User Rating: 0 / 5

Star InactiveStar InactiveStar InactiveStar InactiveStar Inactive

Let’s begin our analysis of the patient with a review of his recent history. The Standard and Poors 500 Index (SPX) closed at 2581 on February 8th, down 10% from the high on January 26th. The rest of February and early March were textbook post correction trading: a recovery followed by a test of the correction lows. Then it appeared we were out of the woods. But SPX closed on March 23rd at 2588, which was not only coincident with the February 8th low, but also the 200-day moving average at 2585. The market thrashed about last week and began this week with another retest of the February 8th correction low. Monday’s close was 2582, only one dollar off of the close on February 8th.

Then the patient recovered and the gap open yesterday morning appeared to be what we were expecting: the correction low has been tested and we are on our way to a full recovery and can put the correction behind us. But our patient had a relapse today, losing 58 points, or 2.2%, to close at 2604, just above the 200 dma at 2594.

The market’s fall in early February was triggered by fears of a trade war after President Trump announced he was considering 25% tariffs on imported steel and aluminum. The EU, Britain, and Canada all complained and threatened retaliation. Then back room negotiations exempted those countries from any new tariffs. Then a deal was announced with South Korea with concessions on both sides. That left China, the principal supporter of North Korea. Perhaps more than tariffs are on the table.

Let’s return to the SPX price chart. The February 8th correction was accompanied by extreme trade volume spikes. Last week’s market weakness resulted in trading volumes that barely reached the 50 dma. This week’s trading volume was even more benign, starting at the 50 dma and declining all week. How is that possible with these extreme market swings?

Given the wild swings and reversals in SPX this week, volatility has been surprisingly steady and mild. VIX closed at its high for the week on Monday at 23.5% and hit its low yesterday at 19%. But today’s reversal didn’t seem to panic traders, with VIX closing at 21.5%.

There is a dichotomy in this market analysis. If I just focus on the extreme price swings and price reversals day after day, I am ready to panic and look for psychiatric help.  But low trading volumes and relatively low volatility are sending us a very different message. An additional fact from the SPX price chart isn’t consistent with the “sky is falling” conclusion: the combination of the lows from the February correction and the 200 dma are holding very well as support. That level has been tested five times over the past two weeks of trading, and it has held. That is powerful support.

What is my diagnosis for the patient, Mr. Market? He is nervous, afraid of every shadow, and dives under the table after every tweet from President Trump. But he has not yet fallen out of bed. The 200 dma is holding.

I am slowly and selectively picking my spots, e.g., the Apple diagonal spread I opened this week. Apple is drowning in cash as a result of the tax reform bill. Strong stock buy-back programs and increasing shareholder dividends are most likely on the drawing board for the earnings announcement on May 1st. Analysts are already increasing their price targets.

Keep your powder dry.

User Rating: 0 / 5

Star InactiveStar InactiveStar InactiveStar InactiveStar Inactive

We suffered a down market this week with the Standard and Poors 500 Index (SPX) opening Monday at 2791 and closing today at 2752, down 39 points for the week. In fact, we lost five points in the last two minutes of trading this afternoon. That will give us something to think about this weekend. Is this a residual effect of the correction? Or is this a market reaction to the discussion of trade tariffs?

The healthy effect of a correction is to adjust prices to more reasonable levels. Maybe the market is sending us a message something like:

The market high of 2873 toward the end of January was definitely over-valued.

Recovering over 70% of the correction by the end of February was too much, too soon.
Trying for that high again last week was still too much, too soon.

Perhaps the recent market range for SPX from the low this month to the high last Friday represents the trading range for the near-term future?

The Russell 2000 Index (RUT) has outperformed SPX handily since the correction and came very close to matching its previous all-time high last Friday. But this week took the wind out of RUT’s sails, closing today at 1586 after opening the week at 1602.

The NASDAQ Composite was even more bullish than RUT last week, breaking its previous all-time high last Friday and then again on Monday. But NASDAQ just settled lower the rest of the week, closing today at 7482.

Most analysts attributed the market weakness two weeks ago to trade tariff talk and fears of a trade war. Then they declared tariffs old news and cited the excellent jobs report as the driver of last Friday’s strong market. But this week’s market weakness is now blamed once again on fears of a trade war.

I saw the Secretary of Commerce, Wilbur Ross, interviewed last week and his analysis of the proposed 25% steel tariff claimed it would only add about $150 to the cost of the average new car. That seems pretty innocuous. But then I saw a Congressman claiming his study concluded the proposed steel tariffs would result in the loss of five jobs in our steel consuming industries for every job gained in our steel industry. Both of these conclusions can’t be true. Perhaps we have another case of the statistics being manipulated to suit a particular agenda.

Of course, we can’t forget that Trump is the consummate negotiator. Perhaps the end result of all of this tariff talk will be some relatively palatable tariff adjustments and all of the fear mongering was unnecessary.

I am inclined toward the alternative explanation that this is simply the market’s ongoing correction: first the market over shot to the downside and bounced hard, but overshot on the upside, and swung back lower, and so forth. If this explanation holds  any water, we should see the market oscillations slow in amplitude, resulting in a range bound market for a few weeks with the ultimate result of a more reasonably priced market. If I stand back and look at the big picture of the market, this explanation appears quite reasonable. The S&P 500 price chart does look like oscillations that are dampening on each cycle. If we accept that hypothesis, what market posture should we take?

The underlying bullish strength of this market is undeniable. Given that premise, I will be trading based upon sideways to slightly bullish expectations. Stocks like GRUB and PANW have been largely unaffected by the market uncertainties and can be played full out bullish. Stocks like AAPL are best played with trades like diagonal call spreads that allow for some slow trimming of the cost basis over a few weeks.

User Rating: 0 / 5

Star InactiveStar InactiveStar InactiveStar InactiveStar Inactive

The news commonly headlines with the Dow, but SPX is my monitor for the market. 500 stocks are a much better measure of the market’s health than 30 stocks. SPX closed today at 2656, up 36 points, and the VIX declined 3.5 points to close at 25.6% - two reassuring signs.

SPX gapped open higher at the opening this morning and that is a very bullish sign. But we have been whipsawed back and forth by this market for the past several trading sessions. I watched the screen carefully this afternoon, wondering if we would see another rapid sell-off as we approached the close. But we retained most of today's gains into the close.

Another positive in today’s market was the weakness this morning. After a positive open, the market dipped around 10:30 am ET, but SPX did not reach Friday’s close. Then the bulls took control once again and continued to drive the balance of today’s trading session.

Friday’s price action was also a positive sign for this market. SPX broke its 200 dma at 2539 briefly, but then strongly rebounded over 81 points to close at 2620.

Have we reached bottom? That seems to be the question of the past several days. It is early to be sure, but these signs suggest we are close:

1. Friday’s strong recovery after hitting the 200 dma.

2. This morning’s gap up opening.

3. A successful recovery by the bulls this morning.

4. A declining VIX.

I began to collect a series of stock trade candidates today in preparation for putting some cash to work in the next few days. I found 15 stocks that have met two principal criteria: 1) They didn’t decline far during this correction, and 2) They were trading higher today. In one case, the stock is already teasing its high before the correction. I will be selecting trades from this group for Dr. Duke’s Trading Group over the next few days.

 

User Rating: 0 / 5

Star InactiveStar InactiveStar InactiveStar InactiveStar Inactive

The Standard and Poors 500 Index (SPX) closed Friday at 2732. I was glad to see the 50-day moving average (dma) broken, but it was just barely broken. SPX ran up to 2754, but then declined to close just seven points above the 50 dma. Tomorrow’s open will confirm whether resistance at the 50 dma has really been broken. SPX's closing low on 2/8 at 2581 represents a 10.2% correction from the high of 2873 on 1/26. Technical analysts normally categorize corrections as declines around 10%, so this is in the expected ballpark. Friday’s close has recovered about half of the decline.

Is the correction complete? Is it safe to seek bargains in the market? The price action this week would certainly suggest that conclusion. But don’t jump too fast. The opening tomorrow morning will be critical. This week will be the opportunity for a possible retest of the lows. Pull up the price chart for SPX during the last severe correction in December 2015. That correction was initially 10.5%, but the retest about three weeks later took the correction to 12%. It required nearly four months to fully recover. By contrast, the strength of the recovery last week was significant at 50% or more on all major market indices. That initial bounce back in February 2016 was weak, about 81 points or a 37% recovery.

Market analysts agree that the economic fundamentals are strong. The earnings announcements for the fourth quarter have been consistently strong. If anything, some analysts are starting to fret that earnings are growing too fast.

The Russell 2000 Index (RUT) closed Friday at 1544, recovering over half of its 9.1% loss since RUT’s high on 1/23. The 200 dma served as the solid support level for the Russell index. It was touched on 2/6, and the close two days later was just above the 200 dma. Although the 200 dma was broken intraday on 2/9, the close was well above the 200 dma and RUT’s recovery was underway.

The NASDAQ Composite traded similarly to RUT but remained 75 points above the 200 dma at its lowest point intraday on 2/9. NASDAQ’s trading volume fell off this week, trading at or below the 50 dma all week. As of Friday, NASDAQ had recovered 76% of its losses.

The volatility index of the S&P 500, VIX, opened the week at 27.3% and closed yesterday at 19.5%. The closing high for VIX during this correction was 37.3% on Monday of the previous week, although VIX hit 50% intraday on Tuesday, 2/6. Friday’s close just under 20% brought VIX back to the 20 dma in the middle of the Bollinger bands. That level of the volatility index certainly isn’t low. We aren’t out of the woods yet. If the market turns to test those lows, we could see VIX spike again before things calm down.

The U.S. exchanges are closed today. Asian markets rallied overnight, but Europe is flat to slightly down today. The U.S. markets have established six positive market days since the low on February 8th, so I am inclined to think we have seen the worst of this correction. SPX and RUT have recovered about half of those losses at this point, and NASDAQ has recovered about three quarters of the correction loss. Given the past six positive days, it wouldn’t be surprising to see the markets trade sideways or even pull back modestly tomorrow. The positive to slightly negative price action on global markets overnight and today supports that conclusion. My opinion is that we have seen the worst of this correction. I am beginning to establish new positions. The Apple diagonal spread I entered for our trading group is just one example. But I remain cautious.

User Rating: 0 / 5

Star InactiveStar InactiveStar InactiveStar InactiveStar Inactive

One of the advantages of being a perennial bear is that eventually you get to say, “I told you so”. This incredibly strong bull market was overdue for a minor pause and I believe that is all we are seeing at this point. The Standard and Poors 500 Index (SPX) hit its recent all-time high on January 26th at 2873. Friday’s close at 2762 represented a decline of 3.9%. The next obvious support level would be the 
50-day moving average (dma) at 2715. That would be a 5.5% decline. Many technical analysts look for minor pull backs in the 5 to 7% area and refer to corrections as declines in excess of 10%.

What triggered last week’s pull back? The most common answer cited by analysts was the FOMC announcement that suggested more interest rate increases were coming this year. That should not have been a surprise and one or two modest interest rate hikes will still leave us at historically low levels of interest.

We are in the middle of the earnings announcements for the fourth quarter of 2017 and those announcements have been generally exceeding analysts’ estimates. The effects of the recent tax law changes are only beginning to percolate through the economy. Just consider one of many examples: Apple’s announcement of investing 350 billion dollars into the U.S. economy has not yet resulted in any construction expenditures or new jobs. But it will. My point is simple. The economic foundations are strong. A minor pull back in a strong bull market is perfectly normal. There is no reason to panic.

Trading volume in the S&P companies was above the 50 dma all week as large institutions adjusted their portfolios in the face of the pull back. Many traders are locking in recent gains. When we draw the Bollinger bands on the S&P 500 chart, we see another clue as to where this pull back ends. The lower edge of the Bollinger bands is at 2725, or down 5.2% from the high on January 26th. That 5% number is coming up frequently.

The Russell 2000 Index (RUT) closed Friday at 1547, down 64 points or 4.1% from its recent high of 1611 on January 23rd. RUT has traded much more conservatively for the past month so one might expect less of a pullback in this index. RUT broke its 50 dma at 1553 today.

The NASDAQ Composite has traded strongly in January, matching the trajectory of the S&P 500 index. Similar to SPX, trading volume in NASDAQ exceeded the 50-day moving average (dma) all week. NASDAQ closed Friday at 7241, down 3.5% from its closing high on January 26th of 7506. NASDAQ’s 50 dma stands at 7068, or down 5.8% from the 1/26 high – another number around 5%.

The volatility index of the S&P 500, VIX, closed Friday at 17.3% after opening the week at 11.7%. This remains a relatively low level of volatility. We hit 17.3% intraday on August 11th last year. I am certainly not suggesting you ignore this increase in volatility, but pull backs and corrections normally display levels of 25% or higher. Friday’s VIX, at 17.3%, was higher than any VIX number from 2017, but that was a record year for low volatility. In 2016, we hit highs of 23% in November, 26% in July, and hit 29% twice, once in January and once in February. VIX is a very good warning signal, and we should pay attention, but the current levels are far from correction territory.

My clients routinely have trailing stops and contingent stops on all stock and option positions, and Friday’s price actions certainly tripped several of those stops. But I don’t think wholesale moves to cash are warranted as yet. Monday’s price action will be a critical sign. I am inclined to think the weekend will give traders time to reflect on the market fundamentals and reduce some of the interest rate hike concern.

If we are looking at a pull back of the order of 5%, we may be close, and the 50 dma lines may be expected support levels, at least for SPX and NASDAQ. If we break the 50 dma on SPX this week, I will be making some serious moves to cash my portfolio. But I don’t expect that to be the case. The bulls just need a breather.