies, opened the week with a huge gap up in price, but then backed off that high and traded sideways the balance of the week, closing Friday at 173.50. IWM gained 6% from last Friday’s close to yesterday’s close. That represents a bullish move for the entire market.
In contrast to last week, the NASDAQ Composite index lagged behind this week, opening at 12,047 and closing Friday at 11,829, down 1.8% for the week. NASDAQ’s trading volume was similar to that of the S&P 500 companies, spiking Monday but declining the balance of the week.
This week’s market behavior was essentially sideways with minimal change in either direction. After the very strong market last week, this sideways move was very bullish. We could have easily seen a rash of profit taking this week and given back much of last week’s gains.
I am trading this market more aggressively now. We have survived the cautionary September - October period when so many crashes have occurred in the past. Barring some unforeseen news events, I think the bulls will remain in control. Volatility has declined but remains relatively high from a historical perspective. Watch your positions diligently.
- Written by Dr. Duke
It is hard to overstate the strength of the market this week. The Standard and Poor’s 500 Index (SPX) essentially recovered the losses of the past three weeks in five trading sessions this week. SPX opened the week at 3,296 and closed yesterday at 3,509, up 6.5% in one week! That included three trading session opens with large opening gaps higher. Even Friday’s pause in this week’s strong run had a positive aspect in that traders took the market lower, but that slight pause was seen as a bargain as traders pushed the market higher to close very close to Friday’s open. SPX trading volume spiked on Tuesday but trading volume then declined and closed the week well below average.
As one might have expected, the volatility index for the S&P 500 options, VIX, made a dramatic decline this week as SPX headed higher. VIX opened the week at 38.6% and closed yesterday at 24.5%, roughly at the base level of the past couple of months.
IWM, the ETF based on the Russell 2000 group of companies, ran higher this week, largely in parallel with the broad market indices. IWM opened the week at 154.77 and closed Friday at 163.62, up 5.7%. Although IWM’s increase this week was less than that of the S&P 500, it is worth noting that IWM didn’t decline as far in October as the broad market indices.
The NASDAQ Composite index was the star in this bullish market run this week, closing at 11,895 Friday, up 8.0% for the week. The high-tech stocks that were the center of the bullish run earlier this year have returned to center stage. Unlike the S&P 500, NASDAQ trading volume gained steadily this week.
All of the broad market indices made a strong recovery this week. Everyone has their own explanation, but I think the assessment to which I personally subscribe is that the market is reacting very positively to the prospects of a split election result with neither political party dominating. Many may feel that this election result is less than optimal, but markets prefer minimized economic and political changes simply because that minimizes the prospect of unintended consequences, resulting in reduced risk.
Another indicator of the rapid price swings of this market is seen in IBD’s market assessment that has moved from Confirmed Uptrend to Market In Correction, and then back to Confirmed Uptrend in only 33 trading sessions or about six weeks. I have not done the research, but I suspect this may be a record round trip.
I would caution readers about returning to the market too aggressively. This is especially true in two cases. If your risk profile is more conservative, then caution remains the rule. Even if you are willing to take on more risk, a significant criterion is whether you are able to monitor your positions closely throughout the day. This market moves quickly.
I have personally started investing more capital into the market this week, steadily increasing each day as the market continued higher. But the need for caution remains.
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.