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The overall markets were down this week, with the Standard and Poors 500 Index (SPX) closing Friday at 2914, down 16 points from last week’s close. Should we be concerned? There are certainly plenty of doomsayers on the sidelines who cry loudly each time the market falters even a bit. But I think they have cried wolf too many times.

Friday’s close was precisely at the all-time high logged by SPX on September 20th and remains well above the previous high at 2873 from January 26th. Therefore, it is much too early to speculate on any trend change, especially just after posting a GDP growth rate of 4.2%. Even if we figuratively back up and draw a trendline on SPX for the past two to three months, it is unquestionably strong and continuing to grow. Trading volume for the S&P 500 this week was near the 50-day moving average (dma) most of the week, and moved a bit higher on Friday. In general, trading volumes remain lackluster. It suggests that many traders are just letting their positions run and leaving any additional cash on the sideline.

Market volatility, as measured by the S&P 500 volatility index, VIX, wandered sideways this week, reaching intraday lows and highs of 11.6% to 13.2%, but closing Friday at 12.1%. This VIX trend, together with low to average trading volume, suggests relative calm among the large market participants. The exception to our story among broad market indices is the Russell 2000 Index (RUT) which has trended steadily lower since marking an all-time high of 1741 on August 31st. RUT broke its 50 dma on Wednesday, but posted a gain Friday.

The NASDAQ Composite index closed Friday at 8046, up over 107 points from Monday’s opening. NASDAQ’s has largely traded sideways during September, banded by the highs set at the end of August and bouncing off the 50 dma on the lower end of the trading range. Friday’s close is only 64 points or 0.8% off the 
all-time high on August 31st. Trading volume in the NASDAQ stocks was well above the 50 dma all week with the exception of Thursday.

With the title of this article, I posed the question of whether this week’s downtrend is merely a healthy pause in a bull market or represents a trend change. We should remind ourselves that markets always represent a discounted future view of the market’s collective corporate cash flows. The economic data remain very strong. When was the last time we saw a 4.2% quarterly GDP number? I don’t need to look it up. It has been a long time.

We stand at a unique point in American history. The old rule of journalists’ ensuring that their personal viewpoints were only visible on the editorial page is long gone. One of the consequences of this sea change is that my perception of the general state of the economy may be significantly distorted by a barrage of bad news and generally hateful commentary.

Focus on the economic facts. The economy is growing; unemployment is at record lows; wages are growing at strong rates; companies are complaining about being unable to fill jobs. In the last earnings cycle, more S&P companies beat analyst earnings estimates than has been the case in several years.

In spite of the weakness we saw in the broad market averages this week, the following stocks continue to trade higher: ILMN, LULU, MA, V, and WWE. AAPL has rebounded and is nearing its all-time high.

However, due to the generally negative news environment I described above, this market is very volatile. Watch your positions carefully and take your gains whenever you can. My trading group enjoyed a large gain on NKE with a trade on its earnings announcement this week. I could have almost doubled that gain by carrying the trade into next week, but I closed Friday for a 64% gain rather than hold for a gain of over 100% next week. It’s that kind of market. It doesn’t have to make sense. It just is.

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The bull market continues in spite of all of the negative news being headlined. It seems like all of the headlines are focused on negatives, intending to drive us all into depression. The Standard and Poors 500 Index (SPX) opened at 2854 this week and closed at 2875, up 0.7% this week alone. SPX gapped open higher this morning, underscoring the bullish mood of the market. That was the second gap opening higher this week. Volatility remains relatively low at 12%, as measured by the VIX. Open a price chart on SPX from November, 2016 to the present and ask yourself, why am I surprised by this incredible chart?

I am at the MoneyShow in San Francisco and I must say this may be the best financial conference I have ever attended. I heard talks today by Jim Rogers, the famed hedge fund manager, Tom Sosnoff, of TastyTrade fame, and Gene Simmons, who I knew best as a member of the rock band, KISS. Gene Simmons stole the show. He encouraged the audience to have the courage to follow their dreams; he suggested each of us should strive to be a "psychopath with a conscience". The idea was to not be constrained by the norms or rules of business and/or society, but to have a conscience, i.e., don't hurt anyone. Simmons appears to relish negative labels such as brash, insolent, and irreverent. He believes that much of his success in multiple businesses is due to his willingness to entertain ideas that some would regard as crazy.

One of his current investments is a cannibus business in Canada (Invictus MD, ticker IVITF), starting up just as Canada is legalizing all marijuana. The irony is that Gene doesn't smoke, drink or do any drugs, including marijuana. His focus is on the medical applications of cannibus. He told some incredible stories about the positive medicinal effects, e.g., relieving epilepsy in children. His talk was also an extremely bullish presentation on the freedoms we have in this country that enable all of these business success stories. Simmons is very critical of the typical American's focus on leisure time and an unwillingness to work hard to succeed. One of his interesting anecdotes was to observe that we have two days off every week, or 104 days per year - he asked us, what have we accomplished with all of that time?

The presentation by Jim Rogers and Tom Sosnoff's interview of Gene Simmons were recorded and will be available on the MoneyShow web site in about a week. I encourage you to be sure and watch. It will be worth your time. And reporting from the minor leagues, my presentation, Options Don't Have To Be Risky, was also recorded and I think you will find it worthwhile.

 

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The Standard and Poors 500 Index (SPX) has been locked in a sideways dance since June 25th when it closed at 2717. SPX opened this morning at 2734, and then plunged to 2716, below the the 50-day moving average (dma) at 2721. But then it rebounded and, as I write this blog, is trading up twenty points at 2734. The 50 dma has acted as a strong support level for the past couple of weeks. But these wide swings in price within a single daily trading sessions are unsettling. Monday morning's weak market tripped several stops in my positions, but by the end of the trading session Monday, the market had rebounded. Tuesday's market was exactly the opposite, opening positively and trading higher, only to give back all of those gains before the market closed.

I am sure I wasn’t alone in closing several positions Monday morning because the market was looking so weak. But then SPX recovered and traded up over 28 points to close for a nice gain. Tuesday was exactly the opposite: large positive futures leading to a positive open and a strong morning of bullish trading, but the last hour of trading gave it all back and SPX ended the day in the red.

The Russell 2000 Index (RUT) has traded much more bullishly than SPX most of this year. RUT didn’t pull back as far during the February correction and put on a remarkable run from the first of May through June 20th, gaining nearly 11% in eight weeks. The difference has continued this week with Russell posting nice gains in each trading session this week. RUT is currently trading at 1673, up 12 points. The Russell 2000 index is predominantly made up of domestic companies. These stocks may not be as spooked by the prospects of a trade war and that may explain this divergence of SPX and RUT.

The current sideways trend in the prices of the S&P 500 and the wide price swings we are seeing almost daily are more evidence of the indecision and uncertainty. Traders are nervous and they are running from one side of the ship to the other. Corporate earnings are setting records, beating analyst estimates at unusually high rates. Companies are even complaining of being unable to fill open positions! But you wouldn’t know that by watching the major market indices. Corporate earnings and virtually all of the hard economic data are very positive, but that doesn’t seem to assure traders. News is interpreted with the worst possible implications. The doom and gloom folks must be enjoying this moment in time.

The downside for those of us trading this market was illustrated Monday. The markets opened lower and continued lower, tripping several of my stops. Then the market recovered and thumbed its nose at me. Don’t let those events cause you to lose your trading discipline. Risk management is always the name of the game.

One of the characteristics of this nervous market is overreaction. A recent example is Chipotle Mexican Grill (CMG). Its new CEO revealed his turnaround plan for the company last week and the stock price plunged over 6% the next day. Contrast CMG with the overall market Monday and Tuesday. While the major market indices were giving back early gains, CMG gained 5%. I took advantage of that overreaction, going long CMG stock on Friday and selling a put spread on Tuesday.
This market presents many opportunities, but it remains an uncertain, nervous market. Keep your stops close.

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SPX closed higher again today at 2850. The all-time high from January 26th is 2873. SPX is now well above the 50 dma at 2774. July was a strong bullish month for the S&P 500, and now August is off to a strong start. Are we overdue for at least some sideways action? One concern of mine derives from the trading volume. The last three trading sessions have been very bullish and yet the trading volume has been consistently below the 50 dma and falling each day. Declining volume is not the sign of a strong bullish market.

The mid to small cap stocks, as measured by the Russell 2000 index (RUT), have been trading less bullishly. RUT has been trapped in a sideways trading range from about 1640 to 1710 for the past two months. RUT closed at 1684, just above the 50 dma and the middle of that trading range.

I closed the put spreads in our August iron condor on SPX, resulting in an 11% gain. This will free up capital to enter the November position. In the meantime, our September iron condor on RUT stands at an 11% gain, but due to rolling the puts higher sometime ago, we have a 22% potential gain on this position, so we will probably hold this position for a while longer.

An interesting tidbit: 413 of the S&P 500 companies have now reported earnings in this cycle. 79% of those companies have beat the analysts estimates. Over the past four quarters, an average of 72% of the S&P 500 beat analyst estimates.

Record corporate earnings are providing the foundation for this strong bullish market. As long as trade tariff negotiations appear to be moving positively, the S&P 500 may have a shot at breaking its January all-time high.

We start our Conservative Income Strategies course this evening at 8:00 pm CT. You may attend this first class free of charge and decide whether this course would be useful for you. Register for the private webinar here. Students in previous courses this year paid for their tuition several times over during the course just by following Dr. Duke's trades.

 

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The Standard and Poors 500 Index (SPX) fell out of bed on Friday, reacting to news of new tariffs being applied to China. SPX traded as low as 2762 before bouncing to close at 2780. Interestingly, SPX opened on Monday at precisely 2780, so we closed the week absolutely flat. The trading volume spike Friday was due to options expiration, so that may be ignored. Trading volume remains lackluster, running near the 50-day moving average (dma) and trending slightly lower.

The Russell 2000 Index (RUT) followed its big brothers and traded down on Friday but recovered even more strongly than SPX. RUT closed Friday at 1684, down less than a dollar. Thursday’s close at 1685 was another all-time high for RUT and Friday’s close reaffirmed that high.

The NASDAQ Composite index also traded lower on Friday and then recovered much of its losses, closing down 15 points at 7746. NASDAQ set another all-time high on Thursday, closing at 7761, not too far above Friday’s close. NASDAQ turned in the strongest weekly return of the major market indices, gaining 99 points or 1.3% from Monday’s open to Friday’s close.

The S&P 500 index’s volatility index, VIX, closed Friday at 12.0%, roughly flat for the week (opened Monday at 12.4%).

The big question is the widely accepted rationale for Friday’s down day, trade tariffs and the fear of a “trade war”. Headlines from financial articles include, “Why the trade war is going to get worse”, and “the conflict will escalate into a technological cold war”. Those are scary headlines, but the market clearly doesn’t take it seriously. SPX recovered Friday’s losses nicely and the other major market indices remain at or near all-time highs. The low level of volatility doesn’t suggest much concern about trade wars on the part of the large institutional traders.

In my opinion, we have an interesting market. On the one hand, it doesn’t seem like we have fully recovered from the February correction. The market remains nervous, expecting the other shoe to drop. On the other hand, the trading action is decidedly bullish. Even on days like Friday, where it seemed like a very negative day, most of the losses were recovered and volatility remained flat. 

How should we trade this market? For your non-directional trades, position the trade with more safety margin to the up side, and take more risk on the down side. This takes advantage of the largely sideways trading pattern, but counts on the underlying bullish trend.

Our Conservative Income service remains up about 12% for the year, so there is a lot to be said for conservative option selling. In this market, the turtle beats the rabbit.

For all of your trades, position your stops close. This is a “better safe than sorry” market.